After shrinking in the face of what it presciently viewed as an overheated housing market, Silvergate Bank is shifting gears, seeking to make loans and grow in size.
In December, the $300 million bank received two pieces of good news. Regulators lifted a two-year cease and desist order and granted its long-standing request to change its charter to a commercial bank from an industrial loan company, which is similar to a bank but doesn’t offer checking accounts.
New chief executive Alan J. Lane says the news couldn’t have come at a better time.
“Given the state of the financial markets in general and the sluggishness of the economy, we know a lot of banks are unable to lend right now and we’re hoping to fill that void,” said Lane.
Three years ago, Silvergate’s management decided the residential real estate market was on the verge of a correction. Turns out the forecast was a bit early, but on target.
As a result, Silvergate pulled back from lending, a move that likely didn’t help its standing with regulators.
The cease and desist order levied in December 2005, one of the strongest regulatory sanctions a bank can receive, called for the institution to make a number of changes, including installing a qualified manager and reducing its reliance on brokered deposits, or those acquired from third parties and generally paying higher interest rates.
It also tried to sell itself to Wescom Credit Union of Pasadena, in a precedent-setting transaction that was scuttled when Wal-Mart attempted to purchase a Utah industrial loan business.
After Congress voted a moratorium on all sales of ILCs, Silvergate arranged a private placement that was to give majority ownership to a Virginia private equity group. The deal fizzled when the group failed to line up investors.
Lane says the latest changes, particularly the ability to let customers make deposits in checking accounts, give the La Jolla-based bank a chance to grow significantly.
“Besides the SBA lending that we’re already doing, we’re looking to make business loans, lines of credit and equipment loans,” he said.
Lost Customers
Business loan customers generally maintain checking accounts with the banks where they have loans, but because Silvergate didn’t offer checking account services, it lost out on a lot of customers, Lane says.
“A lot of things (businesses) needed on the deposit side, we couldn’t offer,” he said.
Silvergate is still implementing some of the changes necessary for business loans, but once that’s completed, Lane says the bank could increase in size 10 percent to 20 percent.
He’s looking to boost the current staff of 40 by as many as eight new hires.
In addition, Silvergate’s hefty capital position (its leverage ratio is above 11 percent or twice the minimum required) puts it in good position to buy branches, or entire banks, now under government control, Lane says.
Through the end of September, Silvergate reported net earnings of $539,000, and classified about 1.3 percent of its loans as problems, meaning past due at least 90 days. Both show the bank is healthy, especially in a down economy.
On Solid Ground
Lane says Dennis Frank, Silvergate’s former CEO, had the foresight to avoid higher-risk construction and land loans. As a result, Silvergate is now in better position than many other community banks to extend credit.
Frank remains chairman and CEO of Silvergate Capital, the bank’s privately held parent firm. In addition to La Jolla, the bank has offices in La Mesa, Lancaster and Riverside.
Lane comes to Silvergate from Professional Business Bank, where he served as executive chairman for a year. Previously, he was chief executive at the Business Bank of California, until it was sold to Union Bank of California in 2004.
Earlier, Lane was chief operating officer and a founding manager at Southwest Community Bank in Carlsbad. In 2006, Southwest was sold to Sacramento’s Placer Sierra Bancshares for $175 million, a deal valued at 3.5 times the community bank’s book value at the time it was announced. Lane has more than 25 years of corporate and financial institution leadership experience.
David DeVol, a shareholder and former chief executive at Silvergate, says he’s optimistic the charter change will make the bank more attractive to potential buyers.
“As an organizer of the bank, I’ve had my money tied up in it since 1986, and I’d love to get my money out,” he said.
