Silvergate Capital Corp - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - October 26, 2020

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Exhibit 99.1

Silvergate Capital Corporation Announces Third Quarter 2020 Results
La Jolla, CA, October 26, 2020 -- 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, 2020.
Third Quarter 2020 Financial Highlights
•
Net income for the quarter was $7.1 million, or $0.37 per diluted share, compared to net income of $5.5 million, or $0.29 per diluted share, for the second quarter of 2020, and net income of $6.7 million, or $0.36 per diluted share, for the third quarter of 2019
•
The Silvergate Exchange Network (“SEN”) handled 68,361 transactions in the third quarter of 2020, an increase of 70%, compared to 40,286 transactions in the second quarter of 2020, and an increase of 455% compared to 12,312 transactions in the third quarter of 2019
•
The SEN handled $36.7 billion of U.S. dollar transfers in the third quarter, an increase of 64% compared to $22.4 billion in the second quarter of 2020, and an increase of 252% compared to $10.4 billion in the third quarter of 2019
•
Digital currency customer related fee income for the quarter was $3.3 million, compared to $2.4 million for the second quarter of 2020, and $1.6 million for the third quarter of 2019
•
Digital currency customers grew to 928 at September 30, 2020, compared to 881 at June 30, 2020, and 756 at September 30, 2019
•
Digital currency deposits grew by $586.0 million to $2.1 billion as of September 30, 2020, compared to $1.5 billion as of June 30, 2020
•
At September 30, 2020, outstanding loan deferrals related to COVID-19 was 4.4% of total gross loans held-for-investment compared to 15.5% at June 30, 2020
•
Book value per share was $15.18 at September 30, 2020, compared to $14.36 at June 30, 2020, and $12.92 at September 30, 2019
•
The Company’s total risk-based capital ratio was 24.68% at September 30, 2020, compared to 25.54% at June 30, 2020 and 25.97% at September 30, 2019

Alan Lane, president and chief executive officer of Silvergate, commented, “Our third quarter results clearly demonstrate the accelerating customer adoption of the Silvergate Exchange Network that we continue to experience as the SEN handled 68,361 transactions in the quarter, a 70% sequential increase from the 2020 second quarter and a 455% increase as compared to the 2019 third quarter. This strong growth contributed to the 106% increase in digital currency fee income of $3.3 million in the third quarter as compared to $1.6 million in the year ago third quarter. We also achieved an important milestone at the conclusion of the quarter as the SEN has handled $100 billion in transfer volumes just three years after its creation and introduction to the digital currency industry, which clearly demonstrates its value and importance to the digital currency ecosystem.”
Mr. Lane continued, “Today, as an industry leader and innovator, our team continues to provide uninterrupted banking access for our customers with 95% of our employees working remotely. The Bank’s infrastructure has provided Silvergate with the foundation to succeed in what has become a very digital world and we see an ample runway for further growth given the numerous opportunities to expand the value of the SEN through new product development. One such example is SEN leverage which has completed its initial pilot phase with approved lines of credit totaling $35.5 million, up from $22.5 million in the second quarter. We envision a significant growth trajectory with SEN leverage and will judiciously expand credit availability to our customers over time. In conclusion, Silvergate continues to perform at a very high level as the network effect and competitive barriers of the SEN further expand, the credit metrics of our loan portfolio remain strong, and the Bank remains well capitalized, with a strong liquidity position, to support future growth.”


1

 
 
As of or for the Three Months Ended
 
 
September 30,
2020
 
June 30,
2020
 
September 30,
2019
 
 
 
 
 
 
 
Financial Highlights
 
(Dollars in thousands, except per share data)
Net income
 
$
7,060

 
$
5,466

 
$
6,656

Diluted earnings per share
 
$
0.37

 
$
0.29

 
$
0.36

Return on average assets (ROAA)(1)
 
1.13
%
 
1.02
%
 
1.20
%
Return on average equity (ROAE)(1)
 
10.14
%
 
8.72
%
 
11.78
%
Net interest margin(1)(2)
 
3.19
%
 
3.14
%
 
3.39
%
Cost of deposits(1)(3)
 
0.01
%
 
0.37
%
 
0.50
%
Cost of funds(1)(3)
 
0.07
%
 
0.42
%
 
0.59
%
Efficiency ratio(4)
 
61.74
%
 
65.03
%
 
59.93
%
Total assets
 
$
2,620,573

 
$
2,340,713

 
$
2,136,844

Total deposits
 
$
2,281,108

 
$
1,670,909

 
$
1,848,095

Book value per share
 
$
15.18

 
$
14.36

 
$
12.92

Tier 1 leverage ratio
 
10.36
%
 
11.57
%
 
10.43
%
Total risk-based capital ratio
 
24.68
%
 
25.54
%
 
25.97
%
________________________
(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 a hedging strategy. During the first and second quarters of 2020 all brokered certificates of deposit were called and their 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 September 30, 2020, the Company’s digital currency customers increased to 928 from 881 at June 30, 2020, and from 756 at September 30, 2019. At September 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 68,361 transactions on the SEN for the third quarter of 2020, an increase of 70%, compared to 40,286 transactions for the second quarter of 2020. In addition, for the third quarter of 2020, $36.7 billion of U.S. dollar transfers occurred on the SEN, another quarterly record and a 64% increase from the second quarter of 2020.
 
 
Three Months Ended
 
 
September 30,
2020
 
June 30,
2020
 
September 30,
2019
 
 
 
 
 
 
 
 
 
(Dollars in millions)
# SEN Transactions
 
68,361

 
40,286

 
12,312

$ Volume of SEN Transfers
 
$
36,663

 
$
22,423

 
$
10,425

Results of Operations, Quarter Ended September 30, 2020
Net Interest Income and Net Interest Margin Analysis (Taxable Equivalent Basis)
In 2020, the Company 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 $19.4 million for the third quarter of 2020, compared to $16.5 million for the second quarter of 2020, and $18.4 million for the third quarter of 2019.

2

Compared to the second quarter of 2020, net interest income increased $2.9 million due to a decrease of $1.6 million in interest expense driven by calling the remainder of the callable brokered certificates of deposit in the second quarter, and an increase of $1.3 million in interest income driven primarily by higher mortgage warehouse loan balances.
Average total interest earning assets increased by $305.8 million for the third quarter of 2020 compared to the second quarter of 2020, primarily due to an increase in loans and, to a lesser extent, an increase in interest earning deposits in other banks and securities. The average yield on interest earning assets decreased from 3.51% for the second quarter of 2020 to 3.25% for the third quarter of 2020, primarily due to lower yields on interest earning deposits in other banks, and the variable rate portion of the securities and loan portfolio. The impact of lower yields was partially offset by income from our investments in tax-exempt municipal bonds.
Average interest bearing liabilities decreased $35.0 million for the third quarter of 2020 compared to the second quarter of 2020, due to calling the remaining balance of brokered certificates of deposit in the second quarter of 2020, partially offset by an increase in federal home loan bank (“FHLB”) advances. The average rate paid on total interest bearing liabilities decreased from 2.78% for the second quarter of 2020 to 0.60% for the third quarter of 2020, primarily due to no expense related to brokered certificates of deposit compared to $1.6 million of expense in the second quarter of 2020.
Compared to the third quarter of 2019, net interest income increased $0.9 million, due to a decrease of $2.6 million in interest expense, partially offset by a decrease of $1.6 million in interest income. Average total interest earning assets increased by $257.7 million for the third quarter of 2020 compared to the third quarter of 2019, due to an increase in loans and, to a lesser extent, increases in securities and interest earning deposits in other banks. The average yield on total interest earning assets decreased from 3.93% for the third quarter of 2019 to 3.25% for the third quarter of 2020, primarily due to lower yields on loans, securities and interest earning deposits in other banks. The lower yields were due to declines in federal funds rate and London Interbank Offered Rate (“LIBOR”), which was partially offset by the impact of interest rate floors which were put in place during 2019. Average interest bearing liabilities decreased $248.3 million for the third quarter of 2020 compared to the third quarter of 2019, due to calling the remaining balance of brokered certificates of deposit in the second quarter of 2020, partially offset by an increase in FHLB advances. The average rate on total interest bearing liabilities decreased from 2.35% for the third quarter of 2019 to 0.60% for the third quarter of 2020, primarily due to the impact of calling the remaining outstanding balance of brokered certificates of deposits in the second quarter of 2020.
Net interest margin for the third quarter of 2020 was 3.19%, compared to 3.14% for the second quarter of 2020, and 3.39% for the third quarter of 2019. The increase in the net interest margin compared to the second quarter of 2020 was driven by lower premium expense associated with calling brokered certificates of deposits and lower rates on other interest bearing liabilities. The net interest margin decrease from the third quarter of 2019 was primarily due to lower yields on loans, cash and cash equivalents, and securities due to a declining rate environment, offset by lower interest expense from calling the remainder of the brokered certificates of deposit in the second quarter and a higher proportion of loans driven by mortgage warehouse.

3

 
 
Three Months Ended
 
 
September 30, 2020
 
June 30, 2020
 
September 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
 
$
245,855

 
$
196

 
0.32
%
 
$
168,297

 
$
405

 
0.97
%
 
$
234,606

 
$
1,183

 
2.00
%
Taxable securities
 
679,277

 
3,746

 
2.19
%
 
690,810

 
4,123

 
2.40
%
 
935,263

 
6,510

 
2.76
%
Tax-exempt securities(1)
 
267,511

 
2,177

 
3.24
%
 
231,232

 
1,996

 
3.47
%
 
—

 
—

 
—

Loans(2)(3)
 
1,209,884

 
13,527

 
4.45
%
 
1,008,242

 
11,710

 
4.67
%
 
979,283

 
13,574

 
5.50
%
Other
 
15,112

 
116

 
3.05
%
 
13,224

 
200

 
6.08
%
 
10,742

 
121

 
4.47
%
Total interest earning assets
 
2,417,639

 
19,762

 
3.25
%
 
2,111,805

 
18,434

 
3.51
%
 
2,159,894

 
21,388

 
3.93
%
Noninterest earning assets
 
68,327

 
 
 
 
 
51,776

 
 
 
 
 
45,306

 
 
 
 
Total assets
 
$
2,485,966

 
 
 
 
 
$
2,163,581

 
 
 
 
 
$
2,205,200

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing deposits
 
$
108,755

 
$
57

 
0.21
%
 
$
190,394

 
$
1,652

 
3.49
%
 
$
438,277

 
$
2,385

 
2.16
%
FHLB advances and other borrowings
 
124,886

 
65

 
0.21
%
 
78,266

 
44

 
0.23
%
 
43,642

 
289

 
2.63
%
Subordinated debentures
 
15,825

 
257

 
6.46
%
 
15,821

 
267

 
6.79
%
 
15,810

 
271

 
6.80
%
Total interest bearing liabilities
 
249,466

 
379

 
0.60
%
 
284,481

 
1,963

 
2.78
%
 
497,729

 
2,945

 
2.35
%
Noninterest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest bearing deposits
 
1,935,661

 
 
 
 
 
1,611,972

 
 
 
 
 
1,468,992

 
 
 
 
Other liabilities
 
23,860

 
 
 
 
 
15,070

 
 
 
 
 
14,400

 
 
 
 
Shareholders’ equity
 
276,979

 
 
 
 
 
252,058

 
 
 
 
 
224,079

 
 
 
 
Total liabilities and shareholders’ equity
 
$
2,485,966

 
 
 
 
 
$
2,163,581

 
 
 
 
 
$
2,205,200

 
 
 
 
Net interest spread(4)
 
 
 
 
 
2.65
%
 
 
 
 
 
0.73
%
 
 
 
 
 
1.58
%
Net interest income, taxable equivalent basis
 
 
 
$
19,383

 
 
 
 
 
$
16,471

 
 
 
 
 
$
18,443

 
 
Net interest margin(5)
 
 
 
 
 
3.19
%
 
 
 
 
 
3.14
%
 
 
 
 
 
3.39
%
Reconciliation to reported net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustments for taxable equivalent basis
 
 
 
(457
)
 
 
 
 
 
(419
)
 
 
 
 
 
—

 
 
Net interest income, as reported
 
 
 
$
18,926

 
 
 
 
 
$
16,052

 
 
 
 
 
$
18,443

 
 
________________________
(1)
Interest income on tax-exempt securities is presented on a taxable equivalent basis using the federal statutory tax rate of 21.0% for all periods presented.
(2)
Loans include nonaccrual loans and loans held-for-sale, net of deferred fees and before allowance for loan losses.
(3)
Interest income includes amortization of deferred loan fees, net of deferred loan costs.
(4)
Net interest spread is the difference between interest rates earned on interest earning assets and interest rates paid on interest bearing liabilities.
(5)
Net interest margin is a ratio calculated as annualized net interest income, on a taxable equivalent basis, divided by average interest earning assets for the same period.
Provision for Loan Losses
The Company recorded no additional provision for loan losses for the third quarter of 2020, compared to $0.2 million for the second quarter of 2020, and reversal of $0.9 million for the third quarter of 2019. The level of the allowance for loan losses was unchanged from the second quarter of 2020 based on the loan-to-value ratios in the low- to mid-50% range in the Company's commercial, multi-family and one-to-four family real estate loans held-for-investment portfolios as of September 30, 2020, which provides a lower probability of loss in the event of defaults in the Company’s loan portfolio.
Noninterest Income
Noninterest income for the third quarter of 2020 was $4.0 million, a decrease of $1.5 million, or 27.1%, from the second quarter of 2020. The primary driver of this decrease was a reduction of $2.6 million in gains on sale of securities offset by a $0.9 million, or 35.1%, increase in deposit related fees. Deposit related fees from digital currency customers were

4

$3.3 million for the third quarter of 2020, an increase of $0.9 million, or 36.1% compared to $2.4 million for the second quarter of 2020.
Noninterest income for the third quarter of 2020 increased by $1.4 million, or 52.5%, compared to the third quarter of 2019. This increase was primarily due to a $1.6 million, or 98.7%, increase in deposit related fees and a $0.4 million, or 103.2% increase in mortgage warehouse fee income, partially offset by a $0.3 million decrease in gain (loss) on sale of loans and a $0.3 million decrease in service fees related to off-balance sheet deposits. Deposit related fees from digital currency customers increased $1.7 million, or 106.1%, to $3.3 million compared to $1.6 million for the third quarter of 2019.
 
 
Three Months Ended
 
 
September 30,
2020
 
June 30,
2020
 
September 30,
2019
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Noninterest income:
 
 
 
 
 
 
Mortgage warehouse fee income
 
$
758

 
$
450

 
$
373

Service fees related to off-balance sheet deposits
 
1

 
7

 
283

Deposit related fees
 
3,293

 
2,438

 
1,657

Gain (loss) on sale of securities, net
 
—

 
2,556

 
(16
)
(Loss) gain on sale of loans, net
 
(96
)
 
(56
)
 
248

Other income
 
8

 
39

 
54

Total noninterest income
 
$
3,964

 
$
5,434

 
$
2,599

Noninterest Expense
Noninterest expense totaled $14.1 million for the third quarter of 2020, an increase of $0.2 million compared to the second quarter of 2020, and an increase of $1.5 million compared to the third quarter of 2019.
Noninterest expense increased from the prior quarter due to increases in professional services and communications and data processing, partially offset by a decrease in salaries and employee benefits.
Noninterest expense increased from the third quarter of 2019 due to increases in salaries and employee benefits, professional services and other general and administrative expense.
 
 
Three Months Ended
 
 
September 30,
2020
 
June 30,
2020
 
September 30,
2019
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Noninterest expense:
 
 
 
 
 
 
Salaries and employee benefits
 
$
8,899

 
$
9,002

 
$
8,277

Occupancy and equipment
 
845

 
894

 
892

Communications and data processing
 
1,389

 
1,313

 
1,298

Professional services
 
1,207

 
1,105

 
889

Federal deposit insurance
 
209

 
182

 
39

Correspondent bank charges
 
403

 
347

 
288

Other loan expense
 
60

 
99

 
47

Other real estate owned expense
 
23

 
—

 
75

Other general and administrative
 
1,098

 
1,030

 
806

Total noninterest expense
 
$
14,133

 
$
13,972

 
$
12,611

Income Tax Expense
Income tax expense was $1.7 million for the third quarter of 2020, compared to $1.8 million for the second quarter of 2020, and $2.6 million for the third quarter of 2019. Our effective tax rate for the third quarter of 2020 was 19.4%, compared to 25.0% for the second quarter of 2020, and 28.3% for the third quarter of 2019. The lower effective tax rate during the third

5

quarter of 2020 when compared to the second quarter of 2020 and third quarter of 2019 was due to tax-exempt income earned on certain municipal bonds and the return to provision adjustment which included research and development tax credits.
Results of Operations, Nine Months Ended September 30, 2020
Net income for the nine months ended September 30, 2020 was $16.9 million, or $0.88 per diluted share, compared to $21.2 million, or $1.16 per diluted share, for the comparable period in 2019.
Net interest income for the nine months ended September 30, 2020 was $50.5 million, compared to $55.3 million for the same period in 2019. The decrease in net interest income was primarily due to a $3.5 million decrease in interest income and a $1.3 million increase in interest expense. The decrease in net interest income was due to lower yields on loans, securities, and cash and cash equivalents, as well as additional brokered certificates of deposit interest expense driven by accelerated call premiums, partially offset by hedge related securities investments and interest rate floors.
Noninterest income for the nine months ended September 30, 2020 was $14.3 million, compared to $12.6 million for the same period in 2019. The increase in noninterest income was primarily due to a $3.8 million gain on sale of securities and the $3.7 million increase in fee income from our digital currency customers, less 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 nine months ended September 30, 2020 was $7.3 million, compared to $3.6 million for the nine months ended September 30, 2019.
Noninterest expense was $42.0 million for the nine months ended September 30, 2020, compared to $38.8 million for the nine months ended September 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 $5.3 million for the nine months ended September 30, 2020, compared to income tax expense of $8.3 million for 2019. Our effective tax rates for the nine months ended September 30, 2020 and 2019 were 23.8% and 28.1%, respectively. The decrease in the Company’s effective tax rate was primarily related to tax-exempt income earned on certain municipal bonds.
Balance Sheet
Deposits
At September 30, 2020, deposits totaled $2.3 billion, an increase of $610.2 million, or 36.5%, from June 30, 2020, and an increase of $433.0 million, or 23.4%, from September 30, 2019. Noninterest bearing deposits totaled $2.2 billion, representing approximately 94.9% of total deposits at September 30, 2020, an increase of $601.2 million from the prior quarter end, and a $769.9 million increase compared to September 30, 2019. The increase in total deposits from the prior quarter was driven by an increase in deposits from digital currency exchanges, institutional investors in digital assets and other fintech related customers, with elevated client activity evidenced by the record volume of SEN transactions during the quarter.
The weighted average cost of deposits for the third quarter of 2020 was 0.01%, compared to 0.37% for the second quarter of 2020, and 0.50% for the third quarter of 2019. The decrease in the weighted average cost of deposits compared to the second quarter of 2020 and the third quarter of 2019 was driven by the absence of any interest expense associated with brokered certificates of deposit, which were called in the second quarter of 2020.

6

 
 
Three Months Ended
 
 
September 30, 2020
 
June 30, 2020
 
September 30, 2019
 
 
Average
Balance
 
Average
Rate
 
Average
Balance
 
Average
Rate
 
Average
Balance
 
Average
Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Noninterest bearing demand accounts
 
$
1,935,661

 
—

 
$
1,611,972

 
—

 
$
1,468,992

 
—

Interest bearing accounts:
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand accounts
 
41,871

 
0.10
%
 
44,643

 
0.14
%
 
47,945

 
0.14
%
Money market and savings accounts
 
65,646

 
0.25
%
 
66,598

 
0.39
%
 
81,941

 
1.00
%
Certificates of deposit:
 
 
 
 
 
 
 
 
 
 
 
 
Brokered certificates of deposit
 
—

 
—

 
77,717

 
8.11
%
 
303,524

 
2.81
%
Other
 
1,238

 
0.96
%
 
1,436

 
0.84
%
 
4,867

 
1.33
%
Total interest bearing deposits
 
108,755

 
0.21
%
 
190,394

 
3.49
%
 
438,277

 
2.16
%
Total deposits
 
$
2,044,416

 
0.01
%
 
$
1,802,366

 
0.37
%
 
$
1,907,269

 
0.50
%
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:
 
 
September 30, 2020
 
June 30, 2020
 
September 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
 
69

 
$
729

 
64

 
$
601

 
55

 
$
544

Institutional investors
 
599

 
850

 
566

 
577

 
482

 
506

Other customers
 
260

 
515

 
251

 
331

 
219

 
247

Total
 
928

 
$
2,095

 
881

 
$
1,509

 
756

 
$
1,297

________________________
(1)
Total deposits may not foot due to rounding.
Loan Portfolio
Total loans were $1.4 billion at September 30, 2020, an increase of $286.3 million, or 25.7%, from June 30, 2020, and an increase of $398.3 million, or 39.7%, from September 30, 2019. Total loans at September 30, 2020 consisted of loans held-for-investment, net of $735.9 million and loans held for sale of $665.8 million.

7

 
 
September 30,
2020
 
June 30,
2020
 
September 30,
2019
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
One-to-four family
 
$
209,040

 
$
216,038

 
$
212,440

Multi-family
 
72,714

 
72,007

 
77,901

Commercial
 
316,653

 
316,815

 
322,733

Construction
 
13,854

 
10,822

 
3,986

Commercial and industrial
 
25,951

 
24,707

 
14,563

Consumer and other
 
5,559

 
243

 
76

Reverse mortgage
 
1,322

 
1,309

 
1,629

Mortgage warehouse
 
94,684

 
155,308

 
61,856

Total gross loans held-for-investment
 
739,777

 
797,249

 
695,184

Deferred fees, net
 
2,843

 
3,062

 
2,997

Total loans held-for-investment
 
742,620

 
800,311

 
698,181

Allowance for loan losses
 
(6,763
)
 
(6,763
)
 
(6,191
)
Loans held-for-investment, net
 
735,857

 
793,548

 
691,990

Loans held-for-sale
 
665,842

 
321,835

 
311,410

Total loans
 
$
1,401,699

 
$
1,115,383

 
$
1,003,400

Loans held-for-sale are comprised entirely of mortgage warehouse loans at September 30, 2020 and June 30, 2020, compared to $306.7 million of the total balance at September 30, 2019.
Asset Quality and Allowance for Loan Losses
The allowance for loan losses was $6.8 million at September 30, 2020 and June 30, 2020, compared to $6.2 million at September 30, 2019. The ratio of the allowance for loan losses to gross loans held-for-investment at September 30, 2020 was 0.91%, compared to 0.85% and 0.89% at June 30, 2020 and September 30, 2019, respectively.
Nonperforming assets totaled $4.1 million, or 0.16% of total assets, at September 30, 2020, a decrease of $0.4 million from $4.6 million, or 0.20% of total assets at June 30, 2020. Nonperforming assets decreased $2.7 million, from $6.8 million, or 0.32%, of total assets, at September 30, 2019.
 
 
September 30,
2020
 
June 30,
2020
 
September 30,
2019
 
 
 
 
 
 
 
Asset Quality
 
(Dollars in thousands)
Nonperforming Assets:
 
 
 
 
 
 
Nonperforming loans
 
$
4,107

 
$
4,528

 
$
6,707

Troubled debt restructurings
 
$
1,572

 
$
1,620

 
$
1,840

Other real estate owned, net
 
$
27

 
51

 
$
81

Nonperforming assets
 
$
4,134

 
$
4,579

 
$
6,788

 
 
 
 
 
 
 
Asset Quality Ratios:
 
 
 
 
 
 
Nonperforming assets to total assets
 
0.16
%
 
0.20
%
 
0.32
%
Nonperforming loans to gross loans(1)
 
0.56
%
 
0.57
%
 
0.96
%
Nonperforming assets to gross loans and other real estate owned(1)
 
0.56
%
 
0.57
%
 
0.98
%
Net charge-offs (recoveries) to average total loans(1)
 
0.00
%
 
0.00
%
 
0.01
%
Allowance for loan losses to gross loans(1)
 
0.91
%
 
0.85
%
 
0.89
%
Allowance for loan losses to nonperforming loans
 
164.67
%
 
149.36
%
 
92.31
%
________________________
(1)
Loans exclude loans held-for-sale at each of the dates presented.

8

Coronavirus Disease 2019 (“COVID-19”) Update
During the second and third quarter of 2020, the Company modified a total of 56 loans representing $142.9 million in loan balances, or 19%, of total gross loans held-for-investment as of September 30, 2020. All loans modified under these programs were 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.
As of September 30, 2020, the remaining loans modified due to COVID-19 that are in deferral and have not resumed full contractual payments are as follows:
 
 

Loan Balance
At Period End
 
Percentage of
Loan Portfolio
Balance
 
 
 
 
 
 
 
 
COVID-19 related modifications:
 
 
 
 
Real estate loans:
 
 
 
 
One-to-four family
 
$
9,320

 
1.3%
Retail
 
1,955

 
0.3%
Hospitality
 
21,447

 
2.9%
Total commercial
 
23,402

 
3.2%
Total modifications outstanding
 
$
32,722

 
4.4%
Securities
Securities available-for-sale decreased $6.9 million, or 0.7%, from $951.1 million at June 30, 2020, and increased $34.2 million, or 3.8%, from $909.9 million at September 30, 2019, to $944.2 million at September 30, 2020. The Company did not purchase or sell any securities during the third quarter of 2020.
Capital Ratios
At September 30, 2020, the Company’s ratio of common equity to total assets was 10.83%, compared with 11.45% at June 30, 2020, and 10.79% at September 30, 2019. At September 30, 2020, the Company’s book value per share was $15.18, compared to $14.36 at June 30, 2020, and $12.92 at September 30, 2019.
At September 30, 2020, the Company had a tier 1 leverage ratio of 10.36%, common equity tier 1 capital ratio of 22.58%, tier 1 capital ratio of 24.03% and total capital ratio of 24.68%.
At September 30, 2020, the Bank had a tier 1 leverage ratio of 9.84%, common equity tier 1 capital ratio of 22.82%, tier 1 capital ratio of 22.82% and total capital ratio of 23.47%. 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.

9

Capital Ratios(1)
 
September 30,
2020
 
June 30,
2020
 
September 30,
2019
The Company
 
 
 
 
 
 
Tier 1 leverage ratio
 
10.36
%
 
11.57
%
 
10.43
%
Common equity tier 1 capital ratio
 
22.58
%
 
23.32
%
 
23.57
%
Tier 1 risk-based capital ratio
 
24.03
%
 
24.86
%
 
25.28
%
Total risk-based capital ratio
 
24.68
%
 
25.54
%
 
25.97
%
Common equity to total assets
 
10.83
%
 
11.45
%
 
10.79
%
The Bank
 
 
 
 
 
 
Tier 1 leverage ratio
 
9.84
%
 
10.92
%
 
10.01
%
Common equity tier 1 capital ratio
 
22.82
%
 
23.48
%
 
24.30
%
Tier 1 risk-based capital ratio
 
22.82
%
 
23.48
%
 
24.30
%
Total risk-based capital ratio
 
23.47
%
 
24.17
%
 
25.00
%
________________________
(1)
September 30, 2020 capital ratios are preliminary.
Conference Call and Webcast
The Company will host a conference call on Monday, October 26, 2020 at 11:00 a.m. (Eastern Time) to present and discuss third 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 Third Quarter 2020 Earnings Conference Call. A replay will be available starting at 2:00 p.m. (Eastern Time) on October 26, 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 13711244. The replay will be available until 11:59 p.m. (Eastern Time) on November 9, 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 and has been profitable for 22 consecutive years. The Bank 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

10

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.

Investor Relations Contact:
Jamie Lillis / Shannon Devine
(858) 200-3782
investors@silvergate.com

Source: Silvergate Capital Corporation

11

SILVERGATE CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
(Unaudited)
 
 
September 30,
2020
 
June 30,
2020
 
March 31,
2020
 
December 31,
2019
 
September 30,
2019
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
15,152

 
$
13,777

 
$
2,778

 
$
1,579

 
$
4,098

Interest earning deposits in other banks
 
182,330

 
185,667

 
163,422

 
132,025

 
156,160

Cash and cash equivalents
 
197,482

 
199,444

 
166,200

 
133,604

 
160,258

Securities available-for-sale, at fair value
 
944,161

 
951,094

 
964,317

 
897,766

 
909,917

Securities held-to-maturity, at amortized cost
 
—

 
—

 
—

 
—

 
—

Loans held-for-sale, at lower of cost or fair value
 
665,842

 
321,835

 
435,023

 
375,922

 
311,410

Loans held-for-investment, net of allowance for loan losses
 
735,857

 
793,548

 
679,416

 
664,622

 
691,990

Federal home loan and federal reserve bank stock, at cost
 
14,839

 
13,499

 
10,269

 
10,264

 
10,264

Accrued interest receivable
 
7,385

 
7,700

 
6,344

 
5,950

 
5,875

Other real estate owned, net
 
27

 
51

 
—

 
128

 
81

Premises and equipment, net
 
3,122

 
3,326

 
3,406

 
3,259

 
3,224

Operating lease right-of-use assets
 
3,478

 
3,846

 
4,210

 
4,571

 
4,927

Derivative assets
 
34,138

 
35,770

 
33,506

 
23,440

 
30,885

Low income housing tax credit investment
 
890

 
917

 
927

 
954

 
981

Other assets
 
13,352

 
9,683

 
7,090

 
7,647

 
7,032

Total assets
 
$
2,620,573

 
$
2,340,713

 
$
2,310,708

 
$
2,128,127

 
$
2,136,844

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
Noninterest bearing demand accounts
 
$
2,164,326

 
$
1,563,136

 
$
1,745,219

 
$
1,343,667

 
$
1,394,433

Interest bearing accounts
 
116,782

 
107,773

 
257,738

 
470,987

 
453,662

Total deposits
 
2,281,108

 
1,670,909

 
2,002,957

 
1,814,654

 
1,848,095

Federal home loan bank advances
 
10,000

 
360,000

 
30,000

 
49,000

 
20,000

Notes payable
 
—

 
—

 
—

 
3,714

 
4,000

Subordinated debentures, net
 
15,827

 
15,823

 
15,820

 
15,816

 
15,813

Operating lease liabilities
 
3,770

 
4,146

 
4,515

 
4,881

 
5,237

Accrued expenses and other liabilities
 
26,107

 
21,730

 
12,664

 
9,026

 
13,085

Total liabilities
 
2,336,812

 
2,072,608

 
2,065,956

 
1,897,091

 
1,906,230

Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
Preferred stock
 
—

 
—

 
—

 
—

 
—

Class A common stock
 
186

 
184

 
184

 
178

 
167

Class B non-voting common stock
 
1

 
3

 
3

 
9

 
12

Additional paid-in capital
 
132,647

 
132,479

 
132,336

 
132,138

 
125,573

Retained earnings
 
109,229

 
102,169

 
96,703

 
92,310

 
88,712

Accumulated other comprehensive income
 
41,698

 
33,270

 
15,526

 
6,401

 
16,150

Total shareholders’ equity
 
283,761

 
268,105

 
244,752

 
231,036

 
230,614

Total liabilities and shareholders’ equity
 
$
2,620,573

 
$
2,340,713

 
$
2,310,708

 
$
2,128,127

 
$
2,136,844


12


SILVERGATE CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
2020
 
June 30,
2020
 
September 30,
2019
 
September 30,
2020
 
September 30,
2019
Interest income
 
 
 
 
 
 
 
 
 
 
Loans, including fees
 
$
13,527

 
$
11,710

 
$
13,574

 
$
38,358

 
$
38,369

Taxable securities
 
3,746

 
4,123

 
6,510

 
13,917

 
14,044

Tax-exempt securities
 
1,720

 
1,577

 
—

 
3,345

 
—

Other interest earning assets
 
196

 
405

 
1,183

 
1,325

 
8,038

Dividends and other
 
116

 
200

 
121

 
437

 
472

Total interest income
 
19,305

 
18,015

 
21,388

 
57,382

 
60,923

Interest expense
 
 
 
 
 
 
 
 
 
 
Deposits
 
57

 
1,652

 
2,385

 
5,760

 
3,920

Federal home loan bank advances
 
65

 
44

 
172

 
336

 
172

Notes payable and other
 
—

 
—

 
117

 
36

 
702

Subordinated debentures
 
257

 
267

 
271

 
794

 
802

Total interest expense
 
379

 
1,963

 
2,945

 
6,926

 
5,596

Net interest income before provision for loan losses
 
18,926

 
16,052

 
18,443

 
50,456

 
55,327

Provision for (reversal of) loan losses
 
—

 
222

 
(858
)
 
589

 
(439
)
Net interest income after provision for loan losses
 
18,926

 
15,830

 
19,301

 
49,867

 
55,766

Noninterest income
 
 
 
 
 
 
 
 
 
 
Mortgage warehouse fee income
 
758

 
450

 
373

 
1,590

 
1,085

Service fees related to off-balance sheet deposits
 
1

 
7

 
283

 
78

 
1,454

Deposit related fees
 
3,293

 
2,438

 
1,657

 
7,497

 
3,815

Gain (loss) on sale of securities, net
 
—

 
2,556

 
(16
)
 
3,753

 
(16
)
(Loss) gain on sale of loans, net
 
(96
)
 
(56
)
 
248

 
354

 
593

Gain on sale of branch, net
 
—

 
—

 
—

 
—

 
5,509

Gain on extinguishment of debt
 
—

 
—

 
—

 
925

 
—

Other income
 
8

 
39

 
54

 
132

 
184

Total noninterest income
 
3,964

 
5,434

 
2,599

 
14,329

 
12,624

Noninterest expense
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
8,899

 
9,002

 
8,277

 
26,856

 
25,124

Occupancy and equipment
 
845

 
894

 
892

 
2,646

 
2,777

Communications and data processing
 
1,389

 
1,313

 
1,298

 
3,963

 
3,458

Professional services
 
1,207

 
1,105

 
889

 
3,297

 
3,407

Federal deposit insurance
 
209

 
182

 
39

 
514

 
382

Correspondent bank charges
 
403

 
347

 
288

 
1,123

 
868

Other loan expense
 
60

 
99

 
47

 
281

 
290

Other real estate owned expense
 
23

 
—

 
75

 
23

 
80

Other general and administrative
 
1,098

 
1,030

 
806

 
3,277

 
2,432

Total noninterest expense
 
14,133

 
13,972

 
12,611

 
41,980

 
38,818

Income before income taxes
 
8,757

 
7,292

 
9,289

 
22,216

 
29,572

Income tax expense
 
1,697

 
1,826

 
2,633

 
5,297

 
8,324

Net income
 
7,060

 
5,466

 
6,656

 
16,919

 
21,248

Basic earnings per share
 
$
0.38

 
$
0.29

 
$
0.37

 
$
0.91

 
$
1.19

Diluted earnings per share
 
$
0.37

 
$
0.29

 
$
0.36

 
$
0.88

 
$
1.16

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
18,682

 
18,672

 
17,840

 
18,674

 
17,830

Diluted
 
19,134

 
19,106

 
18,246

 
19,119

 
18,252


13

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 nine months ended September 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 nine months ended September 30, 2020 or for the three months ended September 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.
 
 
Nine Months Ended
September 30,
 
 
2020
 
2019
 
 
 
 
 
 
 
(Dollars in thousands)
Net income
 
 
 
 
Net income, as reported
 
$
16,919

 
$
21,248

Adjustments:
 
 
 
 
Gain on sale of branch, net
 
—

 
(5,509
)
Tax effect(1)
 
—

 
1,574

Adjusted net income
 
$
16,919

 
$
17,313

 
 
 
 
 
Noninterest income / average assets(2)
 
 
 
 
Noninterest income
 
$
14,329

 
$
12,624

Adjustments:
 
 
 
 
Gain on sale of branch, net
 
—

 
(5,509
)
Adjusted noninterest income
 
14,329

 
7,115

Average assets
 
2,293,277

 
2,063,298

Noninterest income / average assets, as reported
 
0.83
%
 
0.82
%
Adjusted noninterest income / average assets
 
0.83
%
 
0.46
%
 
 
 
 
 
Return on average assets (ROAA)(2)
 
 
 
 
Adjusted net income
 
$
16,919

 
$
17,313

Average assets
 
2,293,277

 
2,063,298

Return on average assets (ROAA), as reported
 
0.99
%
 
1.38
%
Adjusted return on average assets
 
0.99
%
 
1.12
%
 
 
 
 
 
Return on average equity (ROAE)(2)
 
 
 
 
Adjusted net income
 
$
16,919

 
$
17,313

Average equity
 
258,904

 
208,775

Return on average equity (ROAE), as reported
 
8.73
%
 
13.61
%
Adjusted return on average equity
 
8.73
%
 
11.09
%
 
 
 
 
 
Efficiency ratio
 
 
 
 
Noninterest expense
 
$
41,980

 
$
38,818

Net interest income
 
50,456

 
55,327

Noninterest income
 
14,329

 
12,624

Total net interest income and noninterest income
 
64,785

 
67,951

Adjustments:
 
 
 
 
Gain on sale of branch, net
 
—

 
(5,509
)
Adjusted total net interest income and noninterest income
 
64,785

 
62,442

Efficiency ratio, as reported
 
64.80
%
 
57.13
%
Adjusted efficiency ratio
 
64.80
%
 
62.17
%
________________________
(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.

14

Silvergate Capital Corp Reports