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Silvergate Capital Corporation Announces Fourth Quarter 2021 Results

·20-min read

LA JOLLA, Calif., January 18, 2022--(BUSINESS WIRE)--Silvergate Capital Corporation ("Silvergate" or "Company") (NYSE:SI) and its wholly-owned subsidiary, Silvergate Bank ("Bank"), today announced financial results for the three and twelve months ended December 31, 2021.

Fourth Quarter 2021 Highlights

  • Net income for the quarter was $21.4 million, compared to $23.5 million for the third quarter of 2021, and $9.1 million for the fourth quarter of 2020

  • Net income available to common shareholders for the quarter was $18.4 million, or $0.66 per diluted common share, compared to net income of $23.5 million, or $0.88 per diluted share, for the third quarter of 2021, and net income of $9.1 million, or $0.47 per diluted share, for the fourth quarter of 2020

  • The Silvergate Exchange Network ("SEN") handled $219.2 billion of U.S. dollar transfers in the fourth quarter of 2021, an increase of 35% compared to $162.0 billion in the third quarter of 2021, and an increase of 270% compared to $59.2 billion in the fourth quarter of 2020

  • Total SEN Leverage commitments were $570.5 million at December 31, 2021, compared to $322.5 million at September 30, 2021, and $82.5 million at December 31, 2020

  • Digital currency customer related fee income for the quarter was $9.3 million, compared to $8.1 million for the third quarter of 2021, and $3.8 million for the fourth quarter of 2020

  • Digital currency customers grew to 1,381 at December 31, 2021, compared to 1,305 at September 30, 2021, and 969 at December 31, 2020

  • Average digital currency customer deposits grew to $13.3 billion during the fourth quarter of 2021, compared to $11.2 billion during the third quarter of 2021

  • Completed $552.0 million equity offering, resulting in a total issuance of 3,806,895 shares of Class A common stock, for net proceeds of $530.3 million after deducting underwriting discounts and offering expenses

Full Year 2021 Highlights

  • Net income for the year ended December 31, 2021 was $78.5 million compared to $26.0 million for the year ended December 31, 2020

  • Net income available to common shareholders for the year ended December 31, 2021 was $75.5 million, or $2.91 per diluted common share, compared to net income of $26.0 million, or $1.36 per diluted share for the year ended December 31, 2020

  • The SEN handled $787.4 billion of U.S. dollar transfers for the year ended December 31, 2021, compared to $135.7 billion for the year ended December 31, 2020

  • Digital currency customer related fee income for the year ended December 31, 2021 was $35.8 million, compared to $11.1 million for the year ended December 31, 2020

Alan Lane, president and chief executive officer of Silvergate, commented, "2021 was another year of significant growth and momentum for Silvergate, driven by strong demand for our digital currency solutions powered by the SEN. Total deposits grew to $14.3 billion at the end of 2021 and our full year net income more than tripled compared to last year, reflecting growth in both fee income and net interest income. In the fourth quarter, we grew SEN utilization and transaction revenue, significantly grew SEN Leverage lines of credit and increased average deposits from digital currency customers to a record $13.3 billion. We also continued to build our stablecoin infrastructure capabilities, and announced the launch of the EJF Silvergate Venture Fund, an investment vehicle to support entrepreneurs who will help shape the future of the digital currency ecosystem. As we look forward to 2022 and beyond, I am excited about the opportunities and areas for growth that lie ahead as the digital currency industry continues to evolve."

As of or for the Three Months Ended

December 31,
2021

September 30,
2021

December 31,
2020

Financial Highlights

(Dollars in thousands, except per share data)

Net income

$

21,391

$

23,492

$

9,119

Net income available to common shareholders

$

18,375

$

23,492

$

9,119

Diluted earnings per common share

$

0.66

$

0.88

$

0.47

Return on average assets (ROAA)(1)

0.50

%

0.75

%

1.14

%

Return on average common equity (ROACE)(1)

7.25

%

10.45

%

12.60

%

Net interest margin(1)(2)

1.11

%

1.26

%

2.85

%

Cost of deposits(1)

0.00

%

0.00

%

0.01

%

Cost of funds(1)

0.01

%

0.01

%

0.04

%

Efficiency ratio(4)

52.08

%

43.20

%

65.87

%

Total assets

$

16,005,495

$

12,776,621

$

5,586,235

Total deposits

$

14,290,628

$

11,662,520

$

5,248,026

Book value per common share

$

46.55

$

33.10

$

15.63

Tier 1 leverage ratio

11.07

%

8.71

%

8.29

%

Total risk-based capital ratio

55.60

%

51.13

%

23.49

%

Year Ended December 31,

2021

2020

Financial Highlights

(Dollars in thousands, except per share data)

Net income

$

78,528

$

26,038

Net income available to common shareholders

$

75,512

$

26,038

Diluted earnings per common share

$

2.91

$

1.36

Return on average assets (ROAA)

0.66

%

1.03

%

Return on average common equity (ROACE)

9.32

%

9.78

%

Net interest margin(2)

1.20

%

3.00

%

Cost of deposits(3)

0.00

%

0.27

%

Cost of funds(3)

0.01

%

0.32

%

Efficiency ratio(4)

51.06

%

65.11

%

________________________

(1)

Data has been annualized.

(2)

Net interest margin is a ratio calculated as 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 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 December 31, 2021, the Company’s digital currency customers increased to 1,381 from 1,305 at September 30, 2021, and from 969 at December 31, 2020. At December 31, 2021, prospective digital currency customer leads in various stages of the customer onboarding process and pipeline was above 300. For the fourth quarter of 2021, $219.2 billion of U.S. dollar transfers occurred on the SEN, a 35% increase from $162.0 billion transfers in the third quarter of 2021, and an increase of 270% compared to $59.2 billion in the fourth quarter of 2020. Based on digital currency industry transaction data provided by Coin Metrics, bitcoin and ether dollar trading volumes increased by 14% during the fourth quarter of 2021 compared to the third quarter of 2021.

Results of Operations, Quarter Ended December 31, 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 $40.2 million for the fourth quarter of 2021, compared to $39.0 million for the third quarter of 2021, and $22.4 million for the fourth quarter of 2020.

Compared to the third quarter of 2021, net interest income increased $1.2 million, due to increased interest income, while interest expense remained flat. Average total interest earning assets increased by $2.2 billion for the fourth quarter of 2021 compared to the third quarter of 2021, primarily due to increased interest earning deposits in other banks. The average yield on interest earning assets decreased from 1.27% for the third quarter of 2021 to 1.11% for the fourth quarter of 2021, primarily due to lower yields on recently purchased securities and, to a lesser extent, interest earning deposits in other banks being a greater percentage of interest earning assets.

Compared to the fourth quarter of 2020, net interest income increased $17.8 million due to increased interest income, with the largest driver being higher balances of securities, while interest expense remained relatively flat. Average total interest earning assets increased by $11.3 billion for the fourth quarter of 2021 compared to the fourth quarter of 2020, due to an increase in noninterest bearing deposits, which were deployed into securities and interest earning deposits in other banks. The average yield on total interest earning assets decreased from 2.89% for the fourth quarter of 2020 to 1.11% for the fourth quarter of 2021, primarily due to interest earning deposits in other banks being a greater percentage of interest earning assets, and lower yields on securities purchased throughout 2021. Average interest bearing liabilities decreased $44.3 million for the fourth quarter of 2021 compared to the fourth quarter of 2020, due to lower balances of interest bearing deposits and reduced FHLB advances in 2021. The average rate on total interest bearing liabilities increased from 0.87% for the fourth quarter of 2020 to 1.17% for the fourth quarter of 2021, primarily due to the decrease in lower cost interest bearing deposits and FHLB advances, which resulted in a larger proportion of higher cost subordinated debentures as a percentage of total interest bearing liabilities.

Net interest margin for the fourth quarter of 2021 was 1.11%, compared to 1.26% for the third quarter of 2021, and 2.85% for the fourth quarter of 2020. The decrease in the net interest margin compared to the third quarter of 2021 was primarily due to lower yields on recently purchased securities and, to a lesser extent, interest earning deposits in other banks being a greater percentage of interest earning assets. The decrease in the net interest margin compared to the fourth 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

December 31, 2021

September 30, 2021

December 31, 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

$

5,282,661

$

2,166

0.16

%

$

4,104,776

$

1,755

0.17

%

$

689,385

$

314

0.18

%

Taxable securities

5,735,932

10,178

0.70

%

5,449,202

14,000

1.02

%

671,209

3,548

2.10

%

Tax-exempt securities(1)

1,728,862

9,454

2.17

%

1,187,452

6,347

2.12

%

266,158

2,173

3.25

%

Loans(2)(3)

1,641,345

17,892

4.32

%

1,493,590

16,972

4.51

%

1,474,893

16,374

4.42

%

Other

34,490

777

8.94

%

31,028

195

2.49

%

15,331

255

6.62

%

Total interest earning assets

14,423,290

40,467

1.11

%

12,266,048

39,269

1.27

%

3,116,976

22,664

2.89

%

Noninterest earning assets

295,841

197,477

66,477

Total assets

$

14,719,131

$

12,463,525

$

3,183,453

Liabilities and Shareholders’ Equity

Interest bearing liabilities:

Interest bearing deposits

$

77,564

$

27

0.14

%

$

76,898

$

26

0.13

%

$

114,782

$

47

0.16

%

FHLB advances and other borrowings

12

0.00

%

1

0.00

%

7,098

0.00

%

Subordinated debentures

15,843

249

6.24

%

15,839

247

6.19

%

15,829

253

6.36

%

Total interest bearing liabilities

93,419

276

1.17

%

92,738

273

1.17

%

137,709

300

0.87

%

Noninterest bearing liabilities:

Noninterest bearing deposits

13,377,552

11,305,650

2,732,692

Other liabilities

49,023

50,657

25,143

Shareholders’ equity

1,199,137

1,014,480

287,909

Total liabilities and shareholders’ equity

$

14,719,131

$

12,463,525

$

3,183,453

Net interest spread(4)

(0.06

) %

0.10

%

2.02

%

Net interest income, taxable equivalent basis

$

40,191

$

38,996

$

22,364

Net interest margin(5)

1.11

%

1.26

%

2.85

%

Reconciliation to reported net interest income:

Adjustments for taxable equivalent basis

(1,985

)

(1,333

)

(456

)

Net interest income, as reported

$

38,206

$

37,663

$

21,908

________________________

(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 fourth quarter of 2021, the third quarter of 2021, or for the fourth quarter of 2020 as a result of management’s assessment of the level of the allowance for loan losses relative to the size and composition of the loan portfolio, among other factors.

Noninterest Income

Noninterest income for the fourth quarter of 2021 was $11.1 million, a decrease of $3.0 million, or 21.3%, from the third quarter of 2021. The primary driver of this decrease was a $5.1 million decrease in gain on sale of securities offset by a $1.2 million, or 14.8%, increase in deposit related fees as a result of higher cash management fees from digital currency related customers and a $0.9 million increase in other income due to a gain on sale of other assets.

Noninterest income for the fourth quarter of 2021 increased by $6.2 million, or 128.0%, compared to the fourth quarter of 2020. This increase was primarily due to a $5.5 million, or 144.0%, increase in deposit related fees and a $0.9 million increase in other income due to a gain on sale of other assets, partially offset by a $0.3 million, or 27.9% decrease in mortgage warehouse fee income.

Three Months Ended

December 31,
2021

September 30,
2021

December 31,
2020

(Dollars in thousands)

Noninterest income:

Mortgage warehouse fee income

$

684

$

665

$

949

Deposit related fees

9,378

8,171

3,844

Gain on sale of securities, net

56

5,182

Other income

937

24

55

Total noninterest income

$

11,055

$

14,042

$

4,848

Noninterest Expense

Noninterest expense totaled $25.7 million for the fourth quarter of 2021, an increase of $3.3 million, or 14.8%, compared to the third quarter of 2021, and an increase of $8.0 million, or 45.6%, compared to the fourth quarter of 2020. The increase in noninterest expense compared to prior quarter was primarily due to an increase in salaries and employee benefits. The increase in noninterest expense from the fourth quarter of 2020 was primarily driven by an increase in salaries and employee benefits and increased federal deposit insurance expense resulting from the significant growth in digital currency deposits. The increase in noninterest expense from the prior year was partially offset by a decrease in occupancy and equipment expense related to a $2.3 million impairment charge recorded in the fourth quarter of 2020.

Three Months Ended

December 31,
2021

September 30,
2021

December 31,
2020

(Dollars in thousands)

Noninterest expense:

Salaries and employee benefits

$

13,815

$

10,729

$

9,637

Occupancy and equipment

728

523

3,044

Communications and data processing

1,862

1,793

1,443

Professional services

2,994

2,471

1,163

Federal deposit insurance

3,100

4,297

658

Correspondent bank charges

634

572

410

Other loan expense

364

299

45

Other general and administrative

2,159

1,655

1,225

Total noninterest expense

$

25,656

$

22,339

$

17,625

Income Tax Expense (Benefit)

Income tax expense was $2.2 million for the fourth quarter of 2021, compared to $5.9 million for the third quarter of 2021, and a benefit of $0.1 million for the fourth quarter of 2020. Our effective tax rate for the fourth quarter of 2021 was 9.4%, compared to 20.0% for the third quarter of 2021, and (1.6)% for the fourth quarter of 2020. The lower effective tax rates for the fourth quarter of 2021 and 2020, compared to the third quarter of 2021 were due to higher excess tax benefits recognized on the exercise of stock options and tax-exempt income earned on certain municipal bonds.

Results of Operations, Year Ended December 31, 2021

Net income available to common shareholders for the year ended December 31, 2021 was $75.5 million, or $2.91 per diluted common share, compared to $26.0 million, or $1.36 per diluted share, for the comparable period in 2020.

Net interest income for the year ended December 31, 2021 was $129.3 million, compared to $72.4 million for the same period in 2020. The increase in net interest income was primarily due to a $50.8 million increase in interest income and a $6.1 million decrease in interest expense, primarily due to significant growth in our balance sheet.

Noninterest income for the year ended December 31, 2021 was $45.3 million, compared to $19.2 million for the same period in 2020. The increase in noninterest income was primarily due to a $24.6 million increase in fee income from our digital currency customers and a $1.5 million increase in gain on sale of securities. Digital currency customer related fee income for the year ended December 31, 2021 was $35.8 million, compared to $11.1 million for the year ended December 31, 2020.

Noninterest expense was $89.1 million for the year ended December 31, 2021, compared to $59.6 million for the year ended December 31, 2020. The increase in noninterest expense was primarily due to a $12.4 million increase in federal deposit insurance and a $9.3 million increase in salaries and benefits expense.

Income tax expense was $6.9 million for the year ended December 31, 2021, compared to $5.2 million for the same period in 2020. Our effective tax rates for the years ended December 31, 2021 and 2020 were 8.1% and 16.5%, respectively. The decrease in the Company’s effective tax rate in 2021 was primarily related to higher excess tax benefit from stock-based compensation and tax-exempt income earned on certain municipal bonds.

Balance Sheet

Deposits

At December 31, 2021, deposits totaled $14.3 billion, an increase of $2.6 billion, or 22.5%, from September 30, 2021, and an increase of $9.0 billion, or 172.3%, from December 31, 2020. Noninterest bearing deposits totaled $14.2 billion, representing approximately 99.5% of total deposits at December 31, 2021, an increase of $2.6 billion from the prior quarter end, and a $9.1 billion increase compared to December 31, 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 $6.5 billion in deposits, or approximately 45.3% of total deposits at December 31, 2021, compared to $5.3 billion in deposits, or approximately 45.6% of total deposits at September 30, 2021, and $2.5 billion in deposits, or approximately 47.5% of total deposits at December 31, 2020, 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 fourth quarter of 2021 amounted to $13.3 billion, with the high and low daily total digital currency deposit levels during such time being $16.0 billion and $10.2 billion, respectively, compared to an average of $11.2 billion during the third quarter of 2021, and high and low daily deposit levels of $12.6 billion and $9.8 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:

December 31, 2021

September 30, 2021

December 31, 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

$

8,288

94

$

6,759

76

$

2,479

Institutional investors

894

4,220

830

3,344

607

1,811

Other customers

393

1,603

381

1,365

286

749

Total

1,381

$

14,111

1,305

$

11,468

969

$

5,039

________________________

(1)

Total deposits may not foot due to rounding.

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

Three Months Ended

December 31, 2021

September 30, 2021

December 31, 2020

Average
Balance

Average
Rate

Average
Balance

Average
Rate

Average
Balance

Average
Rate

(Dollars in thousands)

Noninterest bearing demand accounts

$

13,377,552

$

11,305,650

$

2,732,692

Interest bearing accounts:

Interest bearing demand accounts

7,660

0.05

%

8,597

0.05

%

41,968

0.17

%

Money market and savings accounts

69,364

0.14

%

67,735

0.14

%

71,871

0.15

%

Certificates of deposit

540

0.73

%

566

0.70

%

943

0.84

%

Total interest bearing deposits

77,564

0.14

%

76,898

0.13

%

114,782

0.16

%

Total deposits

$

13,455,116

0.00

%

$

11,382,548

0.00

%

$

2,847,474

0.01

%

Loan Portfolio

Total loans, including net loans held-for-investment and loans held for sale, were $1.8 billion at December 31, 2021, an increase of $152.3 million, or 9.4%, from September 30, 2021, and an increase of $167.8 million, or 10.4%, from December 31, 2020.

December 31,
2021

September 30,
2021

December 31,
2020

(Dollars in thousands)

Real estate loans:

One-to-four family

$

105,098

$

119,817

$

187,855

Multi-family

56,751

54,636

77,126

Commercial

210,136

250,295

301,901

Construction

7,573

6,046

6,272

Commercial and industrial(1)

335,862

254,624

78,909

Reverse mortgage and other

1,410

1,385

1,495

Mortgage warehouse

177,115

128,975

97,903

Total gross loans held-for-investment

893,945

815,778

751,461

275

883

2,206

Total loans held-for-investment

894,220

816,661

753,667

Allowance for loan losses

...

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