Silvergate Capital Corporation Announces First Quarter 2022 Results

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, 2022.

First Quarter 2022 Highlights

• Net income for the quarter was $27.4 million, compared to $21.4 million for the fourth quarter of 2021, and $12.7 million for the first quarter of 2021

• Net income available to common shareholders for the quarter was $24.7 million, or $0.79 per diluted common share, compared to net income of $18.4 million, or $0.66 per diluted share, for the fourth quarter of 2021, and net income of $12.7 million, or $0.55 per diluted share, for the first quarter of 2021

• Digital currency customers grew to 1,503 at March 31, 2022, compared to 1,381 at December 31, 2021, and 1,104 at March 31, 2021

• The Silvergate Exchange Network ("SEN") handled $142.3 billion of U.S. dollar transfers in the first quarter of 2022, a decrease of 35% compared to $219.2 billion in the fourth quarter of 2021, and a decrease of 15% compared to $166.5 billion in the first quarter of 2021; Cumulative U.S. dollar transfers on the SEN crossed $1 trillion dollars

• Total SEN Leverage commitments were $1,070.1 million at March 31, 2022, compared to $570.5 million at December 31, 2021, and $196.5 million at March 31, 2021

• Digital currency customer related fee income for the quarter was $8.9 million, compared to $9.3 million for the fourth quarter of 2021, and $7.1 million for the first quarter of 2021

• Average digital currency customer deposits grew to $14.7 billion during the first quarter of 2022, compared to $13.3 billion during the fourth quarter of 2021

• Closed acquisition of select blockchain-based payment technology assets from the Diem Group, further enhancing Silvergate's existing stablecoin infrastructure

Alan Lane, president and chief executive officer of Silvergate, commented, "We started off 2022 on a strong note, driven by the power of our platform and continued progress on our strategic initiatives. I'm particularly pleased with our first quarter results when you consider that this was one of the most challenging periods for the broader crypto ecosystem since the beginning of the pandemic. While volume on the Silvergate Exchange Network was impacted by broader industry trends, I remain encouraged by the continued growth we saw in customers, SEN Leverage commitments, and average deposits, which reached a record $14.7 billion. To advance our customer-first approach, we continued to invest in our strategic initiatives, including stablecoin infrastructure through the acquisition of select blockchain-based payment technology assets from the Diem Group, and the launch of the Euro SEN. I look forward to the rest of 2022 and I am excited for what lies ahead for Silvergate."

Digital Currency Initiative

At March 31, 2022, the Company's digital currency customers increased to 1,503 from 1,381 at December 31, 2021, and from 1,104 at March 31, 2021. At March 31, 2022, prospective digital currency customer leads in various stages of the customer onboarding process and pipeline was above 300. For the first quarter of 2022, $142.3 billion of U.S. dollar transfers occurred on the SEN, a 35% decrease from $219.2 billion transfers in the fourth quarter of 2021, and a decrease of 15% compared to $166.5 billion in the first quarter of 2021. Based on digital currency industry transaction data provided by Coin Metrics, bitcoin and ether dollar trading volumes decreased by 33% during the first quarter of 2022 compared to the fourth quarter of 2021.

Results of Operations, Quarter Ended March 31, 2022

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 $54.0 million for the first quarter of 2022, compared to $40.2 million for the fourth quarter of 2021, and $23.5 million for the first quarter of 2021.

Compared to the fourth quarter of 2021, net interest income increased $13.8 million, due to increased interest income, while interest expense remained flat. Average total interest earning assets increased by $1.7 billion for the first quarter of 2022 compared to the fourth quarter of 2021, primarily due to increased securities offset by decreased interest earning deposits in other banks. The average yield on interest earning assets increased from 1.11% for the fourth quarter of 2021 to 1.37% for the first quarter of 2022, primarily due to a higher proportion of securities and a lower proportion of interest earning deposits in other banks as a percentage of interest earning assets, as well as higher yields on recently purchased securities. Average interest bearing liabilities increased $70.2 million for the first quarter of 2022 compared to the fourth quarter of 2021, due to increased FHLB advances. The average rate on total interest bearing liabilities decreased from 1.17% for the fourth quarter of 2021 to 0.85% for the first quarter of 2022, primarily due to a higher proportion of lower cost FHLB borrowings as a percentage of interest bearing liabilities.

Compared to the first quarter of 2021, net interest income increased $30.5 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 $9.0 billion for the first quarter of 2022 compared to the first quarter of 2021, primarily due to increased securities balances funded by the growth in digital currency related deposits. The average yield on total interest earning assets increased from 1.35% for the first quarter of 2021 to 1.37% for the first quarter of 2022, primarily due to a higher proportion of securities and a lower proportion of interest earning deposits in other banks as a percentage of interest earning assets, partially offset by lower yields on the securities portfolio due to the majority of the securities in the portfolio being acquired in the last 12 months within a lower rate environment. Average interest bearing liabilities increased $30.6 million for the first quarter of 2022 compared to the first quarter of 2021, due to increased FHLB advances offset by lower balances of interest bearing deposits. The average rate on total interest bearing liabilities decreased from 0.89% for the first quarter of 2021 to 0.85% for the first quarter of 2022, primarily due to a higher proportion of lower cost FHLB borrowings as a percentage of interest bearing liabilities.

Net interest margin for the first quarter of 2022 was 1.36%, compared to 1.11% for the fourth quarter of 2021, and 1.33% for the first quarter of 2021. The increase in the net interest margin compared to the fourth quarter of 2021 was primarily due to a higher proportion of securities and a lower proportion of interest earning deposits in other banks as a percentage of interest earning assets, as well as higher yields on recently purchased securities. The increase in the net interest margin compared to the first quarter of 2021 was primarily due to a higher proportion of securities and a lower proportion of interest earning deposits in other banks as a percentage of interest earning assets, partially offset by lower yields on the securities portfolio.

Provision for Loan Losses

The Company recorded a reversal of provision for loan losses of $2.5 million for the first quarter of 2022, compared to no provision for the fourth quarter of 2021, or for the first quarter of 2021. The reversal in the first quarter of 2022 was due to the changes in loan product and segment mix in the portfolio, including the net impact of the sale of approximately $150.8 million of real estate loans, partially offset by an increase in SEN Leverage loans.

Noninterest Income

Noninterest income for the first quarter of 2022 was $9.5 million, a decrease of $1.6 million, or 14.5%, from the fourth quarter of 2021. The primary reasons for this decrease were a $0.6 million increase in loss on sale of securities and a $0.4 million, or 4.4%, decrease in deposit related fees as a result of lower foreign exchange fees attributed in part to the geopolitical environment, which negatively impacted trading volume. Additionally, there was a $0.5 million decrease in other income due to a gain on sale of other assets of $0.4 million for the first quarter of 2022 compared to a gain on sale of other assets of $0.9 million recognized in the fourth quarter of 2021.

Noninterest income for the first quarter of 2022 increased by $1.4 million, or 16.8%, compared to the first quarter of 2021. This increase was primarily due to a $1.8 million, or 25.9%, increase in deposit related fees and a $0.4 million increase in other income due to a gain on sale of other assets, offset by a $0.3 million, or 31.8%, decrease in mortgage warehouse fee income and a $0.6 million loss on sale of securities recognized in the first quarter of 2022.

Noninterest Expense

Noninterest expense totaled $28.0 million for the first quarter of 2022, an increase of $2.4 million, or 9.2%, compared to the fourth quarter of 2021, and an increase of $8.4 million, or 42.9%, compared to the first quarter of 2021. The increase in noninterest expense compared to prior quarter was primarily due to an increase in salaries and benefits expense attributable to increased headcount as part of organic growth as well as increases in communications and data processing costs all of which support the Company's strategic initiatives. Other general and administrative expenses increased primarily due to an increase in the provision for off-balance sheet commitments related to SEN Leverage loans. This was partially offset by a decrease in federal deposit insurance expense due to a slower growth rate in deposit levels. The increase in noninterest expense from the first quarter of 2021 was primarily driven by an increase in salaries and employee benefits attributable to increased headcount as well as increases in communications and data processing, professional services, and other general and administrative of costs all of which support organic growth and the Company's strategic initiatives.

Income Tax Expense (Benefit)

Income tax expense was $7.0 million for the first quarter of 2022, compared to $2.2 million for the fourth quarter of 2021, and a benefit of $1.2 million for the first quarter of 2021. Our effective tax rate for the first quarter of 2022 was 20.4%, compared to 9.4% for the fourth quarter of 2021, and (10.5)% for the first quarter of 2021. The tax expense and effective tax rate for the first quarter of 2022 was impacted by significant increases in tax-exempt income earned on certain municipal bonds compared to the fourth quarter of 2021 and the first quarter of 2021. In addition, the lower effective tax rates for the fourth quarter of 2022 and the first quarter of 2021, were due to higher excess tax benefits recognized on the exercise of stock options.

Balance Sheet

Deposits

At March 31, 2022, deposits totaled $13.4 billion, a decrease of $0.9 billion, or 6.3%, from December 31, 2021, and an increase of $6.4 billion, or 91.3%, from March 31, 2021. Noninterest bearing deposits totaled $13.3 billion, representing approximately 99.5% of total deposits at March 31, 2022, a decrease of $0.9 billion from the prior quarter end, and a $6.4 billion increase compared to March 31, 2021.

Our continued growth has been accompanied by significant fluctuations in the levels of our deposits, in particular our deposits from customers operating in the digital currency industry. The Bank's average total digital currency customer deposits during the first quarter of 2022 amounted to $14.7 billion, with the high and low daily total digital currency deposit levels during such time being $16.2 billion and $13.2 billion, respectively, compared to an average of $13.3 billion during the fourth quarter of 2021, and high and low daily deposit levels of $16.0 billion and $10.2 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:

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(1) Total deposits may not foot due to rounding.

The weighted average cost of deposits for the first quarter of 2022, the fourth quarter of 2021 and the first quarter of 2021 was 0.00%.

Loan Portfolio

Total loans, including net loans held-for-investment and loans held-for-sale, were $1.7 billion at March 31, 2022, a decrease of $104.3 million, or 5.9%, from December 31, 2021, and an increase of $50.5 million, or 3.1%, from March 31, 2021. In March 2022, the Company sold commercial real estate, multi-family real estate and construction loans, which decreased overall loans by approximately $150.8 million, net after participating a portion of the loans, compared to the fourth quarter of 2021.

Asset Quality and Allowance for Loan Losses

The allowance for loan losses was $4.4 million at March 31, 2022, compared to $6.9 million at December 31, 2021 and March 31, 2021. The ratio of the allowance for loan losses to total loans held-for-investment at March 31, 2022 was 0.60%, compared to 0.77% and 0.94% at December 31, 2021 and March 31, 2021, respectively. The decrease in this ratio at March 31, 2022 was primarily due to the lower risk profile of the loan portfolio as a result of the loan sale discussed above.

Nonperforming assets totaled $3.6 million, or 0.02% of total assets, at March 31, 2022, a decrease of $0.4 million from $4.0 million, or 0.03% of total assets at December 31, 2021. Nonperforming assets decreased $1.6 million, from $5.3 million, or 0.07%, of total assets at March 31, 2021.

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(1) Loans exclude loans held-for-sale at each of the dates presented.

Securities

The total securities portfolio increased $3.6 billion, or 41.6%, from $8.6 billion at December 31, 2021, and increased $10.5 billion, or 610.4%, from $1.7 billion at March 31, 2021, to $12.2 billion at March 31, 2022. During the first quarter of 2022, the Company purchased $4.6 billion of securities, including $1.3 billion of U.S. Treasuries, $1.1 billion of tax-exempt municipal bonds, $1.1 billion of agency residential mortgage-backed securities, $432.6 million of U.S. agency securities excluding mortgage-backed securities, $348.3 million of private label commercial mortgage-backed securities and $256.4 million of agency commercial mortgage-backed securities. During the first quarter of 2022, the Company sold $432.1 million of longer duration securities and recognized a net loss of $0.6 million. The securities sold were part of a restructuring that is projected to have a positive impact on future earnings when compared to securities purchased in the first quarter of 2022. In addition, the Company sold the related interest rate cap contracts that hedged a portion of the securities that were sold and a realized gain on sale of $0.4 million was recognized in other noninterest income. As of March 31, 2021, there were $2.8 billion of securities classified as held-to-maturity.

Capital Ratios

At March 31, 2022, the Company's ratio of common equity to total assets was 8.56%, compared with 8.84% at December 31, 2021, and 9.20% at March 31, 2021. At March 31, 2022, the Company's book value per common share was $42.77, compared to $46.55 at December 31, 2021, and $28.75 at March 31, 2021.

At March 31, 2022, the Company had a tier 1 leverage ratio of 9.68%, common equity tier 1 capital ratio of 38.97%, tier 1 risk-based capital ratio of 44.84% and total risk-based capital ratio of 45.01%.

At March 31, 2022, the Bank had a tier 1 leverage ratio of 9.51%, common equity tier 1 capital ratio of 44.28%, tier 1 risk-based capital ratio of 44.28% and total risk-based capital ratio of 44.45%. 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 risk-based capital ratio and 10.00% for total risk-based capital ratio.

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(1) March 31, 2022 capital ratios are preliminary.

Asset Purchase and Issuance of Common Stock

On January 31, 2022, the Company entered into an Asset Purchase Agreement (the "Purchase Agreement") under which it acquired from the Libra Association, Diem Networks US HoldCo, Inc., Diem Networks US, Inc., Diem Networks II LLC, Diem LLC, and Diem Networks LLC, (collectively, the "Sellers") certain intellectual property and other technology assets designed for running a blockchain-based payment network.

Under the terms of the Purchase Agreement, the aggregate purchase price for the acquired assets consisted of (i) $50.0 million in cash consideration and (ii) 1,221,217 shares of the Company's Class A common stock. The value of the total transaction consideration was $181.6 million. The Company accounted for the purchase as an asset acquisition and capitalized direct transaction costs related to the purchase of approximately $8.4 million. Further development costs incurred will be capitalized in accordance with accounting guidance for internal use software and the asset will be amortized over its expected useful life once it is ready for its intended use.

Subsequent Event

On April 11, 2022, the Company's Board of Directors declared a quarterly dividend payment of $13.44 per share, equivalent to $0.336 per depositary share, on its Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A (the "Series A Preferred Stock"), for the period covering February 15, 2022 through May 14, 2022, for a total dividend of $2.7 million. The depositary shares representing the Series A Preferred Stock are traded on the New York Stock Exchange under the symbol "SI PRA." The dividend will be payable on May 16, 2022 to shareholders of record of the Series A Preferred Stock as of April 29, 2022.

Conference Call and Webcast

The Company will host a conference call on Tuesday, April 19, 2022 at 11:00 a.m. (Eastern Time) to present and discuss first quarter 2022 financial results. The conference call can be accessed live by dialing 1-844-200-6205 or for international callers, 1-929-526-1599, entering the access code 487806. A replay will be available starting at 1:00 p.m. (Eastern Time) on April 19, 2022 and can be accessed by dialing 1-866-813-9403, or for international callers +44-204-525-0658. The passcode for the replay is 046195. The replay will be available until 11:59 p.m. (Eastern Time) on May 3, 2022.

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.silvergate.com. The online replay will remain available for a limited time beginning immediately following the call.

About Silvergate

Silvergate Capital Corporation (NYSE:SI) is the leading provider of innovative financial infrastructure solutions and services for the growing digital currency industry. The Company's real-time payments platform, known as the Silvergate Exchange Network, is at the heart of its customer-centric suite of payments, lending and funding solutions serving an expanding class of digital currency companies and investors around the world. Silvergate is enabling the rapid growth of digital currency markets and reshaping global commerce for a digital currency future.

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 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.

While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: changes in general economic, political, or industry conditions; geopolitical concerns, including the ongoing war in Ukraine; the magnitude and duration of the COVID-19 pandemic and related variants and mutations and their impact on the global economy and financial market conditions and our business, results of operations, and financial condition; uncertainty in U.S. fiscal and monetary policy, including the interest rate policies of the Board of Governors of the Federal Reserve System; inflation/deflation, interest rate, market, and monetary fluctuations; volatility and disruptions in global capital and credit markets; the transition away from USD LIBOR and uncertainty regarding potential alternative reference rates, including SOFR; competitive pressures on product pricing and services; success, impact, and timing of our business strategies, including market acceptance of any new products or services; the impact of changes in financial services policies, laws, and regulations, including those concerning taxes, banking, securities, digital currencies and insurance, and the application thereof by regulatory bodies; cybersecurity threats and the cost of defending against them, including the costs of compliance with potential legislation to combat cybersecurity at a state, national, or global level; and other factors that may affect our future results.

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.

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