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Silvergate Capital Corporation Announces First Quarter 2022 Results

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LA JOLLA, Calif., April 19, 2022--(BUSINESS WIRE)--Silvergate Capital Corporation ("Silvergate" or "Company") (NYSE:SI) and its wholly-owned subsidiary, Silvergate Bank ("Bank"), today announced financial results for the three months ended March 31, 2022.

First Quarter 2022 Highlights

  • Net income for the quarter was $27.4 million, compared to $21.4 million for the fourth quarter of 2021, and $12.7 million for the first quarter of 2021

  • Net income available to common shareholders for the quarter was $24.7 million, or $0.79 per diluted common share, compared to net income of $18.4 million, or $0.66 per diluted share, for the fourth quarter of 2021, and net income of $12.7 million, or $0.55 per diluted share, for the first quarter of 2021

  • Digital currency customers grew to 1,503 at March 31, 2022, compared to 1,381 at December 31, 2021, and 1,104 at March 31, 2021

  • The Silvergate Exchange Network ("SEN") handled $142.3 billion of U.S. dollar transfers in the first quarter of 2022, a decrease of 35% compared to $219.2 billion in the fourth quarter of 2021, and a decrease of 15% compared to $166.5 billion in the first quarter of 2021; Cumulative U.S. dollar transfers on the SEN crossed $1 trillion dollars

  • Total SEN Leverage commitments were $1,070.1 million at March 31, 2022, compared to $570.5 million at December 31, 2021, and $196.5 million at March 31, 2021

  • Digital currency customer related fee income for the quarter was $8.9 million, compared to $9.3 million for the fourth quarter of 2021, and $7.1 million for the first quarter of 2021

  • Average digital currency customer deposits grew to $14.7 billion during the first quarter of 2022, compared to $13.3 billion during the fourth quarter of 2021

  • Closed acquisition of select blockchain-based payment technology assets from the Diem Group, further enhancing Silvergate’s existing stablecoin infrastructure

Alan Lane, president and chief executive officer of Silvergate, commented, "We started off 2022 on a strong note, driven by the power of our platform and continued progress on our strategic initiatives. I’m particularly pleased with our first quarter results when you consider that this was one of the most challenging periods for the broader crypto ecosystem since the beginning of the pandemic. While volume on the Silvergate Exchange Network was impacted by broader industry trends, I remain encouraged by the continued growth we saw in customers, SEN Leverage commitments, and average deposits, which reached a record $14.7 billion. To advance our customer-first approach, we continued to invest in our strategic initiatives, including stablecoin infrastructure through the acquisition of select blockchain-based payment technology assets from the Diem Group, and the launch of the Euro SEN. I look forward to the rest of 2022 and I am excited for what lies ahead for Silvergate."

As of or for the Three Months Ended

March 31,
2022

December 31,
2021

March 31,
2021

Financial Highlights

(Dollars in thousands, except per share data)

Net income

$

27,386

$

21,391

$

12,710

Net income available to common shareholders

$

24,698

$

18,375

$

12,710

Diluted earnings per common share

$

0.79

$

0.66

$

0.55

Return on average assets (ROAA)(1)

0.60

%

0.50

%

0.71

%

Return on average common equity (ROACE)(1)

6.87

%

7.25

%

9.76

%

Net interest margin(1)(2)

1.36

%

1.11

%

1.33

%

Cost of deposits(1)

0.00

%

0.00

%

0.00

%

Cost of funds(1)

0.01

%

0.01

%

0.02

%

Efficiency ratio(3)

46.74

%

52.08

%

63.03

%

Total assets

$

15,798,013

$

16,005,495

$

7,757,152

Total deposits

$

13,396,162

$

14,290,628

$

7,002,371

Book value per common share

$

42.77

$

46.55

$

28.75

Tier 1 leverage ratio

9.68

%

11.07

%

9.68

%

Total risk-based capital ratio

45.01

%

57.08

%

54.79

%

________________________

(1)

Data has been annualized.

(2)

Net interest margin is a ratio calculated as net interest income, on a fully taxable equivalent basis for interest income on tax-exempt securities using the federal statutory tax rate of 21.0%, divided by average interest earning assets for the same period.

(3)

Efficiency ratio is calculated by dividing noninterest expenses by net interest income plus noninterest income.

Digital Currency Initiative

At March 31, 2022, the Company’s digital currency customers increased to 1,503 from 1,381 at December 31, 2021, and from 1,104 at March 31, 2021. At March 31, 2022, prospective digital currency customer leads in various stages of the customer onboarding process and pipeline was above 300. For the first quarter of 2022, $142.3 billion of U.S. dollar transfers occurred on the SEN, a 35% decrease from $219.2 billion transfers in the fourth quarter of 2021, and a decrease of 15% compared to $166.5 billion in the first quarter of 2021. Based on digital currency industry transaction data provided by Coin Metrics, bitcoin and ether dollar trading volumes decreased by 33% during the first quarter of 2022 compared to the fourth quarter of 2021.

Results of Operations, Quarter Ended March 31, 2022

Net Interest Income and Net Interest Margin Analysis (Taxable Equivalent Basis)

The Company’s securities portfolio includes tax-exempt municipal bonds with tax-exempt income from these securities calculated and presented below on a taxable equivalent basis. Net interest income, net interest spread and net interest margin are presented on a taxable equivalent basis to consistently reflect income from taxable securities and tax-exempt securities based on the federal statutory tax rate of 21.0%.

Net interest income on a taxable equivalent basis totaled $54.0 million for the first quarter of 2022, compared to $40.2 million for the fourth quarter of 2021, and $23.5 million for the first quarter of 2021.

Compared to the fourth quarter of 2021, net interest income increased $13.8 million, due to increased interest income, while interest expense remained flat. Average total interest earning assets increased by $1.7 billion for the first quarter of 2022 compared to the fourth quarter of 2021, primarily due to increased securities offset by decreased interest earning deposits in other banks. The average yield on interest earning assets increased from 1.11% for the fourth quarter of 2021 to 1.37% for the first quarter of 2022, primarily due to a higher proportion of securities and a lower proportion of interest earning deposits in other banks as a percentage of interest earning assets, as well as higher yields on recently purchased securities. Average interest bearing liabilities increased $70.2 million for the first quarter of 2022 compared to the fourth quarter of 2021, due to increased FHLB advances. The average rate on total interest bearing liabilities decreased from 1.17% for the fourth quarter of 2021 to 0.85% for the first quarter of 2022, primarily due to a higher proportion of lower cost FHLB borrowings as a percentage of interest bearing liabilities.

Compared to the first quarter of 2021, net interest income increased $30.5 million due to increased interest income, with the largest driver being higher balances of securities, while interest expense remained relatively flat. Average total interest earning assets increased by $9.0 billion for the first quarter of 2022 compared to the first quarter of 2021, primarily due to increased securities balances funded by the growth in digital currency related deposits. The average yield on total interest earning assets increased from 1.35% for the first quarter of 2021 to 1.37% for the first quarter of 2022, primarily due to a higher proportion of securities and a lower proportion of interest earning deposits in other banks as a percentage of interest earning assets, partially offset by lower yields on the securities portfolio due to the majority of the securities in the portfolio being acquired in the last 12 months within a lower rate environment. Average interest bearing liabilities increased $30.6 million for the first quarter of 2022 compared to the first quarter of 2021, due to increased FHLB advances offset by lower balances of interest bearing deposits. The average rate on total interest bearing liabilities decreased from 0.89% for the first quarter of 2021 to 0.85% for the first quarter of 2022, primarily due to a higher proportion of lower cost FHLB borrowings as a percentage of interest bearing liabilities.

Net interest margin for the first quarter of 2022 was 1.36%, compared to 1.11% for the fourth quarter of 2021, and 1.33% for the first quarter of 2021. The increase in the net interest margin compared to the fourth quarter of 2021 was primarily due to a higher proportion of securities and a lower proportion of interest earning deposits in other banks as a percentage of interest earning assets, as well as higher yields on recently purchased securities. The increase in the net interest margin compared to the first quarter of 2021 was primarily due to a higher proportion of securities and a lower proportion of interest earning deposits in other banks as a percentage of interest earning assets, partially offset by lower yields on the securities portfolio.

Three Months Ended

March 31, 2022

December 31, 2021

March 31, 2021

Average
Outstanding
Balance

Interest
Income/
Expense

Average
Yield/
Rate

Average
Outstanding
Balance

Interest
Income/
Expense

Average
Yield/
Rate

Average
Outstanding
Balance

Interest
Income/
Expense

Average
Yield/
Rate

(Dollars in thousands)

Assets

Interest earning assets:

Interest earning deposits in other banks

$

3,067,054

$

1,385

0.18

%

$

5,282,661

$

2,166

0.16

%

$

4,450,110

$

1,279

0.12

%

Taxable securities

8,492,768

17,779

0.85

%

5,735,932

10,178

0.70

%

850,558

3,592

1.71

%

Tax-exempt securities(1)

2,887,072

16,689

2.34

%

1,728,862

9,454

2.17

%

270,711

2,146

3.21

%

Loans(2)(3)

1,644,604

18,287

4.51

%

1,641,345

17,892

4.32

%

1,559,989

16,597

4.31

%

Other

41,751

203

1.97

%

34,490

777

8.94

%

15,331

143

3.78

%

Total interest earning assets

16,133,249

54,343

1.37

%

14,423,290

40,467

1.11

%

7,146,699

23,757

1.35

%

Noninterest earning assets

500,299

295,841

72,155

Total assets

$

16,633,548

$

14,719,131

$

7,218,854

Liabilities and Shareholders’ Equity

Interest bearing liabilities:

Interest bearing deposits

$

76,663

$

21

0.11

%

$

77,564

$

27

0.14

%

$

117,228

$

46

0.16

%

FHLB advances and other borrowings

71,111

70

0.40

%

12

0.00

%

Subordinated debentures

15,846

252

6.45

%

15,843

249

6.24

%

15,832

245

6.28

%

Total interest bearing liabilities

163,620

343

0.85

%

93,419

276

1.17

%

133,060

291

0.89

%

Noninterest bearing liabilities:

Noninterest bearing deposits

14,781,601

13,377,552

6,526,555

Other liabilities

36,770

49,023

30,911

Shareholders’ equity

1,651,557

1,199,137

528,328

Total liabilities and shareholders’ equity

$

16,633,548

$

14,719,131

$

7,218,854

Net interest spread(4)

0.52

%

(0.06

) %

0.46

%

Net interest income, taxable equivalent basis

$

54,000

$

40,191

$

23,466

Net interest margin(5)

1.36

%

1.11

%

1.33

%

Reconciliation to reported net interest income:

Adjustments for taxable equivalent basis

(3,505

)

(1,985

)

(451

)

Net interest income, as reported

$

50,495

$

38,206

$

23,015

________________________

(1)

Interest income on tax-exempt securities is presented on a taxable equivalent basis using the federal statutory tax rate of 21.0% for all periods presented.

(2)

Loans include nonaccrual loans and loans held-for-sale, net of deferred fees and before allowance for loan losses.

(3)

Interest income includes amortization of deferred loan fees, net of deferred loan costs.

(4)

Net interest spread is the difference between interest rates earned on interest earning assets and interest rates paid on interest bearing liabilities.

(5)

Net interest margin is a ratio calculated as annualized net interest income, on a taxable equivalent basis, divided by average interest earning assets for the same period.

Provision for Loan Losses

The Company recorded a reversal of provision for loan losses of $2.5 million for the first quarter of 2022, compared to no provision for the fourth quarter of 2021, or for the first quarter of 2021. The reversal in the first quarter of 2022 was due to the changes in loan product and segment mix in the portfolio, including the net impact of the sale of approximately $150.8 million of real estate loans, partially offset by an increase in SEN Leverage loans.

Noninterest Income

Noninterest income for the first quarter of 2022 was $9.5 million, a decrease of $1.6 million, or 14.5%, from the fourth quarter of 2021. The primary reasons for this decrease were a $0.6 million increase in loss on sale of securities and a $0.4 million, or 4.4%, decrease in deposit related fees as a result of lower foreign exchange fees attributed in part to the geopolitical environment, which negatively impacted trading volume. Additionally, there was a $0.5 million decrease in other income due to a gain on sale of other assets of $0.4 million for the first quarter of 2022 compared to a gain on sale of other assets of $0.9 million recognized in the fourth quarter of 2021.

Noninterest income for the first quarter of 2022 increased by $1.4 million, or 16.8%, compared to the first quarter of 2021. This increase was primarily due to a $1.8 million, or 25.9%, increase in deposit related fees and a $0.4 million increase in other income due to a gain on sale of other assets, offset by a $0.3 million, or 31.8%, decrease in mortgage warehouse fee income and a $0.6 million loss on sale of securities recognized in the first quarter of 2022.

Three Months Ended

March 31,
2022

December 31,
2021

March 31,
2021

(Dollars in thousands)

Noninterest income:

Deposit related fees

$

8,968

$

9,378

$

7,124

Mortgage warehouse fee income

651

684

954

(Loss) gain on sale of securities, net

(605

)

56

Other income

436

937

12

Total noninterest income

$

9,450

$

11,055

$

8,090

Noninterest Expense

Noninterest expense totaled $28.0 million for the first quarter of 2022, an increase of $2.4 million, or 9.2%, compared to the fourth quarter of 2021, and an increase of $8.4 million, or 42.9%, compared to the first quarter of 2021. The increase in noninterest expense compared to prior quarter was primarily due to an increase in salaries and benefits expense attributable to increased headcount as part of organic growth as well as increases in communications and data processing costs all of which support the Company’s strategic initiatives. Other general and administrative expenses increased primarily due to an increase in the provision for off-balance sheet commitments related to SEN Leverage loans. This was partially offset by a decrease in federal deposit insurance expense due to a slower growth rate in deposit levels. The increase in noninterest expense from the first quarter of 2021 was primarily driven by an increase in salaries and employee benefits attributable to increased headcount as well as increases in communications and data processing, professional services, and other general and administrative of costs all of which support organic growth and the Company’s strategic initiatives.

Three Months Ended

March 31,
2022

December 31,
2021

March 31,
2021

(Dollars in thousands)

Noninterest expense:

Salaries and employee benefits

$

15,544

$

13,815

$

10,990

Occupancy and equipment

586

728

614

Communications and data processing

2,762

1,862

1,621

Professional services

2,954

2,994

1,717

Federal deposit insurance

1,762

3,100

2,296

Correspondent bank charges

828

634

497

Other loan expense

384

364

174

Other general and administrative

3,198

2,159

1,697

Total noninterest expense

$

28,018

$

25,656

$

19,606

Income Tax Expense (Benefit)

Income tax expense was $7.0 million for the first quarter of 2022, compared to $2.2 million for the fourth quarter of 2021, and a benefit of $1.2 million for the first quarter of 2021. Our effective tax rate for the first quarter of 2022 was 20.4%, compared to 9.4% for the fourth quarter of 2021, and (10.5)% for the first quarter of 2021. The tax expense and effective tax rate for the first quarter of 2022 was impacted by significant increases in tax-exempt income earned on certain municipal bonds compared to the fourth quarter of 2021 and the first quarter of 2021. In addition, the lower effective tax rates for the fourth quarter of 2022 and the first quarter of 2021, were due to higher excess tax benefits recognized on the exercise of stock options.

Balance Sheet

Deposits

At March 31, 2022, deposits totaled $13.4 billion, a decrease of $0.9 billion, or 6.3%, from December 31, 2021, and an increase of $6.4 billion, or 91.3%, from March 31, 2021. Noninterest bearing deposits totaled $13.3 billion, representing approximately 99.5% of total deposits at March 31, 2022, a decrease of $0.9 billion from the prior quarter end, and a $6.4 billion increase compared to March 31, 2021.

Our continued growth has been accompanied by significant fluctuations in the levels of our deposits, in particular our deposits from customers operating in the digital currency industry. The Bank’s average total digital currency customer deposits during the first quarter of 2022 amounted to $14.7 billion, with the high and low daily total digital currency deposit levels during such time being $16.2 billion and $13.2 billion, respectively, compared to an average of $13.3 billion during the fourth quarter of 2021, and high and low daily deposit levels of $16.0 billion and $10.2 billion, respectively.

Demand for new deposit accounts is generated by the Company’s banking platform for innovators that includes the SEN, which is enabled through Silvergate’s proprietary API, and other cash management solutions. These tools enable Silvergate’s customers to grow their businesses and scale operations. The following table sets forth a breakdown of the Company’s digital currency customer base and the deposits held by such customers at the dates noted below:

March 31, 2022

December 31, 2021

March 31, 2021

Number of
Customers

Total
Deposits(1)

Number of
Customers

Total
Deposits(1)

Number of
Customers

Total
Deposits(1)

(Dollars in millions)

Digital currency exchanges

96

$ 7,960

94

$ 8,288

85

$ 2,993

Institutional investors

966

3,109

894

4,220

695

2,166

Other customers

441

2,126

393

1,603

324

1,634

Total

1,503

$ 13,195

1,381

$ 14,111

1,104

$ 6,793

________________________

(1) Total deposits may not foot due to rounding.

The weighted average cost of deposits for the first quarter of 2022, the fourth quarter of 2021 and the first quarter of 2021 was 0.00%.

Three Months Ended

March 31, 2022

December 31, 2021

March 31, 2021

Average
Balance

Average
Rate

Average
Balance

Average
Rate

Average
Balance

Average
Rate

(Dollars in thousands)

Noninterest bearing demand accounts

$

14,781,601

$

13,377,552

$

6,526,555

Interest bearing accounts:

Interest bearing demand accounts

5,531

0.07

%

7,660

0.05

%

42,197

0.13

%

Money market and savings accounts

70,632

0.11

%

69,364

0.14

%

74,318

0.16

%

Certificates of deposit

500

0.81

%

540

0.73

%

713

0.57

%

Total interest bearing deposits

76,663

0.11

%

77,564

0.14

%

117,228

0.16

%

Total deposits