Silvergate Capital Corporation Announces First Quarter 2021 Results

Rhea-AI Summary

Silvergate Capital Corporation (NYSE:SI) reported a net income of $12.7 million, or $0.55 per diluted share, for Q1 2021, up from $9.1 million in Q4 2020. The Silvergate Exchange Network processed 166,772 transactions, an 84% increase from the previous quarter, amounting to $166.5 billion in transfers. Digital currency customer deposits surged to $6.8 billion. The company completed two equity offerings, raising $441.1 million. However, net interest margin declined to 1.33%, down from 2.85% in Q4 2020, while noninterest expenses rose to $19.6 million.

Positive

• Net income increased to $12.7 million from $9.1 million in Q4 2020.
• SEN transactions grew by 84% to 166,772, reflecting increased activity.
• Digital currency customer deposits rose by $1.8 billion, totaling $6.8 billion.
• Completed equity offerings raised $441.1 million, enhancing capital.

Negative

• Net interest margin decreased to 1.33%, down from 2.85% in Q4 2020.
• Noninterest expenses increased by 11.2% compared to Q4 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, 2021.

First Quarter 2021 Highlights

• Net income for the quarter was $12.7 million, or $0.55 per diluted share, compared to net income of $9.1 million, or $0.47 per diluted share, for the fourth quarter of 2020, and net income of $4.4 million, or $0.23 per diluted share, for the first quarter of 2020
• The Silvergate Exchange Network (“SEN”) handled 166,772 transactions in the first quarter of 2021, an increase of 84%, compared to 90,763 transactions in the fourth quarter of 2020, and an increase of 431% compared to 31,405 transactions in the first quarter of 2020
• The SEN handled $166.5 billion of U.S. dollar transfers in the first quarter of 2021, an increase of 181% compared to $59.2 billion in the fourth quarter of 2020, and an increase of 858% compared to $17.4 billion in the first quarter of 2020
• Digital currency customer related fee income for the quarter was $7.1 million, compared to $3.8 million for the fourth quarter of 2020, and $1.7 million for the first quarter of 2020
• Digital currency customers grew to 1,104 at March 31, 2021, compared to 969 at December 31, 2020, and 850 at March 31, 2020
• Digital currency customer deposits grew by $1.8 billion to $6.8 billion as of March 31, 2021, compared to $5.0 billion as of December 31, 2020
• Completed two equity offerings, which resulted in the issuance of a total of 5,860,858 shares of Class A common stock for aggregate gross proceeds of $441.1 million and net proceeds of $423.5 million after deducting underwriting discounts and offering expenses

Alan Lane, president and chief executive officer of Silvergate, commented, “We kicked off 2021 on a very strong note, as highlighted by Q1 growth across all of our Silvergate Exchange Network (SEN) key performance metrics, including continued customer growth, a significant increase in transactions and over $7 million in transaction revenue. As the SEN continues to expand, we have the opportunity to build upon the network effect to offer additional products and services to our customers. One example of this is SEN Leverage, our differentiated funding offering, which increased approved credit lines to $196.5 million in Q1 from $82.5 million in the prior quarter, as customers utilized this product. In March we announced that Coinbase Custody and Fidelity Digital Assets will be custodians for the SEN Leverage product, providing investors with more choice and greater access to capital.”

“In addition, during Q1, the average deposit balance was $6.6 billion, up from $2.8 billion in Q4 and $1.9 billion in Q1 2020,” continued Mr. Lane. “Early in the year, we issued $287.5 million in equity and later put a $300 million ATM program in place to ensure we remain well capitalized to meet regulatory capital requirements as deposit growth accelerates.”

		As of or for the Three Months Ended
		March 31, 2021				December 31, 2020				March 31, 2020
Financial Highlights		(Dollars in thousands, except per share data)
Net income		$	12,710			$	9,119			$	4,393
Diluted earnings per share		$	0.55			$	0.47			$	0.23
Return on average assets (ROAA)(1)		0.71		%		1.14		%		0.79		%
Return on average equity (ROAE)(1)		9.76		%		12.60		%		7.14		%
Net interest margin(1)(2)		1.33		%		2.85		%		2.86		%
Cost of deposits(1)(3)		0.00		%		0.01		%		0.87		%
Cost of funds(1)(3)		0.02		%		0.04		%		0.94		%
Efficiency ratio(4)		63.03		%		65.87		%		67.98		%
Total assets		$	7,757,152			$	5,586,235			$	2,310,708
Total deposits		$	7,002,371			$	5,248,026			$	2,002,957
Book value per share		$	28.75			$	15.63			$	13.11
Tier 1 leverage ratio		9.68		%		8.29		%		10.98		%
Total risk-based capital ratio		54.91		%		23.49		%		26.05		%

________________________

(1)		Data has been annualized.
(2)		Net interest margin is a ratio calculated as annualized net interest income, on a fully taxable equivalent basis for interest income on tax-exempt securities using the federal statutory tax rate of 21.0%, divided by average interest earning assets for the same period.
(3)		Cost of deposits and cost of funds for the first quarter of 2020 includes interest expense and accelerated premium amortization expense related to callable brokered certificates of deposit that were called during the first and second quarters of 2020.
(4)		Efficiency ratio is calculated by dividing noninterest expenses by net interest income plus noninterest income.

Digital Currency Initiative

At March 31, 2021, the Company’s digital currency customers increased to 1,104 from 969 at December 31, 2020, and from 850 at March 31, 2020. At March 31, 2021, prospective digital currency customer leads in various stages of the customer onboarding process and pipeline remained above 200. There was a record 166,772 transactions on the SEN for the first quarter of 2021, an increase of 84%, compared to 90,763 transactions for the fourth quarter of 2020. In addition, for the first quarter of 2021, $166.5 billion of U.S. dollar transfers occurred on the SEN, another quarterly record and a 181% increase from the fourth quarter of 2020.

		Three Months Ended
		March 31, 2021				December 31, 2020				March 31, 2020
		(Dollars in millions)
# SEN Transactions		166,772				90,763				31,405
$ Volume of SEN Transfers		$	166,506			$	59,227			$	17,372

Results of Operations, Quarter Ended March 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 $23.5 million for the first quarter of 2021, compared to $22.4 million for the fourth quarter of 2020, and $15.5 million for the first quarter of 2020.

Compared to the fourth quarter of 2020, net interest income increased $1.1 million entirely due to an increase in interest income driven primarily by higher balances of interest earning deposits in other banks, while interest expense remained flat. Average total interest earning assets increased by $4.0 billion for the first quarter of 2021 compared to the fourth quarter of 2020, primarily due to an increase in interest earning deposits in other banks. The average yield on interest earning assets decreased from 2.89% for the fourth quarter of 2020 to 1.35% for the first 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, interest earning deposits and loans. The lower yields on securities was driven by the impact of securities purchases during the quarter at lower rates compared to the existing portfolio. Average interest bearing liabilities decreased $4.6 million for the first quarter of 2021 compared to the fourth quarter of 2020, due to a decrease in FHLB advances. The average rate paid on total interest bearing liabilities increased from 0.87% for the fourth quarter of 2020 to 0.89% for the first quarter of 2021 due to the change in composition of liabilities impacted by the reduction in FHLB advances.

Compared to the first quarter of 2020, net interest income increased $8.0 million, due to a decrease of $4.3 million in interest expense, and an increase of $3.7 million in interest income. Average total interest earning assets increased by $5.0 billion for the first quarter of 2021 compared to the first quarter of 2020, due to an increase in interest earning deposits in other banks and loans, with loan growth driving the increase in interest income. The average yield on total interest earning assets decreased from 3.71% for the first quarter of 2020 to 1.35% for the first quarter of 2021, primarily due to interest earning deposits in other banks being a greater percentage of interest earning assets, and lower yields being realized on interest earning deposits, loans and securities. The lower yields were due to declines in federal funds rate and London Interbank Offered Rate (“LIBOR”), which were partially offset by the impact of interest rate floors. Average interest bearing liabilities decreased $391.7 million for the first quarter of 2021 compared to the first quarter of 2020, due to calling the remaining balance of brokered certificates of deposit in the second quarter of 2020. The average rate on total interest bearing liabilities decreased from 3.51% for the first quarter of 2020 to 0.89% for the first quarter of 2021, primarily due to the impact of calling a portion of brokered certificates of deposits in the first quarter of 2020, which included $2.1 million of accelerated premium expense in addition to $1.6 million of coupon interest expense for the first quarter of 2020.

Net interest margin for the first quarter of 2021 was 1.33%, compared to 2.85% for the fourth quarter of 2020, and 2.86% for the first quarter of 2020. The decrease in the net interest margin compared to the fourth quarter of 2020 was primarily driven by a greater proportion of lower yielding cash and cash equivalents as a percentage of total interest earning assets, which was driven by the increase in noninterest bearing digital currency customer deposits. The net interest margin decrease from the first quarter of 2020 was primarily due to lower yields on interest earning deposits, loans and securities due to a declining interest rate environment partially offset by lower interest expense as a result of calling the outstanding brokered certificates of deposits in the second quarter of 2020.

		Three Months Ended
		March 31, 2021												December 31, 2020												March 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		$	4,450,110			$	1,279				0.12	%		$	689,385			$	314				0.18	%		$	234,356			$	724				1.24	%
Taxable securities		850,558				3,592					1.71	%		671,209				3,548					2.10	%		902,165				6,048					2.70	%
Tax-exempt securities(1)		270,711				2,146					3.21	%		266,158				2,173					3.25	%		6,611				61					3.71	%
Loans(2)(3)		1,559,989				16,597					4.31	%		1,474,893				16,374					4.42	%		1,024,982				13,121					5.15	%
Other		15,331				143					3.78	%		15,331				255					6.62	%		10,746				121					4.53	%
Total interest earning assets		7,146,699				23,757					1.35	%		3,116,976				22,664					2.89	%		2,178,860				20,075					3.71	%
Noninterest earning assets		72,155												66,477												49,307
Total assets		$	7,218,854											$	3,183,453											$	2,228,167
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits		$	117,228			$	46				0.16	%		$	114,782			$	47				0.16	%		$	441,682			$	4,051				3.69	%
FHLB advances		—				—					—			7,098				—					0.00	%		63,986				227					1.43	%
Subordinated debentures and other		15,832				245					6.28	%		15,829				253					6.36	%		19,061				306					6.46	%
Total interest bearing liabilities		133,060				291					0.89	%		137,709				300					0.87	%		524,729				4,584					3.51	%
Noninterest bearing liabilities:
Noninterest bearing deposits		6,526,555												2,732,692												1,436,062
Other liabilities		30,911												25,143												19,900
Shareholders’ equity		528,328												287,909												247,476
Total liabilities and shareholders’ equity		$	7,218,854											$	3,183,453											$	2,228,167
Net interest spread(4)											0.46	%											2.02	%											0.20	%
Net interest income, taxable equivalent basis						$	23,466											$	22,364											$	15,491
Net interest margin(5)											1.33	%											2.85	%											2.86	%
Reconciliation to reported net interest income:
Adjustments for taxable equivalent basis						(451		)										(456		)										(13		)
Net interest income, as reported						$	23,015											$	21,908											$	15,478

________________________

(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 first quarter of 2021, compared to $0.2 million provision for loan losses for the fourth quarter of 2020 and $0.4 million for the first quarter of 2020.

Noninterest Income

Noninterest income for the first quarter of 2021 was $8.1 million, an increase of $3.2 million, or 66.9%, from the fourth quarter of 2020. The primary driver of this increase was a $3.3 million, or 85.3%, increase in deposit related fees. The majority of deposit related fees are from digital currency customers which were $7.1 million for the first quarter of 2021, an increase of $3.3 million, or 86.8% compared to $3.8 million for the fourth quarter of 2020.

Noninterest income for the first quarter of 2021 increased by $3.2 million, or 64.1%, compared to the first quarter of 2020. This increase was primarily due to a $5.4 million, or 303.4%, increase in deposit related fees and a $0.6 million, or 149.7% increase in mortgage warehouse fee income, partially offset by a $1.2 million decrease in gain on sale of securities, a $0.9 million decrease in gain on extinguishment of debt and a $0.5 million decrease in gain on sale of loans. Deposit related fees from digital currency customers increased $5.4 million, or 317.4%, to $7.1 million, compared to $1.7 million for the first quarter of 2020.

		Three Months Ended
		March 31, 2021				December 31, 2020				March 31, 2020
		(Dollars in thousands)
Noninterest income:
Mortgage warehouse fee income		$	954			$	949			$	382
Service fees related to off-balance sheet deposits		—				—				70
Deposit related fees		7,124				3,844				1,766
Gain on sale of securities, net		—				—				1,197
Gain on sale of loans, net		—				—				506
Gain on extinguishment of debt		—				—				925
Other income		12				55				85
Total noninterest income		$	8,090			$	4,848			$	4,931

Noninterest Expense

Noninterest expense totaled $19.6 million for the first quarter of 2021, an increase of $2.0 million, or 11.2%, compared to the fourth quarter of 2020, and an increase of $5.7 million, or 41.3%, compared to the first quarter of 2020. The increase in noninterest expense compared to prior quarter and first quarter of 2020 was primarily driven by increased federal deposit insurance expense resulting from the significant growth in digital currency deposits and also by investments related to strategic growth initiatives. The increase in noninterest expense from the prior quarter 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
		March 31, 2021				December 31, 2020				March 31, 2020
		(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits		$	10,990			$	9,637			$	8,955
Occupancy and equipment		614				3,044				907
Communications and data processing		1,621				1,443				1,261
Professional services		1,717				1,163				985
Federal deposit insurance		2,296				658				123
Correspondent bank charges		497				410				373
Other loan expense		174				45				122
Other general and administrative		1,697				1,225				1,149
Total noninterest expense		$	19,606			$	17,625			$	13,875

Income Tax Expense (Benefit)

Income tax benefit was $1.2 million for the first quarter of 2021, compared to a benefit of $0.1 million for the fourth quarter of 2020, and an expense of $1.8 million for the first quarter of 2020. Our effective tax rate for the first quarter of 2021 was (10.5)%, compared to (1.6)% for the fourth quarter of 2020, and 28.8% for the first quarter of 2020. The lower effective tax rate for the first quarter of 2021 and the fourth quarter of 2020 when compared to the first quarter of 2020 was due to significant tax benefits recognized on the exercise of stock options and the impact of tax-exempt income.

Balance Sheet

Deposits

At March 31, 2021, deposits totaled $7.0 billion, an increase of $1.8 billion, or 33.4%, from December 31, 2020, and an increase of $5.0 billion, or 249.6%, from March 31, 2020. Noninterest bearing deposits totaled $6.9 billion, representing approximately 98.4% of total deposits at March 31, 2021, an increase of $1.8 billion from the prior quarter end, and a $5.1 billion increase compared to March 31, 2020. The increase in total deposits from the prior quarter end 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 Bank’s 10 largest depositors accounted for $2.8 billion in deposits, or approximately 40.6% of total deposits at March 31, 2021 compared to $2.5 billion in deposits, or approximately 47.5% of total deposits at December 31, 2020, substantially all of which are 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 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 deposits during the first quarter of 2021 amounted to $6.4 billion, the high and low daily total digital currency deposit levels during such time were $8.4 billion and $4.6 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 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:

		March 31, 2021							December 31, 2020							March 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		85			$	2,993			76			$	2,479			61			$	599
Institutional investors		695			2,166				607			1,811				541			715
Other customers		324			1,634				286			749				248			379
Total		1,104			$	6,793			969			$	5,039			850			$	1,693

________________________

(1)

Total deposits may not foot due to rounding.

The weighted average cost of deposits for the first quarter of 2021 was 0.00%, compared to 0.01% for the fourth quarter of 2020, and 0.87% for the first quarter of 2020. The decrease in the weighted average cost of deposits compared to the first quarter of 2020 was driven by the absence of any interest expense associated with brokered certificates of deposit, which were called in the second quarter of 2020.

Three Months Ended

March 31, 2021

December 31, 2020

March 31, 2020

Average Balance

Average Rate

Average Balance

Average Rate

Average Balance

Average Rate

FAQ

What was Silvergate's net income for Q1 2021?

Silvergate reported a net income of $12.7 million for Q1 2021.

How many transactions did the Silvergate Exchange Network handle in Q1 2021?

The SEN handled 166,772 transactions in Q1 2021, an 84% increase from Q4 2020.

What was the total amount of digital currency customer deposits at Silvergate as of March 31, 2021?

Digital currency customer deposits totaled $6.8 billion as of March 31, 2021.

What impact did the equity offerings have on Silvergate's financial position?

The equity offerings raised $441.1 million, strengthening Silvergate's capital position.

How did Silvergate's net interest margin change in Q1 2021?

The net interest margin decreased to 1.33% in Q1 2021, down from 2.85% in Q4 2020.