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Silvergate Capital Corporation Announces Third Quarter 2021 Results

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LA JOLLA, Calif., October 19, 2021--(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 nine months ended September 30, 2021.

Third Quarter 2021 Highlights

  • Net income available to common shareholders for the quarter was $23.5 million, or $0.88 per diluted share, compared to net income of $20.9 million, or $0.80 per diluted share, for the second quarter of 2021, and net income of $7.1 million, or $0.37 per diluted share, for the third quarter of 2020

  • The Silvergate Exchange Network ("SEN") handled $162.0 billion of U.S. dollar transfers in the third quarter of 2021, a decrease of 32% compared to $239.6 billion in the second quarter of 2021, and an increase of 342% compared to $36.7 billion in the third quarter of 2020

  • Total SEN Leverage commitments were $322.5 million at September 30, 2021, compared to $258.5 million at June 30, 2021, and $35.5 million at September 30, 2020

  • Digital currency customer related fee income for the quarter was $8.1 million, compared to $11.3 million for the second quarter of 2021, and $3.3 million for the third quarter of 2020

  • Digital currency customers grew to 1,305 at September 30, 2021, compared to 1,224 at June 30, 2021, and 928 at September 30, 2020

  • Average digital currency customer deposits grew to $11.2 billion during the third quarter of 2021, compared to $9.9 billion during the second quarter of 2021

  • Completed previously announced $200 million depository share offering, for net proceeds of $193.7 million after deducting underwriting discounts and offering expenses

Alan Lane, president and chief executive officer of Silvergate, commented, "Silvergate had another great quarter, underscored by record quarterly pre-tax income, continued platform growth, and an expanding balance sheet. In the third quarter we grew average digital currency deposits to $11.2 billion, the highest in our history, added new digital currency customers to the SEN, and further increased SEN Leverage commitments and balances. Our strong results and increasingly diverse earnings stream highlight the important roles that we play in serving our customers in the still nascent digital currency industry."

As of or for the Three Months Ended

September 30,
2021

June 30,
2021

September 30,
2020

Financial Highlights

(Dollars in thousands, except per share data)

Net income available to common shareholders

$

23,492

$

20,935

$

7,060

Diluted earnings per common share

$

0.88

$

0.80

$

0.37

Return on average assets (ROAA)(1)

0.75

%

0.77

%

1.13

%

Return on average common equity (ROACE)(1)

10.45

%

10.40

%

10.14

%

Net interest margin(1)(2)

1.26

%

1.16

%

3.19

%

Cost of deposits(1)(3)

0.00

%

0.00

%

0.01

%

Cost of funds(1)(3)

0.01

%

0.01

%

0.07

%

Efficiency ratio(4)

43.20

%

50.69

%

61.74

%

Total assets

$

12,776,621

$

12,289,476

$

2,620,573

Total deposits

$

11,662,520

$

11,371,556

$

2,281,108

Book value per common share

$

33.10

$

32.84

$

15.18

Tier 1 leverage ratio

8.71

%

7.91

%

10.36

%

Total risk-based capital ratio

51.13

%

48.00

%

24.68

%

________________________

(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 for the second quarter of 2020 includes interest expense and accelerated premium amortization expense related to callable brokered certificates of deposit that were called during the second quarter of 2020.

(4)

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

Digital Currency Initiative

At September 30, 2021, the Company’s digital currency customers increased to 1,305 from 1,224 at June 30, 2021, and from 928 at September 30, 2020. At September 30, 2021, prospective digital currency customer leads in various stages of the customer onboarding process and pipeline remained above 200. For the third quarter of 2021, $162.0 billion of U.S. dollar transfers occurred on the SEN, a 32% decrease from $239.6 billion transfers in the second quarter of 2021, and an increase of 342% compared to $36.7 billion in the third quarter of 2020. Based on digital currency industry transaction data provided by Coin Metrics, bitcoin and ether dollar trading volumes decreased by 43% during the third quarter of 2021 compared to the second quarter of 2021. The Company will no longer provide data related to the number of SEN transactions conducted quarterly but will continue to report quarterly SEN dollar volumes as industry data from Coin Metrics is more highly correlated to this metric.

Results of Operations, Quarter Ended September 30, 2021

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

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

Net interest income on a taxable equivalent basis totaled $39.0 million for the third quarter of 2021, compared to $31.2 million for the second quarter of 2021, and $19.4 million for the third quarter of 2020.

Compared to the second quarter of 2021, net interest income increased $7.8 million, due to increased interest income, with the largest driver being higher balances of securities, while interest expense remained flat. Average total interest earning assets increased by $1.5 billion for the third quarter of 2021 compared to the second quarter of 2021, primarily due to increased digital currency related deposits that were invested in securities in the second and third quarter of 2021. The average yield on interest earning assets increased from 1.17% for the second quarter of 2021 to 1.27% for the third quarter of 2021, primarily due to a higher proportion of securities and a lower proportion of lower yielding interest earnings deposits in other banks. Average interest bearing liabilities decreased $20.6 million for the third quarter of 2021 compared to the second quarter of 2021, due to a decrease in interest bearing deposits. The average rate paid on total interest bearing liabilities increased from 1.02% for the second quarter of 2021 to 1.17% for the third quarter of 2021, driven by the decrease in lower cost interest bearing deposits, which resulted in a larger proportion of higher cost subordinated debentures as a percentage of total interest bearing liabilities.

Compared to the third quarter of 2020, net interest income increased $19.6 million, due to an increase of $19.5 million in interest income and a decrease of $0.1 million in interest expense. Average total interest earning assets increased by $9.8 billion for the third quarter of 2021 compared to the third quarter of 2020, due to an increase in noninterest bearing deposits, which resulted in higher levels of interest earning deposits in other banks and securities. In addition, average loans increased by 23.4% due to increases in mortgage warehouse loans, driven by elevated mortgage refinance activity and increased SEN Leverage lending, which was launched in the first quarter of 2020. The average yield on total interest earning assets decreased from 3.25% for the third quarter of 2020 to 1.27% for the third quarter of 2021, primarily due to interest earning deposits in other banks being a greater percentage of interest earning assets, and lower yields on recently purchased securities. Average interest bearing liabilities decreased $156.7 million for the third quarter of 2021 compared to the third quarter of 2020, due to reduced FHLB advances in 2021 and lower balances of interest bearing deposits. The average rate on total interest bearing liabilities increased from 0.60% for the third quarter of 2020 to 1.17% for the third quarter of 2021, primarily due to the decrease in lower cost FHLB advances and interest bearing deposits, which resulted in a larger proportion of higher cost subordinated debentures as a percentage of total interest bearing liabilities.

Net interest margin for the third quarter of 2021 was 1.26%, compared to 1.16% for the second quarter of 2021, and 3.19% for the third quarter of 2020. The increase in the net interest margin compared to the second quarter of 2021 was primarily driven by the increase in the proportion of securities compared to lower yielding interest earning deposits in other banks. The net interest margin decrease from the third quarter of 2020 was primarily due to a higher proportion of interest earning deposits as a percentage of total interest earning assets, as well as lower yields on securities due to a declining interest rate environment.

Three Months Ended

September 30, 2021

June 30, 2021

September 30, 2020

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

$

4,104,776

$

1,755

0.17

%

$

5,603,397

$

1,599

0.11

%

$

245,855

$

196

0.32

%

Taxable securities

5,449,202

14,000

1.02

%

2,937,659

8,324

1.14

%

679,277

3,746

2.19

%

Tax-exempt securities(1)

1,187,452

6,347

2.12

%

698,149

3,953

2.27

%

267,511

2,177

3.24

%

Loans(2)(3)

1,493,590

16,972

4.51

%

1,541,373

17,158

4.46

%

1,209,884

13,527

4.45

%

Other

31,028

195

2.49

%

29,394

466

6.36

%

15,112

116

3.05

%

Total interest earning assets

12,266,048

39,269

1.27

%

10,809,972

31,500

1.17

%

2,417,639

19,762

3.25

%

Noninterest earning assets

197,477

121,288

68,327

Total assets

$

12,463,525

$

10,931,260

$

2,485,966

Liabilities and Shareholders’ Equity

Interest bearing liabilities:

Interest bearing deposits

$

76,898

$

26

0.13

%

$

97,463

$

35

0.14

%

$

108,755

$

57

0.21

%

FHLB advances and other borrowings

1

0.00

%

44

124,886

65

0.21

%

Subordinated debentures

15,839

247

6.19

%

15,836

252

6.38

%

15,825

257

6.46

%

Total interest bearing liabilities

92,738

273

1.17

%

113,343

287

1.02

%

249,466

379

0.60

%

Noninterest bearing liabilities:

Noninterest bearing deposits

11,305,650

9,980,680

1,935,661

Other liabilities

50,657

29,586

23,860

Shareholders’ equity

1,014,480

807,651

276,979

Total liabilities and shareholders’ equity

$

12,463,525

$

10,931,260

$

2,485,966

Net interest spread(4)

0.10

%

0.15

%

2.65

%

Net interest income, taxable equivalent basis

$

38,996

$

31,213

$

19,383

Net interest margin(5)

1.26

%

1.16

%

3.19

%

Reconciliation to reported net interest income:

Adjustments for taxable equivalent basis

(1,333)

(830)

(457)

Net interest income, as reported

$

37,663

$

30,383

$

18,926

________________________

(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 did not record a provision for loan losses for the third quarter of 2021, the second quarter of 2021, or for the third quarter of 2020 as a result of management’s assessment of the level of the allowance for loan losses, and the amount and mix of the loan portfolio, among other factors.

Noninterest Income

Noninterest income for the third quarter of 2021 was $14.0 million, an increase of $2.0 million, or 16.3%, from the second quarter of 2021. The primary driver of this increase was a $5.2 million gain on sale of securities offset by a $3.1 million, or 27.7%, decrease in deposit related fees as a result of lower cash management fees from digital currency related customers.

Noninterest income for the third quarter of 2021 increased by $10.1 million, or 254.2%, compared to the third quarter of 2020. This increase was primarily due to a $5.2 million increase in gain on sale of securities and a $4.9 million, or 148.1%, increase in deposit related fees, partially offset by a $0.1 million, or 12.3% decrease in mortgage warehouse fee income.

Three Months Ended

September 30,
2021

June 30,
2021

September 30,
2020

(Dollars in thousands)

Noninterest income:

Mortgage warehouse fee income

$

665

$

753

$

758

Service fees related to off-balance sheet deposits

1

Deposit related fees

8,171

11,308

3,293

Gain on sale of securities, net

5,182

Loss on sale of loans, net

(96)

Other income

24

8

8

Total noninterest income

$

14,042

$

12,069

$

3,964

Noninterest Expense

Noninterest expense totaled $22.3 million for the third quarter of 2021, an increase of $0.8 million, or 3.8%, compared to the second quarter of 2021, and an increase of $8.2 million, or 58.1%, compared to the third quarter of 2020. The increase in noninterest expense compared to prior quarter was due to an increase in salaries and employee benefits and federal deposit insurance. The increase in noninterest expense from the third quarter of 2020 was primarily driven by increased federal deposit insurance expense resulting from the significant growth in digital currency deposits and by ongoing investments related to strategic growth initiatives.

Three Months Ended

September 30,
2021

June 30,
2021

September 30,
2020

(Dollars in thousands)

Noninterest expense:

Salaries and employee benefits

$

10,729

$

10,260

$

8,899

Occupancy and equipment

523

599

845

Communications and data processing

1,793

1,796

1,389

Professional services

2,471

2,594

1,207

Federal deposit insurance

4,297

3,844

209

Correspondent bank charges

572

812

403

Other loan expense

299

280

60

Other general and administrative

1,655

1,334

1,121

Total noninterest expense

$

22,339

$

21,519

$

14,133

Income Tax Expense (Benefit)

Income tax expense was $5.9 million for the third quarter of 2021, compared to a benefit of $2,000 for the second quarter of 2021, and an expense of $1.7 million for the third quarter of 2020. Our effective tax rate for the third quarter of 2021 was 20.0%, compared to zero for the second quarter of 2021, and 19.4% for the third quarter of 2020. The lower effective tax rate for the second quarter of 2021 was due to significant tax benefits recognized on the exercise of stock options.

Balance Sheet

Deposits

At September 30, 2021, deposits totaled $11.7 billion, an increase of $291.0 million, or 2.6%, from June 30, 2021, and an increase of $9.4 billion, or 411.3%, from September 30, 2020. Noninterest bearing deposits totaled $11.6 billion, representing approximately 99.3% of total deposits at September 30, 2021, an increase of $295.7 million from the prior quarter end, and a $9.4 billion increase compared to September 30, 2020. The increase in total deposits from the prior year quarter end was driven by an increase in deposits from digital currency exchanges, institutional investors in digital assets and other fintech related customers. The Bank’s 10 largest depositors accounted for $5.3 billion in deposits, or approximately 45.6% of total deposits at September 30, 2021, compared to $5.3 billion in deposits, or approximately 46.7% of total deposits at June 30, 2021, substantially all of which are from customers operating in the digital currency industry.

Our continued growth has been accompanied by significant fluctuations in the level of our deposits, in particular our deposits from customers operating in the digital currency industry, as our customers in this industry typically carry higher balances over the weekend to take advantage of the 24/7 availability of the SEN, and carry lower balances during the business week. The Bank’s average total digital currency customer deposits during the third quarter of 2021 amounted to $11.2 billion, the high and low daily total digital currency deposit levels during such time were $12.6 billion and $9.8 billion, respectively, compared to an average of $9.9 billion during the second quarter of 2021, and high and low daily deposit levels of $11.8 billion and $6.8 billion, respectively.

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

September 30, 2021

June 30, 2021

September 30, 2020

Number of
Customers

Total
Deposits(1)

Number of
Customers

Total
Deposits(1)

Number of
Customers

Total
Deposits(1)

(Dollars in millions)

Digital currency exchanges

94

$

6,759

93

$

5,395

69

$

729

Institutional investors

830

3,344

771

3,986

599

850

Other customers

381

1,365

360

1,734

260

515

Total

1,305

$

11,468

1,224

$

11,114

928

$

2,095

________________________

(1)

Total deposits may not foot due to rounding.

The weighted average cost of deposits for the third quarter of 2021 and for the second quarter of 2021 was 0.00%, compared to 0.01% for the third quarter of 2020.

Three Months Ended

September 30, 2021

June 30, 2021

September 30, 2020

Average
Balance

Average
Rate

Average
Balance

Average
Rate

Average
Balance

Average
Rate

(Dollars in thousands)

Noninterest bearing demand accounts

$

11,305,650

$

9,980,680

$

1,935,661

Interest bearing accounts:

Interest bearing demand accounts

8,597

0.05

%

27,303

0.12

%

41,871

0.10

%

Money market and savings accounts

67,735

0.14

%

69,527

0.15

%

65,646

0.25

%

Certificates of deposit

566

0.70

%

633

0.63

%

1,238

1.29

%

Total interest bearing deposits

76,898

0.13

%

97,463

0.14

%

108,755

0.21

%

Total deposits

$

11,382,548

0.00

%

$

10,078,143

0.00

%

$

2,044,416

0.01

%

Loan Portfolio

Total loans, including net loans held-for-investment and loans held for sale, were $1.6 billion at September 30, 2021, an increase of $139.5 million, or 9.4%, from June 30, 2021, and an increase of $226.5 million, or 16.2%, from September 30, 2020.

September 30,
2021

June 30,
2021

September 30,
2020

(Dollars in thousands)

Real estate loans:

One-to-four family

$

119,817

$

144,247

$

209,040

Multi-family

54,636

67,704

72,714

Commercial

250,295

272,948

316,653

Construction

6,046

5,481

13,854

Commercial and industrial(1)

254,624

204,279

25,951

Reverse mortgage and other

1,385

1,364

6,881

Mortgage warehouse

128,975

49,897

94,684

Total gross loans held-for-investment

815,778

745,920

739,777

Deferred fees, net

883

1,151

2,843

Total loans held-for-investment

816,661

747,071

742,620

Allowance for loan losses

(6,916)

(6,916)

(6,763)

Loans held-for-investment, net

809,745

740,155

735,857

Loans held-for-sale(2)

818,447

748,577

665,842

Total loans

$

1,628,192

$

1,488,732

$

1,401,699

________________________

(1)

Commercial and industrial loans includes $254.5 million, $203.4 million and $22.4 million of SEN Leverage loans as of September 30, 2021, June 30, 2021 and September 30, 2020, respectively.

(2)

Loans held-for-sale are comprised entirely of mortgage warehouse loans for all periods presented.

Asset Quality and Allowance for Loan L...

The allowance for loan losses was unchanged at $6.9 million at September 30, 2021, compared to June 30, 2021 and increased slightly from $6.8 million at September 30, 2020. The ratio of the allowance for loan losses to gross loans held-for-investment at September 30, 2021 was 0.85%, compared to 0.93% and 0.91% at June 30, 2021 and September 30, 2020, respectively.

Nonperforming assets totaled $5.8 million, or 0.05% of total assets, at September 30, 2021, a decrease of $1.7 million from $7.5 million, or 0.06% of total assets at June 30, 2021. Nonperforming assets increased $1.7 million, from $4.1 million, or 0.16%, of total assets, at September 30, 2020.

September 30,
2021

June 30,
2021

September 30,
2020

Asset Quality

(Dollars in thousands)

Nonperforming Assets:

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