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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, 2020
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 and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 5, 2020, the registrant had 18,371,294 shares of Class A voting common stock and 296,836 shares of Class B non-voting common stock outstanding.

Table of Contents

SILVERGATE CAPITAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
  
  
  
  
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
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,
2020
 
December 31,
2019
ASSETS
 
 
 
 
Cash and due from banks
 
$
2,778

 
$
1,579

Interest earning deposits in other banks
 
163,422

 
132,025

Cash and cash equivalents
 
166,200

 
133,604

Securities available-for-sale, at fair value
 
964,317

 
897,766

Loans held-for-sale, at lower of cost or fair value
 
435,023

 
375,922

Loans held-for-investment, net of allowance for loan losses of $6,558 and $6,191 at March 31, 2020 and December 31, 2019, respectively
 
679,416

 
664,622

Federal home loan and federal reserve bank stock, at cost
 
10,269

 
10,264

Accrued interest receivable
 
6,344

 
5,950

Other real estate owned, net
 
—

 
128

Premises and equipment, net
 
3,406

 
3,259

Operating lease right-of-use assets
 
4,210

 
4,571

Derivative assets
 
33,506

 
23,440

Low income housing tax credit investment
 
927

 
954

Other assets
 
7,090

 
7,647

Total assets
 
$
2,310,708

 
$
2,128,127

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Deposits:
 
 
 
 
Noninterest bearing demand accounts
 
$
1,745,219

 
$
1,343,667

Interest bearing accounts
 
257,738

 
470,987

Total deposits
 
2,002,957

 
1,814,654

Federal home loan bank advances
 
30,000

 
49,000

Notes payable
 
—

 
3,714

Subordinated debentures, net
 
15,820

 
15,816

Operating lease liabilities
 
4,515

 
4,881

Accrued expenses and other liabilities
 
12,664

 
9,026

Total liabilities
 
2,065,956

 
1,897,091

Commitments and contingencies
 

 

Preferred stock, $0.01 par value—authorized 10,000 shares; no shares issued or outstanding at March 31, 2020 and December 31, 2019
 
—

 
—

Class A common stock, $0.01 par value—authorized 125,000 shares; 18,371 and 17,775 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively
 
184

 
178

Class B non-voting common stock, $0.01 par value—authorized 25,000 shares; 297 and 893 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively
 
3

 
9

Additional paid-in capital
 
132,336

 
132,138

Retained earnings
 
96,703

 
92,310

Accumulated other comprehensive income
 
15,526

 
6,401

Total shareholders’ equity
 
244,752

 
231,036

Total liabilities and shareholders’ equity
 
$
2,310,708

 
$
2,128,127


See accompanying notes to unaudited consolidated financial statements

3

SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited) 
 
 
Three Months Ended
March 31,
 
 
2020
 
2019
Interest income
 
 
 
 
Loans, including fees
 
$
13,121

 
$
13,111

Taxable securities
 
6,048

 
3,033

Tax-exempt securities
 
48

 
—

Other interest earning assets
 
724

 
3,797

Dividends and other
 
121

 
122

Total interest income
 
20,062

 
20,063

Interest expense
 
 
 
 
Deposits
 
4,051

 
341

Federal home loan bank advances
 
227

 
—

Notes payable and other
 
36

 
142

Subordinated debentures
 
270

 
264

Total interest expense
 
4,584

 
747

Net interest income before provision for loan losses
 
15,478

 
19,316

Provision for loan losses
 
367

 
267

Net interest income after provision for loan losses
 
15,111

 
19,049

Noninterest income
 
 
 
 
Mortgage warehouse fee income
 
382

 
366

Service fees related to off-balance sheet deposits
 
70

 
759

Deposit related fees
 
1,766

 
987

Gain on sale of securities, net
 
1,197

 
—

Gain on sale of loans, net
 
506

 
189

Gain on sale of branch, net
 
—

 
5,509

Gain on extinguishment of debt
 
925

 
—

Other income
 
85

 
61

Total noninterest income
 
4,931

 
7,871

Noninterest expense
 
 
 
 
Salaries and employee benefits
 
8,955

 
8,765

Occupancy and equipment
 
907

 
873

Communications and data processing
 
1,261

 
1,037

Professional services
 
985

 
1,445

Federal deposit insurance
 
123

 
175

Correspondent bank charges
 
373

 
279

Other loan expense
 
122

 
125

Other general and administrative
 
1,149

 
787

Total noninterest expense
 
13,875

 
13,486

Income before income taxes
 
6,167

 
13,434

Income tax expense
 
1,774

 
3,998

Net income
 
$
4,393

 
$
9,436

Basic earnings per share
 
$
0.24

 
$
0.53

Diluted earnings per share
 
$
0.23

 
$
0.52

Weighted average shares outstanding:
 
 
 
 
Basic
 
18,668

 
17,818

Diluted
 
19,117

 
18,258


See accompanying notes to unaudited consolidated financial statements

4

SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
 
 
Three Months Ended
March 31,
 
 
2020
 
2019
Net income
 
$
4,393

 
$
9,436

Other comprehensive income (loss):
 
 
 
 
Change in net unrealized (loss) gain on available-for-sale securities
 
(9,313
)
 
663

Less: Reclassification adjustment for net gains included in net income
 
(1,197
)
 
—

Income tax effect
 
3,007

 
(200
)
Unrealized (loss) gain on available-for-sale securities, net of tax
 
(7,503
)
 
463

Change in net unrealized gain (loss) on derivative assets
 
23,466

 
(46
)
Less: Reclassification adjustment for net gains included in net income
 
(171
)
 
—

Income tax effect
 
(6,667
)
 
19

Unrealized gain (loss) on derivative instruments, net of tax
 
16,628

 
(27
)
Other comprehensive income
 
9,125

 
436

Total comprehensive income
 
$
13,518

 
$
9,872


See accompanying notes to unaudited consolidated financial statements


5

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, 2019
 
16,628,941

 
$
166

 
1,189,548

 
$
12

 
$
125,665

 
$
67,464

 
$
(2,061
)
 
$
191,246

Total comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
—

 
9,436

 
436

 
9,872

Stock-based compensation
 
—

 
—

 
—

 
—

 
19

 
—

 
—

 
19

Balance at March 31, 2019
 
16,628,941

 
166

 
1,189,548

 
12

 
125,684

 
76,900

 
(1,625
)
 
201,137

 
 
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


See accompanying notes to unaudited consolidated financial statements

6

SILVERGATE CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Cash flows from operating activities
 
 
 
 
Net income
 
$
4,393

 
$
9,436

 Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
830

 
255

Amortization of securities premiums and discounts, net
 
679

 
130

Amortization of loan premiums and discounts and deferred loan origination fees and costs, net
 
399

 
(102
)
Stock-based compensation
 
199

 
19

Deferred income tax expense (benefit)
 
487

 
(6
)
Provision for loan losses
 
367

 
267

Gain on sale of loans, net
 
(506
)
 
(189
)
Gain on sale of securities, net
 
(1,197
)
 
—

Originations/purchases of loans held-for-sale
 
(1,222,816
)
 
(622,318
)
Proceeds from sales of loans held-for-sale
 
1,153,515

 
606,240

Gain on sale of branch, net
 
—

 
(5,509
)
Gain on extinguishment of debt
 
(925
)
 
—

Other, net
 
(168
)
 
354

Changes in operating assets and liabilities:
 
 
 
 
Accrued interest receivable and other assets
 
(520
)
 
(142
)
Accrued expenses and other liabilities
 
87

 
398

Net cash used in operating activities
 
(65,176
)
 
(11,167
)
Cash flows from investing activities
 
 
 
 
Purchases of securities available-for-sale
 
(98,986
)
 
(110,319
)
Proceeds from paydowns and maturities of securities available-for-sale
 
7,936

 
5,498

Proceeds from sale of securities available-for-sale
 
14,016

 
—

Loan originations/purchases and payments, net
 
(41,254
)
 
(12,790
)
Proceeds from sale of loans held-for-sale previously classified as held-for-investment
 
36,400

 
11,622

Purchase of federal home loan and federal reserve bank stock, net
 
(5
)
 
(603
)
Proceeds from sale of other real estate owned
 
128

 
—

Purchase of premises and equipment
 
(391
)
 
(435
)
Proceeds from sale of branch, net of cash
 
—

 
32,555

Proceeds from (purchases of) derivative contracts, net
 
13,370

 
(2,555
)
Other, net
 
—

 
2

Net cash used in investing activities
 
(68,786
)
 
(77,025
)
Cash flows from financing activities
 
 
 
 
Net change in noninterest bearing deposits
 
401,552

 
(86,897
)
Net change in interest bearing deposits
 
(213,250
)
 
(22,893
)
Net change in federal home loan bank advances
 
(18,075
)
 
—

Net change in other borrowings
 
—

 
57,135

Payments made on notes payable
 
(3,714
)
 
(571
)
Taxes paid related to net share settlement of equity awards
 
(1
)
 
—

Other, net
 
46

 
22

Net cash provided by (used in) financing activities
 
166,558

 
(53,204
)
Net increase (decrease) in cash and cash equivalents
 
32,596

 
(141,396
)
Cash and cash equivalents, beginning of year
 
133,604

 
674,420

Cash and cash equivalents, end of year
 
$
166,200

 
$
533,024


See accompanying notes to unaudited consolidated financial statements

7

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 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. At the same time, the Company also became a registered bank holding company under the federal Bank Holding Company Act. The Bank became a member of the Federal Reserve System in December 2012. The Bank is subject to regulation by the California Department of Business Oversight (“DBO”), and the Federal Reserve Bank of San Francisco (“FRB”), and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to applicable legal limits.
On November 15, 2018, the Company and the Bank entered into a purchase and assumption agreement to sell the Bank’s retail branch located in San Marcos, California and business loan portfolio to HomeStreet Bank. The Company completed the sale in March 2019, which included the reduction of $115.4 million in loans and $74.5 million in deposits and resulted in a pre-tax gain on sale of $5.5 million.
Financial Statement Preparation and Presentation
The accompanying interim consolidated financial statements have been prepared by the Company, without 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 presentation of the Company’s consolidated financial statements as of March 31, 2020, however uncertainty over the ultimate impact that the novel coronavirus disease, (or “COVID-19”) will have on the economy generally, and on the Company’s business in particular, makes any estimates and assumptions as of March 31, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19.
These consolidated statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K dated March 10, 2020. 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. 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 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 (Topic326), 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

8

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 date of adoption. The Company continues to evaluate the effects of ASU 2016-13 on its financial statements and disclosures and whether or not to early adopt the guidance.
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, which currently is expected to 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. The Company is evaluating the impact that ASU 2020-04 will have on those financial assets where LIBOR is used as an index rate.
With the exception of 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
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, 2020
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Government agency mortgage-backed securities
 
$
682

 
$
34

 
$
—

 
$
716

Government agency collateralized mortgage obligation
 
236,334

 
709

 
(863
)
 
236,180

Private-label collateralized mortgage obligation
 
25,844

 
—

 
(3,462
)
 
22,382

Commercial mortgage-backed securities:
 
 
 
 
 
 
 
 
Private-label collateralized mortgage obligation
 
364,543

 
10,913

 
(806
)
 
374,650

Municipal bonds
 
85,268

 
7,388

 
—

 
92,656

Asset backed securities:
 
 
 
 
 
 
 
 
Government sponsored student loan pools
 
256,449

 
—

 
(18,716
)
 
237,733

 
 
$
969,120

 
$
19,044

 
$
(23,847
)
 
$
964,317


9

 
 
Available-for-sale securities
 
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
December 31, 2019
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Government agency mortgage-backed securities
 
$
769

 
$
32

 
$
—

 
$
801

Government agency collateralized mortgage obligation
 
242,203

 
552

 
(837
)
 
241,918

Private-label collateralized mortgage obligation
 
26,346

 
352

 
(198
)
 
26,500

Commercial mortgage-backed securities:
 
 
 
 
 
 
 
 
Private-label collateralized mortgage obligation
 
364,719

 
12,474

 
(177
)
 
377,016

Asset backed securities:
 
 
 
 
 
 
 
 
Government sponsored student loan pools
 
258,022

 
—

 
(6,491
)
 
251,531

 
 
$
892,059

 
$
13,410

 
$
(7,703
)
 
$
897,766

There were no investment securities pledged for borrowings or for other purposes as required or permitted by law as of March 31, 2020 and December 31, 2019.
At March 31, 2020, the total fair value of securities issued by six individual issuers, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity was $343.0 million.
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, 2020
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Government agency collateralized mortgage obligation
 
134,490

 
(820
)
 
4,530

 
(43
)
 
139,020

 
(863
)
Private-label collateralized mortgage obligation
 
10,325

 
(481
)
 
12,057

 
(2,981
)
 
22,382

 
(3,462
)
Commercial mortgage-backed securities:
Private-label collateralized mortgage obligation
 
41,720

 
(806
)
 
—

 
—

 
41,720

 
(806
)
Asset backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Government sponsored student loan pools
 
22,615

 
(1,772
)
 
215,117

 
(16,944
)
 
237,732

 
(18,716
)
 
 
$
209,150

 
$
(3,879
)
 
$
231,704

 
$
(19,968
)
 
$
440,854

 
$
(23,847
)

10

 
 
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, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Government agency collateralized mortgage obligation
 
$
143,633

 
$
(785
)
 
$
15,794

 
$
(52
)
 
$
159,427

 
$
(837
)
Private-label collateralized mortgage obligation
 
59

 
(1
)
 
15,168

 
(197
)
 
15,227

 
(198
)
Commercial mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Private-label collateralized mortgage obligation
 
13,142

 
(177
)
 
—

 
—

 
13,142

 
(177
)
Asset backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Government sponsored student loan pools
 
62,938

 
(1,317
)
 
188,593

 
(5,174
)
 
251,531

 
(6,491
)
 
 
$
219,772

 
$
(2,280
)
 
$
219,555

 
$
(5,423
)
 
$
439,327

 
$
(7,703
)

As indicated in the tables above, as of March 31, 2020, the Company’s investment securities had gross unrealized losses totaling approximately $23.8 million, compared to approximately $7.7 million at December 31, 2019. The Company analyzed 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. In addition, the Company has contracted with third party companies to perform independent cash flow analyses of its securities portfolio as needed. 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, 2020 or December 31, 2019. Management continues to expect to recover the adjusted amortized cost basis of these bonds.
As of March 31, 2020, the Company had 33 securities whose estimated fair value declined 5.13% from the Company’s amortized cost; at December 31, 2019, the Company had 33 securities whose estimated fair value declined 1.72% from the Company’s amortized cost. The increase in percentage of unrealized losses is related to market liquidity concerns associated with COVID-19 during the first quarter which widened credit spreads on securities and changes in market interest rates since the purchase dates. Unrecognized losses associated with liquidity concerns as a result of COVID-19 are not expected to remain constant in the future, however, unrecognized losses will continue to vary with general market interest rate fluctuations. Fair values are expected to recover as the securities approach their respective maturity dates and management believes it is not more likely than not it will be required to sell before recovery of the amortized cost basis.
For the three months ended March 31, 2020 the Company received $14.0 million in proceeds and recognized a $1.2 million gain on sales of available-for-sale securities. There were no sales and calls of securities for the three months ended March 31, 2019.
There were no credit losses recognized in earnings for the three months ended March 31, 2020 and 2019.
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 loans. Real estate 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.

11

Commercial and industrial. Commercial and industrial loans consist of loans and lines of credit to small and medium-sized businesses in a wide variety of industries, including distributors, manufacturers, software developers business services companies and independent finance companies. Commercial and industrial loans are generally collateralized by accounts receivable, inventory, equipment, loan and lease receivables, and other commercial assets, and may be supported by other credit enhancements such as personal guarantees. Risk 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. Since the March 2019 sale of the business loan portfolio, commercial and industrial loans consist primarily of asset based loans. In 2020, the Company began offering a new pilot product called SEN Leverage, which will allow Silvergate customers to obtain U.S. dollar loans collateralized by bitcoin held at select digital currency exchanges that are also Silvergate customers. The product uses the Silvergate Exchange Network (“SEN”) to fund loans and process repayments in real-time 24 hours per day, 7 days per week. The Company plans to expand this offering in the latter part of 2020. The outstanding loan balance of SEN Leverage loans was immaterial as of March 31, 2020.
Consumer and other. Consumer loans consist of consumer loans and other loans secured by personal property.
Reverse mortgage. 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. Reverse mortgage 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. In mid-2014, the Company ceased purchases of reverse mortgage loans and, began selling its remaining loans in the secondary market.
Mortgage warehouse. The Company’s 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 $21.7 million and $63.9 million of loans to participants during the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020 and December 31, 2019, gross warehouse loans were approximately $486.6 million and $405.0 million, respectively.
A summary of loans as of the periods presented are as follows:
 
 
March 31,
2020
 
December 31,
2019
 
 
 
 
 
 
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
One-to-four family
 
$
202,214

 
$
193,367

Multi-family
 
76,721

 
81,233

Commercial
 
325,116

 
331,052

Construction
 
10,034

 
7,213

Commercial and industrial
 
15,948

 
14,440

Consumer and other
 
154

 
122

Reverse mortgage
 
1,431

 
1,415

Mortgage warehouse
 
51,596

 
39,247

Total gross loans held-for-investment
 
683,214

 
668,089

Deferred fees, net
 
2,760

 
2,724

Total loans held-for-investment
 
685,974

 
670,813

Allowance for loan losses
 
(6,558
)
 
(6,191
)
Total loans held-for-investment, net
 
$
679,416

 
$
664,622

Total loans held-for-sale(1)
 
$
435,023

 
$
375,922

________________________
(1)
Loans held-for-sale included $435.0 million and $365.8 million of mortgage warehouse loans at March 31, 2020 and December 31, 2019, respectively.
At March 31, 2020 and December 31, 2019, approximately $615.5 million and $614.3 million, respectively, of the Company’s loan portfolio were collateralized by various forms of real estate. A significant percentage of such loans are collateralized by properties located in California (74.4% and 64.8% as of March 31, 2020 and December 31, 2019, respectively) and Arizona (6.6% and 10.2% as of March 31, 2020 and December 31, 2019, respectively) with no other state

12

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 $2.3 million and $2.2 million and deferred fees totaled approximately $2.8 million and $2.7 million at March 31, 2020 and December 31, 2019, respectively.
Allowance for Loan Losses
During the first quarter, the Company recorded a provision for loan losses of $0.4 million and the ratio of the allowance for loan losses to gross loans held-for-investment at March 31, 2020 was 0.96%. The level of the first quarter provision was based on modest increases in loan portfolio balances, Silvergate’s historically strong credit quality and minimal loan charge-offs, and was largely influenced by the low to moderate loan-to-value margins in the Company's commercial and multi-family real estate and single-family residential real estate loans held-for-investment, as evidenced by weighted average loan-to-value ratios in the low- to mid-50% range as of March 31, 2020. Although there is significant uncertainly in the current economic environment due to the impact of the COVID-19 pandemic, the Company’s relatively low loan-to-value ratios provides a lower probability of loss in the event of defaults in the Company’s loan portfolio. The Company will continue to monitor trends in its portfolio segments for any known or probable adverse conditions with a particular emphasis on retail and hospitality loans within the commercial real estate loan portfolio.
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, 2020
 
 
One-to
-Four
Family
 
Multi-
Family
 
Commercial
Real Estate
 
Construction
 
Commercial
and Industrial
 
Consumer
and Other
 
Reverse
Mortgage
 
Mortgage
Warehouse
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Balance, December 31, 2019
 
$
2,051

 
$
653

 
$
2,791

 
$
96

 
$
312

 
$
1

 
$
37

 
$
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

 
$
1

 
$
38

 
$
218

 
$
6,558

 
 
Three Months Ended March 31, 2019
 
 
One-to
-Four
Family
 
Multi-
Family
 
Commercial
Real Estate
 
Construction
 
Commercial
and Industrial
 
Consumer
and Other
 
Reverse
Mortgage
 
Mortgage
Warehouse
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Balance, December 31, 2018
 
$
1,848

 
$
483

 
$
3,854

 
$
98

 
$
156

 
$
1

 
$
54

 
$
229

 
$
6,723

Charge-offs
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Recoveries
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Provision for loan losses
 
41

 
28

 
83

 
10

 
100

 
(1
)
 
—

 
6

 
267

Balance, March 31, 2019
 
$
1,889

 
$
511

 
$
3,937

 
$
108

 
$
256

 
$
—

 
$
54

 
$
235

 
$
6,990


13

 
 
March 31, 2020
 
 
One-to
-Four
Family
 
Multi-
Family
 
Commercial
Real Estate
 
Construction
 
Commercial
and Industrial
 
Consumer
and Other
 
Reverse
Mortgage
 
Mortgage
Warehouse
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Amount of allowance attributed to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Specifically evaluated impaired loans
 
$
11

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
29

 
$
—

 
$
40

General portfolio allocation
 
1,960

 
689

 
2,957

 
258

 
426

 
1

 
9

 
218

 
6,518

Total allowance for loan losses
 
$
1,971

 
$
689

 
$
2,957

 
$
258

 
$
426

 
$
1

 
$
38

 
$
218

 
$
6,558

Loans evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Specifically evaluated
 
$
3,732

 
$
—

 
$
1,941

 
$
—

 
$
2,252

 
$
—

 
$
850

 
$
—

 
$
8,775

Collectively evaluated
 
198,482

 
76,721

 
323,175

 
10,034

 
13,696

 
154

 
581

 
51,596

 
674,439

Total gross loans held-for-investment
 
$
202,214

 
$
76,721

 
$
325,116

 
$
10,034

 
$
15,948

 
$
154

 
$
1,431

 
$
51,596

 
$
683,214

 
 
December 31, 2019
 
 
One-to
-Four
Family
 
Multi-
Family
 
Commercial
Real Estate
 
Construction
 
Commercial
and Industrial
 
Consumer
and Other
 
Reverse
Mortgage
 
Mortgage
Warehouse
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Amount of allowance attributed to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Specifically evaluated impaired loans
 
$
10

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
29

 
$
—

 
$
39

General portfolio allocation
 
2,041

 
653

 
2,791

 
96

 
312

 
1

 
8

 
250

 
6,152

Total allowance for loan losses
 
$
2,051

 
$
653

 
$
2,791

 
$
96

 
$
312

 
$
1

 
$
37

 
$
250

 
$
6,191

Loans evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Specifically evaluated
 
$
4,222

 
$
—

 
$
7,353

 
$
—

 
$
2,714

 
$
—

 
$
848

 
$
—

 
$
15,137

Collectively evaluated
 
189,145

 
81,233

 
323,699

 
7,213

 
11,726

 
122

 
567

 
39,247

 
652,952

Total gross loans held-for-investment
 
$
193,367

 
$
81,233

 
$
331,052

 
$
7,213

 
$
14,440

 
$
122

 
$
1,415

 
$
39,247

 
$
668,089


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, 2020
 
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
With no related allowance recorded:
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
One-to-four family
 
$
4,315

 
$
3,666

 
$
—

Commercial
 
1,941

 
1,941

 
—

Commercial and industrial
 
2,484

 
2,252

 
—

Reverse mortgage
 
511

 
511

 
—

 
 
9,251

 
8,370

 
—

With an allowance recorded:
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
One-to-four family
 
66

 
66

 
11

Reverse mortgage
 
339

 
339

 
29

 
 
405

 
405

 
40

Total impaired loans
 
$
9,656

 
$
8,775

 
$
40


14

 
 
December 31, 2019
 
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
With no related allowance recorded:
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
One-to-four family
 
$
4,792

 
$
4,156

 
$
—

Commercial
 
7,632

 
7,353

 
—

Commercial and industrial
 
2,929

 
2,714

 
—

Reverse mortgage
 
510

 
511

 
—

 
 
15,863

 
14,734

 
—

With an allowance recorded:
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
One-to-four family
 
66

 
66

 
10

Reverse mortgage
 
337

 
337

 
29

 
 
403

 
403

 
39

Total impaired loans
 
$
16,266

 
$
15,137

 
$
39

 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
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
 
$
3,731

 
$
26

 
$
3,539

 
$
47

Commercial
 
1,941

 
21

 
7,878

 
97

Commercial and industrial
 
2,329

 
42

 
2,888

 
53

Reverse mortgage
 
511

 
—

 
798

 
—

 
 
8,512

 
89

 
15,103

 
197

With an allowance recorded:
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
One-to-four family
 
66

 
1

 
8

 
—

Reverse mortgage
 
338

 
—

 
430

 
—

 
 
404

 
1

 
438

 
—

Total impaired loans
 
$
8,916

 
$
90

 
$
15,541

 
$
197


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. Nonperforming loans consist of loans on nonaccrual status for which the accrual of interest has been discontinued and loans 90 days or more past due and still accruing interest.

15

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, 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: