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Silvergate Sees Record Earnings in 3rd Quarter

SILVERGATE BANK

CEO: Alan Lane.

Assets: $630 million as of Sept. 2012.

Net income: $3 million in both 2011 and 2010.

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No. of local branches: Four, plus one in Lancaster.

No. of local employees: 90

Headquarters: University City.

Year founded: 1988.

Company description: Commercial bank.

Key factors for success: Careful underwriting, diverse product lines, and strong capital levels.

Silvergate Bank, based in the University City area and with five branches, reported the best quarter in its 24- year history, with third quarter net income of $2.4 million, up 220 percent over its earnings in the like quarter of 2011.

For the nine months, Silvergate reported net earnings of $4.8 million, more than double its profit from the prior year’s nine months.

“It’s a culmination of everything that we’ve been working on,” said CEO Alan Lane on the results. “It’s all coming together.”

The biggest factor in the bank’s record profits is the simple fact that the bank got larger. Its total assets as of Sept. 30 were $630 million, up 45 percent from a year earlier. That ranks it as the area’s fourth largest commercial lender.

Silvergate opened two new branches in the past year, in Escondido and Carlsbad, and relocated another in La Mesa, all of which are contributing to the growth, Lane said.

The privately-held bank has gone through a yo-yo transition, shrinking from about $500 million earlier in the decade to below $300 million before expanding again. In late 2006, it received a cease and desist order from bank regulators, requiring it to take a number of corrective steps including hiring qualified management.

Lane came on board in late 2008, and moved the bank into several new lending areas that are proving quite profitable.

“It appears that what they’re doing is successful,” said David DeVol, Silvergate’s former CEO. “As the founder of Silvergate (when it was a thrift and loan), I’m especially pleased with its record setting performance.”

In 2009, Silvergate launched a mortgage warehouse loan division that makes short-term loans to small mortgage banks. In the third quarter, the division funded $578 million in mortgages, bringing its total fundings for the year to nearly $1.5 billion.

Reverse Mortgage Opportunity

Late last year, Silvergate got into the reverse mortgage business, buying federally guaranteed mortgages from smaller mortgage lenders. It holds the loans until it can arrange a sale.

Lane said reverse mortgages, which provide loans to borrowers who have built up equity in their properties, present lots of opportunity, especially after two major lenders in the product Wells Fargo and Bank of America exited the business last year.

Recently Silvergate took its involvement to another level by obtaining securitization capability from the Government National Mortgage Association or Ginnie Mae. It recently bundled its first securitized bond of $19 million in the reverse mortgages that are all guaranteed by the Federal Housing Administration.

Not only are the individual loans backed by FHA, the bond itself is guaranteed, making it a very safe investment, Lane said. Because the mortgages carry such low interest, the yield on the securitized bonds range from 2.5 to 3 percent, he said.

The bank’s net interest income, or the difference between what it charges on its average loans and what it pays out on deposits, came in at 4.09 percent for the nine months, down from 4.43 percent for the like period of 2011.

Dennis Frank, Silvergate’s chairman, said the margin exceeded the average of all California commercial banks, yet Lane acknowledged the profit margin decline, stating it was a direct result of record low interest rates that every lender is dealing with.

While Silvergate’s clearly growing larger, it’s also keeping the number of problem loans it has under control. Total nonaccrual loans and foreclosed real estate made up 1.61 percent of total assets, compared with 2.32 percent of assets at the end of September 2011.

Silvergate’s capital ratios are also holding up above key regulatory thresholds, with its Tier 1 leverage ratio at 11.61 percent, and total risk-based capital at 16.46 percent at the end of September. The ratios for a bank to be classified as well-capitalized are 5 percent and 10 percent respectively.

Now at five branches, including one in Lancaster, Lane said the bank is likely finished expanding within San Diego County, and has set its sights on opening an office in either south Orange County or Riverside County.

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