EX-99.1 2 ex991earningsreleaseq1.htm EXHIBIT 99.1 Exhibit
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Ex. 99.1

Silvergate Capital Corporation Announces First Quarter 2020 Results
La Jolla, CA, April 29, 2020 -- Silvergate Capital Corporation (“Silvergate” or “Company”) (NYSE:SI) and its wholly-owned subsidiary, Silvergate Bank (“Bank”), today announced financial results for the three months ended March 31, 2020.
First Quarter 2020 Financial Highlights
•
Net income for the quarter was $4.4 million, or $0.23 per diluted share, compared to net income of $3.6 million, or $0.19 per diluted share, for the fourth quarter of 2019, and net income of $9.4 million, or $0.52 per diluted share, for the first quarter of 2019
•
Digital currency customers grew to 850 at March 31, 2020 compared to 804 at December 31, 2019, and 617 at March 31, 2019
•
The Silvergate Exchange Network (“SEN”) handled 31,405 transactions in the first quarter, compared to 14,400 transactions in the fourth quarter of 2019, and 7,097 transactions in the first quarter of 2019
•
The SEN handled $17.4 billion of U.S. dollar transfers in the first quarter, compared to $9.6 billion in the fourth quarter of 2019, and $4.1 billion in the first quarter of 2019
•
Digital currency customer related fee income for the quarter was $1.7 million, compared to $1.4 million for the fourth quarter of 2019, and $0.9 million for the first quarter of 2019
•
Book value per share was $13.11 at March 31, 2020, compared to $12.38 at December 31, 2019, and $11.29 at March 31, 2019
•
Total risk-based capital ratio was 26.05% at March 31, 2020, compared to 26.90% at December 31, 2019 and 30.10% at March 31, 2019
•
Weighted average loan-to-values at March 31, 2020 were 53.1% for commercial and multi-family real estate loans and 54.1% for single-family residential real estate loans

Alan Lane, president and chief executive officer of Silvergate, commented, “As we work together as a nation to fight the spread of COVID-19, our first priority has been to ensure the safety and health of our employees and customers. Our strong risk management culture has encompassed not only a robust pandemic continuity plan but also a dynamic hedging program to protect our Company against an economic downturn and declining interest rates. This enabled our team to quickly transition our employees to a work at home environment while seamlessly maintaining our operations and mitigating the recent precipitous decline in interest rates.”
Mr. Lane continued, “We have also positioned Silvergate to succeed in a digital world as we have quickly become the leading provider of digital currency infrastructure through the development and growth of our global payments platform, known worldwide as the Silvergate Exchange Network or ‘SEN’. Our first quarter results demonstrate our continued success expanding the SEN network as we grew our net customer count to 850 from 804, at year end, while maintaining a pipeline of more than 200 potential customers. Additionally, we experienced transaction growth in excess of 100% as a result of the increased volume of bitcoin trades combined with the strong network effect of the SEN. We will continue to expand our product offerings to further enhance the value of the SEN and are very encouraged with our SEN Leverage pilot program which we rolled out in the first quarter.”
COVID-19 Updates
Employees
Silvergate has prioritized ensuring the safety of the Company’s employees. Silvergate maintains a robust business continuity plan with periodic tests to ensure the plan’s effectiveness. Our most recent test of the pandemic portion of our business continuity plan was staged in September of 2019. That test positioned Silvergate to quickly adapt to the spreading pandemic in early March 2020, when we started to move a majority of the Company’s employees to a remote working environment while seamlessly maintaining our operations. The Company adheres to social distancing policies for those few employees still working in the office, has reduced branch hours and continually provides guidelines to employees to promote healthy habits and ways to stay connected while working remotely.

1

Customers and Community
To support the Company’s customers and the local community, Silvergate has initiated payment relief for borrowers impacted by COVID-19, and established referral relationships for those seeking assistance under the SBA’s “Paycheck Protection Program” (PPP). The Company has contacted the vast majority of all of the Company’s commercial real estate borrowers to discuss and assess their financial status. Silvergate has instructed the sub-servicer for the Company’s one-to-four family residential mortgages to offer borrower payment deferrals for confirmed hardships related to COVID-19. During this pandemic Silvergate has provided its customers uninterrupted banking access, including through the SEN.
Silvergate partners with various community organizations that address the needs of low to moderate income individuals and small businesses. Recently, the Company donated $45,000 to a number of nonprofit organizations trying to achieve their service missions in the wake of increased demand due to COVID-19, and the Company funded eight $1,000 scholarships for college students who are experiencing housing challenges.
Loan Portfolio
At March 31, 2020, Silvergate’s loans held-for-investment portfolio was $679.4 million, with its largest segments consisting of commercial real estate and one-to-four-family real estate loans. Within the commercial real estate loan portfolio, the Company had $61.9 million of retail loans and $46.1 million of hospitality loans at such date. During the first quarter, the Company recorded a provision for loan losses of $0.4 million and the ratio of the allowance for loan losses to gross loans held-for-investment at March 31, 2020 was 0.96%. The level of the first quarter provision was based on modest increases in loan portfolio balances, Silvergate’s historically strong credit quality and minimal loan charge-offs, and was largely influenced by the low to moderate loan-to-value margins in the Company's commercial and multi-family real estate and single-family residential real estate loans held-for-investment as evidenced by weighted average loan-to-value ratios in the low- to mid-50% range. Although there is significant uncertainly in the current economic environment due to the impact of the COVID-19 pandemic, the Company’s relatively low loan-to-value ratios, along with only modest exposure to the retail and hospitality sectors, provides lower probability of loss in the event of defaults in the Company’s portfolio. The Company will continue to monitor trends in its portfolio segments for any known or probable adverse conditions.
Subsequent to March 31, 2020, the Company began modifying loans by offering payment deferrals for customers experiencing difficulty due to COVID-19. As of April 24, 2020, 29 loans or a total of $109.1 million in loan balances had been modified, with the majority of the modifications for our commercial real estate borrowers. The two sectors that are expected to be most heavily impacted by COVID-19, hospitality and retail, made up $63.7 million of these modifications. As of April 24, 2020, the Company had an additional 26 customers with total loan balances of $27.7 million that were in the process of modification. None of the modified loans met or are expected to meet the criteria of a troubled debt restructuring under the Coronavirus Aid, Relief, and Economic Security Act issued on March 27, 2020 or the interagency statement on loan modifications issued on April 7, 2020 by federal banking agencies.


2

 
 
As of or for the Three Months Ended
 
 
March 31,
2020
 
December 31,
2019
 
March 31,
2019
 
 
 
 
 
 
 
Financial Highlights
 
(Dollars in thousands, except per share data)
Net income
 
$
4,393

 
$
3,598

 
$
9,436

Diluted earnings per share
 
$
0.23

 
$
0.19

 
$
0.52

Return on average assets (ROAA)(1)(5)
 
0.79
%
 
0.67
%
 
1.94
%
Return on average equity (ROAE)(1)(5)
 
7.14
%
 
6.08
%
 
19.53
%
Net interest margin(1)(2)
 
2.86
%
 
2.97
%
 
4.01
%
Cost of deposits(1)(3)
 
0.87
%
 
0.84
%
 
0.08
%
Cost of funds(1)(3)
 
0.94
%
 
0.94
%
 
0.17
%
Efficiency ratio(4)(5)
 
67.98
%
 
72.81
%
 
49.60
%
Total assets
 
$
2,310,708

 
$
2,128,127

 
$
1,891,394

Total deposits
 
$
2,002,957

 
$
1,814,654

 
$
1,598,764

Book value per share
 
$
13.11

 
$
12.38

 
$
11.29

Tier 1 leverage ratio
 
10.98
%
 
11.23
%
 
11.05
%
Total risk-based capital ratio
 
26.05
%
 
26.90
%
 
30.10
%
________________________
(1)
Data has been annualized.
(2)
Net interest margin is a ratio calculated as annualized net interest income 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 the cost of a hedging strategy discussed in “Balance Sheet —Deposits” in more detail below.
(4)
Efficiency ratio is calculated by dividing noninterest expenses by net interest income plus noninterest income.
(5)
In March 2019, the Bank completed the sale of its San Marcos branch and business loan portfolio which generated a pre-tax gain on sale of $5.5 million, or $3.9 million after tax, which significantly positively impacted net income, diluted earnings per share, ROAA, ROAE and efficiency ratio during the first quarter of 2019. See “Non-GAAP Financial Measures” for further information and reconciliation of these metrics.
Digital Currency Initiative
At March 31, 2020, the Company’s digital currency customers increased to 850 from 804 at December 31, 2019, and from 617 at March 31, 2019. At March 31, 2020, Silvergate had over 200 prospective digital currency customer leads in various stages of our customer onboarding process and pipeline. There were 31,405 transactions on the SEN for the three months ended March 31, 2020. In addition, for the three months ended March 31, 2020, $17.4 billion of U.S. dollar transfers occurred on the SEN.
 
 
Three Months Ended
 
 
March 31,
2020
 
December 31,
2019
 
March 31,
2019
 
 
 
 
 
 
 
 
 
(Dollars in millions)
# SEN Transactions
 
31,405

 
14,400

 
7,097

$ Volume of SEN Transfers
 
$
17,372

 
$
9,607

 
$
4,076

Results of Operations, Quarter Ended March 31, 2020
Net Interest Income and Net Interest Margin Analysis
Net interest income totaled $15.5 million for the first quarter of 2020, compared to $15.6 million for the fourth quarter of 2019, and $19.3 million for the first quarter of 2019.
Compared to the fourth quarter of 2019, net interest income decreased $0.2 million due to a decrease of $0.1 million in interest income and an increase of $0.1 million in interest expense.
Average total interest earning assets increased by $88.0 million for the first quarter of 2020 compared to the fourth quarter of 2019 primarily due to increases in interest earning deposits in other banks, which in turn were driven by an increase in noninterest bearing deposits. However, the yield on interest earning assets, primarily the interest earned on

3

deposits in other banks, was impacted by the cumulative effects of the three decreases in the federal funds rate over the last two quarters.
Average interest bearing liabilities decreased $26.5 million for the first quarter of 2020 compared to the fourth quarter of 2019, due to decreased borrowing with the FHLB. The average rate paid on total interest bearing liabilities increased from 3.23% for the fourth quarter of 2019, to 3.51% for the first quarter of 2020, primarily due to the premium expense associated with calling a portion of our brokered certificates of deposit, as described in more detail below.
In March 2019, the Company began implementing a hedging strategy that included purchases of interest rate floors and fixed-rate commercial mortgage-backed securities, primarily funded by callable brokered certificates of deposit. This strategy was intended to protect earnings in a declining interest rate environment. As of December 31, 2019, the Company had purchased $400.0 million in notional amount of interest rate floors, $350.4 million in fixed-rate commercial mortgage-backed securities and issued $325.0 million of callable brokered certificates of deposit related to the hedging strategy.
During the fourth quarter of 2019, the Company called and reissued $237.5 million of the callable brokered certificates of deposit, which resulted in the recognition of $1.6 million of premium amortization in interest expense. In the first quarter of 2020, the Company called $278.3 million and reissued $95.9 million of the callable brokered certificates of deposit, which resulted in the recognition of $2.1 million of premium amortization in interest expense. The outstanding balance of brokered certificates of deposit was $142.6 million as of March 31, 2020. The accelerated impact of premium expense is being offset by lower rates on the newly issued certificates of deposits and overall lower outstanding balance. The weighted average all-in cost of the brokered certificates of deposit was 1.92% as of March 31, 2020, compared to 2.29% as of December 31, 2019.
In the first quarter of 2020, the Company sold $200.0 million of its total $400.0 million notional amount of interest rate floors, which resulted in a net gain of $8.4 million, to be recognized over the weighted average remaining term of 4.1 years. The sale of the floors secured the benefit of lower interest rates at the time of the sale.
Compared to the first quarter of 2019, net interest income decreased $3.8 million, due entirely to an increase of $3.8 million in interest expense, as interest income was essentially unchanged. Average total interest earning assets increased by $227.5 million for the first quarter of 2020 compared to the first quarter of 2019, due to increases in securities and loans offset by decreases in interest earning deposits in other banks. The average yield on total interest earning assets decreased from 4.17% for the first quarter of 2019 to 3.70% for the first quarter of 2020, primarily due to lower yields on interest earning deposits in other banks and securities. The lower yields were due to declines in federal funds rate and LIBOR which was partially offset by the interest rate floors. Average interest bearing liabilities increased $290.8 million for the first quarter of 2020 compared to the first quarter of 2019 due to the issuance of callable brokered certificates of deposit and FHLB advances. The average rate on total interest bearing liabilities increased from 1.30% for the first quarter of 2019 to 3.51% for the first quarter of 2020, primarily due to the callable brokered certificates of deposits associated with our hedging strategy.
Net interest margin for the first quarter of 2020 was 2.86%, compared to 2.97% for the fourth quarter of 2019, and 4.01% for the first quarter of 2019. The decrease in the net interest margin compared to the fourth quarter of 2019 was driven by an increase in interest expense due to slightly higher premium expense associated with calling brokered certificates of deposits and lower yields on interest earning deposit due to declines in the federal funds rate. The net interest margin decrease from the first quarter of 2019 was primarily due to the impact of lower federal funds rates and LIBOR, along with increased FHLB borrowings, partially mitigated by the combined effects associated with the hedging strategy, which included the impacts of calling and reissuing a portion of the brokered callable certificates of deposit, along with the benefit derived from the interest rate floors.


4

 
 
Three Months Ended
 
 
March 31, 2020
 
December 31, 2019
 
March 31, 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
 
$
234,356

 
$
724

 
1.24
%
 
$
165,685

 
$
685

 
1.64
%
 
$
635,073

 
$
3,797

 
2.42
%
Securities(1)
 
908,776

 
6,096

 
2.70
%
 
905,399

 
6,117

 
2.68
%
 
380,403

 
3,033

 
3.23
%
Loans(2)(3)
 
1,024,982

 
13,121

 
5.15
%
 
1,008,987

 
13,076

 
5.14
%
 
925,389

 
13,111

 
5.75
%
Other
 
10,746

 
121

 
4.53
%
 
10,744

 
234

 
8.64
%
 
10,514

 
122

 
4.71
%
Total interest earning assets
 
2,178,860

 
20,062

 
3.70
%
 
2,090,815

 
20,112

 
3.82
%
 
1,951,379

 
20,063

 
4.17
%
Noninterest earning assets
 
49,307

 
 
 
 
 
46,708

 
 
 
 
 
21,104

 
 
 
 
Total assets
 
$
2,228,167

 
 
 
 
 
$
2,137,523

 
 
 
 
 
$
1,972,483

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing deposits
 
$
441,682

 
$
4,051

 
3.69
%
 
$
449,985

 
$
3,793

 
3.34
%
 
$
201,194

 
$
341

 
0.69
%
FHLB advances and other borrowings
 
67,229

 
263

 
1.57
%
 
85,451

 
419

 
1.95
%
 
16,921

 
142

 
3.40
%
Subordinated debentures
 
15,818

 
270

 
6.87
%
 
15,815

 
270

 
6.77
%
 
15,803

 
264

 
6.78
%
Total interest bearing liabilities
 
524,729

 
4,584

 
3.51
%
 
551,251

 
4,482

 
3.23
%
 
233,918

 
747

 
1.30
%
Noninterest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest bearing deposits
 
1,436,062

 
 
 
 
 
1,335,186

 
 
 
 
 
1,531,877

 
 
 
 
Other liabilities
 
19,900

 
 
 
 
 
16,274

 
 
 
 
 
10,699

 
 
 
 
Shareholders’ equity
 
247,476

 
 
 
 
 
234,812

 
 
 
 
 
195,989

 
 
 
 
Total liabilities and shareholders’ equity
 
$
2,228,167

 
 
 
 
 
$
2,137,523

 
 
 
 
 
$
1,972,483

 
 
 
 
Net interest spread(4)
 
 
 
 
 
0.19
%
 
 
 
 
 
0.59
%
 
 
 
 
 
2.87
%
Net interest income
 
 
 
$
15,478

 
 
 
 
 
$
15,630

 
 
 
 
 
$
19,316

 
 
Net interest margin(5)
 
 
 
 
 
2.86
%
 
 
 
 
 
2.97
%
 
 
 
 
 
4.01
%
________________________
(1)
Securities interest income includes $48,000 of tax-exempt income associated with municipal bonds purchased in the first quarter of 2020.
(2)
Loans include nonaccrual loans and loans held-for-sale, net of deferred fees and before allowance for loan losses.
(3)
Interest income includes amortization of deferred loan fees, net of deferred loan costs.
(4)
Net interest spread is the difference between interest rates earned on interest earning assets and interest rates paid on interest bearing liabilities.
(5)
Net interest margin is a ratio calculated as annualized net interest income divided by average interest earning assets for the same period.
Provision for Loan Losses
The Company recorded a provision for loan losses of $0.4 million for the first quarter of 2020, compared to no provision for the fourth quarter of 2019, and $0.3 million for the first quarter of 2019. The provision in the first quarter of 2020 was due to increases in loan portfolio balances and recalibration of qualitative factors in our allowance for loan losses methodology for certain portfolio segments to reflect current economic conditions at the end of the quarter.
Noninterest Income
Noninterest income for the first quarter of 2020 was $4.9 million, an increase of $1.8 million, or 57.5%, from the fourth quarter of 2019. The primary drivers of this increase were a $1.2 million gain on sale of securities and a $0.9 million gain on extinguishment of debt related to the initiation and settlement of a $64.0 million FHLB five-year term advance during the first quarter of 2020.
Noninterest income for the first quarter of 2020 decreased by $2.9 million, or 37.4%, compared to the first quarter of 2019. Excluding the pre-tax gain on sale of $5.5 million for the San Marcos branch and business loan portfolio that was completed in March 2019, noninterest income increased $2.6 million, or 108.8%. This increase was primarily due to the gain on sale of securities and gain on extinguishment of debt noted above, and by a $0.8 million, or 78.9%, increase in deposit related fees, partially offset by a $0.7 million decrease in service fees related to off-balance sheet deposits.

5

 
 
Three Months Ended
 
 
March 31,
2020
 
December 31,
2019
 
March 31,
2019
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Noninterest income:
 
 
 
 
 
 
Mortgage warehouse fee income
 
$
382

 
$
388

 
$
366

Service fees related to off-balance sheet deposits
 
70

 
183

 
759

Deposit related fees
 
1,766

 
1,487

 
987

Gain on sale of securities, net
 
1,197

 
740

 
—

Gain on sale of loans, net
 
506

 
235

 
189

Gain on sale of branch, net
 
—

 
—

 
5,509

Gain on extinguishment of debt
 
925

 
—

 
—

Other income
 
85

 
97

 
61

Total noninterest income
 
$
4,931

 
$
3,130

 
$
7,871

Noninterest Expense
Noninterest expense totaled $13.9 million for the first quarter of 2020, an increase of $0.2 million compared to the fourth quarter of 2019, and an increase of $0.4 million compared to the first quarter of 2019.
Noninterest expense increased from the prior quarter due to increases in salaries and employee benefits and communications and data processing, offset by a decrease in professional services expense.
Noninterest expense increased from the first quarter of 2019 due to increases in salaries and employee benefits, communications and data processing and other general and administrative expense, offset by decreases in professional services expense.
 
 
Three Months Ended
 
 
March 31,
2020
 
December 31,
2019
 
March 31,
2019
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Noninterest expense:
 
 
 
 
 
 
Salaries and employee benefits
 
$
8,955

 
$
8,773

 
$
8,765

Occupancy and equipment
 
907

 
861

 
873

Communications and data processing
 
1,261

 
1,149

 
1,037

Professional services
 
985

 
1,198

 
1,445

Federal deposit insurance
 
123

 
33

 
175

Correspondent bank charges
 
373

 
323

 
279

Other loan expense
 
122

 
122

 
125

Other real estate owned expense
 
—

 
90

 
—

Other general and administrative
 
1,149

 
1,111

 
787

Total noninterest expense
 
$
13,875

 
$
13,660

 
$
13,486

Income Tax Expense
Income tax expense was $1.8 million for the first quarter of 2020, compared to $1.5 million for the fourth quarter of 2019, and $4.0 million for the first quarter of 2019. Our effective tax rate for the first quarter of 2020 was 28.8%, compared to 29.5% for the fourth quarter of 2019, and 29.8% first quarter of 2019.


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Balance Sheet
Deposits
At March 31, 2020, deposits totaled $2.0 billion, an increase of $188.3 million, or 10.4%, from December 31, 2019, and an increase of $404.2 million, or 25.3%, from March 31, 2019. Noninterest bearing deposits totaled $1.7 billion (representing approximately 87.1% of total deposits) at March 31, 2020, an increase of $401.6 million from the prior quarter end and a $293.0 million increase compared to March 31, 2019. The increase in total deposits from the prior quarter was driven by an increase in deposit levels from our digital currency customers who maintained excess capital with Silvergate as a result of the dislocation taking place in the digital currency markets during March. The increase in total deposits from March 31, 2019 includes a net increase of $141.3 million in callable brokered certificates of deposit associated with the hedging strategy, as well as changes in deposit levels related to our digital currency customers.
The weighted average cost of deposits for the first quarter of 2020 was 0.87%, compared to 0.84% for the fourth quarter of 2019, and 0.08% for the first quarter of 2019. The increase in the weighted average cost of deposits compared to the first quarter of 2019 was driven by the accelerated premium expense associated with the call and reissuance of brokered certificates of deposit in the first quarter of 2020. As a result of declining interest rates, a portion of the brokered certificates of deposit were called and partially reissued at lower rates in the fourth quarter of 2019 and the first quarter of 2020. The outstanding balance of callable brokered certificates of deposit as of March 31, 2020 was $142.6 million, with unamortized premium of $1.3 million, and an average maturity of 5.0 years. These certificates of deposit are initially callable within three months after issuance, and monthly thereafter. All callable brokered certificates of deposit have call dates prior to June 30, 2020.
 
 
Three Months Ended
 
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
 
 
Average
Balance
 
Average
Rate
 
Average
Balance
 
Average
Rate
 
Average
Balance
 
Average
Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Noninterest bearing demand accounts
 
$
1,436,062

 
—

 
$
1,335,186

 
—

 
$
1,531,877

 
—

Interest bearing accounts:
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand accounts
 
51,551

 
0.13
%
 
50,095

 
0.13
%
 
51,563

 
0.14
%
Money market and savings accounts
 
81,670

 
0.97
%
 
83,199

 
1.00
%
 
120,272

 
0.72
%
Certificates of deposit:
 


 


 


 


 


 


Brokered certificates of deposit
 
306,828

 
5.02
%
 
314,262

 
4.49
%
 
—

 
—

Other
 
1,633

 
0.99
%
 
2,429

 
1.23
%
 
29,359

 
1.52
%
Total interest bearing deposits
 
441,682

 
3.69
%
 
449,985

 
3.34
%
 
201,194

 
0.69
%
Total deposits
 
$
1,877,744

 
0.87
%
 
$
1,785,171

 
0.84
%
 
$
1,733,071

 
0.08
%

7

Demand for new deposit accounts is generated by our banking platform for innovators that includes the SEN, which is enabled through our proprietary API and cash management solutions. These tools enable our clients to grow their business and scale operations. The following table sets forth a breakdown of our digital currency customer base and the deposits held by such customers at the dates noted below:
 
 
March 31, 2020
 
December 31, 2019
 
March 31, 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
 
61

 
$
599

 
60

 
$
527

 
44

 
$
517

Institutional investors
 
541

 
715

 
509

 
432

 
417

 
512

Other customers
 
248

 
379

 
235

 
286

 
156

 
291

Total
 
850

 
$
1,693

 
804

 
$
1,246

 
617

 
$
1,320

________________________
(1)
Total deposits may not foot due to rounding.
Loan Portfolio
Total loans held-for-investment were $686.0 million at March 31, 2020, an increase of $15.2 million, or 2.3%, from December 31, 2019, and an increase of $67.8 million, or 11.0%, from March 31, 2019.
 
 
March 31,
2020
 
December 31,
2019
 
March 31,
2019
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
One-to-four family
 
$
202,214

 
$
193,367

 
$
196,131

Multi-family
 
76,721

 
81,233

 
42,748

Commercial
 
325,116

 
331,052

 
317,851

Construction
 
10,034

 
7,213

 
4,117

Commercial and industrial
 
15,948

 
14,440

 
10,163

Consumer and other
 
154

 
122

 
11

Reverse mortgage
 
1,431

 
1,415

 
1,762

Mortgage warehouse
 
51,596

 
39,247

 
42,788

Total gross loans held-for-investment
 
683,214

 
668,089

 
615,571

Deferred fees, net
 
2,760

 
2,724

 
2,594

Total loans held-for-investment
 
685,974

 
670,813

 
618,165

Allowance for loan losses
 
(6,558
)
 
(6,191
)
 
(6,990
)
Total loans held-for-investment, net
 
$
679,416

 
$
664,622

 
$
611,175

Total loans held-for-sale
 
$
435,023

 
$
375,922

 
$
234,067

Loans held-for-sale included $435.0 million, $365.8 million and $210.2 million of mortgage warehouse loans at March 31, 2020, December 31, 2019, and March 31, 2019, respectively.
Asset Quality and Allowance for Loan Losses
At March 31, 2020, our allowance for loan losses was $6.6 million, compared to $6.2 million at December 31, 2019, and $7.0 million at March 31, 2019. The ratio of the allowance for loan losses to gross loans held-for-investment at March 31, 2020 was 0.96%, compared to 0.93% and 1.14% at December 31, 2019 and March 31, 2019, respectively.
Nonperforming assets totaled $5.1 million, or 0.22% of total assets, at March 31, 2020, a decrease of $0.9 million from $6.0 million, or 0.28% of total assets at December 31, 2019. Nonperforming assets decreased $2.2 million, from $7.4 million, or 0.39% of total assets, at March 31, 2019.

8

 
 
March 31,
2020
 
December 31,
2019
 
March 31,
2019
 
 
 
 
 
 
 
Asset Quality
 
(Dollars in thousands)
Nonperforming Assets:
 
 
 
 
 
 
Nonperforming loans
 
$
5,126

 
$
5,909

 
$
7,336

Troubled debt restructurings
 
$
1,610

 
$
1,791

 
$
507

Other real estate owned, net
 
—

 
$
128

 
$
31

Nonperforming assets
 
$
5,126

 
$
6,037

 
$
7,367

 
 
 
 
 
 
 
Asset Quality Ratios:
 
 
 
 
 
 
Nonperforming assets to total assets
 
0.22
%
 
0.28
%
 
0.39
%
Nonperforming loans to gross loans(1)
 
0.75
%
 
0.88
%
 
1.19
%
Nonperforming assets to gross loans and other real estate owned(1)
 
0.75
%
 
0.90
%
 
1.20
%
Net charge-offs (recoveries) to average total loans(1)
 
0.00
%
 
0.01
%
 
0.00
%
Allowance for loan losses to gross loans(1)
 
0.96
%
 
0.93
%
 
1.14
%
Allowance for loan losses to nonperforming loans
 
127.94
%
 
104.77
%
 
95.28
%
________________________
(1)
Loans exclude loans held-for-sale at each of the dates presented.
Securities
Securities available-for-sale increased $66.6 million, or 7.4%, from $897.8 million at December 31, 2019, and increased $502.0 million, or 108.6%, from $462.3 million at March 31, 2019, to $964.3 million at March 31, 2020. The increase in the Company’s securities portfolio over the previous year was substantially due to the implementation of the hedging strategy and the purchase of high quality available-for-sale securities. During the first quarter of 2020 the Company sold $12.8 million of fixed-rate commercial mortgage-backed securities and realized a gain on sale of $1.2 million. The Company reinvested the proceeds from these sales and purchased $15.3 million of fixed-rate commercial mortgage-backed securities. In addition, during the first quarter of 2020, the Company purchased $85.8 million of highly rated tax-exempt municipal bonds. These municipal bonds are all general obligation or revenue bonds that are fixed rate and have call dates within 10 years.
Capital Ratios
At March 31, 2020, the Company’s ratio of common equity to total assets was 10.59%, compared with 10.86% at December 31, 2019, and 10.63% at March 31, 2019. At March 31, 2020, the Company’s book value per share was $13.11, compared to $12.38 at December 31, 2019, and $11.29 at March 31, 2019.
At March 31, 2020, the Company had a tier 1 leverage ratio of 10.98%, common equity tier 1 capital ratio of 23.75%, tier 1 capital ratio of 25.36% and total capital ratio of 26.05%.
At March 31, 2020, the Bank had a tier 1 leverage ratio of 10.33%, common equity tier 1 capital ratio of 23.86%, tier 1 capital ratio of 23.86% and total capital ratio of 24.55%. 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)
 
March 31,
2020
 
December 31,
2019
 
March 31,
2019
The Company
 
 
 
 
 
 
Tier 1 leverage ratio
 
10.98
%
 
11.23
%
 
11.05
%
Common equity tier 1 capital ratio
 
23.75
%
 
24.52
%
 
27.09
%
Tier 1 risk-based capital ratio
 
25.36
%
 
26.21
%
 
29.16
%
Total risk-based capital ratio
 
26.05
%
 
26.90
%
 
30.10
%
Common equity to total assets
 
10.59
%
 
10.86
%
 
10.63
%
The Bank
 
 
 
 
 
 
Tier 1 leverage ratio
 
10.33
%
 
10.52
%
 
10.52
%
Common equity tier 1 capital ratio
 
23.86
%
 
24.55
%
 
27.84
%
Tier 1 risk-based capital ratio
 
23.86
%
 
24.55
%
 
27.84
%
Total risk-based capital ratio
 
24.55
%
 
25.24
%
 
28.79
%
________________________
(1)
March 31, 2020 capital ratios are preliminary.
Conference Call and Webcast
The Company will host a conference call on Wednesday, April 29, 2020 at 11:00 a.m. (Eastern Time) to present and discuss first 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 First Quarter 2020 Earnings Conference Call. A replay will be available starting at 2:00 p.m. (Eastern Time) on April 29, 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 13701393. The replay will be available until 11:59 p.m. (Eastern Time) on May 13, 2020.
Interested investors and other parties may also listen to a simultaneous webcast of the conference call by logging onto the investor relations section of the Company's website at https://ir.silvergatebank.com. The online replay will remain available for a limited time beginning immediately following the call.
About Silvergate
Silvergate Capital Corporation is a registered bank holding company for Silvergate Bank, headquartered in La Jolla, California. Silvergate Bank is a commercial bank that opened in 1988, has been profitable for 22 consecutive years, and has focused its strategy on creating the banking platform for innovators, especially in the digital currency industry, and developing product and service solutions addressing the needs of entrepreneurs. The Company’s assets consist primarily of its investment in the Bank and the Company’s primary activities are conducted through the Bank. The Company is subject to supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank is subject to supervision by the California Department of Business Oversight, Division of Financial Institutions and, as a Federal Reserve member bank, the Federal Reserve. The Bank’s deposits are insured up to legal limits by the Federal Deposit Insurance Corporation.
Forward Looking Statements
Statements in this earnings release may constitute forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “projection,” “forecast,” “goal,” “target,” “would,” “aim” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry and management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. The inclusion of these forward-looking statements should not be regarded as a representation by us or any other person that such expectations, estimates and projections will be achieved. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. For information about other important factors that could cause actual results to

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 substantially 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
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
(Unaudited)
 
 
March 31,
2020
 
December 31,
2019
 
September 30,
2019
 
June 30,
2019
 
March 31,
2019
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
2,778

 
$
1,579

 
$
4,098

 
$
2,036

 
$
3,865

Interest earning deposits in other banks
 
163,422

 
132,025

 
156,160

 
339,325

 
529,159

Cash and cash equivalents
 
166,200

 
133,604

 
160,258

 
341,361

 
533,024

Securities available-for-sale, at fair value
 
964,317

 
897,766

 
909,917

 
920,481

 
462,330

Securities held-to-maturity, at amortized cost
 
—

 
—

 
—

 
63

 
70

Loans held-for-sale, at lower of cost or fair value
 
435,023

 
375,922

 
311,410

 
235,834

 
234,067

Loans held-for-investment, net of allowance for loan losses
 
679,416

 
664,622

 
691,990

 
684,410

 
611,175

Federal home loan and federal reserve bank stock, at cost
 
10,269

 
10,264

 
10,264

 
10,264

 
10,264

Accrued interest receivable
 
6,344

 
5,950

 
5,875

 
6,296

 
5,474

Other real estate owned, net
 
—

 
128

 
81

 
112

 
31

Premises and equipment, net
 
3,406

 
3,259

 
3,224

 
3,276

 
3,195

Operating lease right-of-use assets
 
4,210

 
4,571

 
4,927

 
5,280

 
4,476

Derivative assets
 
33,506

 
23,440

 
30,885

 
25,698

 
3,392

Low income housing tax credit investment
 
927

 
954

 
981

 
1,008

 
1,015

Deferred tax asset
 
—

 
—

 
—

 
—

 
3,153

Other assets
 
7,090

 
7,647

 
7,032

 
7,951

 
19,728

Total assets
 
$
2,310,708

 
$
2,128,127

 
$
2,136,844

 
$
2,242,034

 
$
1,891,394

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
Noninterest bearing demand accounts
 
$
1,745,219

 
$
1,343,667

 
$
1,394,433

 
$
1,549,886

 
$
1,452,191

Interest bearing accounts
 
257,738

 
470,987

 
453,662

 
388,764

 
146,573

Total deposits
 
2,002,957

 
1,814,654

 
1,848,095

 
1,938,650

 
1,598,764

Federal home loan bank advances
 
30,000

 
49,000

 
20,000

 
—

 
—

Other borrowings
 
—

 
—

 
—

 
53,545

 
57,135

Notes payable
 
—

 
3,714

 
4,000

 
4,286

 
4,286

Subordinated debentures, net
 
15,820

 
15,816

 
15,813

 
15,809

 
15,806

Operating lease liabilities
 
4,515

 
4,881

 
5,237

 
5,581

 
4,762

Accrued expenses and other liabilities
 
12,664

 
9,026

 
13,085

 
9,415

 
9,504

Total liabilities
 
2,065,956

 
1,897,091

 
1,906,230

 
2,027,286

 
1,690,257

Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
Preferred stock
 
—

 
—

 
—

 
—

 
—

Class A common stock
 
184

 
178

 
167

 
166

 
166

Class B non-voting common stock
 
3

 
9

 
12

 
12

 
12

Additional paid-in capital
 
132,336

 
132,138

 
125,573

 
125,599

 
125,684

Retained earnings
 
96,703

 
92,310

 
88,712

 
82,056

 
76,900

Accumulated other comprehensive income (loss)
 
15,526

 
6,401

 
16,150

 
6,915

 
(1,625
)
Total shareholders’ equity
 
244,752

 
231,036

 
230,614

 
214,748

 
201,137

Total liabilities and shareholders’ equity
 
$
2,310,708

 
$
2,128,127

 
$
2,136,844

 
$
2,242,034

 
$
1,891,394


12

SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
 
 
Three Months Ended
 
 
March 31,
2020
 
December 31,
2019
 
March 31,
2019
Interest income
 
 
 
 
 
 
Loans, including fees
 
$
13,121

 
$
13,076

 
$
13,111

Taxable securities
 
6,048

 
6,117

 
3,033

Tax-exempt securities
 
48

 
—

 
—

Other interest earning assets
 
724

 
685

 
3,797

Dividends and other
 
121

 
234

 
122

Total interest income
 
20,062

 
20,112

 
20,063

Interest expense
 
 
 
 
 
 
Deposits
 
4,051

 
3,793

 
341

Federal home loan bank advances
 
227

 
374

 
—

Notes payable and other
 
36

 
45

 
142

Subordinated debentures
 
270

 
270

 
264

Total interest expense
 
4,584

 
4,482

 
747

Net interest income before provision for loan losses
 
15,478

 
15,630

 
19,316

Provision for loan losses
 
367

 
—

 
267

Net interest income after provision for loan losses
 
15,111

 
15,630

 
19,049

Noninterest income
 
 
 
 
 
 
Mortgage warehouse fee income
 
382

 
388

 
366

Service fees related to off-balance sheet deposits
 
70

 
183

 
759

Deposit related fees
 
1,766

 
1,487

 
987

Gain on sale of securities, net
 
1,197

 
740

 
—

Gain on sale of loans, net
 
506

 
235

 
189

Gain on sale of branch, net
 
—

 
—

 
5,509

Gain on extinguishment of debt
 
925

 
—

 
—

Other income
 
85

 
97

 
61

Total noninterest income
 
4,931

 
3,130

 
7,871

Noninterest expense
 
 
 
 
 
 
Salaries and employee benefits
 
8,955

 
8,773

 
8,765

Occupancy and equipment
 
907

 
861

 
873

Communications and data processing
 
1,261

 
1,149

 
1,037

Professional services
 
985

 
1,198

 
1,445

Federal deposit insurance
 
123

 
33

 
175

Correspondent bank charges
 
373

 
323

 
279

Other loan expense
 
122

 
122

 
125

Other real estate owned expense
 
—

 
90

 
—

Other general and administrative
 
1,149

 
1,111

 
787

Total noninterest expense
 
13,875

 
13,660

 
13,486

Income before income taxes
 
6,167

 
5,100

 
13,434

Income tax expense
 
1,774

 
1,502

 
3,998

Net income
 
4,393

 
3,598

 
9,436

Basic earnings per share
 
$
0.24

 
$
0.20

 
$
0.53

Diluted earnings per share
 
$
0.23

 
$
0.19

 
$
0.52

Weighted average shares outstanding:
 
 
 
 
 
 
Basic
 
18,668

 
18,336

 
17,818

Diluted
 
19,117

 
18,779

 
18,258


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 three months ended March 31, 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. 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.
 
 
Three Months Ended
March 31,
 
 
2020
 
2019
 
 
 
 
 
 
 
(Dollars in thousands)
Net income
 
 
 
 
Net income, as reported
 
$
4,393

 
$
9,436

Adjustments:
 
 
 
 
Gain on sale of branch, net
 
—

 
(5,509
)
Tax effect(1)
 
—

 
1,574

Adjusted net income
 
$
4,393

 
$
5,501

 
 
 
 
 
Noninterest income / average assets(2)
 
 
 
 
Noninterest income
 
$
4,931

 
$
7,871

Adjustments:
 
 
 
 
Gain on sale of branch, net
 
—

 
(5,509
)
Adjusted noninterest income
 
4,931

 
2,362

Average assets
 
2,228,167

 
1,972,483

Noninterest income / average assets, as reported
 
0.89
%
 
1.62
%
Adjusted noninterest income / average assets
 
0.89
%
 
0.49
%
 
 
 
 
 
Return on average assets (ROAA)(2)
 
 
 
 
Adjusted net income
 
$
4,393

 
$
5,501

Average assets
 
2,228,167

 
1,972,483

Return on average assets (ROAA), as reported
 
0.79
%
 
1.94
%
Adjusted return on average assets
 
0.79
%
 
1.13
%
 
 
 
 
 
Return on average equity (ROAE)(2)
 
 
 
 
Adjusted net income
 
$
4,393

 
$
5,501

Average equity
 
247,476

 
195,989

Return on average equity (ROAE), as reported
 
7.14
%
 
19.53
%
Adjusted return on average equity
 
7.14
%
 
11.38
%
 
 
 
 
 
Efficiency ratio
 
 
 
 
Noninterest expense
 
$
13,875

 
$
13,486

Net interest income
 
15,478

 
19,316

Noninterest income
 
4,931

 
7,871

Total net interest income and noninterest income
 
20,409

 
27,187

Adjustments:
 
 
 
 
Gain on sale of branch, net
 
—

 
(5,509
)
Adjusted total net interest income and noninterest income
 
20,409

 
21,678

Efficiency ratio, as reported
 
67.98
%
 
49.60
%
Adjusted efficiency ratio
 
67.98
%
 
62.21
%
________________________
(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