SI - Earnings call transcript Q4 2019 | Silvergate Capital Corp

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Operator

Good morning and welcome to the Silvergate Capital Corporation Fourth Quarter and Full Year 2019 Earnings Conference Call.

During today's presentation, all parties will be in a listen-only mode.

Following the presentation, the conference line will be opened for questions with instructions to follow at that time.

As a reminder, this conference is being recorded.

I would now like to turn the call over to Shannon Devine, Investor Relations for Silvergate. ahead. go Please

Shannon Devine

our are be fourth and will Tony Executive and in results operator, Development Ben by earnings everyone. appreciate about We With Thank fourth Reynolds, good quarter Chief year Director Chief participation Officer. our for talk to our here XXXX of Q&A. and our Corporate Financial and Officer; Lane, your Alan full They joined Martino, me EVP you, and today morning quarter full call. year our

As replay be a February this available website. the on of through Access our on of available replay XXXX. a time the reminder, telephonic section call Investor is also XX:XX will p.m. XX, Relations to Eastern

IR our section a of discussion Additionally complement to on slide website. deck today's available is also

set that XXXX. meaning Private of and variety about include differ constitute with Commission. to to that in may Securities remind begin, cause certain contain and we subject are factors of that the could management's the prospects. expectations, me estimates, let uncertainties Act forward-looking These Before Such within implied factors Reform other plans periodic filed and this call such and statements and results risks other are risks, indicated our statement. from actual by current those beliefs, materially Such remarks reports statements of future Litigation everyone or Exchange Securities statements forth the a

forward-looking update to We duty such statements. do undertake not any

with our the in these A performance. as GAAP. believe of GAAP information presentation non-GAAP substitute additional today's isolation useful can during of Additionally, be release. comparable we our considered measure in reconciliation measures results certain earnings in prepared a not which will found call, The or be to accordance for should are measures, most U.S. discuss in evaluating non-GAAP we this

this point, Alan. the I'll call turn to over At

Alan Lane

everyone. and Thank morning you, Shannon, good

offering, work which Exchange loyal I'd trading our helped get day first of through Stock culminated the York a public hard of like the moment and who XXXX. customers in employees people The success contributed of on of to us our New thank and our partners to advisors on the I and many initial November offering. our take our X, started, support the Before to

also the Silvergate. of of Silvergate’s The public known the publicize as an and real public completion only Exchange world market. global offering aware, significant for you to and delivered our forum growth many As for are differentiator platform Network, the around digital but currency growth Silvergate provides SEN, has payments as or opportunity a in initiatives our and not market further capital, additional offerings a

call, to unable call to of our our our the the IPO of overview I to handing I review Turning hear there, then those and growth quarter highlights brief Silvergate to briefly for performance will provide From the results. open Tony during investors today's more for strategy roadshow. our of fourth a questions. over for call who a story will before discussion detailed like would our we were

estate and solutions is of December growing joined Silvergate in provider Silvergate founded to I services of digital XXXX, And just industrial company. was an estate market and and infrastructure a begin, financial real in under as innovative California-chartered CDs Capital Corporation industry. family by leading money funded was It financial currency loan To total commercial when the the XXXX single accounts. of FDIC-insured institution. loans assets Silvergate clean had deposit real million small, consisting primarily $XXX in residential

offering has unfamiliar a a Silvergate for XXXX today. January a known this years currency as first began way digital a deposit What we SEN. payments industry into benefit deposits fairly new ago to of in continues evolved six account a dollar industry global creating the advantage, which support in mover lending as began worldwide straight exploring significant platform first to the as our and to U.S. forward gather our account strategies. We XXXX, In opened deposit company

financial believe normal to We five legacy a system, business historically only which that never bank in XX/X sleeps. world week hours digital during operates market, Silvergate is first the the days XXX bring into the the which currency

the industry, in mover advantages. first this As SEN provides with competitive nascent four still us the key

time and further participating so a advantage. First, it new in network competitive drives customers already value the creates relationships we customer, a network. effect, to creates every that a Silvergate incremental provide This onboards longstanding

network customer strategy. rapidly which word related Prior for but our grew currency mouth a didn't customers, of by to digital we solving our provides problems to referrals. Second, acquisition cost business, mention our for XXXX, low website led

products benefit asset-backed third for is base that looking facilities. and asset digital related is customer settlement access The to credit to underserved an

Finally, Silvergate I fee grow will more detail in to has moment. the income, a discuss in ability which

transact the around XX in using the Our they connect trading around allowing commodities near the we real-time equities XXX customers or focus what desks the is almost clock, on and very of world. our market are exchanges using be institutional investors might as institutional in strategies OTC to to to them Many similar trading markets.

can you fund that and you can't ultimately more is on the money are are you hedge have a a your funds at other aren't competitive times SEN because over SEN, on capital Importantly, and that move hedge they efficient. you advantage if

the a XXXX. are a our We This disadvantage. which increase that XXX XX% a Silvergate that end transferred potential, Conversely, are between customer. because cost Silvergate new investors ended have from seen significant customer growth. customer customers customers, leave in Silvergate when distinct you over the don't transfers at deposits to be they exchanges are be with and These customer year not use to drives year book are to customers customer Silvergate can no SEN and

we Our new customer future review growth. bodes robust pipeline institutions well also and XXX with more believe than our which remains approval process, in for

Turning X. to Slide

grown customers so of utilization SEN. our has their As have too the

year-over-year. For growth handled XXX% the U.S. SEN the full year representing billion dollar of XXXX, $XX.X transfers

the growth XXXX. SEN XXX% compared in significant experienced number by to XXXX rising also transactions, as of We in

a global income categories Fee are of revenue, model we ACH is portion rapidly solutions and While including fee-based comprised total FX our primarily represents our platform. net wires significant income cash three transactions, to lastly and payments different of business evolving as adopt SEN management such a as fees. customers interest our

customer fee XXXX. For digital year representing $X.X XXX% income was to full an XXXX, related currency compared million the increase of as

price on robust Our fourth fee currency which XXXX increase that as compared Bitcoin the and income compared an to XXXX would related quarter. XXX% note fourth quarter. transactions third XX% as U.S. sequentially digital fourth our quarter, volatile SEN volumes currency from the the quarter. $X.X modestly underlying quarter digital in XXXX as the million, grew fee representing remained the the quarter growth was fourth was customer to XXXX third dollar of of income I That related the said, impacted

Looking and the believe we fee see and products in very forward, we opportunities income. that SEN to new introduce expand stages of are the multiple monetizing early our

strike to increase continue a to the maximizing fee the in We the between balance short-term. network income with effect desire

will which earlier offering we build existing in customers with to income January. continue Leverage, long-term, One new out that product is a components fee the through SEN we product our example development. is announced the Over new new and

U.S. to fund currency that SEN per dollar the Leverage With week. real-time SEN. product will digital collateralized also exchanges credit loans repayments are of process held Silvergate at SEN customers this hours customers in obtain plan The uses select bank to to by Bitcoin, to days day, customers Silvergate. effect of allow a seven and provide we the XX network product, loans existing leveraging the

are over XXXX. us underwriting the same more rolling that rigorous will I well in in currently with initiative. lending fully new served of that pilot product standards We we expectations the out highlight have half the a second to this apply years the of would

demonstrates customer's time needs. innovation Leverage SEN a our on and Importantly, Silvergate. focus Over growth we strong Silvergate’s this see driver for as further

as continue for will development, and competitive in value work effect. enhance to priority the SEN strengthen both growth product of further Silvergate the unique we to advantage, a its network which its new will invest future

more With for the review like turn of now to our call to that, Tony over results. would I financial a detailed

Tony Martino

Alan. you, Thank

strengthen X fee SEN Slide and key from around currency income was strong significant customers. the increases provides currency continues transfers consistently the in to trends as network resulting both As expansion by platform, customer digital our growth our of covered already related digital in Alan, effect,

$XX.X of XXXX. quarter for million X, non-interest Slide bearing The of quarter of X.X% value the to in third deposit face brokered at certificates compared XX% includes our were hedging. XXXX XX, used $XXX December XXXX fourth decreased or to million XX, $X.X of deposits Turning At the balance billion totaling billion. deposit to December deposits callable total $X.X as

rate along from purchase initially floors used and $XXX in strategy of were million XXXX to CDs a in July, securities with part decrease March rates. the issued commercial million were impact mortgage the These notional amount of and interest interest mitigate to in hedging fixed $XXX as rate between backed

all-in XX, these and as cost X.XX% The million at the Company during reissued callable of brokered of had CDs callable lower September $XXX.X rates. XXXX new quarter CDs CDs fourth called the at brokered and an

cost in a realize December and order of lower million during expense all-in XX, $XXX to callable CDs quarter million $X.X rates incurred replace at company the the these premium fourth The X.XX% CDs call the was as brokered to the in of XXXX. benefit

to points cost CDs. XX of the Our total average basis related a was XX points for brokered with quarter the of weighted deposits basis callable

XXXX basis $X.X basis the the the million basis premium points second carrying related callable the with points in CDs. of were third expense all-in XX quarter. brokered Out of and points, XXXX in of respectively cost XX the premium CDs related cost weighted quarter basis total a XX underlying quarter XX of for calling and points points the compares points XX which of throughout the of deposits and remaining This CDs of to interest expense XX to basis is basis related resulting to basis from the points the to XX the the

callable XXXX deposits The weighted average in year did quarter eight at time. that fourth of cost of CDs the points reflects any not basis of fact the have that we brokered prior

X.XX% Slide was in quarter quarter cost reflected for in was CDs deposits. compared the and for interest driven fourth by our net the as X, X.XX% margin our the quarter Turning the third XXXX. of brokered fourth decrease X.XX% of The quarter to the to of impact fourth in part

in quarters securities, rates by and you the reduction impacted In how XXXX. in third yields and fourth were loans, can of the addition, cash on see the

X, Now to of quarter increase income million $X.X the million compared onto non-interest on in XXXX of for $X of increase fourth quarter quarter third and the $X.X $X.X to million, was million Slide in of an fourth compared the XXXX. non-interest $XXX,XXX income XXXX a

million compared to the due increase XXXX. primarily in gain full our in on The XXXX. was that San income was of Marcos for income closed year of $X.X $X.X digital sale XXX% in to and million from branch million quarter our the the Non-interest the currency $XX.X customers increase a year full fee first

million, Slide the to fourth X, XXXX XXXX. $XX $XX.X $XX.X third non-interest the Turning million of in the expense which million to compares quarter quarter in of for of XXXX and quarter fourth was

in $X increases infrastructure. services, the administrative and The expansion related benefits, other to of was linked organic largely salaries our due quarter increase and fees, employee operational growth million and of primarily general professional to and our

total an division were December driven mortgage increase loans year-end X, billion XX.X% warehouse increase by quarter $X.XX and linked Side the X.X% Onto compared the a our compared XXXX increase XX, to year. a in to during at XXXX,

the the Bank. on our regulations. exceeded bank's of subsidiary capital levels at ratios Silvergate XXXX XX, ratios federal Slide represent each ratios capital At established the by banking well-capitalized December XX, The

XX.XX% Our securities. capital deposits cash the a fact reflects ratio in at total high our and proportion that held of risk grade large based are

on in up first for your everyone any for time line our I'd to We forward that, the look results like April. questions. again today. to open you ask Operator? quarter to Thank operator With the updating

[Operator with line you. question. first KBW. Please your with Perito from Our the proceed question Thank Instructions] Michael comes of

Michael Perito

Hey morning. guys. Good

Alan Lane

Good morning, Mike.

Michael Perito

a had few to questions. Alan I Leverage. start SEN I on wanted

adjusted curious an if I be volatile underwriting using price product as this – also, risk this, a and when expand product, processes asset a to be to and think, a interesting about what longer it little you seems pretty collateral, the could what returns you but like seems maybe bit thinking of underlying kind the what how the obviously that attractive of I'm – there's will you on makes plan comfortable underwriting term. and kind that

Alan Lane

a little Leverage, Sure. and I'll Ben over is SEN hand then Mike, start so on to out provide color. Alan, it this to I'll additional

of to as sure – service opportunity day, a believe way for said, very, the hours the to market Having that the consider have the I ability they is Bitcoin we're that, trades strong pilot that fact seven what very Bitcoin make So week. our customers, happens financial because days strength a perspective, the and risk the first we potentially from that are provides approaching collateral with underwriting would to strongest a of you very very working a for liquid debt looking what unique regardless collateral. a is XX adjusted the that said we an returns Bitcoin a a the

loan intend you the terms or or to underlying would require that believe require dollars of have collateral we the shortfall, by experience underwrite coverage, the should selling paying additional opportunity, will cover credit additional dollars for collateral type platform. either will, you a that margin of to would way adding U.S. a product, we And in given on if the an we adding the collateral volatility the we certainly the borrower the will down by collateral if the that that requirement

The we're pay day, be operates Network to XX/X, world down can XX a to XXX, the that of our to banks ability collateral for this monitoring shortfalls be able with position collateral probably believe week. and cover in offer the that of the or customers that functionality the days the their Silvergate line one only we a Exchange seven fact type hours

add Ben that? like to to would you

Ben Reynolds

note Yes, have highly is as sophisticated towards product to that so the I institutional this it's that clients. think important investors we targeted

to we in that So have, XXX clients close category.

And equities that's to mentioned group so and the that these very really this. sophisticated. for Alan trading folks they're target earlier, highly are As markets, commodities are the used

walk in And also the as a this success mentioned and we into we'll Alan before it We'll then expand it. pilot. concept demonstrate is the

Alan Lane

the and strong type a very this And of And get question this. be borrowers. then with Mike, one on we other on, point pilot that the might able again, asked yield that had on you working to is

be a initially will this the likely coverage, given price of that that there this just So, borrower. into go other would the about way of many digit strength the we've loan And is we level borrower of cetera. will the to et thought type be high-single the cost any collateral like factors that

features the so different it a mentioned, through to back to all be of basis. we to, you the intend during work start over reporting And pilot see XX how works Ben slowly And on quarterly XXX next the we'll we'll as days. here and

Michael Perito

the on normalized half updated willing that growth on, ability year you it basis were any you that to the of growth of have the I some but That's had just today. And for Great. questions. net I helpful, might show one, quickly, Thank I that just it. you. have to on to and curious thoughts rundown, was or elevated XXXX might think hit a appreciate I terms outlook related had in the balances there back a Alan, want also there were, deposit deposit impacted in that share a couple in I think growth couple were XXXX kind deposits if – of of

Alan Lane

Sure.

little I the and categories. Tony different as here to might So again, deposit look a we weigh-in well, as at bit ask start I'll then

day, customers, hours to participate amongst platform deposits our in across is So that, have a money the order the one XX everyone things that the also that fact of some they seven fairly in days deposit have said therefore market can a in is a able SEN, we – to volatility. that, think times the and the of enjoy because on enjoy that different week. aware themselves our base itself. we be Having the I deposit transfer at as experience It's the stable Bitcoin volatile fairly order platform to to call levels on

believe that customers SEN adding the we things transactions care number new on take the time. focused and and is the adoption are which the encouraging control, can over we on driving we themselves somewhat deposit and the SEN So of across will of balances

categories so know And, to of want don't Tony, deposits. I the at different on all you if comment

Tony Martino

give on to just here breakdown. Tony more a it's bit little Mike, so Sure, the you color

focus among of concentration adding less that So, discussed, more we're customer we the deposits. customers, to means the building base, continue quarter Alan on right? distribution customers As deposit every

a that's so element. And key

As we opportunities on reliant, fee to strategically we move less generating deposit focus funding. on forward, and become income want just more necessarily

little of this makeup a little $XXX bit quarter, that, and you as of of to or the know, for we makeup on Just insight a deposit breakdown give reported, a of NIM color hedging the we which not includes deposit bit rates. the We on the XX impact a part We NIM of as you $X.X used reported million our X.XX expense a of them. NIM. advantage basis CDs, were part to took point called of on and obviously for fintech are in took of million But a brokered business. equated premium decrease callable we subset that of part

to moving area funding and in as the we're sure you we adjustments our to that normalize first broader to just at make pointed the distribute But lower cost. are customers, continue base So, we to strategically, deposits continue quarter, out change. as make going costs. for approach deposit you currency can We're see add can that non-fintech doesn't to business the no continue we into the digital to

Michael Perito

with question, of just that And to then Tony you just stick that. into a Appreciate for my kind last second. leads just

in if impact no be significant have major any about could of more if forward? range for equal, fed, XXXX. that or should I does I minus as X.XX that we mean, the that other So there from thinking margin we action else mean, implications plus figure Are all most stabilize that we move the

Tony Martino

further – Mike yes normalize. given no moves – in where that's No, it we expect rates you're exactly spot-on that's

Michael Perito

just first as that'll happen clarify? And soon the as quarter, to

Tony Martino

NIM. the see I where That's now. right point entry the yes, Well,

Michael Perito

Appreciate great guys. Thank you questions. Okay, taking you. my

Alan Lane

Mike. Thanks

Operator

you. Thank

proceed Koysman of question your with next comes line question. the with Eugene Please from Barclays. Our

Eugene Koysman

taking Good morning. for my question. Thanks

Alan Lane

Good morning Eugene.

Eugene Koysman

new need client clients to keep the relationships assume that account, related should growth your deposit SEN drive fair investor the the they Looked SEN and deposits to earlier? deficiency the with the to on wanted deposits the we going down. from use the to of about both referenced forward more clients and How your Thanks. follow-up up, or Silvergate but increased for that like discussion. the Alan actual exchange is more deposits were deposit use I it were digital because the fewer ability think

Alan Lane

Sure. Eugene, off. this again. I'll start is Alan

of went release, right. absolutely bit period at you're as were the we number the were at look levels bit institutional up deposit the they of So across press investors the in that primarily. number at point, a institutional down When categories, investor customers we in different the and the while reported down category quarter the end exchange a and the candidly,

relates the Bitcoin on not is lot potential that is, volatility would of investor what a the to And daily that price and drive as of in in there's falling interest trading a movement basis. funds. aware, will ways daily look look, – pay to as They earn do their interest these on yield And they potentially other not yield you deposits. on will for are we

is when market seven back a day, way a at access week. days their assets, in have a assets outside – to have that trading make they when to we experienced opportunity why to – XX the hours time best are that Again, do declined Silvergate, the some they want they can so of the little that's that comes so, and trade returns fact just knowing when add continuing bit. the the customers putting different exchanges outflows periods deposits And focus during on on by we to

want to to time did turn focus you will is And over then your point, on deposits. adding And Ben, customers, that? so our drive add to which in

Ben Reynolds

Yeah.

Obviously, QX average daily down significantly. in Bitcoin price about versus average the at the of that Bitcoin QX look in price was you if deposits our of it down weren't XX%. daily QX, in So

Alan well looking to happening have the underlying the as really, utilization a it's as of we price number customers platform, asset that a so, And combination of the on at factors, the of number of of mentioned, SEN. what's the the as

down. optimistic had transfers ever SEN about had the at price we've fact is And moving at the quarter we more a time than so, was what XX,XXX that in really before fourth that the we're

cash look same you And of at the it's need kind so, It's order institutional just SEN and back them when transfers to more deposit the really efficient. execute they peel you strategies. more in trading the less the category, investor really on making onion really than that

the they more increases, in So to as the to strategies. and capital trading price same need have more have order execute –

growth while expect class we we deposit see as of it's the love And think of that whole us utilization mentioned, asset understand SEN. growth to as the as the Alan we're the drivers so, a as bit – we'd growth, and well. little pleased very And deposits a of the to see the grows, in the I with

Eugene Koysman

fair. That's

the in impact all levels me the to Bitcoin this deposits, at understand the deposit volatility isolate the Bitcoin and impact in and So, that two if of possible to the so help try drop-off the price it's the last quarters, – from and we on saw also efficiency. increased

So if is of one factors, X let's other. drop percent we those say the deposit two that, because or can say of

Ben Reynolds

Yeah. I'll start.

offering and think come have trying that intention you're that, are challenging other and things customers the way has Eugene So other news been one I to been the know, is at there, you into looking – yield. the their some the so correlation space banks to out mentioned there have of the do of

an is on month roadshow we question happens what we've start that – element XX as come there were actually that period. another been we so going in It's And got on to a yield people for paying it. and has the when

a type to not makes another condition, that of difficult it variable it's So correlation were the it's you but very new that do suggesting.

Alan Lane

if stages, will. is other thing – Eugene, thing the this the you other platform, the class is in their asset Alan. are the and both still And nascent

So to SEN the between SEN versus we're then they on trading. a the and folks get connect start customers the add we and account of the a open fund when oftentimes there's connect to account continuing and when they lag and when bit as long as little then

build stronger point this correlations, able we really believe time difficult. So it's but we to will be at over

Eugene Koysman

specifics you. FX your longer-term? SEN Got any pilot, your income last SEN question and give for And you on fee also today Leverage can the it. you it. efforts us and And do is this fees? Thank SEN how on demand through to much product Got monetize anticipate usage

Alan Lane

Sure.

Alan we'll Expanding on it down, extent in start FX will breaking income there. opportunity is volumes. this FX, the the fairly or over FX again. fee And start new So, the I'll last initiative is us our that We a so certain side. to platform or the – a year so. activity the – for follow the trading

so, in continue and And expand will underlying little the likely Having a income. grow will right. we as up see that, fee the of to FX our we bit continue volatility believe there, said to to we capabilities that

be of types volatility, other as again number have of transactions transactions that – it's categories transactional – all but will we not want space. do This the will monetize I far and new to to linear. fees, believe the little a to new those continue that and up growth It's is say right. a the But ability to our a of there grow the industry. bit As fees,

Leverage, service clearly the play did and SEN as SEN. you well to adoption the SEN through it are quarters. out far the is on the see by offering to as Leverage, received very comment unique is you a want customer adoption But We market can And Ben? that of over and going that

Ben Reynolds

Yeah, yeah.

to our of customers SEN, value you how shareholder we That's our to value shareholder and say, as So, do Alan if over SEN – the objective, maximizing relates step right? maximizing a it maximize longer and I term, mean the take the so value back mentioned. the as you

the so you say, is SEN do and on like really the Leverage, or side. pick the product on acquisition So Leverage of strengths how development then SEN that you And okay, of exactly? a customer do well one you business

a can that So, answer existing balance this we two we if sheet? customers investors, course, group and of yes. have sides efficient our of of And like these have the you exchanges capital because captive go out and of would customers make these are network hey, to up think say, the to you about more it, institutional folks most is and

is our have. with by existing risk so we existing the adjusted grow customers loan ways portfolio sales we – that generate folks of that And the some not and believe, able attractive are monetize is that the those, we we to returns what that have, very with being

example the explained SEN And scalable asset roadshow offer really we through if additional so, you that's continuing those And R&D our so believe platform the digital what a which process. to ultimately services work pipeline we around is product as very as services – and space, one be, what in of we to will, the customers. we're

this So, I would than say, customers maximize of of charge that's we think quarter. we terms how term kind much more in how longer we about these what it can

Eugene Koysman

you. Thank makes a Really sense. That lot of appreciate it.

Operator

Lane to for turn are Thank you. over remarks. any back time. Mr. Alan like closing the call There to no further questions I'd at this

Alan Lane

and very Thank right. else's everybody your you operator for you questions Eugene thank much All and and Mike for participation.

shareholders. which on to value in focus was here we in for what turn on customers, to continue drive piggyback Just just Ben adding entire saying, is then closing value our will think to our

fee this achieved have we call. demonstrate our The growing customer we results our global adoption, And quarter for that as XXXX. customer growth SEN which has income our year we full that results believe success believe concludes so, we to and experienced well payments and growth And network. look bodes both fourth substantial the

look super with and was to our utilizing recent just Leverage. product we offerings forward speaking we're for you and customers currency opportunities very Thank our to launch excited digital Ben all we you expand SEN your alluding see soon. our the SEN As to participation of very multiple to, much for

Operator

This teleconference. today's concludes Thank you.

Thank and time. this at lines your disconnect make have You a day. for participation nice you your

Silvergate Capital (SICLQ) 29 Jan 202019 Q4 Earnings call transcript