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Silvergate Capital Corporation Announces Fourth Quarter 2022 Results

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 three and twelve months ended December 31, 2022.

Fourth Quarter 2022 Commentary

During the fourth quarter of 2022, the digital asset industry experienced a transformational shift, with significant over-leverage in the industry leading to several high-profile bankruptcies. These dynamics created a crisis of confidence across the ecosystem and led many industry participants to shift to a “risk off” position across digital asset trading platforms. In turn, the Company saw significant outflows of deposits during the quarter and took several actions to maintain cash liquidity. The Company initially utilized wholesale funding, and subsequently sold debt securities to accommodate sustained lower deposit levels and maintain its highly liquid balance sheet.

As Silvergate prepares for what it expects will be a sustained period of lower deposits, it is taking several actions to help ensure the business is resilient, including managing its expense base and evaluating its product portfolio and customer relationships going forward. In addition, Silvergate has made the difficult decision to substantively reduce its workforce in order to account for the economic realities facing its business and the digital asset industry today.

Alan Lane, chief executive officer of Silvergate, commented, “While we are taking decisive actions to navigate the current environment, our mission has not changed. We believe in the digital asset industry, and we remain focused on providing value-added services for our core institutional customers. To that end, we are committed to maintaining a highly liquid balance sheet with a strong capital position.”

Fourth Quarter 2022 Highlights

  • Net loss attributable to common shareholders for the quarter was $1.0 billion, or $33.16 loss per common share, compared to net income of $40.6 million, or $1.28 per diluted share, for the third quarter of 2022, and net income of $18.4 million, or $0.66 per diluted share, for the fourth quarter of 2021
  • Digital asset customers were 1,620 at December 31, 2022, compared to 1,677 at September 30, 2022, and 1,381 at December 31, 2021
  • The Silvergate Exchange Network (“SEN”) handled $117.1 billion of U.S. dollar transfers in the fourth quarter of 2022, an increase of 4% compared to $112.6 billion in the third quarter of 2022, and a decrease of 47% compared to $219.2 billion in the fourth quarter of 2021
  • Total SEN Leverage commitments were $1.1 billion at December 31, 2022, compared to $1.5 billion at September 30, 2022, and $570.5 million at December 31, 2021
  • Digital asset customer related fee income for the quarter was $6.6 million, compared to $7.9 million for the third quarter of 2022, and $9.3 million for the fourth quarter of 2021
  • Average digital asset customer deposits were $7.3 billion during the fourth quarter of 2022, compared to $12.0 billion during the third quarter of 2022

Full Year 2022 Highlights

  • Net loss attributable to common shareholders for the year ended December 31, 2022 was $948.7 million, or $30.07 loss per common share, compared to net income of $75.5 million, or $2.91 per diluted share for the year ended December 31, 2021
  • The SEN handled $563.3 billion of U.S. dollar transfers for the year ended December 31, 2022, compared to $787.4 billion for the year ended December 31, 2021
  • Digital asset customer related fee income for the year ended December 31, 2022 was $32.2 million, compared to $35.8 million for the year ended December 31, 2021
 
  As of or for the Three Months Ended
  December 31,
2022
 September 30,
2022
 December 31,
2021
       
Financial Highlights (Dollars in thousands, except per share data)
Net (loss) income attributable to common shareholders $(1,049,917) $40,640  $18,375 
Adjusted net income available to common shareholders(1) $15,124  $40,640  $18,375 
Diluted (loss) earnings per common share $(33.16) $1.28  $0.66 
Adjusted earnings per diluted share(1) $0.48  $1.28  $0.66 
Return on average assets (ROAA)(2)  (27.83) %  1.04%  0.50%
Adjusted return on average assets(1)(2)  0.40%  1.04%  0.50%
Return on average common equity (ROACE)(2)  (409.02) %  12.99%  7.25%
Adjusted return on average common equity(1)(2)  5.89%  12.99%  7.25%
Net interest margin(2)(3)  1.54%  2.21%  1.11%
Cost of deposits(2)  0.77%  0.16%  0.00%
Cost of funds(2)  1.76%  0.28%  0.01%
Efficiency ratio(4)  (28.61) %  37.11%  52.08%
Adjusted efficiency ratio(1)(2)  63.30%  37.11%  52.08%
Total assets $11,355,553  $15,467,340  $16,005,495 
Total deposits $6,296,550  $13,238,426  $14,290,628 
Book value per common share $12.93  $35.94  $46.55 
Tier 1 leverage ratio  5.36%  10.71%  11.07%
Total risk-based capital ratio  57.26%  46.63%  57.08%
 
  Year Ended December 31,
  2022 2021
     
Financial Highlights (Dollars in thousands, except per share data)
Net (loss) income attributable to common shareholders $(948,662) $75,512 
Adjusted net income available to common shareholders(1) $116,379  $75,512 
Diluted (loss) earnings per common share $(30.07) $2.91 
Adjusted earnings per diluted share(1) $3.69  $2.91 
Return on average assets (ROAA)  (5.97) %  0.66%
Adjusted return on average assets(1)  0.73%  0.66%
Return on average common equity (ROACE)  (75.54) %  9.32%
Adjusted return on average common equity(1)  9.27%  9.32%
Net interest margin(3)  1.71%  1.20%
Cost of deposits  0.18%  0.00%
Cost of funds  0.50%  0.01%
Efficiency ratio(4)  (54.62) %  51.06%
Adjusted efficiency ratio(1)  44.93%  51.06%
________________________
(1)See “Non-GAAP Financial Measures” for further information and reconciliation of these metrics.
(2)Data has been annualized.
(3)Net interest margin is a ratio calculated as net interest income divided by average interest earning assets for the same period. For the three and twelve months ended December 31, 2021, net interest margin ratio is calculated on a fully taxable equivalent basis for interest income on tax-exempt securities using the federal statutory tax rate of 21.0%. As a result of the Company recording losses in the fourth quarter of 2022 and full year 2022, the income from tax-exempt securities in these periods does not include any adjustments for taxable equivalent basis.
(4)Efficiency ratio is calculated by dividing noninterest expenses by net interest income plus noninterest income.

Digital Asset Initiative

At December 31, 2022, the Company’s digital asset customers were 1,620 compared to 1,677 at September 30, 2022, and 1,381 at December 31, 2021. As the Company prepares for what it expects will be a sustained period of transformation, it is taking several actions to help ensure the business is resilient, including offboarding certain non-core customers and eliminating a portion of its product portfolio. As a result of these efforts, the Company is assessing its pipeline of prospective digital asset customers. For the fourth quarter of 2022, $117.1 billion of U.S. dollar transfers occurred on the SEN, a 4% increase from $112.6 billion transfers in the third quarter of 2022, and a decrease of 47% compared to $219.2 billion in the fourth quarter of 2021.

Results of Operations, Quarter Ended December 31, 2022

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

The Company’s securities portfolio included tax-exempt municipal bonds with tax-exempt income. As a result of the Company recording losses in the fourth quarter of 2022 and full year 2022, the income from tax-exempt securities in these periods does not include any adjustments for taxable equivalent basis. For prior years, net interest income, net interest spread and net interest margin are presented on a taxable equivalent basis based on the federal statutory tax rate of 21.0%.

Net interest income on a taxable equivalent basis totaled $53.7 million for the fourth quarter of 2022, compared to $80.9 million for the third quarter of 2022, and $40.2 million for the fourth quarter of 2021.

Compared to the third quarter of 2022, net interest income decreased $27.2 million due to increased interest expense, partially offset by increased interest income driven by higher yields across all interest earning asset categories. Average total interest earning assets decreased by $0.7 billion for the fourth quarter of 2022 compared to the third quarter of 2022, primarily due to decreased securities and loans balances. The average yield on interest earning assets increased from 2.47% for the third quarter of 2022 to 3.27% for the fourth quarter of 2022, with the most significant impacts due to higher yields on securities and interest earning deposits in other banks. Average interest bearing liabilities increased $4.4 billion for the fourth quarter of 2022 compared to the third quarter of 2022, due to the significantly higher utilization of short-term borrowings and brokered certificates of deposit. The average rate on total interest bearing liabilities increased from 2.19% for the third quarter of 2022 to 3.87% for the fourth quarter of 2022, primarily due to an increase in interest rates on short-term borrowings and brokered certificates of deposit.

Compared to the fourth quarter of 2021, net interest income increased $13.5 million due to increased interest income, with the largest driver being higher yields on interest earning assets, offset by increased interest expense. Average total interest earning assets decreased by $0.6 billion for the fourth quarter of 2022 compared to the fourth quarter of 2021, primarily due to decreased interest earning deposits in other banks and loan balances partially offset by an increase in securities balances. The average yield on total interest earning assets increased from 1.11% for the fourth quarter of 2021 to 3.27% for the fourth quarter of 2022, primarily due to overall higher yields resulting from increased interest rates. Average interest bearing liabilities increased $6.1 billion for the fourth quarter of 2022 compared to the fourth quarter of 2021, due to higher average balances on short-term borrowings and brokered certificates of deposit. The average rate on total interest bearing liabilities increased from 1.17% for the fourth quarter of 2021 to 3.87% for the fourth quarter of 2022, primarily due to the impact of increased interest rates on short-term borrowings.

Net interest margin for the fourth quarter of 2022 was 1.54%, compared to 2.21% for the third quarter of 2022, and 1.11% for the fourth quarter of 2021. The decrease in net interest margin compared to the third quarter of 2022 was primarily due to higher interest expense associated with short-term borrowings and brokered certificates of deposit. The increase in net interest margin compared to the fourth quarter of 2021 was primarily due to higher yields on adjustable rate securities, interest earning assets in other banks and loans, partially offset by higher borrowing costs associated with short-term borrowings and brokered certificates of deposit.

 
  Three Months Ended
  December 31, 2022 September 30, 2022 December 31, 2021
  AverageOutstandingBalance InterestIncome/Expense Average
Yield/
Rate
 AverageOutstandingBalance InterestIncome/Expense AverageYield/Rate AverageOutstandingBalance InterestIncome/Expense AverageYield/Rate
                   
  (Dollars in thousands)
Assets                  
Interest earning assets:                  
Interest earning deposits in other banks $2,804,816 $27,395 3.88% $1,324,361 $8,001 2.40% $5,282,661 $2,166  0.16%
Taxable securities  7,856,510  52,363 2.64%  8,868,639  47,401 2.12%  5,735,932  10,178  0.70%
Tax-exempt securities(1)  1,972,899  12,279 2.47%  2,889,391  14,412 1.98%  1,728,862  9,454  2.17%
Loans(2)(3)  1,085,757  21,046 7.69%  1,407,290  20,663 5.83%  1,641,345  17,892  4.32%
Other  126,382  1,039 3.26%  62,835  289 1.82%  34,490  777  8.94%
Total interest earning assets  13,846,364  114,122 3.27%  14,552,516  90,766 2.47%  14,423,290  40,467  1.11%
Noninterest earning assets  1,119,827      942,110      295,841    
Total assets $14,966,191     $15,494,626     $14,719,131    
Liabilities and Shareholders’ Equity                  
Interest bearing liabilities:                  
Interest bearing deposits $1,958,921 $18,290 3.70% $1,000,615 $5,221 2.07% $77,564 $27  0.14%
Short-term borrowings  4,212,772  41,862 3.94%  769,565  4,399 2.27%  12    0.00%
Subordinated debentures  15,857  281 7.03%  15,854  258 6.46%  15,843  249  6.24%
Total interest bearing liabilities  6,187,550  60,433 3.87%  1,786,034  9,878 2.19%  93,419  276  1.17%
Noninterest bearing liabilities:                  
Noninterest bearing deposits  7,432,838      12,139,522      13,377,552    
Other liabilities  133,787      134,164      49,023    
Shareholders’ equity  1,212,016      1,434,906      1,199,137    
Total liabilities and shareholders’ equity $14,966,191     $15,494,626     $14,719,131    
Net interest spread(4)     (0.60) %     0.28%     (0.06) %
Net interest income, taxable equivalent basis   $53,689     $80,888     $40,191   
Net interest margin(5)     1.54%     2.21%     1.11%
Reconciliation to reported net interest income:                  
Adjustments for taxable equivalent basis                (1,985)  
Net interest income, as reported   $53,689     $80,888     $38,206   
________________________
(1)Interest income on tax-exempt securities is presented on a taxable equivalent basis using the federal statutory tax rate of 21.0% for the three months ended December 31, 2021. There were no adjustments to taxable equivalent basis for the three months ended December 31, 2022 or September 30, 2022.
(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 divided by average interest earning assets for the same period. For the three months ended December 31, 2021, net interest margin ratio is calculated on a fully taxable equivalent basis for interest income on tax-exempt securities using the federal statutory tax rate of 21.0%.
 

Provision (Reversal) for Loan Losses

The Company recorded a $0.5 million reversal of provision for loan losses for the fourth quarter of 2022, compared to a $0.6 million reversal of provision for the third quarter of 2022 and no provision for the fourth quarter of 2021 as a result of management’s assessment of the level of the allowance for loan losses, and the lower amount and change in mix of the loan portfolio, among other factors.

Noninterest Income (Loss)

Noninterest loss for the fourth quarter of 2022 was $887.3 million, compared to noninterest income of $8.5 million for the third quarter of 2022 and $11.1 million for the fourth quarter of 2021. The decline in the fourth quarter was due to losses on securities of $751.4 million and losses on derivatives of $8.7 million resulting from sale of $5.2 billion of debt securities and related derivatives that took place during the quarter. In addition, the Company recorded a $134.5 million impairment charge related to an estimated $1.7 billion of securities it expects to sell in the first quarter of 2023 to reduce borrowings.

 
  Three Months Ended
  December 31,
2022
 September 30,
2022
 December 31,
2021
       
  (Dollars in thousands)
Noninterest income:      
Deposit related fees $6,623  $7,953  $9,378
Mortgage warehouse fee income  167   482   684
(Loss) gain on securities, net  (885,807)     56
(Loss) gain on derivatives, net  (8,699)     928
Loss on sale of loans, net  (46)  (329)  
Other income  495   348   9
Total noninterest (loss) income $(887,267) $8,454  $11,055
 

Noninterest Expense

Noninterest expense totaled $238.5 million for the fourth quarter of 2022, an increase of $205.3 million, or 619.4%, compared to the third quarter of 2022, and an increase of $212.8 million, or 829.6%, compared to the fourth quarter of 2021. The increase in noninterest expense compared to the prior quarter was primarily due to a $196.2 million impairment charge on developed technology assets acquired earlier in the year. In the fourth quarter of 2022, the Company determined that based on recent changes in market conditions of the digital asset industry, the likelihood of the launch of a blockchain-based payment solution was no longer imminent and performed an impairment analysis resulting in the impairment charge. In addition, noninterest expense increased due to a $7.1 million increase in salaries and benefits expense due in large part to a $3.7 million restructuring charge related to exiting the mortgage warehouse lending product during the fourth quarter of 2022. The restructuring costs primarily consist of severance and employee benefits.

The increase in noninterest expense from the fourth quarter of 2021 was primarily driven by the impairment charge discussed above and an increase in salaries and employee benefits attributable to increased headcount prior to December 2022, as well as increases in communications and data processing, and professional services, all of which supported organic growth of 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
  December 31,
2022
 September 30,
2022
 December 31,
2021
       
  (Dollars in thousands)
Noninterest expense:      
Salaries and employee benefits $26,707 $19,632 $13,815
Occupancy and equipment  850  822  728
Impairment of intangible assets  196,223    
Communications and data processing  3,306  3,210  1,862
Professional services  6,112  4,314  2,994
Federal deposit insurance  1,210  1,217  3,100
Correspondent bank charges  286  902  634
Other loan expense  528  529  364
Other general and administrative  3,270  2,527  2,159
Total noninterest expense $238,492 $33,153 $25,656
 

Income Tax Expense (Benefit)

Income tax benefit was $24.3 million for the fourth quarter of 2022, compared to an expense of $13.5 million for the third quarter of 2022, and $2.2 million for the fourth quarter of 2021. Our effective tax rate for the fourth quarter of 2022 was 2.3%, compared to 23.7% for the third quarter of 2022, and 9.4% for the fourth quarter of 2021. The decrease in the tax expense and effective tax rate for the fourth quarter of 2022 compared to the third quarter of 2022 and the fourth quarter of 2021 was driven by losses incurred in the fourth quarter of 2022. The income tax benefit recorded in the fourth quarter of 2022 was due to the reversal of prior period income tax expense incurred during the first three quarters of the year, partially offset by a charge from the transition to a 100% valuation allowance on deferred tax assets.

Results of Operations, Year Ended December 31, 2022

Net loss attributable to common shareholders for the year ended December 31, 2022 was $948.7 million, or $30.07 loss per diluted common share, compared to income of $75.5 million, or $2.91 per diluted share, for the comparable period in 2021.

Net interest income for the year ended December 31, 2022 was $255.6 million, compared to $129.3 million for the same period in 2021. The increase in net interest income was primarily due to a $196.9 million increase in interest income and a $70.6 million increase in interest expense, primarily due to growth in the balance sheet and an increase in rates.

Noninterest loss for the year ended December 31, 2022 was $860.1 million, compared to noninterest income of $45.3 million for the same period in 2021. The decrease in noninterest income was primarily due to an $886.2 million net loss on securities. Digital asset customer related fee income for the year ended December 31, 2022 was $32.2 million, compared to $35.8 million for the year ended December 31, 2021.

Noninterest expense was $330.2 million for the year ended December 31, 2022, compared to $89.1 million for the year ended December 31, 2021. The increase in noninterest expense was primarily due to a $196.2 million impairment charge on intangible assets and a $32.4 million increase in salaries and benefits expense.

Income tax expense was $6.7 million for the year ended December 31, 2022, compared to $6.9 million for the same period in 2021. Our effective tax rates for the years ended December 31, 2022 and 2021 were (0.7)% and 8.1%, respectively. The decrease in the Company’s effective tax rate in 2022 was primarily related to losses incurred in the fourth quarter of 2022. Due to the uncertainty of future earnings, the deferred tax asset balance of $342.0 million was subject to a 100% valuation allowance at December 31, 2022. The income tax expense recorded in 2022 was primarily due to the transition to this valuation allowance, resulting in the expensing of the $6.5 million deferred tax asset balance as of December 31, 2021. The deferred tax asset balance associated with net operating losses will carry forward indefinitely and can be utilized against 80% of future periods taxable income.

Balance Sheet

Deposits

At December 31, 2022, deposits totaled $6.3 billion, a decrease of $6.9 billion, or 52.4%, from September 30, 2022, and a decrease of $8.0 billion, or 55.9%, from December 31, 2021. Noninterest bearing deposits totaled $3.9 billion, representing approximately 61.2% of total deposits at December 31, 2022, a decrease of $8.2 billion from the prior quarter end, and a $10.4 billion decrease compared to December 31, 2021. At December 31, 2022, the Company held $2.4 billion of brokered certificates of deposit.

The Bank’s average total deposits from digital asset customers during the fourth quarter of 2022 amounted to $7.3 billion, with the high and low daily totals of these deposit levels during such time being $11.9 billion and $3.5 billion, respectively, compared to an average of $12.0 billion during the third quarter of 2022, and high and low daily deposit levels of $14.0 billion and $11.1 billion, respectively.

The following table sets forth a breakdown of the Company’s digital asset customer base and the deposits held by such customers at the dates noted below:

 
  December 31, 2022 September 30, 2022 December 31, 2021
  Number of Customers Total Deposits(1) Number of Customers Total Deposits(1) Number of Customers Total Deposits(1)
             
  (Dollars in millions)
Digital asset exchanges 104 $2,882 108 $7,579 94 $8,288
Institutional investors 1,025  539 1,069  3,043 894  4,220
Other customers 491  410 500  1,247 393  1,603
Total 1,620 $3,830 1,677 $11,869 1,381 $14,111
________________________
(1)Total deposits may not foot due to rounding.

The weighted average cost of deposits for the fourth quarter of 2022 was 0.77%, compared to 0.16% for the third quarter of 2022 and 0.00% for the fourth quarter of 2021. The increase in the weighted average cost of deposits in the third and fourth quarter of 2022 was due to the issuance of brokered certificates of deposit.

 
  Three Months Ended
  December 31, 2022 September 30, 2022 December 31, 2021
  AverageBalance AverageRate AverageBalance AverageRate AverageBalance AverageRate
             
  (Dollars in thousands)
Noninterest bearing demand accounts $7,432,838   $12,139,522   $13,377,552  
Interest bearing accounts:            
Interest bearing demand accounts  3,423 0.00%  3,470 0.00%  7,660 0.05%
Money market and savings accounts  31,951 0.01%  49,720 0.00%  69,364 0.14%
Certificates of deposit  1,923,547 3.77%  947,425 2.19%  540 0.73%
Total interest bearing deposits  1,958,921 3.70%  1,000,615 2.07%  77,564 0.14%
Total deposits $9,391,759 0.77% $13,140,137 0.16% $13,455,116 0.00%
 

Loan Portfolio

Total loans, including net loans held-for-investment and loans held-for-sale, were $590.2 million at December 31, 2022, a decrease of $802.3 million, or 57.6%, from September 30, 2022, and a decrease of $1.2 billion, or 66.9%, from December 31, 2021. Given the current macro environment, the rising interest rate environment and related reduction in mortgage volumes, Silvergate exited its mortgage warehouse lending product in the fourth quarter of 2022.

 
  December 31,
2022
 September 30,
2022
 December 31,
2021
       
  (Dollars in thousands)
Real estate loans:      
One-to-four family $37,495  $37,636  $105,098 
Multi-family  9,086   9,028   56,751 
Commercial  62,609   63,979   210,136 
Construction        7,573 
Commercial and industrial(1)  301,655   302,160   335,862 
Reverse mortgage and other  1,080   1,270   1,410 
Mortgage warehouse     58,760   177,115 
Total gross loans held-for-investment  411,925   472,833   893,945 
Deferred fees, net  (959)  (1,871)  275 
Total loans held-for-investment  410,966   470,962   894,220 
Allowance for loan losses  (2,638)  (3,176)  (6,916)
Loans held-for-investment, net  408,328   467,786   887,304 
Loans held-for-sale(2)  181,846   924,644   893,194 
Total loans $590,174  $1,392,430  $1,780,498 
________________________
(1)Commercial and industrial loans includes $301.7 million, $302.2 million and $335.9 million of SEN Leverage loans as of December 31, 2022, September 30, 2022 and December 31, 2021, respectively.
(2)Loans held-for-sale includes $181.8 million, $891.5 million and $893.2 million of mortgage warehouse loans as of December 31, 2022, September 30, 2022 and December 31, 2021, respectively.
 

Asset Quality and Allowance for Loan Losses

The allowance for loan losses was $2.6 million at December 31, 2022, compared to $3.2 million at September 30, 2022 and $6.9 million at December 31, 2021. The ratio of the allowance for loan losses to total loans held-for-investment at December 31, 2022 was 0.64%, compared to 0.67% and 0.77% at September 30, 2022 and December 31, 2021, respectively.

Nonperforming assets totaled $3.4 million, or 0.03% of total assets, at December 31, 2022, a decrease of $0.3 million from $3.7 million, or 0.02% of total assets at September 30, 2022. Nonperforming assets decreased $0.6 million, from $4.0 million, or 0.03%, of total assets at December 31, 2021.

  December 31,
2022
 September 30,
2022
 December 31,
2021
       
Asset Quality (Dollars in thousands)
Nonperforming Assets:      
Nonaccrual loans $3,339  $3,698  $4,003 
Troubled debt restructurings $1,618  $1,623  $1,713 
Other real estate owned, net $83  $45    
Nonperforming assets $3,422  $3,743  $4,003 
       
Asset Quality Ratios:      
Nonperforming assets to total assets  0.03%  0.02%  0.03%
Nonaccrual loans to total loans(1)  0.81%  0.79%  0.45%
Net charge-offs to average total loans(1)  0.10%  0.09%  0.00%
Allowance for loan losses to total loans(1)  0.64%  0.67%  0.77%
Allowance for loan losses to nonaccrual loans  79.01%  85.88%  172.77%
________________________
(1)Loans exclude loans held-for-sale at each of the dates presented.
 

Securities

The total securities portfolio decreased $5.7 billion, or 49.8%, from $11.4 billion at September 30, 2022, and decreased $2.9 billion, or 33.5%, from $8.6 billion at December 31, 2021, to $5.7 billion at December 31, 2022. In order to accommodate sustained lower deposit levels and to maintain a highly liquid balance sheet, Silvergate sold $5.2 billion of debt securities for cash proceeds during the fourth quarter of 2022. The sale resulted in a loss on the sale of securities of $751.4 million during the fourth quarter of 2022. In addition, the Company recorded a $134.5 million impairment charge related to an estimated $1.7 billion of securities it expects to sell in the first quarter of 2023 to reduce borrowings. As of December 31, 2022, all securities which were previously classified as held-to-maturity had been transferred to available-for-sale.

Capital Ratios

At December 31, 2022, the Company’s ratio of common equity to total assets was 3.61%, compared with 7.36% at September 30, 2022, and 8.84% at December 31, 2021. At December 31, 2022, the Company’s book value per common share was $12.93, compared to $35.94 at September 30, 2022, and $46.55 at December 31, 2021. The decrease in the Company’s book value per common share from September 30, 2022 was primarily due to the mark-to-market impact of reclassifying securities from held-to-maturity to available-for-sale, the valuation allowance on deferred tax assets and the impairment charge on intangible assets.

At December 31, 2022, the Company had a tier 1 leverage ratio of 5.36%, common equity tier 1 capital ratio of 42.48%, tier 1 risk-based capital ratio of 57.07% and total risk-based capital ratio of 57.26%.

At December 31, 2022, the Bank had a tier 1 leverage ratio of 5.12%, common equity tier 1 capital ratio of 53.89%, tier 1 risk-based capital ratio of 53.89% and total risk-based capital ratio of 54.07%. 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 risk-based capital ratio and 10.00% for total risk-based capital ratio.

 
Capital Ratios(1) December 31,
2022
 September 30,
2022
 December 31,
2021
The Company      
Tier 1 leverage ratio 5.36% 10.71% 11.07%
Common equity tier 1 capital ratio 42.48% 40.72% 49.53%
Tier 1 risk-based capital ratio 57.07% 46.54% 56.82%
Total risk-based capital ratio 57.26% 46.63% 57.08%
Common equity to total assets 3.61% 7.36% 8.84%
The Bank      
Tier 1 leverage ratio 5.12% 10.45% 10.49%
Common equity tier 1 capital ratio 53.89% 45.45% 53.89%
Tier 1 risk-based capital ratio 53.89% 45.45% 53.89%
Total risk-based capital ratio 54.07% 45.53% 54.15%
________________________
(1)December 31, 2022 capital ratios are preliminary.
 

Subsequent Events

In 2022, the Company increased employee headcount at a rapid rate in an effort to keep up with its growing digital asset business and serve its customers. The Company has reduced headcount by approximately 200 employees, or 40%, in order to account for the economic realities facing the business and industry today. Reducing headcount will enable Silvergate to continue to offer a tailored customer experience, while prudently managing expenses in a more challenging macro environment. Impacted employees were notified on January 4, 2023, and the Company has provided these individuals with severance packages and job placement resources. The Company estimates aggregate costs associated with the reduction in force of approximately $8.1 million, including approximately $6.2 million in severance payments and $1.2 million in employee benefits. The majority of these costs will be incurred in the first quarter of 2023.

Subsequent to December 31, 2022 and through January 17, 2023 the Company received $1.5 billion in proceeds and recognized approximately $11.4 million of losses and $5.0 million of gains on sales of available-for-sale securities.

Conference Call and Webcast

The Company will host a conference call on Tuesday, January 17, 2023 at 11:00 a.m. (Eastern Time) to present and discuss fourth quarter 2022 financial results. The conference call can be accessed live by dialing 1-844-200-6205 or for international callers, 1-929-526-1599, entering the access code 308427. A replay will be available starting at 1:00 p.m. (Eastern Time) on January 17, 2023 and can be accessed by dialing 1-866-813-9403, or for international callers +44-204-525-0658. The passcode for the replay is 949184. The replay will be available until 11:59 p.m. (Eastern Time) on January 31, 2023.

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.silvergate.com. The online replay will remain available for a limited time beginning immediately following the call.

About Silvergate

Silvergate Capital Corporation (NYSE: SI) is the leading provider of innovative financial infrastructure solutions and services for the digital asset industry. The Company’s real-time payments platform, known as the Silvergate Exchange Network, is at the heart of its customer-centric suite of payments, lending and funding solutions serving digital asset companies and investors around the world. Silvergate is enabling digital asset markets and reshaping global commerce for a digital asset future.

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.

While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: changes in general economic, political, or industry conditions; geopolitical concerns, including the ongoing war in Ukraine; the magnitude and duration of the COVID-19 pandemic and related variants and mutations and their impact on the global economy and financial market conditions and our business, results of operations, and financial condition; uncertainty in U.S. fiscal and monetary policy, including the interest rate policies of the Board of Governors of the Federal Reserve System; inflation/deflation, interest rate, market, and monetary fluctuations; volatility and disruptions in global capital and credit markets; the transition away from USD LIBOR and uncertainty regarding potential alternative reference rates, including SOFR; competitive pressures on product pricing and services; success, impact, and timing of our business strategies, including market acceptance of any new products or services; the impact of changes in financial services policies, laws, and regulations, including those concerning taxes, banking, securities, digital currencies and insurance, and the application thereof by regulatory bodies; cybersecurity threats and the cost of defending against them, including the costs of compliance with potential legislation to combat cybersecurity at a state, national, or global level; and other factors that may affect our future results.

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
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
(Unaudited)
 
  December 31,
2022
 September 30,
2022
 June 30,
2022
 March 31,
2022
 December 31,
2021
ASSETS          
Cash and due from banks $555,581  $465,853  $256,378  $207,304  $208,193 
Interest earning deposits in other banks  4,019,003   1,420,970   1,637,410   1,178,205   5,179,753 
Cash and cash equivalents  4,574,584   1,886,823   1,893,788   1,385,509   5,387,946 
Securities available-for-sale, at fair value  5,732,539   8,317,247   8,686,307   9,463,494   8,625,259 
Securities held-to-maturity, at amortized cost     3,104,557   3,131,321   2,751,625    
Loans held-for-sale, at lower of cost or fair value  181,846   924,644   872,056   937,140   893,194 
Loans held-for-investment, net of allowance for loan losses  408,328   467,786   594,671   739,014   887,304 
Other investments  169,190   60,428   63,456   61,719   34,010 
Accrued interest receivable  42,944   78,799   72,463   62,573   40,370 
Premises and equipment, net  3,866   3,518   3,328   1,678   3,008 
Intangible assets     194,045   190,455   189,977    
Derivative assets  39,998   153,990   104,995   46,415   34,056 
Safeguarding assets        52,838   243,769    
Other assets  202,258   275,503   234,816   158,869   100,348 
Total assets $11,355,553  $15,467,340  $15,900,494  $16,041,782  $16,005,495 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Deposits:          
Noninterest bearing demand accounts $3,852,547  $12,005,719  $13,436,017  $13,323,535  $14,213,472 
Interest bearing accounts  2,444,003   1,232,707   64,703   72,627   77,156 
Total deposits  6,296,550   13,238,426   13,500,720   13,396,162   14,290,628 
Short-term borrowings  4,300,000   700,000   800,000   800,000    
Subordinated debentures, net  15,859   15,855   15,852   15,848   15,845 
Safeguarding liabilities        52,838   243,769    
Accrued expenses and other liabilities  139,923   181,714   107,865   39,507   90,186 
Total liabilities  10,752,332   14,135,995   14,477,275   14,495,286   14,396,659 
Commitments and contingencies          
Preferred stock  2   2   2   2   2 
Class A common stock  317   317   316   316   304 
Class B non-voting common stock(1)               
Additional paid-in capital  1,557,033   1,555,996   1,554,627   1,553,547   1,421,592 
Retained (deficit) earnings  (754,802)  295,115   254,475   218,558   193,860 
Accumulated other comprehensive loss  (199,329)  (520,085)  (386,201)  (225,927)  (6,922)
Total shareholders’ equity  603,221   1,331,345   1,423,219   1,546,496   1,608,836 
Total liabilities and shareholders’ equity $11,355,553  $15,467,340  $15,900,494  $16,041,782  $16,005,495 
________________________
(1)Effective June 14, 2022, Class B non-voting common stock was cancelled and its authorized shares reallocated to Class A common stock following a shareholder approved amendment to the Company’s articles of incorporation.
 
SILVERGATE CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
 
  Three Months Ended Year Ended
  December 31,
2022
 September 30,
2022
 December 31,
2021
 December 31,
2022
 December 31,
2021
Interest income          
Loans, including fees $21,046  $20,663  $17,892 $82,050  $68,619
Taxable securities  52,363   47,401   10,178  148,529   36,094
Tax-exempt securities  12,279   14,412   7,469  54,695   17,301
Other interest earning assets  27,395   8,001   2,166  39,789   6,799
Dividends and other  1,039   289   777  2,250   1,581
Total interest income  114,122   90,766   38,482  327,313   130,394
Interest expense          
Deposits  18,290   5,221   27  23,534   134
Short-term borrowings  41,862   4,399     47,127   
Subordinated debentures  281   258   249  1,034   993
Total interest expense  60,433   9,878   276  71,695   1,127
Net interest income before provision for loan losses  53,689   80,888   38,206  255,618   129,267
Reversal of provision for loan losses  (502)  (601)    (3,577)  
Net interest income after provision for loan losses  54,191   81,489   38,206  259,195   129,267
Noninterest income          
Deposit related fees  6,623   7,953   9,378  32,352   35,981
Mortgage warehouse fee income  167   482   684  1,855   3,056
(Loss) gain on securities, net  (885,807)     56  (886,184)  5,238
(Loss) gain on derivatives, net  (8,699)     928  (8,699)  928
Loss on sale of loans, net  (46)  (329)    (375)  
Other income  495   348   9  902   53
Total noninterest (loss) income  (887,267)  8,454   11,055  (860,149)  45,256
Noninterest expense          
Salaries and employee benefits  26,707   19,632   13,815  78,239   45,794
Occupancy and equipment  850   822   728  3,321   2,464
Impairment of intangible assets  196,223        196,223   
Communications and data processing  3,306   3,210   1,862  12,245   7,072
Professional services  6,112   4,314   2,994  19,660   9,776
Federal deposit insurance  1,210   1,217   3,100  5,684   13,537
Correspondent bank charges  286   902   634  2,817   2,515
Other loan expense  528   529   364  2,123   1,117
Other general and administrative  3,270   2,527   2,159  9,903   6,845
Total noninterest expense  238,492   33,153   25,656  330,215   89,120
(Loss) income before income taxes  (1,071,568)  56,790   23,605  (931,169)  85,403
Income tax (benefit) expense  (24,339)  13,462   2,214  6,741   6,875
Net (loss) income  (1,047,229)  43,328   21,391  (937,910)  78,528
Dividends on preferred stock  2,688   2,688   3,016  10,752   3,016
Net (loss) income attributable to common shareholders $(1,049,917) $40,640  $18,375 $(948,662) $75,512
Basic (loss) earnings per common share $(33.16) $1.28  $0.67 $(30.07) $2.95
Diluted (loss) earnings per common share $(33.16) $1.28  $0.66 $(30.07) $2.91
Weighted average common shares outstanding:          
Basic  31,663   31,655   27,527  31,545   25,582
Diluted  31,663   31,803   27,744  31,545   25,922
 

Non-GAAP Financial Measures
(Unaudited)

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 periods presented below in order to present our results of operations for that period on a basis consistent with our historical operations. 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.

During the fourth quarter of 2022, the digital asset industry experienced a transformational shift, with significant over-leverage in the industry, leading to several high-profile bankruptcies. These dynamics led to a crisis of confidence across the ecosystem and led many industry participants to shift deposits away from digital asset trading platforms. The Company saw significant outflows of deposits during the quarter and took several actions to maintain cash liquidity, which included utilizing wholesale funding and subsequently sold debt securities to accommodate the sustained lower deposit levels and maintain its highly liquid balance sheet. This restructuring of the Company’s balance sheet led to the decision to reduce its expense base going forward by significantly reducing its workforce. The following adjustments represent the impact of these actions in response to the events that occurred in the fourth quarter of 2022 and are considered infrequent in nature. The likelihood that these charges will occur in subsequent periods may depend on deposit levels and customer behavior.

Loss on securities: The Company sold securities in order to manage liquidity and recognized net losses related to the declines in market values relative to amortized cost. In addition, an other than temporary impairment charge was recorded for securities that the Company will more likely than not be required to sell before recovery of its amortized cost basis.

Loss on derivatives: In conjunction with the securities sales the Company, de-designated and sold certain related derivatives hedging fair value of securities and realized net losses on the change in fair value on the derivative instruments related to the timing of the sales of derivatives.

Restructuring charges: Restructuring charges includes direct costs related to reduction in force efforts or other exit and disposal activities, such as decisions to no longer provide certain products. Costs related to reduction in force actions primarily consist of one-time termination benefits for affected employees including severance payments, employee benefit payments, accelerated stock-based compensation expense and other related costs, such as job placement services and legal costs.

Impairment of intangible assets: In January 2022, the Company purchased certain developed technology assets related to running a block-chain-based payment network. In the fourth quarter of 2022, the Company determined that based on recent changes in market conditions of the digital asset industry, the likelihood of the launch of a blockchain-based payment solution was no longer imminent. The Company performed an impairment analysis and took an impairment charge of $196.2 million.

Income taxes: The tax effect adjustment below was determined by calculating the estimated annual effective tax rate on adjusted income before income taxes and applying the rate to pre-tax income. The difference between the estimated income tax and the income tax expense or benefit as reported was included as a tax effect adjustment.

Adjusted diluted shares: Adjusted earnings per diluted share is calculated by dividing adjusted net income available to common shareholders by the weighted average common shares outstanding adjusted for the dilutive effects of all potential shares of common stock. In periods where a net loss attributable to common shareholders was reported, the diluted shares were the same as basic shares because the effects of potentially dilutive shares were anti-dilutive.

 
  Three Months Ended Year Ended
  December 31,
2022
 September 30,
2022
 December 31,
2021
 December 31,
2022
 December 31,
2021
           
  (In thousands, except per share data)
Noninterest income          
Noninterest income (loss), as reported $(887,267) $8,454 $11,055 $(860,149) $45,256
Adjustments:          
Loss on securities, net  885,807       885,807   
Loss on derivatives, net  8,699       8,699   
Adjusted noninterest income $7,239  $8,454 $11,055 $34,357  $45,256
           
Noninterest expense          
Noninterest expense, as reported $238,492  $33,153 $25,656 $330,215  $89,120
Adjustments:          
Impairment of intangible assets  (196,223)      (196,223)  
Restructuring charges  (3,704)      (3,704)  
Adjusted noninterest expense $38,565  $33,153 $25,656 $130,288  $89,120
           
Net income (loss) attributable to common shareholders
Net (loss) income attributable to common shareholders, as reported $(1,049,917) $40,640 $18,375 $(948,662) $75,512
Adjustments:          
Loss on securities, net  885,807       885,807   
Loss on derivatives, net  8,699       8,699   
Impairment of intangible assets  196,223       196,223   
Restructuring charges  3,704       3,704   
Tax effect(1)  (29,392)      (29,392)  
Adjusted net income available to common shareholders $15,124  $40,640 $18,375 $116,379  $75,512
           
Earnings (loss) per diluted share          
(Loss) earnings per diluted share, as reported $(33.16) $1.28 $0.66 $(30.07) $2.91
Adjusted net income available to common shareholders $15,124  $40,640 $18,375 $116,379  $75,512
Weighted average common shares outstanding:          
Diluted shares, as reported  31,663   31,803  27,744  31,545   25,922
Add: Diluted effects of stock-based awards  104       26   
Adjusted fully diluted shares  31,767   31,803  27,744  31,571   25,922
Adjusted earnings per diluted share $0.48  $1.28 $0.66 $3.69  $2.91
________________________
(1)Amount represents the total income tax adjustment needed to calculate an effective income tax rate on adjusted income before income taxes of 22.1%.
 
  Three Months Ended Year Ended
  December 31,
2022
 September 30,
2022
 December 31,
2021
 December 31,
2022
 December 31,
2021
           
  (Dollars in thousands)
Return on average assets (ROAA)(1)          
Adjusted net income available to common shareholders $15,124  $40,640  $18,375  $116,379  $75,512 
Average assets  14,966,191   15,494,626   14,719,131   15,882,737   11,356,838 
Return on average assets (ROAA), as reported  (27.83) %  1.04%  0.50%  (5.97) %  0.66%
Adjusted return on average assets  0.40%  1.04%  0.50%  0.73%  0.66%
           
Return on average common equity (ROACE)(1)          
Adjusted net income available to common shareholders $15,124  $40,640  $18,375  $116,379  $75,512 
Average common equity  1,018,395   1,241,285   1,005,491   1,255,880   809,963 
Return on average common equity (ROACE), as reported  (409.02) %  12.99%  7.25%  (75.54) %  9.32%
Adjusted return on average common equity  5.89%  12.99%  7.25%  9.27%  9.32%
           
Efficiency ratio          
Adjusted noninterest expense $38,565  $33,153  $25,656  $130,288  $89,120 
Net interest income  53,689   80,888   38,206   255,618   129,267 
Adjusted noninterest income  7,239   8,454   11,055   34,357   45,256 
Adjusted total net interest income and noninterest income  60,928   89,342   49,261   289,975   174,523 
Efficiency ratio, as reported  (28.61) %  37.11%  52.08%  (54.62) %  51.06%
Adjusted efficiency ratio  63.30%  37.11%  52.08%  44.93%  51.06%
________________________
(1)Data has been annualized.

Investor Relations Contact:
Edelman Smithfield for Silvergate
858-200-3782
[email protected]

Source: Silvergate Capital Corporation

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