Shoulder Innovations, Inc.

Good morning and welcome to the Silvergate Capital Corporation third quarter 2020 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference line will be open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would like to turn the call over to Ms. Shannon Devine, Investor Relations for Silvergate. Please go ahead.

Thank you, Operator, and good morning, everyone. We appreciate your participation in our third quarter 2020 earnings call. With me here today are Alan Lane, our President and Chief Executive Officer, Tony Marchino, our Chief Financial Officer, and Ben Reynolds, EVP and Silvergate Bank Director of Corporate Development. As a reminder, a telephonic replay of this call will be available through 1159 p.m. Eastern Time on November 9, 2020. Access to the replay is also available on the investor relations section of our website. Additionally, a slide deck to complement today's discussion is available on the IR section of our website. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans, and prospects. Such statements are subject to a variety of risks, uncertainties, and other factors, including the COVID-19 pandemic that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our periodic and current reports to files with the Securities and Exchange Commission. We do not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss certain non-GAAP measures which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered an isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these nine GAAP measures to the most comparable GAAP measure can be found in our earnings relief. At this point, I'll turn the call over to Alan.

Thank you, Shannon, and good morning, everyone. Today, I'll provide a high-level overview of our operations before speaking to our results and the continued success we are achieving growing our global payments platform, the SilverGate Exchange Network, or SEND. I will then turn the call over to Tony, who will provide a more detailed review of our third quarter financial results before opening the call for questions. On previous earnings calls, I've addressed the current environment and how we've optimized our workforce while continuing to deliver uninterrupted service to our banking clients. 95% of our employees continue to work remotely, and I'd like to thank them once again for their continued hard work and efforts during such a challenging time. The record results we are achieving would not be possible without the dedicated commitment of our team. Several years ago, we made the decision to invest in our own infrastructure so that Silvergate could compete and succeed in a digital world. And when we saw digital currencies emerging as an investable asset class, we doubled down on that decision by investing in the technology and regulatory compliance necessary to develop the SEND. The acceptance of the SEND by the digital currency ecosystem is evident in our third quarter results, where our global payments platform achieved an incredible milestone, having surpassed $100 billion in transfer volumes just three years from inception. Our customers completed over $36 billion in SEND transfers during the third quarter alone, exceeding the $32 billion that was completed during all of 2019. This milestone further validates the SEND's competitive advantage and expanding network effect as we continue to add new customers to the platform. As can be seen on slide four, net digital currency customers increased 23% year-over-year to 928 in the third quarter of 2020 as compared to 756 in the year-ago third quarter. Looking forward, we continue to maintain a strong pipeline of potential new digital currency customers with more than 200 prospects either in the pipeline or onboarding process. Digital currency activity was very strong in the third quarter and the SEND handled a record 68,361 transactions, representing a sequential increase of 70% as compared to the second quarter of 2020, and an even more impressive year-over-year increase of 455% as compared to the year-ago third quarter. This strong growth also contributed to the 36% sequential increase in digital currency fee income to $3.3 million in the third quarter, as compared to $2.4 million in the second quarter of 2020, and a 106% increase as compared to $1.6 million in the third quarter of 2019. These results clearly demonstrate the SEND's strong network effect and the need for digital currency investors to be on the SEND in order to efficiently transact in the digital currency ecosystem. During the third quarter, Bitcoin and other digital currencies saw strong price appreciation and an active trading environment, which we believe contributed to the increase in the number of transactions occurring on the SEND. Further, we saw digital currency deposits grow $586 million to $2.1 billion in the third quarter, as customers maintained higher deposit balances in order to transact on the SEND. As we've seen in the past, our digital currency deposit growth is not linear. Factors such as digital currency price appreciation, trading volumes, and volatility within the digital currency markets influence deposit levels. But we believe that as more fintech firms and corporate treasuries announce their investments in Bitcoin, the ecosystem as a whole will continue to expand and Silvergate will continue to benefit. Turning to send leverage, which as a reminder allows customers of Silvergate to obtain U.S. dollar loans collateralized by Bitcoin, we continue to make significant progress. We exited our pilot program at the end of the third quarter with approved lines of credit totaling $35.5 million compared to $22.5 million in the second quarter. We anticipate a long growth trajectory for SEND leverage, and will judiciously expand credit availability to our customers over time. We believe that prudent underwriting, combined with the unique capabilities of the SEND to facilitate loan draws and repayments 24 hours a day, seven days a week, will enable SilverGate to attain attractive risk-adjusted returns as we expand the offering. Before turning the call over to Tony, I thought I'd touch briefly on the key banking risk metrics that provide the foundation for our success. We've always employed a disciplined and conservative credit culture, which is a key factor in our ability to navigate the recent economic duress with no loan losses and little in the way of loan loss provision expense. Turning to interest rate risk, while we don't predict interest rates, we recognized some time ago that our net interest margin and profitability could be negatively impacted in a falling interest rate environment. So in early 2019, we proactively addressed this risk with the interest rate hedging strategy we've discussed in the past. Finally, we remain well capitalized with a total risk-based capital ratio of 24.68% at September 30th, 2020. and a highly liquid balance sheet as reflected by our loan to deposit ratio of 61.45%. Our strong financial position provides our customers with confidence that we are managing our balance sheet to minimize risk and ensure that their deposits are highly liquid and available via the SEND 24 hours a day, seven days a week, 365 days a year. To conclude, I am very pleased with our performance especially given the ongoing uncertain economic environment. While the Fed's zero interest rate policy will be a headwind for many, Silvergate has an exciting growth engine in the SEND, which provides us with numerous opportunities for profitable investment to enhance growth, while our scalable mortgage warehouse business should continue to be a strong contributor to earnings. We believe we are in a very enviable position, and I couldn't be more excited with what the future holds for Silvergate. With that, I'd like to turn the call over to Tony for a more detailed review of our financial results.