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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ending March 31, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from __________________  to  __________________
Commission file number 001-39123
SILVERGATE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Maryland
33-0227337
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
4250 Executive Square, Suite 300, La Jolla, CA 92037
(Address of principal executive offices, including zip code)
(858) 362-6300
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Class A Common Stock, par value $0.01 per share SI New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
Emerging growth company
☒
Non-accelerated Filer
☒
Smaller reporting company
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of May 4, 2021, the registrant had 25,337,473 shares of Class A voting common stock outstanding.

Table of Contents
SILVERGATE CAPITAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
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1
Table of Contents
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)

SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Par Value Amounts)
(Unaudited) 
  March 31,
2021 		December 31,
2020
ASSETS
Cash and due from banks
$ 16,422  $ 16,405 
Interest earning deposits in other banks
4,315,100  2,945,682 
Cash and cash equivalents 4,331,522  2,962,087 
Trading securities 1,990  — 
Securities available-for-sale, at fair value
1,717,418  939,015 
Loans held-for-sale, at lower of cost or fair value
897,227  865,961 
Loans held-for-investment, net of allowance for loan losses of $6,916 at March 31, 2021 and December 31, 2020
728,390  746,751 
Federal home loan and federal reserve bank stock, at cost
14,851  14,851 
Accrued interest receivable
9,432  8,698 
Premises and equipment, net
1,758  2,072 
Derivative assets
34,442  31,104 
Other assets
20,122  15,696 
Total assets $ 7,757,152  $ 5,586,235 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing demand accounts $ 6,889,281  $ 5,133,579 
Interest bearing accounts 113,090  114,447 
Total deposits 7,002,371  5,248,026 
Subordinated debentures, net 15,834  15,831 
Accrued expenses and other liabilities
25,326  28,079 
Total liabilities 7,043,531  5,291,936 
Commitments and contingencies
Preferred stock, $0.01 par value—authorized 10,000 shares; no shares issued or outstanding at March 31, 2021 and December 31, 2020
—  — 
Class A common stock, $0.01 par value—authorized 125,000 shares; 24,820 and 18,770 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively
248  188 
Class B non-voting common stock, $0.01 par value—authorized 25,000 shares; 0 and 64 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively
—  1 
Additional paid-in capital
551,798  129,726 
Retained earnings
131,058  118,348 
Accumulated other comprehensive income 30,517  46,036 
Total shareholders’ equity 713,621  294,299 
Total liabilities and shareholders’ equity $ 7,757,152  $ 5,586,235 
See accompanying notes to unaudited consolidated financial statements
2
Table of Contents
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited) 
Three Months Ended
March 31,
  2021 2020
Interest income
Loans, including fees $ 16,597  $ 13,121 
Taxable securities 3,592  6,048 
Tax-exempt securities 1,695  48 
Other interest earning assets 1,279  724 
Dividends and other 143  121 
Total interest income 23,306  20,062 
Interest expense
Deposits 46  4,051 
Federal home loan bank advances —  227 
Subordinated debentures and other 245  306 
Total interest expense 291  4,584 
Net interest income before provision for loan losses 23,015  15,478 
Provision for loan losses —  367 
Net interest income after provision for loan losses 23,015  15,111 
Noninterest income
Mortgage warehouse fee income 954  382 
Service fees related to off-balance sheet deposits —  70 
Deposit related fees 7,124  1,766 
Gain on sale of securities, net —  1,197 
Gain on sale of loans, net —  506 
Gain on extinguishment of debt —  925 
Other income 12  85 
Total noninterest income 8,090  4,931 
Noninterest expense
Salaries and employee benefits 10,990  8,955 
Occupancy and equipment 614  907 
Communications and data processing 1,621  1,261 
Professional services 1,717  985 
Federal deposit insurance 2,296  123 
Correspondent bank charges 497  373 
Other loan expense 174  122 
Other general and administrative 1,697  1,149 
Total noninterest expense 19,606  13,875 
Income before income taxes 11,499  6,167 
Income tax (benefit) expense (1,211) 1,774 
Net income $ 12,710  $ 4,393 
Basic earnings per share $ 0.56  $ 0.24 
Diluted earnings per share $ 0.55  $ 0.23 
Weighted average shares outstanding:
Basic 22,504  18,668 
Diluted 23,010  19,117 
See accompanying notes to unaudited consolidated financial statements
3
Table of Contents
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
(Unaudited)
Three Months Ended
March 31,
  2021 2020
Net income $ 12,710  $ 4,393 
Other comprehensive income (loss):
Change in net unrealized loss on available-for-sale securities (13,434) (9,313)
Less: Reclassification adjustment for net gain included in net income —  (1,197)
Income tax effect 3,690  3,007 
Unrealized loss on available-for-sale securities, net of tax (9,744) (7,503)
Change in net unrealized (loss) gain on derivative assets (7,460) 23,466 
Less: Reclassification adjustment for net gain included in net income (504) (171)
Income tax effect 2,189  (6,667)
Unrealized (loss) gain on derivative instruments, net of tax (5,775) 16,628 
Other comprehensive (loss) income (15,519) 9,125 
Total comprehensive (loss) income $ (2,809) $ 13,518 
See accompanying notes to unaudited consolidated financial statements
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Table of Contents
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In Thousands, Except Share Data)
(Unaudited) 
Class A Common Stock Class B Common Stock Additional
Paid-In
Capital 		Retained
Earnings 		Accumulated
Other
Comprehensive
Income (Loss) 		Total
Shareholders’
Equity
Shares Amount Shares Amount
Balance at January 1, 2020 17,775,160  $ 178  892,836  $ 9  $ 132,138  $ 92,310  $ 6,401  $ 231,036 
Total comprehensive income, net of tax —  —  —  —  —  4,393  9,125  13,518 
Conversion of Class B common stock to Class A common stock 596,000  6  (596,000) (6) —  —  —  — 
Stock-based compensation —  —  —  —  199  —  —  199 
Exercise of stock options, net of shares withheld for employee taxes 134  —  —  —  (1) —  —  (1)
Balance at March 31, 2020 18,371,294  $ 184  296,836  $ 3  $ 132,336  $ 96,703  $ 15,526  $ 244,752 


Class A Common Stock Class B Common Stock Additional
Paid-In
Capital 		Retained
Earnings 		Accumulated
Other
Comprehensive
Income (Loss) 		Total
Shareholders’
Equity
Shares Amount Shares Amount
Balance at January 1, 2021 18,769,771  $ 188  64,197  $ 1  $ 129,726  $ 118,348  $ 46,036  $ 294,299 
Total comprehensive income (loss), net of tax —  —  —  —  —  12,710  (15,519) (2,809)
Net proceeds from stock issuance 5,860,858  58  —  —  423,482  —  —  423,540 
Conversion of Class B common stock to Class A common stock 64,197  1  (64,197) (1) —  —  —  — 
Stock-based compensation —  —  —  —  290  —  —  290 
Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes 125,142  1  —  —  (1,700) —  —  (1,699)
Balance at March 31, 2021 24,819,968  $ 248  —  $ —  $ 551,798  $ 131,058  $ 30,517  $ 713,621 
See accompanying notes to unaudited consolidated financial statements
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Table of Contents
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended March 31,
  2021 2020
Cash flows from operating activities
Net income $ 12,710  $ 4,393 
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 644  830 
Amortization of securities premiums and discounts, net 1,212  679 
Amortization of loan premiums and discounts and deferred loan origination fees and costs, net 250  399 
Stock-based compensation 290  199 
Provision for loan losses —  367 
Originations/purchases of loans held-for-sale (3,384,431) (1,222,816)
Proceeds from sales of loans held-for-sale 3,353,164  1,153,515 
Other gains, net (1,141) (2,885)
Other, net 891  576 
Changes in operating assets and liabilities:
Accrued interest receivable and other assets (4,119) (520)
Accrued expenses and other liabilities 469  87 
Net cash used in operating activities (20,061) (65,176)
Cash flows from investing activities
Purchases of securities available-for-sale (817,734) (98,986)
Proceeds from sale of securities available-for-sale —  14,016 
Proceeds from paydowns and maturities of securities available-for-sale 21,403  7,936 
Loan originations/purchases and payments, net 18,112  (41,254)
Proceeds from sale of loans held-for-sale previously classified as held-for-investment —  36,400 
Purchase of federal home loan and federal reserve bank stock, net —  (5)
Purchase of premises and equipment (32) (391)
(Payments for) proceeds from derivative contracts, net (8,439) 13,370 
Other, net —  128 
Net cash used in investing activities (786,690) (68,786)
Cash flows from financing activities
Net change in noninterest bearing deposits 1,755,702  401,552 
Net change in interest bearing deposits (1,357) (213,250)
Net change in federal home loan bank advances —  (18,075)
Payments made on notes payable —  (3,714)
Proceeds from common stock issuance, net 423,540  — 
Proceeds from stock option exercise 261  — 
Taxes paid related to net share settlement of equity awards (1,960) (1)
Other, net —  46 
Net cash provided by financing activities 2,176,186  166,558 
Net increase in cash and cash equivalents 1,369,435  32,596 
Cash and cash equivalents, beginning of period 2,962,087  133,604 
Cash and cash equivalents, end of period $ 4,331,522  $ 166,200 
Supplemental cash flow information:
Cash paid for interest $ 444  $ 4,928 
Income taxes paid (refunded), net (6) (22)
Supplemental noncash disclosures:
Loans held-for-investment transferred to loans held-for-sale $ —  $ 30,792 
Loans held-for-sale transferred to loans held-for-investment —  5,098 
Right-of-use assets obtained in exchange for new operating lease liabilities 71  — 
See accompanying notes to unaudited consolidated financial statements
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Table of Contents
SILVERGATE CAPITAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Nature of Business and Summary of Significant Accounting Policies
Nature of Business
The accompanying consolidated financial statements include the accounts of Silvergate Capital Corporation, a Maryland corporation and its wholly-owned subsidiary, Silvergate Bank (the “Bank”), collectively referred to as (the “Company” or “Silvergate”).
The Company’s assets consist primarily of its investment in the Bank and its primary activities are conducted through the Bank. The Bank was incorporated in 1987 and commenced business in 1988 under the California Financial Code as an industrial bank. In February 2009 the Bank converted its charter to a California commercial bank, which gave it the added authority to accept demand deposits. The Company is a registered bank holding company that is subject to supervision by the Board of Governors of the Federal Reserve (“Federal Reserve”). The Bank is subject to regulation by the California Department of Financial Protection and Innovation, Division of Financial Institutions (“DFPI”), and, as a Federal Reserve member bank since 2012, the Federal Reserve Bank of San Francisco (“FRB”). The Bank’s deposits are insured up to legal limits by the Federal Deposit Insurance Corporation (“FDIC”).
On January 26, 2021, the Company completed its underwritten public offering of 4,563,493 shares of Class A common stock at a price of $63.00 per share, including 595,238 shares of Class A common stock upon the exercise in full by the underwriters of their option to purchase additional shares. The aggregate gross proceeds of the offering were approximately $287.5 million and net proceeds to the Company were $272.4 million after deducting underwriting discounts and offering expenses.
On March 9, 2021, the Company entered into an equity distribution agreement pursuant to which the Company may issue and sell, from time to time, up to an aggregate gross sales price of $300.0 million of the Company’s shares of Class A common stock through an “at-the-market” offering program, or ATM Program. As of March 31, 2021, the Company had sold 1,297,365 shares of Class A common stock at an average price of $118.39 under the ATM Program. The transactions resulted in gross proceeds of $153.6 million and net proceeds to the Company of $151.1 million after deducting commissions and expenses.
Financial Statement Preparation and Presentation
The accompanying interim consolidated financial statements have been prepared by the Company, without an audit, in accordance with the instructions to the Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnotes necessary for a fair presentation of its consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”).
In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, consisting of only normal and recurring adjustments, necessary for a fair statement of the Company’s consolidated financial statements. These consolidated statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2020, included in the Company’s Annual Report on Form 10-K dated March 8, 2021. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.
The consolidated financial statements include the accounts of the Company and all other entities in which it has a controlling financial interest. All significant intercompany accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company include its wholly owned subsidiaries. The accounting and reporting policies of the Company are based upon GAAP and conform to predominant practices within the financial services industry.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s financial statements and the accompanying notes. We evaluate estimates on an ongoing basis including the economic impact of Coronavirus Disease 2019 (or “COVID-19”). Actual results could materially differ from those estimates.
Recently issued accounting pronouncements not yet effective
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (or “ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326) to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (or “CECL”) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held to maturity debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a
7
lessor. These amendments were initially effective for fiscal years beginning after December 15, 2019 for SEC registrants and after December 15, 2020, for Public Business Entities, or PBEs. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which finalized the delay of the effective date for smaller reporting companies, such as the Company to apply the standards related to CECL, until fiscal years beginning after December 15, 2022. For debt securities with other than temporary impairment (OTTI), the guidance will be applied prospectively and for existing purchased credit impaired (PCI) assets will be grandfathered and classified as purchased credit deteriorated (PCD) assets at the date of adoption. The asset will be grossed up for the allowance for expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit discount in interest income based on the yield such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance. For all other assets with the scope of CECL, the cumulative effect adjustment will be recognized in retained earnings as of the beginning of the first reporting period in which the guidance is effective. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The Company formed a CECL implementation committee in 2018 which prepared a project plan to migrate towards the adoption date. As part of the project plan, the Company contracted a third-party vendor to assist in the application and analysis of ASU 2016-13 as well as a third party vendor to perform an independent model validation. As part of this process, the Company has determined preliminary loan pool segmentation under CECL, as well as evaluated the key economic loss drivers for each segment. The Company operationalized an initial CECL model during the second quarter of 2019 and is running this preliminary CECL model alongside the existing incurred loss methodology. The Company intends to continue to refine and run the model until the expected adoption date on January 1, 2023. The Company continues to evaluate the effects of ASU 2016-13 on its financial statements and disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (or “ASU 2020-04”), which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the London Interbank Offered Rate (or “LIBOR”) or other interbank offered rate (reference rates) on financial reporting. In the fourth quarter of 2020 the Office of the Comptroller of the Currency, amongst others, announced that the overnight and one, three, six and twelve month USD LIBOR will be discontinued on June 30, 2023. It was originally expected that LIBOR would be discontinued by the end of 2021. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. The expedients and exceptions in this update are available to all entities starting March 12, 2020 through December 31, 2022. In January 2020, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which clarifies the scope of Topic 848 to include derivative instruments impacted by discounting transition. The Company has created a subcommittee of the Asset Liability Management Committee to address the LIBOR transition and phase-out issues. The Company has identified its LIBOR-based contracts that will be impacted by the transition away from of LIBOR, and is incorporating fallback language in negotiated contracts and incorporating non-LIBOR reference rate and/or fallback language in new contracts to prepare for these changes. The Company is evaluating the impact that ASU 2020-04 will have on those financial assets where LIBOR is used as an index rate.
Except for the updated standards discussed above, there have been no new accounting pronouncements not yet effective that have significance, or potential significance, to the Company’s consolidated financial statements.
Note 2—Securities
Trading
The Company engages in trading activities for its own account. Securities that are held principally for resale in the near term are recorded at fair value with changes in fair value included in earnings. Trading securities consists of U.S. Treasury Bills which had a fair value of $2.0 million at March 31, 2021. The carrying values of trading securities included an immaterial amount of net unrealized losses at March 31, 2021.
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Available-for-sale
The fair value of available-for-sale securities and their related gross unrealized gains and losses at the dates indicated are as follows:
  Available-for-sale securities
  Amortized Cost Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair Value
  (Dollars in thousands)
March 31, 2021
Residential mortgage-backed securities:
Government agency mortgage-backed securities $ 152,253  $ 167  $ (1,202) $ 151,218 
Government agency collateralized mortgage obligation 686,030  194  (2,844) 683,380 
Private-label collateralized mortgage obligation 18,688  530  (170) 19,048 
Commercial mortgage-backed securities:
Government agency mortgage-backed securities 49,135  2  (24) 49,113 
Government agency collateralized mortgage obligation 42,435  —  (35) 42,400 
Private-label collateralized mortgage obligation 163,993  10,504  —  174,497 
Municipal bonds:
Tax-exempt 318,132  18,801  (13) 336,920 
Taxable 14,206  1,485  (48) 15,643 
Asset backed securities:
Government sponsored student loan pools 245,716  298  (815) 245,199 
$ 1,690,588  $ 31,981  $ (5,151) $ 1,717,418 
  Available-for-sale securities
  Amortized Cost Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair Value
  (Dollars in thousands)
December 31, 2020
Residential mortgage-backed securities:
Government agency mortgage-backed securities $ 5,701  $ 18  $ (55) $ 5,664 
Government agency collateralized mortgage obligation 197,978  371  (298) 198,051 
Private-label collateralized mortgage obligation 20,544  399  (256) 20,687 
Commercial mortgage-backed securities:
Private-label collateralized mortgage obligation 164,214  18,322  —  182,536 
Municipal bonds:
Tax-exempt 246,159  24,200  —  270,359 
Taxable 15,307  695  —  16,002 
Asset backed securities:
Government sponsored student loan pools 248,848  17  (3,149) 245,716 
$ 898,751  $ 44,022  $ (3,758) $ 939,015 
There were no investment securities pledged for borrowings or for other purposes as required or permitted by law as of March 31, 2021 and December 31, 2020.
At March 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.
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Securities with unrealized losses as of the dates indicated, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:
  Available-for-sale securities
  Less than 12 Months 12 Months or More Total
  Fair Value Unrealized
Losses 		Fair Value Unrealized
Losses 		Fair Value Unrealized
Losses
  (Dollars in thousands)
March 31, 2021
Residential mortgage-backed securities:
Government agency mortgage-backed securities $ 102,614  $ (1,202) $ —  $ —  $ 102,614  $ (1,202)
Government agency collateralized mortgage obligation 478,392  (2,699) 52,294  (145) 530,686  (2,844)
Private-label collateralized mortgage obligation —  —  8,609  (170) 8,609  (170)
Commercial mortgage-backed securities:
Government agency mortgage-backed securities 18,203  (24) —  —  18,203  (24)
Government agency collateralized mortgage obligation 30,900  (35) —  —  30,900  (35)
Municipal bonds:
Tax-exempt 23,800  (13) —  —  23,800  (13)
Taxable 5,767  (48) —  —  5,767  (48)
Asset backed securities:
Government sponsored student loan pools 44,065  (80) 120,704  (735) 164,769  (815)
$ 703,741  $ (4,101) $ 181,607  $ (1,050) $ 885,348  $ (5,151)
  Available-for-sale securities
  Less than 12 Months 12 Months or More Total
  Fair Value Unrealized
Losses 		Fair Value Unrealized
Losses 		Fair Value Unrealized
Losses
  (Dollars in thousands)
December 31, 2020
Residential mortgage-backed securities:
Government agency mortgage-backed securities $ 5,165  $ (55) $ —  $ —  $ 5,165  $ (55)
Government agency collateralized mortgage obligation 120,912  (172) 56,976  (126) 177,888  (298)
Private-label collateralized mortgage obligation 290  (7) 9,950  (249) 10,240  (256)
Asset backed securities:
Government sponsored student loan pools —  —  240,825  (3,149) 240,825  (3,149)
$ 126,367  $ (234) $ 307,751  $ (3,524) $ 434,118  $ (3,758)
As indicated in the tables above, as of March 31, 2021, the Company’s investment securities had gross unrealized losses totaling approximately $5.2 million, compared to approximately $3.8 million at December 31, 2020. The Company analyzes all of its securities with an unrealized loss position. For each security, the Company analyzed the credit quality and performed a projected cash flow analysis. In analyzing the credit quality, management may consider whether the securities are issued by the federal government, its agencies or its sponsored entities, or non-governmental entities, whether downgrades by bond rating agencies have occurred, and if credit quality has deteriorated. When performing a cash flow analysis, the Company uses models that project prepayments, default rates, and loss severities on the collateral supporting the security, based on underlying loan level borrower and loan characteristics and interest rate assumptions. The unrealized losses on government sponsored student
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loan pools are due primarily to increased credit spreads since purchase. The Company believes it has an adequate amount of credit enhancement and government assurance to cover any expected losses at this time. Based on these analyses and reviews conducted by the Company, and assisted by independent third parties, the Company determined that none of its securities required an other-than-temporary impairment charge at March 31, 2021. Management continues to expect to recover the adjusted amortized cost basis of these bonds.
As of March 31, 2021, the Company had 51 securities whose estimated fair value declined 0.58% from the Company’s amortized cost; at December 31, 2020, the Company had 30 securities whose estimated fair value declined 0.86% from the Company’s amortized cost. The Company’s securities that have unrealized losses are due to widened credit spreads and changes in market interest rates since their purchase dates. Current unrealized losses are expected to recover as the securities approach their respective maturity dates. Management believes it will more than likely not be required to sell before recovery of the amortized cost basis.
There were no sales or calls of available-for-sale securities for the three months ended March 31, 2021. For the three months ended March 31, 2020 the Company received $14.0 million in proceeds and recognized a $1.2 million gain and no loss on sales and calls of securities.
There were no credit losses associated with our securities portfolio recognized in earnings for the three months ended March 31, 2021 and 2020.
The amortized cost and estimated fair value of investment securities as of the periods presented by contractual maturity are shown below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the following table, the entire outstanding balance of residential and commercial mortgage-backed securities is categorized based on the final maturity date.
March 31,
2021 		December 31,
2020
Amortized
Cost 		Fair
Value 		Amortized
Cost 		Fair
Value
(Dollars in thousands)
Available-for-sale securities
Within one year $ —  $ —  $ —  $ — 
After one year through five years —  —  —  — 
After five years through ten years 56,363  57,091  14,021  15,694 
After ten years 1,634,225  1,660,327  884,730  923,321 
Total $ 1,690,588  $ 1,717,418  $ 898,751  $ 939,015 
Note 3—Loans
The following disclosure reports the Company’s loan portfolio segments and classes. Segments are groupings of similar loans at a level in which the Company has adopted systematic methods of documentation for determining its allowance for loan and credit losses. Classes are a disaggregation of the portfolio segments. The Company’s loan portfolio segments are:
Real estate. Real estate loans includes loans for which the Company holds one-to-four family, multi-family, commercial and construction real property as collateral. Commercial real estate lending activity is typically restricted to owner-occupied properties or to investor properties that are owned by customers with a current banking relationship. The primary risks of real estate mortgage loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral and significant increases in interest rates, which may make the real estate mortgage loan unprofitable. Real estate loans also may be adversely affected by conditions in the real estate markets or in the general economy.
Commercial and industrial. Commercial and industrial loans consist of loans and lines of credit to businesses that are generally collateralized by accounts receivable, inventory, equipment, loan and lease receivables, digital currency assets such as bitcoin and other commercial assets, and may be supported by other credit enhancements such as personal guarantees. Risks may arise from differences between expected and actual cash flows and/or liquidity levels of the borrowers, as well as the type of collateral securing these loans and the reliability of the conversion thereof to cash. Currently, commercial and industrial loans consist primarily of asset based loans. In January 2020, the Company began offering a new lending product called SEN Leverage, which allows Silvergate customers to obtain U.S. dollar loans collateralized by bitcoin held at select digital currency exchanges and other custodians that are also customers of the Bank. The outstanding balance of SEN Leverage loans was $117.3 million and $77.2 million at March 31, 2021 and December 31, 2020, respectively.
Reverse mortgage and other. From 2012 to 2014, the Company purchased home equity conversion mortgage (“HECM”) loans (also known as reverse mortgage loans) which are a special type of home loan, for homeowners aged 62 years or older, that requires no monthly mortgage payments and allows the borrower to receive payments from the lender. Reverse mortgage
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loan insurance is provided by the U.S. Federal Housing Administration through the HECM program which protects lenders from losses due to non-repayment of the loans when the outstanding loan balance exceeds collateral value at the time the loan is required to be repaid. Other loans consist of consumer loans and loans secured by personal property.
Mortgage warehouse. The Company’s mortgage warehouse lending division provides short-term interim funding for single-family residential mortgage loans originated by mortgage bankers or other lenders pending the sale of such loans in the secondary market. The Company’s risk is mitigated by comprehensive policies, procedures, and controls governing this activity, partial loan funding by the originating lender, guaranties or additional monies pledged to the Company as security, and the short holding period of funded loans on the Company’s balance sheet. In addition, the loss rates of this portfolio have historically been minimal, and these loans are all subject to written purchase commitments from takeout investors or are hedged. The Company’s mortgage warehouse loans may either be held-for-investment or held-for-sale depending on the underlying contract. The Company sold approximately $0.8 million and $21.7 million of loans to participants during the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021 and December 31, 2020, gross mortgage warehouse loans were approximately $973.2 million and $963.9 million, respectively.
A summary of loans as of the periods presented are as follows:
March 31,
2021 		December 31,
2020
  (Dollars in thousands)
Real estate loans:
One-to-four family $ 171,045  $ 187,855 
Multi-family 74,003  77,126 
Commercial 287,411  301,901 
Construction 5,172  6,272 
Commercial and industrial 118,598  78,909 
Reverse mortgage and other 1,346  1,495 
Mortgage warehouse 76,014  97,903 
Total gross loans held-for-investment 733,589  751,461 
Deferred fees, net 1,717  2,206 
Total loans held-for-investment 735,306  753,667 
Allowance for loan losses (6,916) (6,916)
Total loans held-for-investment, net $ 728,390  $ 746,751 
Total loans held-for-sale(1)
$ 897,227  $ 865,961 
________________________
(1)Loans held-for-sale are comprised entirely of mortgage warehouse loans for all periods presented.
At March 31, 2021 and December 31, 2020, approximately $539.0 million and $574.5 million, respectively, of the Company’s loan portfolio was collateralized by various forms of real estate. A significant percentage of such loans are collateralized by properties located in California (64.7% and 68.8% as of March 31, 2021 and December 31, 2020, respectively) and Arizona (4.4% and 5.9% as of March 31, 2021 and December 31, 2020, respectively) with no other state greater than 5%. The Company attempts to address and mitigate concentrations of credit risk by making loans that are diversified by collateral type, placing limits on the amounts of various categories of loans relative to total Company capital, and conducting quarterly reviews of its portfolio by collateral type, geography, and other characteristics. While management believes that the collateral presently securing its portfolio and the recorded allowance for loan losses are adequate to absorb potential losses, there can be no assurances that significant deterioration in the California and Arizona real estate markets would not expose the Company to significantly greater credit risk.
Recorded investment in loans excludes accrued interest receivable, loan origination fees, net and unamortized premium or discount, net due to immateriality. Accrued interest on loans held-for-investment totaled approximately $3.1 million and $2.7 million and deferred fees totaled approximately $1.7 million and $2.2 million at March 31, 2021 and December 31, 2020, respectively.
Allowance for Loan Losses
At March 31, 2021, the Company’s total allowance for loan losses remained flat at $6.9 million, compared to December 31, 2020. The overall level of the allowance was based on Silvergate’s historically strong credit quality and minimal loan charge-offs, and the loan-to-value ratios in the low- to mid-50% range, based on last required appraisal value, in the Company's commercial, multi-family and one-to-four family real estate loans as of March 31, 2021. In addition, during the
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three months ended March 31, 2021, the Company updated the allowance for loan loss model to remove no longer relevant historical loss data for the commercial and industrial loan segment, reflecting the growth of digital collateralized loans that are now the majority of the loan segment balance. In addition, the Company added a COVID-19 loan modification qualitative factor adjustment to the commercial and one-to-four family real estate loan segments to recognize the modifications granted over the previous twelve months and additional risks of default in these loan segments.
The following tables present the allocation of the allowance for loan losses, as well as the activity in the allowance by loan class, and recorded investment in loans held-for-investment as of and for the periods presented:
  Three Months Ended March 31, 2021
  One-to
-Four
Family 		Multi-
Family 		Commercial
Real Estate 		Construction Commercial
and
Industrial 		Reverse
Mortgage
and Other 		Mortgage
Warehouse 		Total
  (Dollars in thousands)
Balance, December 31, 2020 $ 1,245  $ 878  $ 1,810  $ 590  $ 1,931  $ 39  $ 423  $ 6,916 
Charge-offs —  —  —  —  —  —  —  — 
Recoveries —  —  —  —  —  —  —  — 
Provision for loan losses 389  (50) 1,441  (97) (1,571) (21) (91) — 
Balance, March 31, 2021 $ 1,634  $ 828  $ 3,251  $ 493  $ 360  $ 18  $ 332  $ 6,916 
  Three Months Ended March 31, 2020
  One-to
-Four
Family 		Multi-
Family 		Commercial
Real Estate 		Construction Commercial and 
Industrial 		Reverse
Mortgage
and Other 		Mortgage
Warehouse 		Total
  (Dollars in thousands)
Balance, December 31, 2019 $ 2,051  $ 653  $ 2,791  $ 96  $ 312  $ 38  $ 250  $ 6,191 
Charge-offs —  —  —  —  —  —  —  — 
Recoveries —  —  —  —  —  —  —  — 
Provision for loan losses (80) 36  166  162  114  1  (32) 367 
Balance, March 31, 2020 $ 1,971  $ 689  $ 2,957  $ 258  $ 426  $ 39  $ 218  $ 6,558 
  March 31, 2021
  One-to
-Four
Family 		Multi-
Family 		Commercial
Real Estate 		Construction Commercial
and
Industrial 		Reverse
Mortgage
and Other 		Mortgage
Warehouse 		Total
  (Dollars in thousands)
Amount of allowance attributed to:
Specifically evaluated impaired loans $ 12  $ —  $ —  $ —  $ —  $ 7  $ —  $ 19 
General portfolio allocation 1,622  828  3,251  493  360  11  332  6,897 
Total allowance for loan losses
$ 1,634  $ 828  $ 3,251  $ 493  $ 360  $ 18  $ 332  $ 6,916 
Loans evaluated for impairment:
Specifically evaluated $ 5,141  $ —  $ 9,830  $ —  $ 237  $ 876  $ —  $ 16,084 
Collectively evaluated 165,904  74,003  277,581  5,172  118,361  470  76,014  717,505 
Total gross loans held-for-investment
$ 171,045  $ 74,003  $ 287,411  $ 5,172  $ 118,598  $ 1,346  $ 76,014  $ 733,589 
  December 31, 2020
  One-to
-Four
Family 		Multi-
Family 		Commercial
Real Estate 		Construction Commercial
and
Industrial 		Reverse
Mortgage
and Other 		Mortgage
Warehouse 		Total
  (Dollars in thousands)
Amount of allowance attributed to:
Specifically evaluated impaired loans
$ 11  $ —  $ —  $ —  $ —  $ 29  $ —  $ 40 
General portfolio allocation
1,234  878  1,810  590  1,931  10  423  6,876 
Total allowance for loan losses
$ 1,245  $ 878  $ 1,810  $ 590  $ 1,931  $ 39  $ 423  $ 6,916 
Loans evaluated for impairment:
Specifically evaluated
$ 5,780  $ —  $ 9,722  $ —  $ 274  $ 869  $ —  $ 16,645 
Collectively evaluated
182,075  77,126  292,179  6,272  78,635  626  97,903  734,816 
Total gross loans held-for-investment
$ 187,855  $ 77,126  $ 301,901  $ 6,272  $ 78,909  $ 1,495  $ 97,903  $ 751,461 
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Impaired Loans
The following tables provide a summary of the Company’s investment in impaired loans as of and for the periods presented:
  March 31, 2021
  Unpaid
Principal
Balance 		Recorded
Investment 		Related
Allowance
  (Dollars in thousands)
With no related allowance recorded:
Real estate loans:
One-to-four family $ 5,742  $ 5,077  $ — 
Commercial 9,830  9,830  — 
Commercial and industrial 237  237  — 
Reverse mortgage and other 801  800  — 
16,610  15,944  — 
With an allowance recorded:
Real estate loans:
One-to-four family 64  64  12 
Reverse mortgage and other 76  76  7 
140  140  19 
Total impaired loans $ 16,750  $ 16,084  $ 19 
December 31, 2020
  Unpaid
Principal
Balance 		Recorded
Investment 		Related
Allowance
  (Dollars in thousands)
With no related allowance recorded:
Real estate loans:
One-to-four family $ 6,432  $ 5,716  $ — 
Commercial 9,723  9,722  — 
Commercial and industrial 274  274  — 
Reverse mortgage and other 523  523  — 
16,952  16,235  — 
With an allowance recorded:
Real estate loans:
One-to-four family 64  64  11 
Reverse mortgage and other 346  346  29 
410  410  40 
Total impaired loans $ 17,362  $ 16,645  $ 40 
14
Three Months Ended March 31,
  2021 2020
  Average
Recorded
Investment 		Interest
Income
Recognized 		Average
Recorded
Investment 		Interest
Income
Recognized
  (Dollars in thousands)
With no related allowance recorded:
Real estate loans:
One-to-four family $ 4,979  $ 77  $ 3,731  $ 26 
Commercial 9,795  128  1,941  21 
Commercial and industrial 249  5  2,329  42 
Reverse mortgage and other 616  —  511  — 
15,639  210  8,512  89 
With an allowance recorded:
Real estate loans:
One-to-four family 64  1  66  1 
Reverse mortgage and other 258  —  338  — 
322  1  404  1 
Total impaired loans $ 15,961  $ 211  $ 8,916  $ 90 
For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs. Cash basis interest income is not materially different than interest income recognized.
Nonaccrual and Past Due Loans
Nonperforming loans include individually evaluated impaired loans, loans for which the accrual of interest has been discontinued and loans 90 days or more past due and still accruing interest.
The following tables present by loan class the aging analysis based on contractual terms, nonaccrual loans, and the Company’s recorded investment in loans held-for-investment as of the periods presented:
  March 31, 2021
30-59
Days
Past Due 		60-89
Days
Past Due 		Greater
than 89
Days
Past Due 		Total
Past Due 		Current Total Nonaccruing Loans
Receivable > 89
Days and
Accruing
  (Dollars in thousands)
Real estate loans:
One-to-four family $ 2,773  $ 2,187  $ 2,834  $ 7,794  $ 163,251  $ 171,045  $ 4,457  $ — 
Multi-family —  —  —  —  74,003  74,003  —  — 
Commercial —  —  —  —  287,411  287,411  —  — 
Construction —  —  —  —  5,172  5,172  —  — 
Commercial and industrial —  —  —  —  118,598  118,598  —  — 
Reverse mortgage and other —  —  —  —  1,346  1,346  876  — 
Mortgage warehouse —  —  —  —  76,014  76,014  —  — 
Total gross loans held-for-investment $ 2,773  $ 2,187  $ 2,834  $ 7,794  $ 725,795  $ 733,589  $ 5,333  $ — 
15
  December 31, 2020
  30-59
Days
Past Due 		60-89
Days
Past Due 		Greater
than 89
Days
Past Due 		Total
Past Due 		Current Total Nonaccruing Loans
Receivable > 89
Days and
Accruing
  (Dollars in thousands)
Real estate loans:
One-to-four family $ 992  $ 85  $ 3,820  $ 4,897  $ 182,958  $ 187,855  $ 4,113  $ — 
Multi-family 206  —  —  206  76,920  77,126  —  — 
Commercial —  —  —  —  301,901  301,901  —  — 
Construction —  —  —  —  6,272  6,272  —  — 
Commercial and industrial —  —  —  —  78,909  78,909  —  — 
Reverse mortgage and other —  —  —  —  1,495  1,495  869  — 
Mortgage warehouse —  —  —  —  97,903  97,903  —  — 
Total gross loans held-for-investment $ 1,198  $ 85  $ 3,820  $ 5,103  $ 746,358  $ 751,461  $ 4,982  $ — 
Troubled Debt Restructurings
A loan is identified as a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulties and, for economic or legal reasons related to these difficulties, the Company grants a concession to the borrower in the restructuring that it would not otherwise consider. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. The Company has granted a concession when, as a result of the restructuring, it does not expect to collect all amounts due or within the time periods originally due under the original contract, including one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a temporary forbearance with regard to the payment of principal or interest. All troubled debt restructurings are reviewed for potential impairment. Generally, a nonaccrual loan that is restructured remains on nonaccrual status for a minimum period of six months to demonstrate that the borrower can perform under the restructured terms. If the borrower’s performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan. Loans classified as TDRs are reported as impaired loans.
As of March 31, 2021 and December 31, 2020, the Company had a recorded investment in TDRs of $1.5 million and $1.5 million, respectively. The Company has allocated $11,000 of specific allowance for those loans at March 31, 2021 and $11,000 December 31, 2020. The Company has not committed to lend additional amounts to these TDRs. No loans were modified as TDRs during the three months ended March 31, 2021 or 2020.
A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. There were no loans modified as TDRs for which there was a payment default within twelve months during the three months ended March 31, 2021 or 2020. There was no provision for loan loss or charge-offs for TDR’s that subsequently defaulted during the three months ended March 31, 2021 or 2020.
COVID-19 Related Modifications
In March 2020, Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs. In December 2020, CARES Act was extended to allow eligible loan modifications until the earlier of January 1, 2022 or the date that is 60 days after the termination date of the national emergency. In accordance with interagency guidance issued in April 2020, short-term modifications made to a borrower affected by the COVID-19 pandemic and governmental shutdown orders, such as payment deferrals, fee waivers and extensions of repayment terms, do not need to be identified as TDRs if the loans were current at the time a modification plan was implemented. The Company elected to adopt the provisions of the CARES Act for modifications that meet the requirements described above.
In April 2020, the Company implemented a short-term loan modification program for customers impacted financially by the COVID-19 pandemic to provide temporary relief to certain borrowers who meet the program’s qualifications. The program was offered to borrowers to modify their existing loans to temporarily defer principal and/or interest payments for a specified period of time, extend loan maturity dates and/or waive certain loan covenants. Deferred payments may be extended for continued hardship, on a case by case basis, where COVID-19 related issues continue to persist. Due to the fluid nature of COVID-19, this program has been evolving in order to provide maximum relief to bank borrowers. The majority of short-term loan modifications for commercial real estate loan borrowers consist of deferred payments which may include principal, interest
16
and escrow. Deferred interest is capitalized to the loan balance and deferred principal is added to the maturity or payoff date. For one-to-four family residential real estate loans, the majority of short-term modifications consist of deferring full monthly payment of principal, interest and escrow, with deferred payments due at maturity or payoff of the loan. Loans qualifying for these modifications are not required to be reported as a TDR, delinquent, nonaccrual, impaired or criticized solely as a result of a COVID-19 loan modification for the months of payment deferrals. Borrowers considered current are those that are less than 30 days past due on their modified contractual payments. None of the modified loans met the criteria of a TDR under the CARES Act or the related interagency statement.
As of March 31, 2021, loans representing $65.3 million in loan balances, or 8.9% of total gross loans held-for-investment, with the majority of the balance consisting of $40.0 million of commercial real estate loans in the hospitality sector, were still under modification, deferring a portion or all of the contractual payments.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. This analysis typically includes larger, nonhomogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:
Pass:
  Loans in all classes that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.
Special mention:
  Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard:
  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful:
  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss:
  Credits rated as loss are charged-off. Management has no expectation of the recovery of any payments in respect of credits rated as loss.
The following tables present by portfolio class the Company’s internal risk grading system as well as certain other information concerning the credit quality of the Company’s recorded investment in loans held-for-investment as of the periods presented. No assets were classified as loss or doubtful during the periods presented.
  Credit Risk Grades
  Pass Special Mention Substandard Doubtful Total
  (Dollars in thousands)
March 31, 2021
Real estate loans:
One-to-four family $ 163,313  $ 3,275  $ 4,457  $ —  $ 171,045 
Multi-family 74,003  —  —  —  74,003 
Commercial 265,135  14,402  7,874  —  287,411 
Construction 5,172  —  —  —  5,172 
Commercial and industrial 118,361  —  237  —  118,598 
Reverse mortgage and other 470  —  876  —  1,346 
Mortgage warehouse 76,014  —  —  —  76,014 
Total gross loans held-for-investment
$ 702,468  $ 17,677  $ 13,444  $ —  $ 733,589 
17
  Credit Risk Grades
  Pass Special Mention Substandard Doubtful Total
  (Dollars in thousands)
December 31, 2020
Real estate loans:
One-to-four family $ 180,458  $ 3,284  $ 4,113  $ —  $ 187,855 
Multi-family 77,126  —  —  —  77,126 
Commercial 288,309  5,825  7,767  —  301,901 
Construction 6,272  —  —  —  6,272 
Commercial and industrial 78,635  —  274  —  78,909 
Reverse mortgage and other 626  —  869  —  1,495 
Mortgage warehouse 97,903  —  —  —  97,903 
Total gross loans held-for-investment
$ 729,329  $ 9,109  $ 13,023  $ —  $ 751,461 
Related Party Loans
The Company had related party loans with an outstanding balance of $5.5 million and $5.0 million as of March 31, 2021 and December 31, 2020, respectively. During the three months ended March 31, 2021, the Company advanced $2.0 million of related party loans and received $1.5 million in principal payments.
Note 4—FHLB Advances and Other Borrowings
Federal Home Loan Bank (“FHLB”) Advances
The following table sets forth certain information on our FHLB advances during the period presented:
Three Months Ended
March 31, 2021 		Year Ended
December 31, 2020
  (Dollars in thousands)
Amount outstanding at period-end —  — 
Weighted average interest rate at period-end —  — 
Maximum month-end balance during the period —  $ 360,000 
Average balance outstanding during the period —  $ 68,522 
Weighted average interest rate during the period —  0.50  %
FHLB advances are secured with eligible collateral consisting of certain real estate loans. Advances from the FHLB are subject to the FHLB’s collateral and underwriting requirements, and as of March 31, 2021 and December 31, 2020, were limited in the aggregate to 35% of the Company’s total assets. Loans with carrying values of approximately $1.4 billion and $1.5 billion were pledged to the FHLB as of March 31, 2021 and December 31, 2020, respectively. Unused borrowing capacity based on the lesser of the percentage of total assets and pledged collateral was approximately $866.7 million and $893.0 million as of March 31, 2021 and December 31, 2020, respectively.
FRB Advances
The Company is also approved to borrow through the Discount Window of the Federal Reserve Bank of San Francisco on a collateralized basis without any fixed dollar limit. Loans with a carrying value of approximately $6.2 million and $6.3 million were pledged to the FRB at March 31, 2021 and December 31, 2020, respectively. The Company’s borrowing capacity under the Federal Reserve’s discount window program was approximately $5.1 million and $4.8 million as of March 31, 2021 and December 31, 2020, respectively. At March 31, 2021 and December 31, 2020, there were no borrowings outstanding under any of these lines.
Federal Funds Purchased
The Company may borrow up to an aggregate $68.0 million, overnight on an unsecured basis, from three of its correspondent banks. Access to these funds is subject to liquidity availability, market conditions and any negative material change in the Company’s credit profile. As of March 31, 2021 and December 31, 2020, the Company had no outstanding balance of federal funds purchased.
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Note 5—Subordinated Debentures, Net
A trust formed by the Company issued $12.5 million of floating rate trust preferred securities in July 2001 as part of a pooled offering of such securities. The Company issued subordinated debentures to the trust in exchange for its proceeds from the offering. The debentures and related accrued interest represent substantially all of the assets of the trust. The subordinated debentures bear interest at six-month LIBOR plus 375 basis points, which adjusts every six months in January and July of each year. Interest is payable semiannually. At March 31, 2021, the interest rate for the Company’s next scheduled payment was 3.98%, based on six-month LIBOR of 0.23%. On any January 25 or July 25 the Company may redeem the 2001 subordinated debentures at 100% of principal amount plus accrued interest. The 2001 subordinated debentures mature on July 25, 2031.
A second trust formed by the Company issued $3.0 million of trust preferred securities in January 2005 as part of a pooled offering of such securities. The Company issued subordinated debentures to the trust in exchange for its proceeds from the offering. The debentures and related accrued interest represent substantially all of the assets of the trust. The subordinated debentures bear interest at three-month LIBOR plus 185 basis points, which adjusts every three months. Interest is payable quarterly. At March 31, 2021, the interest rate for the Company’s next scheduled payment was 2.03%, based on three-month LIBOR of 0.18%. On the 15th day of any March, June, September, or December, the Company may redeem the 2005 subordinated debentures at 100% of principal amount plus accrued interest. The 2005 subordinated debentures mature on March 15, 2035.
The Company also retained a 3% minority interest in each of these trusts which is included in subordinated debentures. The balance of the equity in the trusts is comprised of mandatorily redeemable preferred securities. The subordinated debentures may be included in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations. The Company has the right to defer interest payments on the subordinated debentures from time to time for a period not to exceed five years.
The outstanding balance of the subordinated debentures was $15.8 million, net of $0.1 million unamortized debt issuance cost as of March 31, 2021 and $15.8 million, net of $0.1 million unamortized debt issuance costs as of December 31, 2020.
Note 6—Derivative and Hedging Activities
The Company is exposed to certain risks relating to its ongoing business operations. The Company utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the derivative does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual derivative agreements. In accordance with accounting guidance, changes in the fair value of derivatives designated and that qualify as cash flow hedges are initially recorded in other comprehensive income (“OCI”), reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. For cash flow and fair value hedges, the initial fair value of hedge components excluded from the assessment of effectiveness is recognized in earnings under a systematic and rational method over the life of the hedging instrument and is presented in the same income statement line item as the earnings effect of the hedged item. Any difference between the change in the fair value of the hedge components excluded from the assessment of effectiveness and the amounts recognized in earnings is recorded as a component of other comprehensive income. For a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. The changes in fair value of the hedged item is recorded as a basis adjustment to the hedged assets or liabilities. The amount included as basis adjustments would be reclassified to current earnings on a straight-line basis over the original life of the hedged item should the hedges no longer be considered effective.
Interest rate swaps. In 2020, the Company entered into two pay-fixed/receive floating rate interest rate swaps (the “Swap Agreements”) for a notional amount of $14.3 million that were designated as fair value hedges of certain available-for-sale securities. The Swap Agreements were determined to be fully effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The Swap Agreements are based on three-month LIBOR and expire in 2030 and 2031. The Company expects the Swap Agreements to remain effective during the remaining term of the Swap Agreements. The Company may receive collateral or may be required to post collateral based upon the market valuation. As of March 31, 2021, the Company held $0.3 million in cash collateral posted by the counterparty.
Interest rate floors. In 2019, the Company entered into 20 interest rate floor agreements (the “Floor Agreements”) for a total notional amount of $400.0 million to hedge cash flow receipts on cash and securities or loans, if needed. The original Floor Agreements expire on various dates in April 2024 and July 2029. The Company utilizes one-month LIBOR and three-month LIBOR interest rate floors as hedges against adverse changes in cash flows on the designated cash, securities or loans attributable to fluctuations in the federal funds rate or three-month LIBOR below 2.50% or 2.25%, as applicable. The Floor Agreements were determined to be fully effective during all periods presented and, as such, no amount of ineffectiveness has
19
been included in net income. The upfront fee paid to the counterparty in entering into these Floor Agreements was approximately $20.8 million. During the three months ended March 31, 2020, the Company sold $200.0 million of its total $400.0 million notional amount of interest rate floors for $13.0 million, which resulted in a net gain of $8.4 million, to be recognized over the weighted average remaining term of 4.1 years. The remaining agreements are one-month LIBOR floors with a strike price of 2.25% and expire in July 2029.
Interest rate caps. In March 2021, the Company entered into 13 interest rate cap agreements with a total notional amount of $205.0 million (“Federal Funds Rate Cap Agreements”). The Federal Funds Rate Cap Agreements are designated as fair value hedges against changes in the fair value of certain fixed rate tax-exempt municipal bonds. The Company utilizes the interest rate caps as hedges against adverse changes in interest rates on the designated securities attributable to fluctuations in the federal funds rate above 2.00%, as applicable. An increase in the benchmark interest rate hedged reduces the fair value of these assets. The Federal Funds Rate Cap Agreements expire on various dates from 2027 to 2032. The upfront fee paid to the counterparties was approximately $9.5 million. The Company expects the Federal Funds Rate Cap Agreements to remain effective during the remaining term of the respective agreements.
In 2012, the Company entered into a $12.5 million and a $3.0 million notional forward interest rate cap agreement (the “LIBOR Cap Agreements”) to hedge its variable rate subordinated debentures. The LIBOR Cap Agreements expire July 25, 2022 and March 15, 2022, respectively. The Company utilizes interest rate caps as hedges against adverse changes in cash flows on the designated preferred trusts attributable to fluctuations in three-month LIBOR beyond 0.50% for the $3.0 million subordinated debenture and six-month LIBOR beyond 0.75% for the $12.5 million subordinated debenture. The Cap Agreements were determined to be fully effective during all periods presented and, as such, no amount of ineffectiveness has been included in net income. The upfront fee paid to the counterparty in entering into these LIBOR Cap Agreements was approximately $2.5 million.
The table below presents the fair value of the Company’s derivative financial instruments as well as the classification within the consolidated statements of financial condition.
  March 31,
2021 		December 31,
2020
  Balance Sheet
Location 		Fair Value Balance Sheet
Location 		Fair Value
(Dollars in thousands)
Derivatives designated as hedging instruments:
Cash flow hedge interest rate floor Derivative assets $ 22,451  Derivative assets $ 30,766 
Cash flow hedge interest rate cap Derivative assets —  Derivative assets — 
Fair value hedge interest rate swap Derivative assets 1,410