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Silvergate Capital Corporation Announces Fourth Quarter and Full Year 2019 Results

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Company Release – 1/29/2020 6:30 AM ET

LA JOLLA, Calif.–(BUSINESS WIRE)– Silvergate Capital Corporation (“Silvergate” or “Company”) (NYSE:SI) and its wholly-owned subsidiary, Silvergate Bank (“Bank”), today announced financial results for the period ended December 31, 2019.

Fourth Quarter 2019 Financial Highlights

  • Successfully completed the Company’s initial public offering of 824,605 shares of common stock sold by the Company and 2,508,728 shares sold by selling shareholders on November 12, 2019. On November 18, 2019, the underwriters exercised in full their over-allotment option to purchase an additional 499,999 shares from the selling shareholders.
  • Net income for the quarter was $3.6 million, or $0.19 per diluted share, compared to net income of $6.7 million, or $0.36 per diluted share, for the third quarter of 2019, and net income of $8.0 million, or $0.44 per diluted share, for the fourth quarter of 2018
  • Digital currency customers grew to 804 at December 31, 2019 compared to 756 at September 30, 2019, and 542 at December 31, 2018
  • The Silvergate Exchange Network (“SEN”) handled 14,400 transactions in the fourth quarter as compared to 12,312 transactions in the third quarter of 2019 and 4,977 transactions in the fourth quarter of 2018
  • The SEN handled $9.6 billion of U.S. dollar transfers in the fourth quarter as compared to $10.4 billion in the third quarter of 2019, and $3.9 billion in the fourth quarter of 2018
  • Digital currency customer related fee income for the quarter was $1.4 million, compared to $1.6 million for the third quarter of 2019, and $0.7 million for the fourth quarter of 2018
  • Book value per share was $12.38 at December 31, 2019, compared to $12.92 at September 30, 2019, and $10.73 at December 31, 2018

Full Year 2019 Financial Highlights

  • Net income for the year ended December 31, 2019 was $24.8 million, or $1.35 per diluted share, compared to net income of $22.3 million, or $1.31 per diluted share for the year ended December 31, 2018
  • The SEN handled 46,063 transactions for the year ended December 31, 2019 as compared to 7,869 for the year ended December 31, 2018
  • The SEN handled $32.7 billion of U.S. dollar transfers for the year ended December 31, 2019 as compared to $8.3 billion for the year ended December 31, 2018
  • Digital currency customer related fee income for the year ended December 31, 2019 was $4.9 million compared to $2.0 million for the year ended December 31, 2018

Alan Lane, president and chief executive officer of Silvergate, commented, “Our fourth quarter results were in line with our expectations and highlighted by the continued strong growth of the SEN which added 48 digital currency customers in the fourth quarter, bringing our total customers to 804 at the end of the year. The SEN’s strong adoption can also be seen in the network’s digital currency transactions which rose 17% sequentially from the third quarter. While the price of bitcoin was volatile in the fourth quarter, impacting digital fee income and U.S. dollar volumes, we remain confident in the growth outlook for the SEN given our strong customer pipeline and increased SEN transaction volumes combined with the many opportunities that we see to expand the SEN’s product offerings to further drive digital currency fee income growth. One such initiative, recently announced, is SEN Leverage which will allow our customers to obtain U.S. dollar loans collateralized by bitcoin. SEN Leverage further enhances the competitive advantage and network effect of our global payments platform and demonstrates Silvergate’s leadership in providing banking services for the digital currency industry.”

  As of or for the Three Months Ended
  December 31,
2019
 September 30,
2019
 December 31,
2018
       
Financial Highlights (Dollars in thousands, except per share data)
Net income $ 3,598  $ 6,656  $ 8,020 
Diluted earnings per share $ 0.19  $ 0.36  $ 0.44 
Return on average assets (ROAA)(1)  0.67%  1.20%  1.37%
Return on average equity (ROAE)(1)  6.08%  11.78%  16.90%
Net interest margin(1)(2)  2.97%  3.39%  3.59%
Cost of deposits(1)(3)  0.84%  0.50%  0.08%
Cost of funds(1)(3)  0.94%  0.59%  0.14%
Efficiency ratio(4)  72.81%  59.93%  61.12%
Total assets $ 2,128,127  $ 2,136,844  $ 2,004,318 
Total deposits $ 1,814,654  $ 1,848,095  $ 1,783,005 
Book value per share $ 12.38  $ 12.92  $ 10.73 
Tier 1 leverage ratio  11.04%  10.43%  9.00%
Total risk-based capital ratio  26.45%  25.97%  25.77%
  Year Ended December 31,
  2019 2018
     
Financial Highlights (Dollars in thousands, except per share data)
Net income $ 24,846  $ 22,333 
Diluted earnings per share $ 1.35  $ 1.31 
Return on average assets (ROAA)  1.19%  1.11%
Adjusted return on average assets (ROAA)(5)  1.00%  1.11%
Return on average equity (ROAE)  11.54%  13.47%
Adjusted return on average equity (ROAE)(5)  9.71%  13.47%
Net interest margin(2)  3.47%  3.49%
Cost of deposits(3)  0.43%  0.10%
Cost of funds(3)  0.54%  0.17%
Efficiency ratio(4)  60.52%  62.59%
Adjusted efficiency ratio(4)(5)  64.63%  62.59%

_______________________

(1)Data has been annualized.
(2)Net interest margin is a ratio calculated as annualized net interest income divided by average interest earning assets for the same period.
(3)Cost of deposits and cost of funds increased beginning in the second quarter of 2019 due to the cost of a hedging strategy discussed in“Balance Sheet —Securities” in more detail below.
(4)Efficiency ratio is calculated by dividing noninterest expenses by net interest income plus noninterest income.
(5)In March 2019, the Bank completed the sale of its San Marcos branch and business loan portfolio which generated a pre-tax gain on sale of $5.5 million, or $3.9 million after tax, which significantly positively impacted net income, diluted earnings per share, ROAA, ROAE and efficiency ratio during the first quarter of 2019. See “Non-GAAP Financial Measures” for further information and reconciliation of these metrics.

Digital Currency Initiative

At December 31, 2019, our digital currency customers increased to 804 from 756 at September 30, 2019, and from 542 at December 31, 2018. At December 31, 2019, we had 242 prospective digital currency customer leads in various stages of our customer onboarding process and pipeline. There were 14,400 transactions on the SEN for the three months ended December 31, 2019, resulting in 46,063 transactions on the SEN for the year ended December 31, 2019.

In addition, for the three months ended December 31, 2019, $9.6 billion of U.S. dollar transfers occurred on the SEN, bringing total U.S. dollar transfers on the SEN to $32.7 billion for the year ended December 31, 2019.

  Three Months Ended Year Ended
  December 31,
2019
 September 30,
2019
 December 31,
2018
 December 31,
2019
 December 31,
2018
           
  (Dollars in millions)
# SEN Transactions  14,400   12,312   4,977   46,063   7,869 
$ Volume of SEN Transfers $ 9,607  $ 10,425  $ 3,911  $ 32,733  $ 8,270 
 

Results of Operations, Quarter Ended December 31, 2019

Net Interest Income and Net Interest Margin Analysis

Net interest income totaled $15.6 million for the fourth quarter of 2019, compared to $18.4 million for the third quarter of 2019, and $20.9 million for the fourth quarter of 2018.

Compared to the third quarter of 2019, net interest income decreased $2.8 million due to an increase in interest expense as a result of premium expense associated with calling and reissuing brokered certificates of deposits at lower rates, and a decrease in interest earning assets driven primarily by a decrease in average balances of interest earning deposits in other banks and securities. In addition, the Federal Open Market Committee lowered the federal funds rate in both the third and fourth quarter of 2019, reducing the yields on Bank interest earning deposits and securities. This was partially offset by an increase in average loans, primarily due to an increase in mortgage warehouse loan balances.

Compared to the fourth quarter of 2018, net interest income decreased $5.2 million due to a $213.0 million decrease in average interest earning assets, a $302.4 million increase in average interest bearing liabilities, and a 205 basis point increase in the rates on interest bearing liabilities. Average interest earning assets decreased primarily due to a decrease in interest earning deposits offset by an increase in securities and loans. The decrease in interest earning deposits was primarily due to the investment of such funds in higher yielding securities and loans. The increase in securities resulted from purchases of fixed-rate commercial mortgage-backed securities and adjustable rate residential mortgage-backed securities, while the increase in loans was primarily driven by an increase in mortgage refinancing, increased mortgage warehouse loan demand, and increased production of multi-family residential loans, offsetting a decrease in loans related to the sale of the business loan portfolio in the first quarter of 2019. Yields on earning assets benefited from the increase in securities relative to interest earning deposits in other banks and an increase in interest income primarily due to increased mortgage warehouse loan balances. The increase in rates on interest bearing deposits was primarily due to the issuance of callable brokered certificates of deposits, which were used to fund fixed-rate commercial mortgage-backed securities, both associated with a hedging strategy which is discussed in further detail under “Balance Sheet—Securities.” Noninterest bearing deposits generated by the digital currency initiative are primarily invested in securities and interest earning deposits.

Net interest margin for the fourth quarter of 2019 was 2.97%, compared to 3.39% for the third quarter of 2019, and 3.59% for the fourth quarter of 2018. The decrease in the net interest margin compared to the third quarter of 2019 was driven by an increase in interest expense due to premium expense associated with calling and reissuing brokered certificates of deposits at lower rates. The yield on interest earning assets declined 11 basis points due primarily to reductions in the federal funds rate during the third and fourth quarters of 2019, which was partially offset by increased balances of higher yielding mortgage warehouse loans. The net interest margin decrease from the fourth quarter of 2018 was primarily due to increased interest expense from the new callable brokered certificates of deposits associated with the hedging strategy.

  Three Months Ended
  December 31, 2019 September 30, 2019 December 31, 2018
  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
 $ 165,685  $ 685  1.64% $ 234,606  $ 1,183  2.00% $ 1,091,391  $ 6,220  2.26%
Securities  905,399   6,117  2.68%  935,263   6,510  2.76%  309,360   2,316  2.97%
Loans(1)(2)  1,008,987   13,076  5.14%  979,283   13,574  5.50%  892,947   12,743  5.66%
Other  10,744   234  8.64%  10,742   121  4.47%  10,140   322  12.60%
Total interest earning assets  2,090,815   20,112  3.82%  2,159,894   21,388  3.93%  2,303,838   21,601  3.72%
Noninterest earning assets  46,708       45,306       14,124     
Total assets $ 2,137,523      $ 2,205,200      $ 2,317,962     
Liabilities and Shareholders’ Equity                  
Interest bearing liabilities:                  
Interest bearing deposits $ 449,985  $ 3,793  3.34% $ 438,277  $ 2,385  2.16% $ 226,688  $ 401  0.70%
FHLB advances and other
borrowings
  85,451   419  1.95%  43,642   289  2.63%  6,371   93  5.79%
Subordinated debentures  15,815   270  6.77%  15,810   271  6.80%  15,800   244  6.13%
Total interest bearing liabilities  551,251   4,482  3.23%  497,729   2,945  2.35%  248,859   738  1.18%
Noninterest bearing liabilities:                  
Noninterest bearing deposits  1,335,186       1,468,992       1,873,690     
Other liabilities  16,274       14,400       7,123     
Shareholders’ equity  234,812       224,079       188,290     
Total liabilities and shareholders’
equity
 $ 2,137,523      $ 2,205,200      $ 2,317,962     
Net interest spread(3)     0.59%     1.58%     2.54%
Net interest income   $ 15,630      $ 18,443      $ 20,863   
Net interest margin(4)     2.97%     3.39%     3.59%

________________________

(1)Loans include nonaccrual loans and loans held-for-sale, net of deferred fees and before allowance for loan losses.
(2)Interest income includes amortization of deferred loan fees, net of deferred loan costs.
(3)Net interest spread is the difference between interest rates earned on interest earning assets and interest rates paid on interest bearingliabilities.
(4)Net interest margin is a ratio calculated as annualized net interest income divided by average interest earning assets for the same period.

Provision for Loan Losses

The Company recorded no provision for loan losses for the fourth quarter of 2019, compared to reversals of the provision for loan losses of $0.9 million for the third quarter of 2019, and $1.7 million for the fourth quarter of 2018. The reversal in the third quarter of 2019 was due to improvements in qualitative factors related to the loan portfolio and the continued low charge-off rates. The reversal in the fourth quarter of 2018 was primarily due to reclassifying $125.2 million in loans held-for-investment as loans held-for-sale in connection with the Company’s November 2018 agreement to sell the Bank’s business loan portfolio.

Noninterest Income

Noninterest income for the fourth quarter of 2019 was $3.1 million, an increase of $0.5 million, or 20.4%, from the third quarter of 2019. The primary driver of this increase was a $0.7 million gain on sale of securitieswhich is discussed in further detail under “Balance Sheet—Securities.”

Noninterest income for the fourth quarter of 2019 increased by $1.1 million, or 57.2%, compared to the fourth quarter of 2018. This increase was driven by a $0.7 million, or 90.6%, increase in deposit related fees, along with the $0.7 million gain on sale of securities, partially offset by a decrease in service fees related to off-balance sheet deposits. Deposit related fees increased primarily due to increases in cash management, foreign exchange, and SEN related fees associated with our digital currency initiative.

  Three Months Ended
  December 31,
2019
 September 30,
2019
 December 31,
2018
       
  (Dollars in thousands)
Noninterest income:      
Mortgage warehouse fee income $ 388  $ 373  $ 353 
Service fees related to off-balance sheet deposits  183   283   739 
Deposit related fees  1,487   1,657   780 
Gain on sale of loans, net  235   248   12 
Gain (loss) on sale of securities, net  740   (16)  
Other income  97   54   107 
Total noninterest income $ 3,130  $ 2,599  $ 1,991 

Noninterest Expense

Noninterest expense totaled $13.7 million for the fourth quarter of 2019, an increase of $1.0 million compared to the third quarter of 2019, and a decrease of $0.3 million compared to the fourth quarter of 2018.

Noninterest expense increased from the prior quarter due to increases in salaries and employee benefits, professional services and other general and administrative expense.

Noninterest expense decreased from the fourth quarter of 2018 due to lower professional services and federal deposit insurance expense offset by increases in salaries and employee benefits, communications and data processing and other general and administrative expense.

  Three Months Ended
  December 31,
2019
 September 30,
2019
 December 31,
2018
       
  (Dollars in thousands)
Noninterest expense:      
Salaries and employee benefits $8,773  $8,277  $8,563 
Occupancy and equipment 861  892  840 
Communications and data processing 1,149  1,298  939 
Professional services 1,198  889  2,132 
Federal deposit insurance 33  39  152 
Correspondent bank charges 323  288  249 
Other loan expense 122  47  221 
Other real estate owned expense (recovery) 90  75  (15)
Other general and administrative 1,111  806  887 
Total noninterest expense $13,660  $12,611  $13,968 

Income Tax Expense

Income tax expense was $1.5 million for the fourth quarter of 2019, compared to $2.6 million for the third quarter of 2019, and $2.5 million for the fourth quarter of 2018. Our effective tax rate for the fourth quarter of 2019 was 29.5%, compared to 28.3% for the third quarter of 2019, and 24.1% fourth quarter of 2018. The effective tax rate for the fourth quarter of 2019 was impacted by higher blended state taxes and lower excess benefit from stock-based compensation compared to the fourth quarter of 2018.

Results of Operations, Year Ended December 31, 2019

Net income for the year ended December 31, 2019 was $24.8 million, or $1.35 per diluted share, compared to $22.3 million, or $1.31 per diluted share, for 2018.

Net interest income for the year ended December 31, 2019 was $71.0 million, compared to $69.6 million for the same period in 2018. Our increased net interest income was primarily due to an $8.3 million increase in interest income partially offset by a $6.9 million increase in interest expense. The increase in interest income was due to both an increase in average earning assets and higher yields on those assets, driven in part by an increase in higher yielding securities and a reduction in lower yielding interest earning deposits, which offset higher rates on interest bearing deposits as a result of the new callable brokered certificates of deposits associated with the Company’s hedging strategy.

Noninterest income for the year ended December 31, 2019 was $15.8 million, compared to $7.6 million for 2018. The increase in total noninterest income was primarily due to the increase in fee income from our digital currency customers and a $5.5 million gain on a branch sale that occurred in the first quarter of 2019. Digital currency customer related fee income for the year ended December 31, 2019 was $4.9 million as compared to $2.0 million for the year ended December 31, 2018.

Noninterest expense was $52.5 million for the year ended December 31, 2019, compared to $48.3 million for the year ended December 31, 2018. The increase in noninterest expense was primarily due to increases in salaries and benefits and communications and data processing expenses relating to our organic growth, as we have expanded operational infrastructure and implemented our plan to build an efficient, technology-driven global payments platform with significant capacity for growth.

Income tax expense was $9.8 million for the year ended December 31, 2019, compared to income tax expense of $8.1 million for 2018. Our effective tax rate for 2019 and 2018 was 28.3% and 26.5%, respectively.

Balance Sheet

Deposits

At December 31, 2019, deposits totaled $1.8 billion, a decrease of $33.4 million, or 1.8%, from September 30, 2019, and an increase of $31.6 million, or 1.8%, from December 31, 2018. Noninterest bearing deposits totaled $1.3 billion (representing approximately 74.0% of total deposits) at December 31, 2019, a decrease of $50.8 million from the prior quarter end and a $238.1 million decrease compared to December 31, 2018. The decrease in total deposits from the prior quarter reflects changes in deposit levels of our digital currency customers. The increase in total deposits from December 31, 2018 reflects an increase of $325.0 million in callable brokered certificates of deposit associated with our hedging strategy, offset by decreases from our digital currency customers and a $74.5 million decrease from the sale of our San Marcos branch in the first quarter of 2019.

The weighted average cost of deposits for the fourth quarter of 2019 was 0.84%, compared to 0.50% for the third quarter of 2019, and 0.08% for the fourth quarter of 2018. The increase in the weighted average cost of deposits compared to the third quarter of 2019 and the fourth quarter of 2018 was driven by the addition of new callable brokered certificates of deposit associated with a hedging strategy and the accelerated premium expense associated with the call and reissuance of brokered certificates of deposit in the fourth quarter of 2019, as discussed under “Balance Sheet—Securities.”

  Three Months Ended
  December 31, 2019 September 30, 2019 December 31, 2018
  Average
Balance
 Average
Rate
 Average
Balance
 Average
Rate
 Average
Balance
 Average
Rate
             
  (Dollars in thousands)
Noninterest bearing demand accounts $ 1,335,186    $ 1,468,992    $ 1,873,690   
Interest bearing accounts:            
Interest bearing demand accounts  50,095  0.13%  47,945  0.14%  52,169  0.13%
Money market and savings accounts  83,199  1.00%  81,941  1.00%  138,381  0.70%
Certificates of deposit:            
Brokered certificates of deposit  314,262  4.49%  303,524  2.81%    
Other  2,429  1.23%  4,867  1.33%  36,138  1.51%
Total interest bearing deposits  449,985  3.34%  438,277  2.16%  226,688  0.70%
Total deposits $ 1,785,171  0.84% $ 1,907,269  0.50% $ 2,100,378  0.08%

Demand for new deposit accounts is generated by our banking platform for innovators that includes the SEN, which is enabled through our proprietary API and online banking system. These tools enable our clients to grow their business and scale operations.

The following table sets forth a breakdown of our digital currency customer base and the deposits held by such customers at the dates noted below:

  December 31, 2019 September 30, 2019 December 31, 2018
  Number of
Customers
 Total
Deposits
 Number of
Customers
 Total
Deposits
 Number of
Customers
 Total
Deposits
             
  (Dollars in millions)
Digital currency exchanges 80  $529  69  $546  37  $618 
Institutional investors 489  430  468  504  363  577 
Other customers 235  286  219  247  142  274 
Total(1) 804  $1,246  756  $1,297  542  $1,470 

________________________

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

Loan Portfolio

Total loans held-for-investment were $670.8 million at December 31, 2019, a decrease of $27.4 million, or 3.9%, from September 30, 2019, and an increase of $71.3 million, or 11.9%, from December 31, 2018.

  December 31,
2019
 September 30,
2019
 December 31,
2018
       
  (Dollars in thousands)
Real estate loans:      
One-to-four family $ 193,367  $ 212,440  $ 190,885 
Multi-family  81,233   77,901   40,584 
Commercial  331,052   322,733   309,655 
Construction  7,213   3,986   3,847 
Commercial and industrial  14,440   14,563   8,586 
Consumer and other  122   76   150 
Reverse mortgage  1,415   1,629   1,742 
Mortgage warehouse  39,247   61,856   41,586 
Total gross loans held-for-investment  668,089   695,184   597,035 
Deferred fees, net  2,724   2,997   2,469 
Total loans held-for-investment  670,813   698,181   599,504 
Allowance for loan losses  (6,191)  (6,191)  (6,723)
Total loans held-for-investment, net $ 664,622  $ 691,990  $ 592,781 
Total loans held-for-sale $ 375,922  $ 311,410  $ 350,636 

Loans held-for-sale included $365.8 million, $306.7 million and $211.0 million of mortgage warehouse loans at December 31, 2019, September 30, 2019, and December 31, 2018, respectively.

Asset Quality and Allowance for Loan Losses

At December 31, 2019, our allowance for loan losses remained unchanged at $6.2 million compared to September 30, 2019, and $6.7 million at December 31, 2018. The ratio of the allowance for loan losses to gross loans held-for-investment at December 31, 2019 was 0.93%, compared to 0.89% and 1.13% at September 30, 2019 and December 31, 2018, respectively.

Nonperforming assets totaled $6.0 million, or 0.28% of total assets, at December 31, 2019, a decrease of $0.8 million from $6.8 million, or 0.32% of total assets at September 30, 2019. Nonperforming assets decreased $2.3 million, from $8.3 million, or 0.42% of total assets, at December 31, 2018.

  December 31,
2019
 September 30,
2019
 December 31,
2018
       
Asset Quality (Dollars in thousands)
Nonperforming Assets:      
Nonperforming loans $ 5,909  $ 6,707  $ 8,303 
Troubled debt restructurings $ 1,791  $ 1,840  $ 514 
Other real estate owned, net $ 128  $ 81  $ 31 
Nonperforming assets $ 6,037  $ 6,788  $ 8,334 
       
Asset Quality Ratios:      
Nonperforming assets to total assets  0.28%  0.32%  0.42%
Nonperforming loans to gross loans(1)  0.88%  0.96%  1.39%
Nonperforming assets to gross loans and other real estate owned(1)  0.90%  0.98%  1.40%
Net charge-offs (recoveries) to average total loans(1)  0.01%  0.01%  (0.01)%
Allowance for loan losses to gross loans(1)  0.93%  0.89%  1.13%
Allowance for loan losses to nonperforming loans  104.77%  92.31%  80.97%

________________________

(1)Loans exclude loans held-for-sale at each of the dates presented.

Securities

Securities available-for-sale decreased $12.2 million, or 1.3%, from $909.9 million at September 30, 2019, and increased $540.6 million, or 151.3%, from $357.2 million at December 31, 2018, to $897.8 million at December 31, 2019. The Company’s securities portfolio has grown substantially due to the implementation of a hedging strategy and the purchase of high quality available-for-sale securities. In March 2019, the Bank implemented a hedging strategy that includes purchases of interest rate floors and commercial mortgage-backed securities, primarily funded by callable brokered certificates of deposit. This hedging strategy is intended to reduce the Company’s exposure to a decline in earnings in a declining interest rate environment with a minimal negative impact on current earnings. At December 31, 2019, the Company had purchased $400.0 million in notional amount of interest rate floors, $350.4 million in fixed-rate commercial mortgage-backed securities and issued $325.0 million of callable brokered certificates of deposit related to the hedging strategy. The callable brokered certificates of deposit had an unamortized premium of $2.6 million and have an average maturity of 4.6 years as of December 31, 2019. These certificates of deposit are initially callable within three to six months after issuance, and monthly thereafter. The call dates for all callable brokered certificates of deposit are from December 2019 through March 2020. In the fourth quarter the Company called $237.5 million of callable brokered certificates of deposit and reissued new callable brokered certificates of deposit at lower rates. The premium expense associated with calling these certificates was $1.6 million. This premium expense will be offset in the future as a result of the newly issued certificates at lower rates. During the fourth quarter of 2019 the Company sold $10.0 million of fixed-rate commercial mortgage-backed securities and realized a gain on sale of $0.7 million, which partially offset the premium expense associated with calling the brokered certificates of deposit. The Company reinvested the proceeds from the $10.0 million fixed-rate commercial mortgage-backed securities sale into a new $10.0 million fixed-rate commercial mortgage-backed security.

Capital Ratios

At December 31, 2019, the Company’s ratio of common equity to total assets was 10.86%, compared with 10.79% at September 30, 2019, and 9.54% at December 31, 2018. At December 31, 2019, the Company’s book value per share was $12.38, compared to $12.92 at September 30, 2019, and $10.73 at December 31, 2018.

At December 31, 2019, the Company had a tier 1 leverage ratio of 11.04%, common equity tier 1 capital ratio of 24.07%, tier 1 capital ratio of 25.76% and total capital ratio of 26.45%.

At December 31, 2019, the Bank had a tier 1 leverage ratio of 10.52%, common equity tier 1 capital ratio of 24.55%, tier 1 capital ratio of 24.55% and total capital ratio of 25.24%. These capital ratios each exceeded the “well capitalized” standards defined by federal banking regulations of 5.00% for tier 1 leverage ratio, 6.5% for common equity tier 1 capital ratio, 8.00% for tier 1 capital ratio and 10.00% for total capital ratio.

Capital Ratios(1) December 31,
2019
 September 30,
2019
 December 31,
2018
The Company      
Tier 1 leverage ratio 11.04% 10.43% 9.00%
Common equity tier 1 capital ratio 24.07% 23.57% 23.10%
Tier 1 risk-based capital ratio 25.76% 25.28% 24.96%
Total risk-based capital ratio 26.45% 25.97% 25.77%
Common equity to total assets 10.86% 10.79% 9.54%
The Bank      
Tier 1 leverage ratio 10.52% 10.01% 8.51%
Common equity tier 1 capital ratio 24.55% 24.30% 23.68%
Tier 1 risk-based capital ratio 24.55% 24.30% 23.68%
Total risk-based capital ratio 25.24% 25.00% 24.50%

________________________

(1)December 31, 2019 capital ratios are preliminary.

Conference Call and Webcast

The Company will host a conference call on Wednesday, January 29, 2020 at 11:00 a.m. (Eastern Time) to present and discuss fourth quarter and full year 2019 results. The conference call can be accessed live by dialing 1-877-407-4018 or for international callers, 1-201-689-8471, and requesting to be joined to the Silvergate Capital Corporation Fourth Quarter and Full Year 2019 Earnings Conference Call. A replay will be available starting at 2:00 p.m. (Eastern Time) on January 29, 2020 and can be accessed by dialing 1-844-512-2921, or for international callers, 1-412-317-6671. The passcode for the replay is 13698055. The replay will be available until 11:59 p.m. (Eastern Time) on February 12, 2020. Interested investors and other parties may also listen to a simultaneous webcast of the conference call by logging onto the investor relations section of the Company’s website at https://ir.silvergatebank.com. The online replay will remain available for a limited time beginning immediately following the call.

About Silvergate

Silvergate Capital Corporation is a registered bank holding company for Silvergate Bank, headquartered in La Jolla, California. Silvergate Bank is a commercial bank that opened in 1988, has been profitable for 22 consecutive years, and has focused its strategy on creating the banking platform for innovators, especially in the digital currency industry, and developing product and service solutions addressing the needs of entrepreneurs. The Company’s assets consist primarily of its investment in the Bank and the Company’s primary activities are conducted through the Bank. The Company is subject to supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank is subject to supervision by the California Department of Business Oversight, Division of Financial Institutions and, as a Federal Reserve member bank, the Federal Reserve. The Bank’s deposits are insured up to legal limits by the Federal Deposit Insurance Corporation.

Forward Looking Statements

Statements in this earnings release may constitute forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “projection,” “forecast,” “goal,” “target,” “would,” “aim” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry and management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. The inclusion of these forward-looking statements should not be regarded as a representation by us or any other person that such expectations, estimates and projections will be achieved. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. For information about other important factors that could cause actual results to differ materially from those discussed in the forward-looking statements contained in this release, please refer to the Company’s public reports filed with the U.S. Securities and Exchange Commission. Any forward-looking statement speaks only as of the date of this earnings release, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether because of new information, future developments or otherwise, except as required by law. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence. In addition, we cannot assess the impact of each risk and uncertainty on our business or the extent to which any risk or uncertainty, or combination of risks and uncertainties, may cause actual results to differ materially from those contained in any forward-looking statements.

SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
(Unaudited)
  December 31,
2019
 September 30,
2019
 June 30,
2019
 March 31,
2019
 December 31,
2018
ASSETS          
Cash and due from banks $1,579  $4,098  $2,036  $3,865  $4,177 
Interest earning deposits in other banks 132,025  156,160  339,325  529,159  670,243 
Cash and cash equivalents 133,604  160,258  341,361  533,024  674,420 
Securities available-for-sale, at fair value 897,766  909,917  920,481  462,330  357,178 
Securities held-to-maturity, at amortized cost     63  70  73 
Loans held-for-investment, net of allowance for loan
losses
 664,622  691,990  684,410  611,175  592,781 
Loans held-for-sale, at lower of cost or fair value 375,922  311,410  235,834  234,067  350,636 
Federal home loan and federal reserve bank stock, at
cost
 10,264  10,264  10,264  10,264  9,660 
Accrued interest receivable 5,950  5,875  6,296  5,474  5,770 
Other real estate owned, net 128  81  112  31  31 
Premises and equipment, net 3,259  3,224  3,276  3,195  3,656 
Operating lease right-of-use assets 4,571  4,927  5,280  4,476   
Derivative assets 23,440  30,885  25,698  3,392  999 
Low income housing tax credit investment 954  981  1,008  1,015  1,044 
Deferred tax asset       3,153  3,329 
Other assets 7,647  7,032  7,951  19,728  4,741 
Total assets $2,128,127  $2,136,844  $2,242,034  $1,891,394  $2,004,318 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Deposits:          
Noninterest bearing demand accounts $1,343,667  $1,394,433  $1,549,886  $1,452,191  $1,525,922 
Interest bearing accounts 470,987  453,662  388,764  146,573  152,911 
Deposits held-for-sale         104,172 
Total deposits 1,814,654  1,848,095  1,938,650  1,598,764  1,783,005 
Federal home loan bank advances 49,000  20,000       
Other borrowings     53,545  57,135   
Notes payable 3,714  4,000  4,286  4,286  4,857 
Subordinated debentures, net 15,816  15,813  15,809  15,806  15,802 
Operating lease liabilities 4,881  5,237  5,581  4,762   
Accrued expenses and other liabilities 9,026  13,085  9,415  9,504  9,408 
Total liabilities 1,897,091  1,906,230  2,027,286  1,690,257  1,813,072 
Commitments and contingencies          
Preferred stock          
Class A common stock 178  167  166  166  166 
Class B non-voting common stock 9  12  12  12  12 
Additional paid-in capital 132,138  125,573  125,599  125,684  125,665 
Retained earnings 92,310  88,712  82,056  76,900  67,464 
Accumulated other comprehensive income (loss) 6,401  16,150  6,915  (1,625) (2,061)
Total shareholders’ equity 231,036  230,614  214,748  201,137  191,246 
Total liabilities and shareholders’ equity $2,128,127  $2,136,844  $2,242,034  $1,891,394  $2,004,318 
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
  Three Months Ended Year Ended
  December 31,
2019
 September 30,
2019
 December 31,
2018
 December 31,
2019
 December 31,
2018
Interest income          
Loans, including fees $ 13,076  $ 13,574  $ 12,743  $ 51,445  $ 48,100 
Securities  6,117   6,510   2,316   20,161   7,332 
Other interest earning assets  685   1,183   6,220   8,723   16,606 
Dividends and other  234   121   322   706   714 
Total interest income  20,112   21,388   21,601   81,035   72,752 
Interest expense          
Deposits  3,793   2,385   401   7,713   1,787 
Federal home loan bank advances  374   172     546   19 
Notes payable and other  45   117   93   747   408 
Subordinated debentures  270   271   244   1,072   915 
Total interest expense  4,482   2,945   738   10,078   3,129 
Net interest income before provision for loan losses  15,630   18,443   20,863   70,957   69,623 
Reversal of provision for loan losses    (858)  (1,675)  (439)  (1,527)
Net interest income after provision for loan losses  15,630   19,301   22,538   71,396   71,150 
Noninterest income          
Mortgage warehouse fee income  388   373   353   1,473   1,505 
Service fees related to off-balance sheet deposits  183   283   739   1,637   2,422 
Deposit related fees  1,487   1,657   780   5,302   2,435 
Gain on sale of loans, net  235   248   12   828   711 
Gain (loss) on sale of securities, net  740   (16)    724   
Gain on sale of branch, net        5,509   
Other income  97   54   107   281   490 
Total noninterest income  3,130   2,599   1,991   15,754   7,563 
Noninterest expense          
Salaries and employee benefits  8,773   8,277   8,563   33,897   29,898 
Occupancy and equipment  861   892   840   3,638   3,091 
Communications and data processing  1,149   1,298   939   4,607   3,088 
Professional services  1,198   889   2,132   4,605   6,050 
Federal deposit insurance  33   39   152   415   1,230 
Correspondent bank charges  323   288   249   1,191   1,163 
Other loan expense  122   47   221   412   419 
Other real estate owned expense (recovery)  90   75   (15)  170   27 
Other general and administrative  1,111   806   887   3,543   3,348 
Total noninterest expense  13,660   12,611   13,968   52,478   48,314 
Income before income taxes  5,100   9,289   10,561   34,672   30,399 
Income tax expense  1,502   2,633   2,541   9,826   8,066 
Net income  3,598   6,656   8,020   24,846   22,333 
Basic earnings per share $ 0.20  $ 0.37  $ 0.45  $ 1.38  $ 1.35 
Diluted earnings per share $ 0.19  $ 0.36  $ 0.44  $ 1.35  $ 1.31 
Weighted average shares outstanding:          
Basic  18,336   17,840   17,817   17,957   16,543 
Diluted  18,779   18,246   18,257   18,385   17,023 

Non-GAAP Financial Measures

The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures. As other companies may use different calculations for these adjusted measures, this presentation may not be comparable to other similarly titled adjusted measures reported by other companies.

This earnings release includes certain non-GAAP financial measures for the year ended December 31, 2019 in order to present our results of operations for that period on a basis consistent with our historical operations. On November 15, 2018, the Company and the Bank entered into a purchase and assumption agreement with HomeStreet Bank to sell the Bank’s retail branch located in San Marcos, California and business loan portfolio to HomeStreet Bank. This transaction, which was completed in March 2019, generated a pre-tax gain on sale of $5.5 million. Management believes that these non-GAAP financial measures provide useful information to investors that is supplementary to the Company’s financial condition, results of operations and cash flows computed in accordance with GAAP.

  Year Ended
December 31,
  2019 2018
     
  (Dollars in thousands)
Net income    
Net income, as reported $24,846  $22,333 
Adjustments:    
Gain on sale of branch, net (5,509)  
Tax effect(1) 1,574   
Adjusted net income $20,911  $22,333 
     
Noninterest income / average assets(2)    
Noninterest income $15,754  $7,563 
Adjustments:    
Gain on sale of branch, net (5,509)  
Adjusted noninterest income 10,245  7,563 
Average assets 2,082,007  2,008,853 
Noninterest income / average assets, as reported 0.76% 0.38%
Adjusted noninterest income / average assets 0.49% 0.38%
     
Return on average assets (ROAA)(2)    
Adjusted net income $20,911  $22,333 
Average assets 2,082,007  2,008,853 
Return on average assets (ROAA), as reported 1.19% 1.11%
Adjusted return on average assets 1.00% 1.11%
     
Return on average equity (ROAE)(2)    
Adjusted net income $20,911  $22,333 
Average equity 215,338  165,820 
Return on average equity (ROAE), as reported 11.54% 13.47%
Adjusted return on average equity 9.71% 13.47%
     
Efficiency ratio    
Noninterest expense $52,478  $48,314 
Net interest income 70,957  69,623 
Noninterest income 15,754  7,563 
Total net interest income and noninterest income 86,711  77,186 
Adjustments:    
Gain on sale of branch, net (5,509)  
Adjusted total net interest income and noninterest income 81,202  77,186 
Efficiency ratio, as reported 60.52% 62.59%
Adjusted efficiency ratio 64.63% 62.59%

________________________

(1)Amount represents the total income tax effect of the adjustment, which is calculated based on the applicable marginal tax rate of 28.58%.
(2)Data has been annualized.

Investor Relations:
Jamie Lillis / Shannon Devine
(858) 200-3782
[email protected]

Source: Silvergate Capital Corporation

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