Silvergate Capital Corporation Announces Fourth Quarter 2022 Results
La Jolla, CA, January 17, 2023 -- Silvergate Capital Corporation ("Silvergate" or "Company") (NYSE:SI) and its wholly-owned subsidiary, Silvergate Bank ("Bank"), today announced financial results for the three and twelve months ended December 31, 2022.
Fourth Quarter 2022 Commentary
During the fourth quarter of 2022, the digital asset industry experienced a transformational shift, with significant over- leverage in the industry leading to several high-profile bankruptcies. These dynamics created a crisis of confidence across the ecosystem and led many industry participants to shift to a "risk off" position across digital asset trading platforms. In turn, the Company saw significant outflows of deposits during the quarter and took several actions to maintain cash liquidity. The Company initially utilized wholesale funding, and subsequently sold debt securities to accommodate sustained lower deposit levels and maintain its highly liquid balance sheet.
As Silvergate prepares for what it expects will be a sustained period of lower deposits, it is taking several actions to help ensure the business is resilient, including managing its expense base and evaluating its product portfolio and customer relationships going forward. In addition, Silvergate has made the difficult decision to substantively reduce its workforce in order to account for the economic realities facing its business and the digital asset industry today.
Alan Lane, chief executive officer of Silvergate, commented, "While we are taking decisive actions to navigate the current environment, our mission has not changed. We believe in the digital asset industry, and we remain focused on providing value-added services for our core institutional customers. To that end, we are committed to maintaining a highly liquid balance sheet with a strong capital position."
Fourth Quarter 2022 Highlights
- Net loss attributable to common shareholders for the quarter was $1.0 billion, or $33.16 loss per common share, compared to net income of $40.6 million, or $1.28 per diluted share, for the third quarter of 2022, and net income of $18.4 million, or $0.66 per diluted share, for the fourth quarter of 2021
- Digital asset customers were 1,620 at December 31, 2022, compared to 1,677 at September 30, 2022, and 1,381 at December 31, 2021
- The Silvergate Exchange Network ("SEN") handled $117.1 billion of U.S. dollar transfers in the fourth quarter of 2022, an increase of 4% compared to $112.6 billion in the third quarter of 2022, and a decrease of 47% compared to $219.2 billion in the fourth quarter of 2021
- Total SEN Leverage commitments were $1.1 billion at December 31, 2022, compared to $1.5 billion at September 30, 2022, and $570.5 million at December 31, 2021
- Digital asset customer related fee income for the quarter was $6.6 million, compared to $7.9 million for the third quarter of 2022, and $9.3 million for the fourth quarter of 2021
- Average digital asset customer deposits were $7.3 billion during the fourth quarter of 2022, compared to $12.0 billion during the third quarter of 2022
Full Year 2022 Highlights
- Net loss attributable to common shareholders for the year ended December 31, 2022 was $948.7 million, or $30.07 loss per common share, compared to net income of $75.5 million, or $2.91 per diluted share for the year ended December 31, 2021
- The SEN handled $563.3 billion of U.S. dollar transfers for the year ended December 31, 2022, compared to $787.4 billion for the year ended December 31, 2021
- Digital asset customer related fee income for the year ended December 31, 2022 was $32.2 million, compared to $35.8 million for the year ended December 31, 2021
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As of or for the Three Months Ended | |||||||||
December 31, | September 30, | December 31, | |||||||
2022 | 2022 | 2021 | |||||||
Financial Highlights | (Dollars in thousands, except per share data) | ||||||||
Net (loss) income attributable to common | $ | (1,049,917) | $ | 40,640 | $ | 18,375 | |||
shareholders | |||||||||
Adjusted net income available to common | $ | 15,124 | $ | 40,640 | $ | 18,375 | |||
shareholders(1) | |||||||||
Diluted (loss) earnings per common share | $ | (33.16) | $ | 1.28 | $ | 0.66 | |||
Adjusted earnings per diluted share(1) | $ | 0.48 | $ | 1.28 | $ | 0.66 |
Return on average assets (ROAA)(2) | (27.83)% | 1.04 % | 0.50 % | ||||||
Adjusted return on average assets(1)(2) | 0.40 % | 1.04 % | 0.50 % | ||||||
Return on average common equity (ROACE)(2) | (409.02)% | 12.99 % | 7.25 % | ||||||
Adjusted return on average common equity(1)(2) | 5.89 % | 12.99 % | 7.25 % | ||||||
Net interest margin(2)(3) | 1.54 % | 2.21 % | 1.11 % | ||||||
Cost of deposits(2) | 0.77 % | 0.16 % | 0.00 % | ||||||
Cost of funds(2) | 1.76 % | 0.28 % | 0.01 % | ||||||
Efficiency ratio(4) | (28.61)% | 37.11 % | 52.08 % | ||||||
Adjusted efficiency ratio(1)(2) | 63.30 % | 37.11 % | 52.08 % | ||||||
Total assets | $ | 11,355,553 | $ | 15,467,340 | $ | 16,005,495 | |||
Total deposits | $ | 6,296,550 | $ | 13,238,426 | $ | 14,290,628 | |||
Book value per common share | $ | 12.93 | $ | 35.94 | $ | 46.55 | |||
Tier 1 leverage ratio | 5.36 % | 10.71 % | 11.07 % | ||||||
Total risk-based capital ratio | 57.26 | % | 46.63 | % | 57.08 % | ||||
Year Ended December 31, | |||||||||
2022 | 2021 |
Financial Highlights
Net (loss) income attributable to common shareholders Adjusted net income available to common shareholders(1) Diluted (loss) earnings per common share
Adjusted earnings per diluted share(1) Return on average assets (ROAA) Adjusted return on average assets(1)
Return on average common equity (ROACE) Adjusted return on average common equity(1) Net interest margin(3)
Cost of deposits Cost of funds Efficiency ratio(4) Adjusted efficiency ratio(1)
________________________
(Dollars in thousands, except per share data)
$ | (948,662) | $ | 75,512 |
$ | 116,379 | $ | 75,512 |
$ | (30.07) | $ | 2.91 |
$ | 3.69 | $ | 2.91 |
(5.97)% | 0.66 % | ||
0.73 % | 0.66 % | ||
(75.54)% | 9.32 % | ||
9.27 % | 9.32 % | ||
1.71 % | 1.20 % | ||
0.18 % | 0.00 % | ||
0.50 % | 0.01 % | ||
(54.62)% | 51.06 % | ||
44.93 % | 51.06 % |
- See "Non-GAAP Financial Measures" for further information and reconciliation of these metrics.
- Data has been annualized.
- Net interest margin is a ratio calculated as net interest income divided by average interest earning assets for the same period. For the three and twelve months ended December 31, 2021, net interest margin ratio is calculated on a fully taxable equivalent basis for interest income on tax-exempt securities using the federal statutory tax rate of 21.0%. As a result of the Company recording losses in the fourth quarter of 2022 and full year 2022, the income from tax-exempt securities in these periods does not include any adjustments for taxable equivalent basis.
- Efficiency ratio is calculated by dividing noninterest expenses by net interest income plus noninterest income.
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Digital Asset Initiative
At December 31, 2022, the Company's digital asset customers were 1,620 compared to 1,677 at September 30, 2022, and 1,381 at December 31, 2021. As the Company prepares for what it expects will be a sustained period of transformation, it is taking several actions to help ensure the business is resilient, including offboarding certain non-core customers and eliminating a portion of its product portfolio. As a result of these efforts, the Company is assessing its pipeline of prospective digital asset customers. For the fourth quarter of 2022, $117.1 billion of U.S. dollar transfers occurred on the SEN, a 4% increase from $112.6 billion transfers in the third quarter of 2022, and a decrease of 47% compared to $219.2 billion in the fourth quarter of 2021.
Results of Operations, Quarter Ended December 31, 2022
Net Interest Income and Net Interest Margin Analysis (Taxable Equivalent Basis)
The Company's securities portfolio included tax-exempt municipal bonds with tax-exempt income. As a result of the Company recording losses in the fourth quarter of 2022 and full year 2022, the income from tax-exempt securities in these periods does not include any adjustments for taxable equivalent basis. For prior years, net interest income, net interest spread and net interest margin are presented on a taxable equivalent basis based on the federal statutory tax rate of 21.0%.
Net interest income on a taxable equivalent basis totaled $53.7 million for the fourth quarter of 2022, compared to $80.9 million for the third quarter of 2022, and $40.2 million for the fourth quarter of 2021.
Compared to the third quarter of 2022, net interest income decreased $27.2 million due to increased interest expense, partially offset by increased interest income driven by higher yields across all interest earning asset categories. Average total interest earning assets decreased by $0.7 billion for the fourth quarter of 2022 compared to the third quarter of 2022, primarily due to decreased securities and loans balances. The average yield on interest earning assets increased from 2.47% for the third quarter of 2022 to 3.27% for the fourth quarter of 2022, with the most significant impacts due to higher yields on securities and interest earning deposits in other banks. Average interest bearing liabilities increased $4.4 billion for the fourth quarter of 2022 compared to the third quarter of 2022, due to the significantly higher utilization of short-term borrowings and brokered certificates of deposit. The average rate on total interest bearing liabilities increased from 2.19% for the third quarter of 2022 to 3.87% for the fourth quarter of 2022, primarily due to an increase in interest rates on short-term borrowings and brokered certificates of deposit.
Compared to the fourth quarter of 2021, net interest income increased $13.5 million due to increased interest income, with the largest driver being higher yields on interest earning assets, offset by increased interest expense. Average total interest earning assets decreased by $0.6 billion for the fourth quarter of 2022 compared to the fourth quarter of 2021, primarily due to decreased interest earning deposits in other banks and loan balances partially offset by an increase in securities balances. The average yield on total interest earning assets increased from 1.11% for the fourth quarter of 2021 to 3.27% for the fourth quarter of 2022, primarily due to overall higher yields resulting from increased interest rates. Average interest bearing liabilities increased $6.1 billion for the fourth quarter of 2022 compared to the fourth quarter of 2021, due to higher average balances on short-term borrowings and brokered certificates of deposit. The average rate on total interest bearing liabilities increased from 1.17% for the fourth quarter of 2021 to 3.87% for the fourth quarter of 2022, primarily due to the impact of increased interest rates on short-term borrowings.
Net interest margin for the fourth quarter of 2022 was 1.54%, compared to 2.21% for the third quarter of 2022, and 1.11% for the fourth quarter of 2021. The decrease in net interest margin compared to the third quarter of 2022 was primarily due to higher interest expense associated with short-term borrowings and brokered certificates of deposit. The increase in net interest margin compared to the fourth quarter of 2021 was primarily due to higher yields on adjustable rate securities, interest earning assets in other banks and loans, partially offset by higher borrowing costs associated with short-term borrowings and brokered certificates of deposit.
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Three Months Ended | |||||||||||||||||||||||||
December 31, 2022 | September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||
Average | Interest | Average | Average | Interest | Average | Average | Interest | Average | |||||||||||||||||
Outstanding | Income/ | Yield/ | Outstanding | Income/ | Yield/ | Outstanding | Income/ | Yield/ | |||||||||||||||||
Balance | Expense | Rate | Balance | Expense | Rate | Balance | Expense | Rate | |||||||||||||||||
Assets | (Dollars in thousands) | ||||||||||||||||||||||||
Interest earning assets: | |||||||||||||||||||||||||
Interest earning deposits in other | $ | 2,804,816 | $ 27,395 | 3.88 % | $ | 1,324,361 | $ | 8,001 | 2.40 % | $ 5,282,661 | $ | 2,166 | 0.16 % | ||||||||||||
banks | |||||||||||||||||||||||||
Taxable securities | 7,856,510 | 52,363 | 2.64 % | 8,868,639 | 47,401 | 2.12 % | 5,735,932 | 10,178 | 0.70 % | ||||||||||||||||
Tax-exempt securities(1) | 1,972,899 | 12,279 | 2.47 % | 2,889,391 | 14,412 | 1.98 % | 1,728,862 | 9,454 | 2.17 % | ||||||||||||||||
Loans(2)(3) | 1,085,757 | 21,046 | 7.69 % | 1,407,290 | 20,663 | 5.83 % | 1,641,345 | 17,892 | 4.32 % | ||||||||||||||||
Other | 126,382 | 1,039 | 3.26 % | 62,835 | 289 | 1.82 % | 34,490 | 777 | 8.94 % | ||||||||||||||||
Total interest earning assets | 13,846,364 | 114,122 | 3.27 % | 14,552,516 | 90,766 | 2.47 % | 14,423,290 | 40,467 | 1.11 % | ||||||||||||||||
Noninterest earning assets | 1,119,827 | 942,110 | 295,841 | ||||||||||||||||||||||
Total assets | $ | 14,966,191 | $ | 15,494,626 | $14,719,131 | ||||||||||||||||||||
Liabilities and Shareholders' Equity | |||||||||||||||||||||||||
Interest bearing liabilities: | |||||||||||||||||||||||||
Interest bearing deposits | $ | 1,958,921 | $ 18,290 | 3.70 % | $ | 1,000,615 | $ | 5,221 | 2.07 % | $ | 77,564 | $ | 27 | 0.14 % | |||||||||||
Short-term borrowings | 4,212,772 | 41,862 | 3.94 % | 769,565 | 4,399 | 2.27 % | 12 | - | 0.00 % | ||||||||||||||||
Subordinated debentures | 15,857 | 281 | 7.03 % | 15,854 | 258 | 6.46 % | 15,843 | 249 | 6.24 % | ||||||||||||||||
Total interest bearing liabilities | 6,187,550 | 60,433 | 3.87 % | 1,786,034 | 9,878 | 2.19 % | 93,419 | 276 | 1.17 % | ||||||||||||||||
Noninterest bearing liabilities: | |||||||||||||||||||||||||
Noninterest bearing deposits | 7,432,838 | 12,139,522 | 13,377,552 | ||||||||||||||||||||||
Other liabilities | 133,787 | 134,164 | 49,023 | ||||||||||||||||||||||
Shareholders' equity | 1,212,016 | 1,434,906 | 1,199,137 | ||||||||||||||||||||||
Total liabilities and shareholders' | $ | 14,966,191 | $ | 15,494,626 | $14,719,131 | ||||||||||||||||||||
equity | |||||||||||||||||||||||||
Net interest spread(4) | (0.60)% | 0.28 % | (0.06)% | ||||||||||||||||||||||
Net interest income, taxable equivalent | $ 53,689 | $ | 80,888 | $ | 40,191 | ||||||||||||||||||||
basis | |||||||||||||||||||||||||
Net interest margin(5) | 1.54 % | 2.21 % | 1.11 % | ||||||||||||||||||||||
Reconciliation to reported net interest | |||||||||||||||||||||||||
income: | |||||||||||||||||||||||||
Adjustments for taxable equivalent basis | - | - | (1,985) | ||||||||||||||||||||||
Net interest income, as reported | $ 53,689 | $ | 80,888 | $ | 38,206 | ||||||||||||||||||||
________________________
- Interest income on tax-exempt securities is presented on a taxable equivalent basis using the federal statutory tax rate of 21.0% for the three months ended December 31, 2021. There were no adjustments to taxable equivalent basis for the three months ended December 31, 2022 or September 30, 2022.
- Loans include nonaccrual loans and loans held-for-sale, net of deferred fees and before allowance for loan losses.
- Interest income includes amortization of deferred loan fees, net of deferred loan costs.
- Net interest spread is the difference between interest rates earned on interest earning assets and interest rates paid on interest bearing liabilities.
- Net interest margin is a ratio calculated as annualized net interest income divided by average interest earning assets for the same period. For the three months ended December 31, 2021, net interest margin ratio is calculated on a fully taxable equivalent basis for interest income on tax-exempt securities using the federal statutory tax rate of 21.0%.
Provision (Reversal) for Loan Losses
The Company recorded a $0.5 million reversal of provision for loan losses for the fourth quarter of 2022, compared to a $0.6 million reversal of provision for the third quarter of 2022 and no provision for the fourth quarter of 2021 as a result of management's assessment of the level of the allowance for loan losses, and the lower amount and change in mix of the loan portfolio, among other factors.
Noninterest Income (Loss)
Noninterest loss for the fourth quarter of 2022 was $887.3 million, compared to noninterest income of $8.5 million for the third quarter of 2022 and $11.1 million for the fourth quarter of 2021. The decline in the fourth quarter was due to losses on securities of $751.4 million and losses on derivatives of $8.7 million resulting from sale of $5.2 billion of debt securities
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and related derivatives that took place during the quarter. In addition, the Company recorded a $134.5 million impairment charge related to an estimated $1.7 billion of securities it expects to sell in the first quarter of 2023 to reduce borrowings.
Three Months Ended
December 31, | September 30, | December 31, | ||||||
2022 | 2022 | 2021 | ||||||
(Dollars in thousands) | ||||||||
Noninterest income: | ||||||||
Deposit related fees | $ | 6,623 | $ | 7,953 | $ | 9,378 | ||
Mortgage warehouse fee income | 167 | 482 | 684 | |||||
(Loss) gain on securities, net | (885,807) | - | 56 | |||||
(Loss) gain on derivatives, net | (8,699) | - | 928 | |||||
Loss on sale of loans, net | (46) | (329) | - | |||||
Other income | 495 | 348 | 9 | |||||
Total noninterest (loss) income | $ | (887,267) | $ | 8,454 | $ | 11,055 | ||
Noninterest Expense
Noninterest expense totaled $238.5 million for the fourth quarter of 2022, an increase of $205.3 million, or 619.4%, compared to the third quarter of 2022, and an increase of $212.8 million, or 829.6%, compared to the fourth quarter of 2021. The increase in noninterest expense compared to the prior quarter was primarily due to a $196.2 million impairment charge on developed technology assets acquired earlier in the year. In the fourth quarter of 2022, the Company determined that based on recent changes in market conditions of the digital asset industry, the likelihood of the launch of a blockchain-based payment solution was no longer imminent and performed an impairment analysis resulting in the impairment charge. In addition, noninterest expense increased due to a $7.1 million increase in salaries and benefits expense due in large part to a $3.7 million restructuring charge related to exiting the mortgage warehouse lending product during the fourth quarter of 2022. The restructuring costs primarily consist of severance and employee benefits.
The increase in noninterest expense from the fourth quarter of 2021 was primarily driven by the impairment charge discussed above and an increase in salaries and employee benefits attributable to increased headcount prior to December 2022, as well as increases in communications and data processing, and professional services, all of which supported organic growth of the Company's strategic initiatives. This was partially offset by a decrease in federal deposit insurance expense due to a lower growth rate in deposit levels.
Three Months Ended
December 31, | September 30, | December 31, | ||||||
2022 | 2022 | 2021 | ||||||
Noninterest expense: | (Dollars in thousands) | |||||||
Salaries and employee benefits | $ | 26,707 | $ | 19,632 | $ | 13,815 | ||
Occupancy and equipment | 850 | 822 | 728 | |||||
Impairment of intangible assets | 196,223 | - | - | |||||
Communications and data processing | 3,306 | 3,210 | 1,862 | |||||
Professional services | 6,112 | 4,314 | 2,994 | |||||
Federal deposit insurance | 1,210 | 1,217 | 3,100 | |||||
Correspondent bank charges | 286 | 902 | 634 | |||||
Other loan expense | 528 | 529 | 364 | |||||
Other general and administrative | 3,270 | 2,527 | 2,159 | |||||
Total noninterest expense | $ | 238,492 | $ | 33,153 | $ | 25,656 | ||
Income Tax Expense (Benefit)
Income tax benefit was $24.3 million for the fourth quarter of 2022, compared to an expense of $13.5 million for the third quarter of 2022, and $2.2 million for the fourth quarter of 2021. Our effective tax rate for the fourth quarter of 2022 was 2.3%, compared to 23.7% for the third quarter of 2022, and 9.4% for the fourth quarter of 2021. The decrease in the tax
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Silvergate Capital Corp. published this content on 17 January 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 17 January 2023 11:39:04 UTC.