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Silvergate Capital Corporation Announces Second Quarter 2020 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 months ended June 30, 2020.

Second Quarter 2020 Financial Highlights

  • Net income for the quarter was $5.5 million, or $0.29 per diluted share, compared to net income of $4.4 million, or $0.23 per diluted share, for the first quarter of 2020, and net income of $5.2 million, or $0.28 per diluted share, for the second quarter of 2019
  • Digital currency customers grew to 881 at June 30, 2020 compared to 850 at March 31, 2020, and 655 at June 30, 2019
  • The Silvergate Exchange Network (“SEN”) handled 40,286 transactions in the second quarter of 2020, an increase of 28% compared to 31,405 transactions in the first quarter of 2020, and 12,254 transactions in the second quarter of 2019
  • The SEN handled $22.4 billion of U.S. dollar transfers in the second quarter, an increase of 29% compared to $17.4 billion in the first quarter of 2020, and $8.6 billion in the second quarter of 2019
  • Digital currency customer related fee income for the quarter was $2.4 million, compared to $1.7 million for the first quarter of 2020, and $1.1 million for the second quarter of 2019
  • Book value per share was $14.36 at June 30, 2020, compared to $13.11 at March 31, 2020, and $12.04 at June 30, 2019
  • The Company’s total risk-based capital ratio was 25.54% at June 30, 2020, compared to 26.05% at March 31, 2020 and 26.57% at June 30, 2019

Alan Lane, president and chief executive officer of Silvergate, commented, “As our team continues to support our customers and constituents of the Bank in our new normal environment, our priority remains the safety and health of our employees and customers. As an industry innovator and leader, our infrastructure has allowed for a seamless transition during the evolving pandemic, positioning Silvergate for continued success in a digital world. We also remain confident in the credit quality of our loan portfolio given the Bank’s conservative underwriting standards and the low to moderate loan-to-value ratios across our commercial, multi-family and residential real estate portfolios which were in the low- to mid-50% range as of June 30, 2020. In fact, 27% of the loans by dollar volume that were modified as a result of hardship from the pandemic have already resumed payments as of July 15, 2020, which bodes well for the second half of the year.”

Mr. Lane continued, “Our success is also evident in our second quarter expansion of our digital payments platform, known as the Silvergate Exchange Network or SEN, and our growth in the related fee income, up 41% compared to the 2020 first quarter and 119% compared to the 2019 second quarter. Digital currency customers expanded to 881 from 850 in the first quarter of the year, while we maintained a robust pipeline of more than 200 potential customers. As we continue to grow both our digital currency customers and their utilization of the SEN, the network effect and competitive moat of our global payments platform further expands. As part of this, I am very pleased with the expansion of our newest product, SEN Leverage, which during the quarter expanded our bitcoin collateralized loans to $22.5 million in approved credit from $12.5 million in the first quarter. We are pleased with the product’s performance and see it as a potentially strong growth driver for Silvergate.”

  As of or for the Three Months Ended
  June 30,
2020
 March 31,
2020
 June 30,
2019
       
Financial Highlights (Dollars in thousands, except per share data)
Net income $5,466  $4,393  $5,156 
Diluted earnings per share $0.29  $0.23  $0.28 
Return on average assets (ROAA)(1) 1.02% 0.79% 1.03%
Return on average equity (ROAE)(1) 8.72% 7.14% 10.04%
Net interest margin(1)(2) 3.14% 2.86% 3.56%
Cost of deposits(1)(3) 0.37% 0.87% 0.28%
Cost of funds(1)(3) 0.42% 0.94% 0.43%
Efficiency ratio(4) 65.03% 67.98% 64.50%
Total assets $2,340,713  $2,310,708  $2,242,034 
Total deposits $1,670,909  $2,002,957  $1,938,650 
Book value per share $14.36  $13.11  $12.04 
Tier 1 leverage ratio 11.57% 10.98% 11.11%
Total risk-based capital ratio 25.54% 26.05% 26.57%
___________________________
(1) Data has been annualized.
(2) Net interest margin is a ratio calculated as annualized net interest income, on a fully taxable equivalent basis for interest income on tax-exempt securities using the federal statutory tax rate of 21.0%, divided by average interest earning assets for the same period.
(3) Cost of deposits and cost of funds increased beginning in the second quarter of 2019 due to callable brokered certificates of deposit that were issued as part of the hedging strategy discussed in “Balance Sheet —Deposits” in more detail below. During the first and second quarters of 2020 all brokered certificates of deposit were called and the unamortized premium expense was fully written-off.
(4) Efficiency ratio is calculated by dividing noninterest expenses by net interest income plus noninterest income.

Digital Currency Initiative

At June 30, 2020, the Company’s digital currency customers increased to 881 from 850 at March 31, 2020, and from 655 at June 30, 2019. At June 30, 2020, Silvergate had over 200 prospective digital currency customer leads in various stages of the customer onboarding process and pipeline. There were a record 40,286 transactions on the SEN for the second quarter of 2020, an increase of 28% compared to 31,405 transactions for the first quarter of 2020. In addition, for the second quarter of 2020, $22.4 billion of U.S. dollar transfers occurred on the SEN, another quarterly record and a 29% increase from the first quarter of 2020.

  Three Months Ended
  June 30,
2020
 March 31,
2020
 June 30,
2019
       
  (Dollars in millions)
# SEN Transactions 40,286  31,405  12,254 
$ Volume of SEN Transfers $22,423  $17,372  $8,625 

Results of Operations, Quarter Ended June 30, 2020

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

In 2020, the Company has made multiple purchases of tax-exempt municipal bonds. Tax-exempt income from these securities is calculated on a taxable equivalent basis. Net interest income, net interest spread and net interest margin are presented on a taxable equivalent basis to consistently reflect income from taxable securities and tax-exempt securities based on the federal statutory tax rate of 21.0%.

Net interest income on a taxable equivalent basis totaled $16.5 million for the second quarter of 2020, compared to $15.5 million for the first quarter of 2020, and $17.6 million for the second quarter of 2019.

Compared to the first quarter of 2020, net interest income increased $1.0 million due to a decrease of $2.6 million in interest expense offset by a decrease of $1.6 million in interest income.

Average total interest earning assets decreased by $67.1 million for the second quarter of 2020 compared to the first quarter of 2020, primarily due to decreases in interest earning deposits in other banks and loans, offset by a modest increase in securities. The yield on interest earning assets was impacted by the federal funds rate reductions in March 2020, with lower yields on deposits in other banks, taxable securities, and mortgage warehouse loans. The impact of lower yields was partially offset by income from our investments in tax-exempt municipal bonds.

Average interest bearing liabilities decreased $240.2 million for the second quarter of 2020 compared to the first quarter of 2020, due to calling the remaining balance of brokered certificates of deposit. The average rate paid on total interest bearing liabilities decreased from 3.51% for the first quarter of 2020 to 2.78% for the second quarter of 2020, primarily due to lower rates paid on both brokered certificates of deposit and FHLB advances and other borrowings. In addition, the accelerated premium expense associated with calling brokered certificates of deposit was $1.2 million in the second quarter of 2020, compared to $2.1 million in the first quarter of 2020.

Compared to the second quarter of 2019, net interest income decreased $1.1 million, due to a decrease of $1.0 million in interest income and an increase of $0.1 million in interest expense. Average total interest earning assets increased by $130.6 million for the second quarter of 2020 compared to the second quarter of 2019, due to increases in securities and loans offset by decreases in interest earning deposits in other banks. The average yield on total interest earning assets decreased from 3.94% for the second quarter of 2019 to 3.51% for the second quarter of 2020, primarily due to lower yields on interest earning deposits in other banks, securities and loans. The lower yields were due to declines in federal funds rate and LIBOR, which was partially offset by the impact of interest rate floors which were put in place during 2019. Average interest bearing liabilities decreased $62.3 million for the second quarter of 2020 compared to the second quarter of 2019 due to calling the remaining balance of brokered certificates of deposit. The average rate on total interest bearing liabilities increased from 2.20% for the second quarter of 2019 to 2.78% for the second quarter of 2020, primarily due to the impact of calling the remaining outstanding balance of brokered certificates of deposits, and the acceleration of the related premium expense.

Net interest margin for the second quarter of 2020 was 3.14%, compared to 2.86% for the first quarter of 2020, and 3.56% for the second quarter of 2019. The increase in the net interest margin compared to the first quarter of 2020 was driven by a decrease in interest expense due to lower rates and lower premium expense associated with calling brokered certificates of deposits. The net interest margin decrease from the second quarter of 2019 was primarily due to the impact of lower federal funds rates and LIBOR, partially mitigated by decreased FHLB borrowings and the combined effects associated with the hedging strategy, which included the impacts of reducing the balance of the callable brokered certificates of deposit, along with the benefit derived from the interest rate floors.

  Three Months Ended
  June 30, 2020 March 31, 2020 June 30, 2019
  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 $168,297  $405  0.97% $234,356  $724  1.24% $530,325  $3,058  2.31%
Taxable securities 690,810  4,123  2.40% 902,165  6,048  2.70% 579,464  4,501  3.12%
Tax-exempt securities(1) 231,232  1,996  3.47% 6,611  61  3.71%      
Loans(2)(3) 1,008,242  11,710  4.67% 1,024,982  13,121  5.15% 860,682  11,684  5.45%
Other 13,224  200  6.08% 10,746  121  4.53% 10,743  229  8.55%
Total interest earning assets 2,111,805  18,434  3.51% 2,178,860  20,075  3.71% 1,981,214  19,472  3.94%
Noninterest earning assets 51,776      49,307      28,440     
Total assets $2,163,581      $2,228,167      $2,009,654     
Liabilities and Shareholders’ Equity                  
Interest bearing liabilities:                  
Interest bearing deposits $190,394  $1,652  3.49% $441,682  $4,051  3.69% $270,360  $1,194  1.77%
FHLB advances and other borrowings 78,266  44  0.23% 67,229  263  1.57% 60,639  443  2.93%
Subordinated debentures 15,821  267  6.79% 15,818  270  6.87% 15,807  267  6.78%
Total interest bearing liabilities 284,481  1,963  2.78% 524,729  4,584  3.51% 346,806  1,904  2.20%
Noninterest bearing liabilities:                  
Noninterest bearing deposits 1,611,972      1,436,062      1,445,529     
Other liabilities 15,070      19,900      11,371     
Shareholders’ equity 252,058      247,476      205,948     
Total liabilities and shareholders’ equity $2,163,581      $2,228,167      $2,009,654     
Net interest spread(4)     0.73%     0.20%     1.74%
Net interest income, taxable equivalent basis   $16,471      $15,491      $17,568   
Net interest margin(5)     3.14%     2.86%     3.56%
Reconciliation to reported net interest income:                  
Adjustments for taxable equivalent basis   (419)     (13)        
Net interest income, as reported   $16,052      $15,478      $17,568   
___________________________
(1) Interest income on tax-exempt securities is presented on a taxable equivalent basis using the federal statutory tax rate of 21.0% for all periods presented.
(2) Loans include nonaccrual loans and loans held-for-sale, net of deferred fees and before allowance for loan losses.
(3) Interest income includes amortization of deferred loan fees, net of deferred loan costs.
(4) Net interest spread is the difference between interest rates earned on interest earning assets and interest rates paid on interest bearing liabilities.
(5) Net interest margin is a ratio calculated as annualized net interest income, on a taxable equivalent basis, divided by average interest earning assets for the same period.

Provision for Loan Losses

The Company recorded a provision for loan losses of $0.2 million for the second quarter of 2020, compared to $0.4 million provision for the first quarter of 2020, and $0.2 million for the second quarter of 2019. The provision for the second quarter was based on modest increases in loans held-for-investment, Silvergate’s historically strong credit quality and minimal loan charge-offs, and the low to moderate loan-to-value margins in the Company’s commercial, multi-family and one-to-four family real estate loans held-for-investment portfolios, as evidenced by weighted average loan-to-value ratios in the low- to mid-50% range. Although there is significant uncertainty in the current economic environment due to the impact of the COVID-19 pandemic, the Company believes the relatively low to moderate loan-to-value ratios, along with only modest exposure to the retail and hospitality sectors, provides lower probability of loss in the event of defaults in the Company’s loan portfolio. The Company has worked closely with its borrowers throughout the pandemic and 27% of borrowers who initially were granted loan deferrals have resumed payments on their borrowings as of July 15, 2020. The Company will continue to monitor trends in its portfolio segments for any known or probable adverse conditions.

Noninterest Income

Noninterest income for the second quarter of 2020 was $5.4 million, an increase of $0.5 million, or 10.2%, from the first quarter of 2020. The primary drivers of this increase were an increase of $1.4 million in gains on sale of securities and a $0.6 million, or 38.1%, increase in deposit related fees, partially offset by a decrease of $0.6 million in gains on sale of loans and no gain on extinguishment of debt during the quarter compared to $0.9 million in the first quarter of 2020. Deposit related fees from digital currency customers were $2.4 million for the second quarter of 2020, an increase of $0.7 million, or 40.7% compared to $1.7 million for the first quarter of 2020.

Noninterest income for the second quarter of 2020 increased by $3.3 million, or 152.3%, compared to the second quarter of 2019. This increase was primarily due to the gain on sale of securities of $2.6 million and a $1.3 million, or 108.2%, increase in deposit related fees, partially offset by a $0.4 million decrease in service fees related to off-balance sheet deposits. Deposit related fees from digital currency customers increased $1.3 million, or 118.8%, to $2.4 million compared to $1.1 million for the second quarter of 2019.

  Three Months Ended
  June 30,
2020
 March 31,
2020
 June 30,
2019
       
  (Dollars in thousands)
Noninterest income:      
Mortgage warehouse fee income $450  $382  $346 
Service fees related to off-balance sheet deposits 7  70  412 
Deposit related fees 2,438  1,766  1,171 
Gain on sale of securities, net 2,556  1,197   
(Loss) gain on sale of loans, net (56) 506  156 
Gain on extinguishment of debt   925   
Other income 39  85  69 
Total noninterest income $5,434  $4,931  $2,154 

Noninterest Expense

Noninterest expense totaled $14.0 million for the second quarter of 2020, an increase of $0.1 million compared to the first quarter of 2020, and an increase of $1.3 million compared to the second quarter of 2019.

Noninterest expense increased from the prior quarter due to increases in salaries and employee benefits and communications and data processing, and professional services, partially offset by a decrease in other general and administrative expense.

Noninterest expense increased from the second quarter of 2019 due to increases in salaries and employee benefits, communications and data processing and other general and administrative expense, partially offset by decreases in occupancy and equipment expense.

  Three Months Ended
  June 30,
2020
 March 31,
2020
 June 30,
2019
       
  (Dollars in thousands)
Noninterest expense:      
Salaries and employee benefits $9,002  $8,955  $8,082 
Occupancy and equipment 894  907  1,012 
Communications and data processing 1,313  1,261  1,123 
Professional services 1,105  985  1,073 
Federal deposit insurance 182  123  168 
Correspondent bank charges 347  373  301 
Other loan expense 99  122  118 
Other real estate owned expense     5 
Other general and administrative 1,030  1,149  839 
Total noninterest expense $13,972  $13,875  $12,721 

Income Tax Expense

Income tax expense was $1.8 million for the second quarter of 2020, compared to $1.8 million for the first quarter of 2020, and $1.7 million for the second quarter of 2019. Our effective tax rate for the second quarter of 2020 was 25.0%, compared to 28.8% for the first quarter of 2020, and 24.7% for the second quarter of 2019. The lower effective tax rate during the second quarter of 2020 when compared to the first quarter of 2020 was due to tax-exempt income earned on certain municipal bonds.

Results of Operations, Six Months Ended June 30, 2020

Net income for the six months ended June 30, 2020 was $9.9 million, or $0.52 per diluted share, compared to $14.6 million, or $0.80 per diluted share, for 2019.

Net interest income for the six months ended June 30, 2020 was $31.5 million, compared to $36.9 million for the same period in 2019. The decrease in net interest income was primarily due to a $1.5 million decrease in interest income and a $3.9 million increase in interest expense.

Noninterest income for the six months ended June 30, 2020 was $10.4 million, compared to $10.0 million for the same period in 2019. The increase in total noninterest income was primarily due to the increase in fee income from our digital currency customers, a $3.8 million gain on sale of securities offset by the $5.5 million gain on a branch sale that occurred in the first quarter of 2019. Digital currency customer related fee income for the six months ended June 30, 2020 was $4.1 million as compared to $2.0 million for the six months ended June 30, 2019.

Noninterest expense was $27.8 million for the six months ended June 30, 2020, compared to $26.2 million for the six months ended June 30, 2019. The increase in noninterest expense was primarily due to increases in salaries and benefits and other general and administrative expenses.

Income tax expense was $3.6 million for the six months ended June 30, 2020, compared to income tax expense of $5.7 million for 2019. Our effective tax rate for the six months ended June 30, 2020 and 2019 was 26.7% and 28.1%, respectively.

Balance Sheet

Deposits

At June 30, 2020, deposits totaled $1.7 billion, a decrease of $332.0 million, or 16.6%, from March 31, 2020, and a decrease of $267.7 million, or 13.8%, from June 30, 2019. Noninterest bearing deposits totaled $1.6 billion (representing approximately 93.6% of total deposits) at June 30, 2020, a decrease of $182.1 million from the prior quarter end and a $13.3 million increase compared to June 30, 2019. The decrease in total deposits from the prior quarter was driven by a decrease in deposit levels from digital currency customers as the continued volatility in digital currency prices, primarily bitcoin, resulted in the deployment of U.S. dollar deposits held at the bank into digital currency asset classes and a $141.3 million decrease from calling the brokered certificates of deposit in the second quarter of 2020. The decrease in total deposits from June 30, 2019 includes a net decrease of $248.2 million in callable brokered certificates of deposit associated with the hedging strategy, partially offset by an increase in deposit levels related to the Company’s digital currency customers.

The weighted average cost of deposits for the second quarter of 2020 was 0.37%, compared to 0.87% for the first quarter of 2020, and 0.28% for the second quarter of 2019. The decrease in the weighted average cost of deposits compared to the first quarter of 2020 was driven by lower accelerated premium expense associated with calling all remaining brokered certificates of deposit in the second quarter of 2020, when compared to the first quarter of 2020 and an increase in noninterest bearing deposits. When compared to the second quarter of 2019, the increase in weighted average cost of deposits was due to the accelerated premium resulting from calling the outstanding brokered certificates of deposit offset by lower coupon interest expense on those deposits and higher noninterest bearing deposits in the second quarter of 2020 compared to 2019.

  Three Months Ended
  June 30, 2020 March 31, 2020 June 30, 2019
  Average
Balance
 Average
Rate
 Average
Balance
 Average
Rate
 Average
Balance
 Average
Rate
             
  (Dollars in thousands)
Noninterest bearing demand accounts $1,611,972    $1,436,062    $1,445,529   
Interest bearing accounts:            
Interest bearing demand accounts 44,643  0.14% 51,551  0.13% 47,879  0.14%
Money market and savings accounts 66,598  0.39% 81,670  0.97% 77,293  0.83%
Certificates of deposit:            
Brokered certificates of deposit 77,717  8.11% 306,828  5.02% 129,354  2.97%
Other 1,436  0.84% 1,633  0.99% 15,834  1.53%
Total interest bearing deposits 190,394  3.49% 441,682  3.69% 270,360  1.77%
Total deposits $1,802,366  0.37% $1,877,744  0.87% $1,715,889  0.28%

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

  June 30, 2020 March 31, 2020 June 30, 2019
  Number of
Customers
 Total
Deposits(1)
 Number of
Customers
 Total
Deposits(1)
 Number of
Customers
 Total
Deposits(1)
             
  (Dollars in millions)
Digital currency exchanges 64  $601  61  $599  49  $653 
Institutional investors 566  577  541  715  428  569 
Other customers 251  331  248  379  178  242 
Total 881  $1,509  850  $1,693  655  $1,463 
___________________________
(1)Total deposits may not foot due to rounding.

Loan Portfolio

Total loans held-for-investment were $800.3 million at June 30, 2020, an increase of $114.3 million, or 16.7%, from March 31, 2020, and an increase of $108.9 million, or 15.7%, from June 30, 2019.

  June 30,
2020
 March 31,
2020
 June 30,
2019
       
  (Dollars in thousands)
Real estate loans:      
One-to-four family $216,038  $202,214  $203,885 
Multi-family 72,007  76,721  80,080 
Commercial 316,815  325,116  331,034 
Construction 10,822  10,034  3,137 
Commercial and industrial 24,707  15,948  10,658 
Consumer and other 243  154  199 
Reverse mortgage 1,309  1,431  1,686 
Mortgage warehouse 155,308  51,596  57,923 
Total gross loans held-for-investment 797,249  683,214  688,602 
Deferred fees, net 3,062  2,760  2,857 
Total loans held-for-investment 800,311  685,974  691,459 
Allowance for loan losses (6,763) (6,558) (7,049)
Loans held-for-investment, net 793,548  679,416  684,410 
Loans held-for-sale 321,835  435,023  235,834 
Total loans $1,115,383  $1,114,439  $920,244 

Loans held-for-sale included $321.8 million, $435.0 million and $223.9 million of mortgage warehouse loans at June 30, 2020, March 31, 2020, and June 30, 2019, respectively.

Asset Quality and Allowance for Loan Losses

Coronavirus Disease 2019 (“COVID-19”) Update

In April 2020, the Company implemented a short-term loan modification program for customers impacted financially by the COVID-19 pandemic to provide temporary relief to certain borrowers who meet the program’s qualifications. The program was offered to borrowers to modify their existing loans to temporarily defer principal and/or interest payments for a specified period of time, extend loan maturity dates and/or waive certain loan covenants. Deferred payments may be extended for continued hardship but are not to exceed a total of six months. The majority of short-term loan modifications for commercial real estate loan borrowers consist of deferred payments which may include principal, interest and escrow. Deferred interest is capitalized to the loan balance and deferred principal is added to the maturity or payoff date. For one-to-four family loans, the majority of short-term modifications consist of deferring full monthly payment of principal, interest and escrow, with deferred payments due at maturity or payoff of the loan. Loans qualifying for these modifications will not be required to be reported as delinquent, nonaccrual, impaired or criticized solely as a result of a COVID-19 loan modification for the months of payment deferrals. Borrowers considered current are those that are less than 30 days past due on their modified contractual payments.

During the second quarter of 2020, the Company modified 49 loans representing $136.8 million in loan balances, or 17%, of total gross loans held-for-investment as of June 30, 2020. All loans modified under these programs are maintained on full accrual status during the deferral period. Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not troubled debt restructurings (“TDRs”). In accordance with interagency guidance issued in April 2020, these short-term modifications made to a borrower affected by the COVID-19 pandemic and governmental shutdown orders, such as payment deferrals, fee waivers and extensions of repayment terms, do not need to be identified as TDRs if the loans were current at the time a modification plan was implemented. The Company elected to adopt these provisions of the CARES Act for the temporary modifications described above. None of the modified loans met the criteria of a TDR under the CARES Act or the related interagency statement.

Loans modified due to COVID-19 during the period presented are as follows:

  Six Months Ended June 30, 2020
  Number of
Loans
 Loan Balance
At Period End
 Percentage of
Loan Portfolio
Balance
       
  (Dollars in thousands)
COVID-19 related modifications:    
Real estate loans:      
One-to-four family 19  $11,970  6%
Commercial 28  123,500  39%
Commercial and industrial 2  1,373  6%
  49  $136,843  17%

At June 30, 2020, the allowance for loan losses was $6.8 million, compared to $6.6 million at March 31, 2020, and $7.0 million at June 30, 2019. The ratio of the allowance for loan losses to gross loans held-for-investment at June 30, 2020 was 0.85%, compared to 0.96% and 1.02% at March 31, 2020 and June 30, 2019, respectively.

Nonperforming assets totaled $4.6 million, or 0.20% of total assets, at June 30, 2020, a decrease of $0.5 million from $5.1 million, or 0.22% of total assets at March 31, 2020. Nonperforming assets decreased $3.1 million, from $7.6 million, or 0.34%, of total assets, at June 30, 2019.

  June 30,
2020
 March 31,
2020
 June 30,
2019
       
Asset Quality (Dollars in thousands)
Nonperforming Assets:      
Nonperforming loans $4,528  $5,126  $7,518 
Troubled debt restructurings $1,620  $1,676  $1,896 
Other real estate owned, net $51    $112 
Nonperforming assets $4,579  $5,126  $7,630 
       
Asset Quality Ratios:      
Nonperforming assets to total assets 0.20% 0.22% 0.34%
Nonperforming loans to gross loans(1) 0.57% 0.75% 1.09%
Nonperforming assets to gross loans and other real estate owned(1) 0.57% 0.75% 1.11%
Net charge-offs (recoveries) to average total loans(1) 0.00% 0.00% 0.01%
Allowance for loan losses to gross loans(1) 0.85% 0.96% 1.02%
Allowance for loan losses to nonperforming loans 149.36% 127.94% 93.76%
___________________________
(1)Loans exclude loans held-for-sale at each of the dates presented.

Securities

Securities available-for-sale decreased $13.2 million, or 1.4%, from $964.3 million at March 31, 2020, and increased $30.6 million, or 3.3%, from $920.5 million at June 30, 2019, to $951.1 million at June 30, 2020. During the second quarter of 2020 the Company sold $202.3 million of fixed-rate commercial mortgage-backed securities and realized a gain on sale of $2.6 million. These bonds were originally purchased as part of the hedging strategy in 2019. The Company reinvested the proceeds from these sales in $163.8 million of highly rated fixed-rate tax-exempt municipal bonds at higher tax-equivalent yields than the commercial mortgage-backed securities that were sold. The municipal bonds that were purchased have a similar average life as the commercial mortgage-backed securities that were sold. The Company also purchased $15.8 million of highly rated fixed-rate taxable municipal bonds and entered into a series of interest rate swaps, which are accounted for as fair value hedges, to convert the bonds from fixed to floating rate yields.

Capital Ratios

At June 30, 2020, the Company’s ratio of common equity to total assets was 11.45%, compared with 10.59% at March 31, 2020, and 9.58% at June 30, 2019. At June 30, 2020, the Company’s book value per share was $14.36, compared to $13.11 at March 31, 2020, and $12.04 at June 30, 2019.

At June 30, 2020, the Company had a tier 1 leverage ratio of 11.57%, common equity tier 1 capital ratio of 23.32%, tier 1 capital ratio of 24.86% and total capital ratio of 25.54%.

At June 30, 2020, the Bank had a tier 1 leverage ratio of 10.92%, common equity tier 1 capital ratio of 23.48%, tier 1 capital ratio of 23.48% and total capital ratio of 24.17%. 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) June 30,
2020
 March 31,
2020
 June 30,
2019
The Company      
Tier 1 leverage ratio 11.57% 10.98% 11.11%
Common equity tier 1 capital ratio 23.32% 23.75% 23.96%
Tier 1 risk-based capital ratio 24.86% 25.35% 25.75%
Total risk-based capital ratio 25.54% 26.05% 26.57%
Common equity to total assets 11.45% 10.59% 9.58%
The Bank      
Tier 1 leverage ratio 10.92% 10.33% 10.62%
Common equity tier 1 capital ratio 23.48% 23.86% 24.66%
Tier 1 risk-based capital ratio 23.48% 23.86% 24.66%
Total risk-based capital ratio 24.17% 24.55% 25.49%
___________________________
(1)June 30, 2020 capital ratios are preliminary.

Conference Call and Webcast

The Company will host a conference call on Monday, July 27, 2020 at 11:00 a.m. (Eastern Time) to present and discuss second quarter 2020 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 Second Quarter 2020 Earnings Conference Call. A replay will be available starting at 2:00 p.m. (Eastern Time) on July 27, 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 13706030. The replay will be available until 11:59 p.m. (Eastern Time) on August 10, 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.

Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to fully reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; our cyber security risks are increased as the result of an increase in the number of employees working remotely; and FDIC premiums may increase if the agency experiences additional resolution costs.

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)
 
  June 30,
2020
 March 31,
2020
 December 31,
2019
 September 30,
2019
 June 30,
2019
ASSETS          
Cash and due from banks $13,777  $2,778  $1,579  $4,098  $2,036 
Interest earning deposits in other banks 185,667  163,422  132,025  156,160  339,325 
Cash and cash equivalents 199,444  166,200  133,604  160,258  341,361 
Securities available-for-sale, at fair value 951,094  964,317  897,766  909,917  920,481 
Securities held-to-maturity, at amortized cost         63 
Loans held-for-sale, at lower of cost or fair value 321,835  435,023  375,922  311,410  235,834 
Loans held-for-investment, net of allowance for loan losses 793,548  679,416  664,622  691,990  684,410 
Federal home loan and federal reserve bank stock, at cost 13,499  10,269  10,264  10,264  10,264 
Accrued interest receivable 7,700  6,344  5,950  5,875  6,296 
Other real estate owned, net 51    128  81  112 
Premises and equipment, net 3,326  3,406  3,259  3,224  3,276 
Operating lease right-of-use assets 3,846  4,210  4,571  4,927  5,280 
Derivative assets 35,770  33,506  23,440  30,885  25,698 
Low income housing tax credit investment 917  927  954  981  1,008 
Other assets 9,683  7,090  7,647  7,032  7,951 
Total assets $2,340,713  $2,310,708  $2,128,127  $2,136,844  $2,242,034 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Deposits:          
Noninterest bearing demand accounts $1,563,136  $1,745,219  $1,343,667  $1,394,433  $1,549,886 
Interest bearing accounts 107,773  257,738  470,987  453,662  388,764 
Total deposits 1,670,909  2,002,957  1,814,654  1,848,095  1,938,650 
Federal home loan bank advances 360,000  30,000  49,000  20,000   
Other borrowings         53,545 
Notes payable     3,714  4,000  4,286 
Subordinated debentures, net 15,823  15,820  15,816  15,813  15,809 
Operating lease liabilities 4,146  4,515  4,881  5,237  5,581 
Accrued expenses and other liabilities 21,730  12,664  9,026  13,085  9,415 
Total liabilities 2,072,608  2,065,956  1,897,091  1,906,230  2,027,286 
Commitments and contingencies          
Preferred stock          
Class A common stock 184  184  178  167  166 
Class B non-voting common stock 3  3  9  12  12 
Additional paid-in capital 132,479  132,336  132,138  125,573  125,599 
Retained earnings 102,169  96,703  92,310  88,712  82,056 
Accumulated other comprehensive income 33,270  15,526  6,401  16,150  6,915 
Total shareholders’ equity 268,105  244,752  231,036  230,614  214,748 
Total liabilities and shareholders’ equity $2,340,713  $2,310,708  $2,128,127  $2,136,844  $2,242,034 
SILVERGATE CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
 
  Three Months Ended Six Months Ended
  June 30,
2020
 March 31,
2020
 June 30,
2019
 June 30,
2020
 June 30,
2019
Interest income          
Loans, including fees $11,710  $13,121  $11,684  $24,831  $24,795 
Taxable securities 4,123  6,048  4,501  10,171  7,534 
Tax-exempt securities 1,577  48    1,625   
Other interest earning assets 405  724  3,058  1,129  6,855 
Dividends and other 200  121  229  321  351 
Total interest income 18,015  20,062  19,472  38,077  39,535 
Interest expense          
Deposits 1,652  4,051  1,194  5,703  1,535 
Federal home loan bank advances 44  227    271   
Notes payable and other   36  443  36  585 
Subordinated debentures 267  270  267  537  531 
Total interest expense 1,963  4,584  1,904  6,547  2,651 
Net interest income before provision for loan losses 16,052  15,478  17,568  31,530  36,884 
Provision for loan losses 222  367  152  589  419 
Net interest income after provision for loan losses 15,830  15,111  17,416  30,941  36,465 
Noninterest income          
Mortgage warehouse fee income 450  382  346  832  712 
Service fees related to off-balance sheet deposits 7  70  412  77  1,171 
Deposit related fees 2,438  1,766  1,171  4,204  2,158 
Gain on sale of securities, net 2,556  1,197    3,753   
(Loss) gain on sale of loans, net (56) 506  156  450  345 
Gain on sale of branch, net         5,509 
Gain on extinguishment of debt   925    925   
Other income 39  85  69  124  130 
Total noninterest income 5,434  4,931  2,154  10,365  10,025 
Noninterest expense          
Salaries and employee benefits 9,002  8,955  8,082  17,957  16,847 
Occupancy and equipment 894  907  1,012  1,801  1,885 
Communications and data processing 1,313  1,261  1,123  2,574  2,160 
Professional services 1,105  985  1,073  2,090  2,518 
Federal deposit insurance 182  123  168  305  343 
Correspondent bank charges 347  373  301  720  580 
Other loan expense 99  122  118  221  243 
Other real estate owned expense     5    5 
Other general and administrative 1,030  1,149  839  2,179  1,626 
Total noninterest expense 13,972  13,875  12,721  27,847  26,207 
Income before income taxes 7,292  6,167  6,849  13,459  20,283 
Income tax expense 1,826  1,774  1,693  3,600  5,691 
Net income 5,466  4,393  5,156  9,859  14,592 
Basic earnings per share $0.29  $0.24  $0.29  $0.53  $0.82 
Diluted earnings per share $0.29  $0.23  $0.28  $0.52  $0.80 
Weighted average shares outstanding:          
Basic 18,672  18,668  17,835  18,670  17,837 
Diluted 19,124  19,117  18,257  19,112  18,267 

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 six months ended June 30, 2020 and 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. There were no non-GAAP adjustments for the three and six months ended June 30, 2020 or for the three months ended June 30, 2019. 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.

  Six Months Ended
June 30,
  2020 2019
     
  (Dollars in thousands)
Net income    
Net income, as reported $9,859  $14,592 
Adjustments:    
Gain on sale of branch, net   (5,509)
Tax effect(1)   1,574 
Adjusted net income $9,859  $10,657 
     
Noninterest income / average assets(2)    
Noninterest income $10,365  $10,025 
Adjustments:    
Gain on sale of branch, net   (5,509)
Adjusted noninterest income 10,365  4,516 
Average assets 2,195,874  1,991,171 
Noninterest income / average assets, as reported 0.95% 1.02%
Adjusted noninterest income / average assets 0.95% 0.46%
     
Return on average assets (ROAA)(2)    
Adjusted net income $9,859  $10,657 
Average assets 2,195,874  1,991,171 
Return on average assets (ROAA), as reported 0.90% 1.48%
Adjusted return on average assets 0.90% 1.08%
     
Return on average equity (ROAE)(2)    
Adjusted net income $9,859  $10,657 
Average equity 249,767  200,996 
Return on average equity (ROAE), as reported 7.94% 14.64%
Adjusted return on average equity 7.94% 10.69%
     
Efficiency ratio    
Noninterest expense $27,847  $26,207 
Net interest income 31,530  36,884 
Noninterest income 10,365  10,025 
Total net interest income and noninterest income 41,895  46,909 
Adjustments:    
Gain on sale of branch, net   (5,509)
Adjusted total net interest income and noninterest income 41,895  41,400 
Efficiency ratio, as reported 66.47% 55.87%
Adjusted efficiency ratio 66.47% 63.30%
___________________________
(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 Contact:
Jamie Lillis / Shannon Devine
(858) 200-3782
[email protected]

Source: Silvergate Capital Corporation

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