KBRA Assigns Ratings to Silvergate Capital Corporation

Kroll Bond Rating Agency (KBRA) assigns a senior unsecured debt rating of BBB, a preferred stock rating of BBB-, and a short-term debt rating of K3 to Silvergate Capital Corporation (NYSE: SI) (“Silvergate” or “the company”). In addition, KBRA assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 to lead subsidiary, Silvergate Bank. The Outlook for all long-term ratings is Stable.

SI’s ratings are supported by a unique, very attractive (but admittedly narrow) business model that benefits substantially from a distinct ‘first mover’ advantage, and the important network effects that stem from it. A favorable credit profile – led by balance sheet liquidity (including a near 0% cost deposit base) and solid core capital – is important as well, as is a low risk earning asset mix that is largely expected to remain so. At the core of SI’s business strategy is the Silvergate Exchange Network (“SEN”), which, while not without current (and potential future) competition, holds what we consider to be a firm market leadership position in the key element of the institutional digital currency banking market; one which seems durable in our view. Following recent year performance that has resulted in reported ROAs in the 1% range, SI’s 1H21 ROA slipped a bit, but only because of significant deposit growth, a disciplined approach to earning asset mix development, and the interest rate environment. That said, the company’s risk adjusted returns have been and remain very strong. SI’s loan book, including longstanding mortgage warehouse exposure, a small CRE book, and more recent Bitcoin leverage for select SEN members, remains well managed. SI’s recent capital profile has included a leverage ratio tracking moderately below rated peers, but an extremely low risk weighted asset (RWA) density has driven outsized related ratios, including a 47% CET1 measure. While such high RWA-related ratios are less likely prospectively, SI is expected to operate with very robust measures that will almost assuredly preclude any need for subordinated debt – driving our preferred stock rating compression – as the leverage ratio remains the company’s ‘binding’ constraint.

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The ratings are based on KBRA’s Bank & Bank Holding Company Global Rating Methodology published on October 16, 2019 and KBRA’s ESG Global Rating Methodology published on June 16, 2021.

Disclosures

Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority pursuant to the Temporary Registration Regime. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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