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Silvergate Capital Corporation Announces Second Quarter 2022 Results

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LA JOLLA, Calif., July 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 and six months ended June 30, 2022.

Second Quarter 2022 Highlights

  • Net income for the quarter was $38.6 million, compared to $27.4 million for the first quarter of 2022, and $20.9 million for the second quarter of 2021

  • Net income available to common shareholders for the quarter was $35.9 million, or $1.13 per diluted common share, compared to net income of $24.7 million, or $0.79 per diluted share, for the first quarter of 2022, and net income of $20.9 million, or $0.80 per diluted share, for the second quarter of 2021

  • Digital currency customers grew to 1,585 at June 30, 2022, compared to 1,503 at March 31, 2022, and 1,224 at June 30, 2021

  • The Silvergate Exchange Network ("SEN") handled $191.3 billion of U.S. dollar transfers in the second quarter of 2022, an increase of 34% compared to $142.3 billion in the first quarter of 2022, and a decrease of 20% compared to $239.6 billion in the second quarter of 2021

  • Total SEN Leverage commitments increased to $1.4 billion at June 30, 2022, compared to $1.1 billion at March 31, 2022, and $258.5 million at June 30, 2021

  • Digital currency customer related fee income for the quarter was $8.8 million, compared to $8.9 million for the first quarter of 2022, and $11.3 million for the second quarter of 2021

  • Average digital currency customer deposits were $13.8 billion during the second quarter of 2022, compared to $14.7 billion during the first quarter of 2022

Alan Lane, president and chief executive officer of Silvergate, commented, "Silvergate had another strong quarter in light of the challenging backdrop facing the broader digital currency ecosystem. I am proud of our results as we achieved record net income available to common shareholders of $35.9 million and saw some of the highest daily dollar transfer volumes ever on the Silvergate Exchange Network (SEN). In addition, we saw continued demand for our SEN Leverage product, with no losses or forced liquidations."

"Overall, our platform was built to support our clients in this relatively nascent industry during periods of high volumes, market volatility and transformation, and performed as designed throughout the quarter. Our balance sheet is optimized for client liquidity and risk management practices are at the forefront in all aspects of our business to ensure we are prepared for any market environment. I remain confident in our trajectory throughout the second half of 2022, while continuing to invest in our strategic initiatives," Lane added.

As of or for the Three Months Ended

June 30,
2022

March 31,
2022

June 30,
2021

Financial Highlights

(Dollars in thousands, except per share data)

Net income

$

38,605

$

27,386

$

20,935

Net income available to common shareholders

$

35,917

$

24,698

$

20,935

Diluted earnings per common share

$

1.13

$

0.79

$

0.80

Return on average assets (ROAA)(1)

0.90

%

0.60

%

0.77

%

Return on average common equity (ROACE)(1)

10.99

%

6.87

%

10.40

%

Net interest margin(1)(2)

1.96

%

1.36

%

1.16

%

Cost of deposits(1)

0.00

%

0.00

%

0.00

%

Cost of funds(1)

0.03

%

0.01

%

0.01

%

Efficiency ratio(3)

38.30

%

46.74

%

50.69

%

Total assets

$

15,847,656

$

15,798,013

$

12,289,476

Total deposits

$

13,500,720

$

13,396,162

$

11,371,556

Book value per common share

$

38.86

$

42.77

$

32.84

Tier 1 leverage ratio

10.10

%

9.68

%

7.91

%

Total risk-based capital ratio

44.03

%

45.01

%

43.15

%

________________________

(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 June 30, 2022, the Company’s digital currency customers increased to 1,585 from 1,503 at March 31, 2022, and from 1,224 at June 30, 2021. At June 30, 2022, prospective digital currency customer leads in various stages of the customer onboarding process and pipeline were above 300. For the second quarter of 2022, $191.3 billion of U.S. dollar transfers occurred on the SEN, a 34% increase from $142.3 billion transfers in the first quarter of 2022, and a decrease of 20% compared to $239.6 billion in the second quarter of 2021. Based on digital currency industry transaction data provided by Coin Metrics, bitcoin and ether dollar trading volumes increased by 6% during the second quarter of 2022 compared to the first quarter of 2022.

Results of Operations, Quarter Ended June 30, 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 $74.5 million for the second quarter of 2022, compared to $54.0 million for the first quarter of 2022, and $31.2 million for the second quarter of 2021.

Compared to the first quarter of 2022, net interest income increased $20.5 million due to increased interest income, driven by higher yields across all interest earning asset categories, offset slightly by increased interest expense. Average total interest earning assets decreased by $0.9 billion for the second quarter of 2022 compared to the first quarter of 2022, primarily due to decreased interest earning deposits in other banks due in part to lower average deposits and increased securities balances. The average yield on interest earning assets increased from 1.37% for the first quarter of 2022 to 1.99% for the second quarter of 2022, with the most significant impacts due to higher yields on securities and loans. Average interest bearing liabilities increased $318.2 million for the second quarter of 2022 compared to the first quarter of 2022, due to increased FHLB advances. The average rate on total interest bearing liabilities increased from 0.85% for the first quarter of 2022 to 0.87% for the second quarter of 2022, primarily due to an increase in interest rates on FHLB borrowings.

Compared to the second quarter of 2021, net interest income increased $43.3 million due to increased interest income, with the largest driver being higher securities balances, offset slightly by increased interest expense. Average total interest earning assets increased by $4.4 billion for the second quarter of 2022 compared to the second quarter of 2021, primarily due to increased securities balances funded primarily by the growth in digital currency related deposits and reallocation of interest earning deposits in other banks. The average yield on total interest earning assets increased from 1.17% for the second quarter of 2021 to 1.99% for the second 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 securities, loans and interest earning deposits in other banks. Average interest bearing liabilities increased $368.4 million for the second quarter of 2022 compared to the second quarter of 2021, due to increased FHLB advances. The average rate on total interest bearing liabilities decreased from 1.02% for the second quarter of 2021 to 0.87% for the second 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 second quarter of 2022 was 1.96%, compared to 1.36% for the first quarter of 2022, and 1.16% for the second quarter of 2021. The increase in net interest margin compared to the first quarter of 2022 was primarily due to higher yields on adjustable rate securities and loans reflecting the increasing interest rate environment. The increase in net interest margin compared to the second 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 securities, loans and interest earning deposits in other banks.

Three Months Ended

June 30, 2022

March 31, 2022

June 30, 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

$

1,458,173

$

3,008

0.83

%

$

3,067,054

$

1,385

0.18

%

$

5,603,397

$

1,599

0.11

%

Taxable securities

9,058,960

30,986

1.37

%

8,492,768

17,779

0.85

%

2,937,659

8,324

1.14

%

Tax-exempt securities(1)

2,992,038

18,759

2.51

%

2,887,072

16,689

2.34

%

698,149

3,953

2.27

%

Loans(2)(3)

1,689,852

22,054

5.23

%

1,644,604

18,287

4.51

%

1,541,373

17,158

4.46

%

Other

58,852

719

4.90

%

41,751

203

1.97

%

29,394

466

6.36

%

Total interest earning assets

15,257,875

75,526

1.99

%

16,133,249

54,343

1.37

%

10,809,972

31,500

1.17

%

Noninterest earning assets

729,378

500,299

121,288

Total assets

$

15,987,253

$

16,633,548

$

10,931,260

Liabilities and Shareholders’ Equity

Interest bearing liabilities:

Interest bearing deposits

$

68,128

$

2

0.01

%

$

76,663

$

21

0.11

%

$

97,463

$

35

0.14

%

FHLB advances and other borrowings

397,810

796

0.80

%

71,111

70

0.40

%

44

0.00

%

Subordinated debentures

15,850

243

6.15

%

15,846

252

6.45

%

15,836

252

6.38

%

Total interest bearing liabilities

481,788

1,041

0.87

%

163,620

343

0.85

%

113,343

287

1.02

%

Noninterest bearing liabilities:

Noninterest bearing deposits

13,951,397

14,781,601

9,980,680

Other liabilities

49,550

36,770

29,586

Shareholders’ equity

1,504,518

1,651,557

807,651

Total liabilities and shareholders’ equity

$

15,987,253

$

16,633,548

$

10,931,260

Net interest spread(4)

1.12

%

0.52

%

0.15

%

Net interest income, taxable equivalent basis

$

74,485

$

54,000

$

31,213

Net interest margin(5)

1.96

%

1.36

%

1.16

%

Reconciliation to reported net interest income:

Adjustments for taxable equivalent basis

(3,939

)

(3,505

)

(830

)

Net interest income, as reported

$

70,546

$

50,495

$

30,383

________________________

(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 no provision for loan losses for the second quarter of 2022, compared to a reversal of provision for loan losses of $2.5 million for the first quarter of 2022, and no provision for the second 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 real estate loans, partially offset by an increase in SEN Leverage loans.

Noninterest Income

Noninterest income for the second quarter of 2022 was $9.2 million, a decrease of $0.2 million, or 2.5%, from the first quarter of 2022. The primary reasons for this decrease were a $0.4 million decrease in other income due to a gain on sale of other assets of $0.4 million for the first quarter of 2022 and a $0.2 million, or 1.8%, decrease in deposit related fees which remained relatively flat, offset by a $0.4 million decrease in loss on sale of securities.

Noninterest income for the second quarter of 2022 decreased by $2.9 million, or 23.7%, compared to the second quarter of 2021. This decrease was primarily due to a $2.5 million, or 22.1%, decrease in deposit related fees as a result of lower cash management fees from digital currency related customers.

Three Months Ended

June 30,
2022

March 31,
2022

June 30,
2021

(Dollars in thousands)

Noninterest income:

Deposit related fees

$

8,808

$

8,968

$

11,308

Mortgage warehouse fee income

555

651

753

Loss on sale of securities, net

(199

)

(605

)

Other income

50

436

8

Total noninterest income

$

9,214

$

9,450

$

12,069

Noninterest Expense

Noninterest expense totaled $30.6 million for the second quarter of 2022, an increase of $2.5 million, or 9.0%, compared to the first quarter of 2022, and an increase of $9.0 million, or 42.0%, compared to the second quarter of 2021. The increase in noninterest expense compared to the 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 professional services and occupancy and equipment costs, all of which support the Company’s strategic initiatives. Other general and administrative expenses decreased from the first quarter of 2022 primarily due to a $1.6 million reversal of the provision for off-balance sheet commitments due to a change in estimate related to bitcoin collateralized SEN Leverage commitments. The increase in noninterest expense from the second quarter of 2021 was primarily driven by an increase in salaries and employee benefits attributable to increased headcount as well as increases in occupancy and equipment, communications and data processing and professional services, all of which support organic growth and the Company’s strategic initiatives. This was partially offset by a decrease in federal deposit insurance expense due to a lower growth rate in deposit levels.

Three Months Ended

June 30,
2022

March 31,
2022

June 30,
2021

(Dollars in thousands)

Noninterest expense:

Salaries and employee benefits

$

16,356

$

15,544

$

10,260

Occupancy and equipment

1,063

586

599

Communications and data processing

2,967

2,762

1,796

Professional services

6,280

2,954

2,594

Federal deposit insurance

1,495

1,762

3,844

Correspondent bank charges

801

828

812

Other loan expense

682

384

280

Other general and administrative

908

3,198

1,334

Total noninterest expense

$

30,552

$

28,018

$

21,519

Income Tax Expense (Benefit)

Income tax expense was $10.6 million for the second quarter of 2022, compared to $7.0 million for the first quarter of 2022, and a benefit of $2,000 for the second quarter of 2021. Our effective tax rate for the second quarter of 2022 was 21.5%, compared to 20.4% for the first quarter of 2022, and zero for the second quarter of 2021. The tax expense and effective tax rate for the first and second quarter of 2022 were impacted by significant increases in tax-exempt income earned on certain municipal bonds compared to the second quarter of 2021. In addition, the lower effective tax rate for the second quarter of 2021 was due to higher excess tax benefits recognized on the exercise of stock options.

Balance Sheet

Deposits

At June 30, 2022, deposits totaled $13.5 billion, an increase of $104.6 million, or 0.8%, from March 31, 2022, and an increase of $2.1 billion, or 18.7%, from June 30, 2021. Noninterest bearing deposits totaled $13.4 billion, representing approximately 99.5% of total deposits at June 30, 2022, an increase of $112.5 million from the prior quarter end, and a $2.1 billion increase compared to June 30, 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 deposits from digital currency customers during the second quarter of 2022 amounted to $13.8 billion, with the high and low daily totals of these deposit levels during such time being $17.6 billion and $12.6 billion, respectively, compared to an average of $14.7 billion during the first quarter of 2022, and high and low daily deposit levels of $16.2 billion and $13.2 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:

June 30, 2022

March 31, 2022

June 30, 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

102

$

8,133

96

$

7,960

93

$

5,395

Institutional investors

1,017

3,293

966

3,109

771

3,986

Other customers

466

1,879

441

2,126

360

1,734

Total

1,585

$

13,304

1,503

$

13,195

1,224

$

11,114

________________________

(1)

Total deposits may not foot due to rounding.

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

Three Months Ended

June 30, 2022

March 31, 2022

June 30, 2021

Average
Balance

Average
Rate

Average
Balance

Average
Rate

Average
Balance

Average
Rate

(Dollars in thousands)

Noninterest bearing demand accounts

$

13,951,397

$

14,781,601

$

9,980,680

Interest bearing accounts:

Interest bearing demand accounts

3,250

0.00

%

5,531

0.07

%

27,303

0.12

%

Money market and savings accounts

64,456

0.01

%

70,632

0.11

%

69,527

0.15

%

Certificates of deposit

422

0.95

%

500

0.81

%

633

0.63

%

Total interest bearing deposits

68,128

0.01

%

76,663

0.11

%

97,463

0.14

%

Total deposits

$

14,019,525

0.00

%

$

14,858,264

0.00

%

$

10,078,143

0.00

%

Loan Portfolio

Total loans, including net loans held-for-investment and loans held-for-sale, were $1.5 billion at June 30, 2022, a decrease of $209.4 million, or 12.5%, from March 31, 2022, and a decrease of $22.0 million, or 1.5%, from June 30, 2021.

June 30,
2022

March 31,
2022

June 30,
2021

(Dollars in thousands)

Real estate loans:

One-to-four family

$

82,671

$

94,161

$

144,247

Multi-family

8,827

9,368

67,704

Commercial

69,637

80,279

272,948

Construction

5,481

Commercial and industrial(1)

302,610

434,960

204,279

Reverse mortgage and other

1,110

1,137

1,364

Mortgage warehouse

136,485

125,435

49,897

Total gross loans held-for-investment

601,340

745,340

745,920

Deferred fees, net

(2,227

)

(1,884

)

1,151

Total loans held-for-investment

599,113

743,456

747,071

Allowance for loan losses

(4,442

)

(4,442

)

(6,916

)

Loans held-for-investment, net

594,671

739,014

740,155

Loans held-for-sale(2)

872,056

937,140

748,577

Total loans

$

1,466,727

$

1,676,154

$

1,488,732

________________________

(1)

Commercial and industrial loans includes $302.6 million, $435.0 million and $203.4 million of SEN Leverage loans as of June 30, 2022, March 31, 2022 and June 30, 2021, respectively.

(2)

Loans held-for-sale includes $872.1 million, $914.2 million and $748.6 million of mortgage warehouse loans as of June 30, 2022, March 31, 2022 and June 30, 2021, respectively.

Asset Quality and Allowance for Loan Losses

The allowance for loan losses was unchanged from $4.4 million at June 30, 2022, compared to March 31, 2022 and down from $6.9 million at June 30, 2021. The ratio of the allowance for loan losses to total loans held-for-investment at June 30, 2022 was 0.74%, compared to 0.60% and 0.93% at March 31, 2022 and June 30, 2021, respectively.

Nonperforming assets totaled $3.8 million, or 0.02% of total assets, at June 30, 2022, an increase of $0.1 million from $3.6 million, or 0.02% of total assets at March 31, 2022. Nonperforming assets decreased $3.7 million, from $7.4 million, or 0.06%, of total assets at June 30, 2021.

June 30,
2022

March 31,
2022

June 30,
2021

Asset Quality

(Dollars in thousands)

Nonperforming Assets:

Nonaccrual loans

$

3,724

$

3,632

$

7,444

Troubled debt restructurings

$

1,619

$

1,703

$

1,437

Other real estate owned, net