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, 20212022
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 |
Depositary Shares, Each Representing a 1/40th Interest in a Share of 5.375% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A | SI PRA | 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 actAct 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, 2021,2, 2022, the registrant had 25,337,47331,633,815 shares of Class A voting common stock outstanding.
SILVERGATE CAPITAL CORPORATION
FORM 10-Q
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 and Per Share Amounts)
(Unaudited) | | | | March 31, 2021 | | December 31, 2020 | | | March 31, 2022 | | December 31, 2021 |
ASSETS | ASSETS | | | | | ASSETS | | | | |
Cash and due from banks | Cash and due from banks | | $ | 16,422 | | | $ | 16,405 | | Cash and due from banks | | $ | 207,304 | | | $ | 208,193 | |
Interest earning deposits in other banks | Interest earning deposits in other banks | | 4,315,100 | | | 2,945,682 | | Interest earning deposits in other banks | | 1,178,205 | | | 5,179,753 | |
Cash and cash equivalents | Cash and cash equivalents | | 4,331,522 | | | 2,962,087 | | Cash and cash equivalents | | 1,385,509 | | | 5,387,946 | |
Trading securities | | 1,990 | | | 0 | | |
| Securities available-for-sale, at fair value | Securities available-for-sale, at fair value | | 1,717,418 | | | 939,015 | | Securities available-for-sale, at fair value | | 9,463,494 | | | 8,625,259 | |
| Securities held-to-maturity, at amortized cost (fair value of $2,578,976 at March 31, 2022) | | Securities held-to-maturity, at amortized cost (fair value of $2,578,976 at March 31, 2022) | | 2,751,625 | | | — | |
Loans held-for-sale, at lower of cost or fair value | Loans held-for-sale, at lower of cost or fair value | | 897,227 | | | 865,961 | | Loans held-for-sale, at lower of cost or fair value | | 937,140 | | | 893,194 | |
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 | | |
Loans held-for-investment, net of allowance for loan losses of $4,442 and $6,916 at March 31, 2022 and December 31, 2021, respectively | | Loans held-for-investment, net of allowance for loan losses of $4,442 and $6,916 at March 31, 2022 and December 31, 2021, respectively | | 739,014 | | | 887,304 | |
Federal home loan and federal reserve bank stock, at cost | Federal home loan and federal reserve bank stock, at cost | | 14,851 | | | 14,851 | | Federal home loan and federal reserve bank stock, at cost | | 61,719 | | | 34,010 | |
Accrued interest receivable | Accrued interest receivable | | 9,432 | | | 8,698 | | Accrued interest receivable | | 62,573 | | | 40,370 | |
Premises and equipment, net | Premises and equipment, net | | 1,758 | | | 2,072 | | Premises and equipment, net | | 1,678 | | | 3,008 | |
Intangible assets | | Intangible assets | | 189,977 | | | — | |
Derivative assets | Derivative assets | | 34,442 | | | 31,104 | | Derivative assets | | 46,415 | | | 34,056 | |
Other assets | Other assets | | 20,122 | | | 15,696 | | Other assets | | 158,869 | | | 100,348 | |
Total assets | Total assets | | $ | 7,757,152 | | | $ | 5,586,235 | | Total assets | | $ | 15,798,013 | | | $ | 16,005,495 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Deposits: | Deposits: | | Deposits: | |
Noninterest bearing demand accounts | Noninterest bearing demand accounts | | $ | 6,889,281 | | | $ | 5,133,579 | | Noninterest bearing demand accounts | | $ | 13,323,535 | | | $ | 14,213,472 | |
Interest bearing accounts | Interest bearing accounts | | 113,090 | | | 114,447 | | Interest bearing accounts | | 72,627 | | | 77,156 | |
| Total deposits | Total deposits | | 7,002,371 | | | 5,248,026 | | Total deposits | | 13,396,162 | | | 14,290,628 | |
| Federal home loan bank advances | | Federal home loan bank advances | | 800,000 | | | — | |
| Subordinated debentures, net | Subordinated debentures, net | | 15,834 | | | 15,831 | | Subordinated debentures, net | | 15,848 | | | 15,845 | |
Accrued expenses and other liabilities | Accrued expenses and other liabilities | | 25,326 | | | 28,079 | | Accrued expenses and other liabilities | | 39,507 | | | 90,186 | |
Total liabilities | Total liabilities | | 7,043,531 | | | 5,291,936 | | Total liabilities | | 14,251,517 | | | 14,396,659 | |
Commitments and contingencies | Commitments and contingencies | | 0 | | 0 | Commitments and contingencies | | 0 | | 0 |
Preferred stock, $0.01 par value—authorized 10,000 shares; 0 shares issued or outstanding at March 31, 2021 and December 31, 2020 | | 0 | | | 0 | | |
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 | | 0 | | | 1 | | |
Preferred stock, $0.01 par value—authorized 10,000 shares; $1,000 per share liquidation preference, 200 shares issued and outstanding at March 31, 2022 and December 31, 2021 | | Preferred stock, $0.01 par value—authorized 10,000 shares; $1,000 per share liquidation preference, 200 shares issued and outstanding at March 31, 2022 and December 31, 2021 | | 2 | | | 2 | |
Class A common stock, $0.01 par value—authorized 125,000 shares; 31,630 and 30,403 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | | Class A common stock, $0.01 par value—authorized 125,000 shares; 31,630 and 30,403 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | | 316 | | | 304 | |
Class B non-voting common stock, $0.01 par value—authorized 25,000 shares; no shares issued and outstanding at March 31, 2022 and December 31, 2021 | | Class B non-voting common stock, $0.01 par value—authorized 25,000 shares; no shares issued and outstanding at March 31, 2022 and December 31, 2021 | | — | | | — | |
Additional paid-in capital | Additional paid-in capital | | 551,798 | | | 129,726 | | Additional paid-in capital | | 1,553,547 | | | 1,421,592 | |
Retained earnings | Retained earnings | | 131,058 | | | 118,348 | | Retained earnings | | 218,558 | | | 193,860 | |
Accumulated other comprehensive income | | 30,517 | | | 46,036 | | |
Accumulated other comprehensive loss | | Accumulated other comprehensive loss | | (225,927) | | | (6,922) | |
Total shareholders’ equity | Total shareholders’ equity | | 713,621 | | | 294,299 | | Total shareholders’ equity | | 1,546,496 | | | 1,608,836 | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | | $ | 7,757,152 | | | $ | 5,586,235 | | Total liabilities and shareholders’ equity | | $ | 15,798,013 | | | $ | 16,005,495 | |
See accompanying notes to unaudited consolidated financial statements
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
| | | | Three Months Ended March 31, | | | Three Months Ended March 31, |
| | | | 2021 | | 2020 | | | | 2022 | | 2021 |
Interest income | Interest income | | | | | | Interest income | | | | | |
Loans, including fees | Loans, including fees | | | $ | 16,597 | | | $ | 13,121 | | Loans, including fees | | | $ | 18,287 | | | $ | 16,597 | |
Taxable securities | Taxable securities | | | 3,592 | | | 6,048 | | Taxable securities | | | 17,779 | | | 3,592 | |
Tax-exempt securities | Tax-exempt securities | | | 1,695 | | | 48 | | Tax-exempt securities | | | 13,184 | | | 1,695 | |
Other interest earning assets | Other interest earning assets | | | 1,279 | | | 724 | | Other interest earning assets | | | 1,385 | | | 1,279 | |
Dividends and other | Dividends and other | | | 143 | | | 121 | | Dividends and other | | | 203 | | | 143 | |
Total interest income | Total interest income | | | 23,306 | | | 20,062 | | Total interest income | | | 50,838 | | | 23,306 | |
Interest expense | Interest expense | | | | Interest expense | | | |
Deposits | Deposits | | | 46 | | | 4,051 | | Deposits | | | 21 | | | 46 | |
Federal home loan bank advances | Federal home loan bank advances | | | 0 | | | 227 | | Federal home loan bank advances | | | 70 | | | — | |
Subordinated debentures and other | Subordinated debentures and other | | | 245 | | | 306 | | Subordinated debentures and other | | | 252 | | | 245 | |
Total interest expense | Total interest expense | | | 291 | | | 4,584 | | Total interest expense | | | 343 | | | 291 | |
Net interest income before provision for loan losses | Net interest income before provision for loan losses | | | 23,015 | | | 15,478 | | Net interest income before provision for loan losses | | | 50,495 | | | 23,015 | |
Provision for loan losses | | | 0 | | | 367 | | |
Reversal of provision for loan losses | | Reversal of provision for loan losses | | | (2,474) | | | — | |
Net interest income after provision for loan losses | Net interest income after provision for loan losses | | | 23,015 | | | 15,111 | | Net interest income after provision for loan losses | | | 52,969 | | | 23,015 | |
Noninterest income | Noninterest income | | | | Noninterest income | | | |
Deposit related fees | | Deposit related fees | | | 8,968 | | | 7,124 | |
Mortgage warehouse fee income | Mortgage warehouse fee income | | | 954 | | | 382 | | Mortgage warehouse fee income | | | 651 | | | 954 | |
Service fees related to off-balance sheet deposits | | | 0 | | | 70 | | |
Deposit related fees | | | 7,124 | | | 1,766 | | |
Gain on sale of securities, net | | | 0 | | | 1,197 | | |
Gain on sale of loans, net | | | 0 | | | 506 | | |
Gain on extinguishment of debt | | | 0 | | | 925 | | |
| Loss on sale of securities, net | | Loss on sale of securities, net | | | (605) | | | — | |
| Other income | Other income | | | 12 | | | 85 | | Other income | | | 436 | | | 12 | |
Total noninterest income | Total noninterest income | | | 8,090 | | | 4,931 | | Total noninterest income | | | 9,450 | | | 8,090 | |
Noninterest expense | Noninterest expense | | | | Noninterest expense | | | |
Salaries and employee benefits | Salaries and employee benefits | | | 10,990 | | | 8,955 | | Salaries and employee benefits | | | 15,544 | | | 10,990 | |
Occupancy and equipment | Occupancy and equipment | | | 614 | | | 907 | | Occupancy and equipment | | | 586 | | | 614 | |
| Communications and data processing | Communications and data processing | | | 1,621 | | | 1,261 | | Communications and data processing | | | 2,762 | | | 1,621 | |
Professional services | Professional services | | | 1,717 | | | 985 | | Professional services | | | 2,954 | | | 1,717 | |
Federal deposit insurance | Federal deposit insurance | | | 2,296 | | | 123 | | Federal deposit insurance | | | 1,762 | | | 2,296 | |
Correspondent bank charges | Correspondent bank charges | | | 497 | | | 373 | | Correspondent bank charges | | | 828 | | | 497 | |
Other loan expense | Other loan expense | | | 174 | | | 122 | | Other loan expense | | | 384 | | | 174 | |
Other general and administrative | Other general and administrative | | | 1,697 | | | 1,149 | | Other general and administrative | | | 3,198 | | | 1,697 | |
Total noninterest expense | Total noninterest expense | | | 19,606 | | | 13,875 | | Total noninterest expense | | | 28,018 | | | 19,606 | |
Income before income taxes | Income before income taxes | | | 11,499 | | | 6,167 | | Income before income taxes | | | 34,401 | | | 11,499 | |
Income tax (benefit) expense | | | (1,211) | | | 1,774 | | |
Income tax expense (benefit) | | Income tax expense (benefit) | | | 7,015 | | | (1,211) | |
Net income | Net income | | | $ | 12,710 | | | $ | 4,393 | | Net income | | | 27,386 | | | 12,710 | |
| Basic earnings per share | | | $ | 0.56 | | | $ | 0.24 | | |
Diluted earnings per share | | | $ | 0.55 | | | $ | 0.23 | | |
Weighted average shares outstanding: | | | | | | |
Dividends on preferred stock | | Dividends on preferred stock | | | 2,688 | | | — | |
Net income available to common shareholders | | Net income available to common shareholders | | | $ | 24,698 | | | $ | 12,710 | |
Basic earnings per common share | | Basic earnings per common share | | | $ | 0.79 | | | $ | 0.56 | |
Diluted earnings per common share | | Diluted earnings per common share | | | $ | 0.79 | | | $ | 0.55 | |
Weighted average common shares outstanding: | | Weighted average common shares outstanding: | | | | | |
Basic | Basic | | | 22,504 | | | 18,668 | | Basic | | | 31,219 | | | 22,504 | |
Diluted | Diluted | | | 23,010 | | | 19,117 | | Diluted | | | 31,401 | | | 23,010 | |
See accompanying notes to unaudited consolidated financial statements
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS
(In Thousands)
(Unaudited)
| | | | Three Months Ended March 31, | | | Three Months Ended March 31, |
| | | | 2021 | | 2020 | | | | 2022 | | 2021 |
Net income | Net income | | | $ | 12,710 | | | $ | 4,393 | | Net income | | | $ | 27,386 | | | $ | 12,710 | |
Other comprehensive income (loss): | Other comprehensive income (loss): | | | | Other comprehensive income (loss): | | | |
Change in net unrealized loss on available-for-sale securities | Change in net unrealized loss on available-for-sale securities | | | (13,434) | | | (9,313) | | Change in net unrealized loss on available-for-sale securities | | | (324,226) | | | (13,434) | |
Less: Reclassification adjustment for net loss included in net income | | Less: Reclassification adjustment for net loss included in net income | | | 605 | | | — | |
Less: Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity | | Less: Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity | | | 774 | | | — | |
Income tax effect | | Income tax effect | | | 94,220 | | | 3,690 | |
Unrealized loss on available-for-sale securities, net of tax | | Unrealized loss on available-for-sale securities, net of tax | | | (228,627) | | | (9,744) | |
Change in net unrealized gain (loss) on derivative assets | | Change in net unrealized gain (loss) on derivative assets | | | 14,603 | | | (7,460) | |
Less: Reclassification adjustment for net gain included in net income | Less: Reclassification adjustment for net gain included in net income | | | 0 | | | (1,197) | | Less: Reclassification adjustment for net gain included in net income | | | (951) | | | (504) | |
Income tax effect | Income tax effect | | | 3,690 | | | 3,007 | | Income tax effect | | | (4,030) | | | 2,189 | |
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 | | |
Unrealized gain (loss) on derivative instruments, net of tax | | Unrealized gain (loss) on derivative instruments, net of tax | | | 9,622 | | | (5,775) | |
Other comprehensive loss | | Other comprehensive loss | | | (219,005) | | | (15,519) | |
Total comprehensive loss | | Total comprehensive loss | | | $ | (191,619) | | | $ | (2,809) | |
See accompanying notes to unaudited consolidated financial statements
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 | | Preferred Stock | | 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 | | | Shares | | Amount | | Shares | | Amount | | Shares | | | Total Shareholders’ Equity |
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 | | |
Balance at January 1, 2021 | | 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 | | Total comprehensive income (loss), net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 12,710 | | | (15,519) | | | (2,809) | |
| Issuance of stock, net | | Issuance of stock, net | | — | | | — | | | 5,860,858 | | | 58 | | | — | | | — | | | 423,482 | | | — | | | — | | | 423,540 | |
| Conversion of Class B common stock to Class A common stock | Conversion of Class B common stock to Class A common stock | | | 596,000 | | | 6 | | | (596,000) | | | (6) | | | — | | | — | | | — | | | 0 | | Conversion of Class B common stock to Class A common stock | | — | | | — | | | 64,197 | | | 1 | | | (64,197) | | | (1) | | | — | | | — | | | — | | | — | |
Stock-based compensation | Stock-based compensation | | | — | | | — | | | — | | | — | | | 199 | | | — | | | — | | | 199 | | Stock-based compensation | | — | | | — | | | — | | | — | | | — | | | — | | | 290 | | | — | | | — | | | 290 | |
Exercise of stock options, net of shares withheld for employee taxes | Exercise of stock options, net of shares withheld for employee taxes | | | 134 | | | — | | | — | | | — | | | (1) | | | — | | | — | | | (1) | | Exercise of stock options, net of shares withheld for employee taxes | | — | | | — | | | 124,848 | | | 1 | | | — | | | — | | | (1,700) | | | — | | | — | | | (1,699) | |
Issuance of share-based awards, net of shares withheld for employee taxes | | Issuance of share-based awards, net of shares withheld for employee taxes | | — | | | — | | | 294 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Balance at March 31, 2020 | | | 18,371,294 | | | $ | 184 | | | 296,836 | | | $ | 3 | | | $ | 132,336 | | | $ | 96,703 | | | $ | 15,526 | | | $ | 244,752 | | |
Balance at March 31, 2021 | | Balance at March 31, 2021 | | — | | | $ | — | | | 24,819,968 | | | $ | 248 | | | — | | | $ | — | | | $ | 551,798 | | | $ | 131,058 | | | $ | 30,517 | | | $ | 713,621 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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) | | | — | | | — | | | — | | | 0 | |
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 | | | 0 | | | $ | 0 | | | $ | 551,798 | | | $ | 131,058 | | | $ | 30,517 | | | $ | 713,621 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | 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 | | Shares | | Amount | |
Balance at January 1, 2022 | | 200,000 | | | $ | 2 | | | 30,402,706 | | | $ | 304 | | | — | | | $ | — | | | $ | 1,421,592 | | | $ | 193,860 | | | $ | (6,922) | | | $ | 1,608,836 | |
Total comprehensive income (loss), net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 27,386 | | | (219,005) | | | (191,619) | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Dividends on preferred stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,688) | | | — | | | (2,688) | |
Issuance of stock, net | | — | | | — | | | 1,221,217 | | | 12 | | | — | | | — | | | 131,505 | | | — | | | — | | | 131,517 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | — | | | — | | | — | | | — | | | 729 | | | — | | | — | | | 729 | |
Exercise of stock options, net of shares withheld for employee taxes | | — | | | — | | | 1,840 | | | — | | | — | | | — | | | 30 | | | — | | | — | | | 30 | |
Issuance of share-based awards, net of shares withheld for employee taxes | | — | | | — | | | 4,552 | | | — | | | — | | | — | | | (309) | | | — | | | — | | | (309) | |
| | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2022 | | 200,000 | | | $ | 2 | | | 31,630,315 | | | $ | 316 | | | — | | | $ | — | | | $ | 1,553,547 | | | $ | 218,558 | | | $ | (225,927) | | | $ | 1,546,496 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
See accompanying notes to unaudited consolidated financial statements
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited) | | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | | 2021 | | 2020 | | | 2022 | | 2021 |
Cash flows from operating activities | Cash flows from operating activities | | | | | Cash flows from operating activities | | | | |
Net income | Net income | | $ | 12,710 | | | $ | 4,393 | | Net income | | $ | 27,386 | | | $ | 12,710 | |
Adjustments to reconcile net income to net cash used in operating activities: | | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |
Depreciation and amortization | Depreciation and amortization | | 644 | | | 830 | | Depreciation and amortization | | 815 | | | 644 | |
Amortization of securities premiums and discounts, net | Amortization of securities premiums and discounts, net | | 1,212 | | | 679 | | Amortization of securities premiums and discounts, net | | 40,503 | | | 1,212 | |
Amortization of loan premiums and discounts and deferred loan origination fees and costs, net | Amortization of loan premiums and discounts and deferred loan origination fees and costs, net | | 250 | | | 399 | | Amortization of loan premiums and discounts and deferred loan origination fees and costs, net | | (253) | | | 250 | |
Stock-based compensation | Stock-based compensation | | 290 | | | 199 | | Stock-based compensation | | 729 | | | 290 | |
Provision for loan losses | | 0 | | | 367 | | |
Originations/purchases of loans held-for-sale | | (3,384,431) | | | (1,222,816) | | |
Reversal of provision for loan losses | | Reversal of provision for loan losses | | (2,474) | | | — | |
Originations of loans held-for-sale | | Originations of loans held-for-sale | | (2,972,952) | | | (3,384,431) | |
Proceeds from sales of loans held-for-sale | Proceeds from sales of loans held-for-sale | | 3,353,164 | | | 1,153,515 | | Proceeds from sales of loans held-for-sale | | 2,951,944 | | | 3,353,164 | |
| Other gains, net | Other gains, net | | (1,141) | | | (2,885) | | Other gains, net | | (430) | | | (1,141) | |
Other, net | Other, net | | 891 | | | 576 | | Other, net | | 675 | | | 891 | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Accrued interest receivable and other assets | Accrued interest receivable and other assets | | (4,119) | | | (520) | | Accrued interest receivable and other assets | | 15,480 | | | (4,119) | |
Accrued expenses and other liabilities | Accrued expenses and other liabilities | | 469 | | | 87 | | Accrued expenses and other liabilities | | (47,782) | | | 469 | |
Net cash used in operating activities | | (20,061) | | | (65,176) | | |
Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | | 13,641 | | | (20,061) | |
Cash flows from investing activities | Cash flows from investing activities | | | | | Cash flows from investing activities | | | | |
Purchases of securities available-for-sale | Purchases of securities available-for-sale | | (817,734) | | | (98,986) | | Purchases of securities available-for-sale | | (3,303,782) | | | (817,734) | |
Proceeds from sale of securities available-for-sale | Proceeds from sale of securities available-for-sale | | 0 | | | 14,016 | | Proceeds from sale of securities available-for-sale | | 432,059 | | | — | |
Proceeds from paydowns and maturities of securities available-for-sale | Proceeds from paydowns and maturities of securities available-for-sale | | 21,403 | | | 7,936 | | Proceeds from paydowns and maturities of securities available-for-sale | | 131,521 | | | 21,403 | |
Purchases of securities held-to-maturity | | Purchases of securities held-to-maturity | | (1,249,507) | | | — | |
Proceeds from paydowns and maturities of securities held-to-maturity | | Proceeds from paydowns and maturities of securities held-to-maturity | | 26,665 | | | — | |
Loan originations/purchases and payments, net | Loan originations/purchases and payments, net | | 18,112 | | | (41,254) | | Loan originations/purchases and payments, net | | (20,405) | | | 18,112 | |
Proceeds from sale of loans held-for-sale previously classified as held-for-investment | | 0 | | | 36,400 | | |
Proceeds from sale of loans, net | | Proceeds from sale of loans, net | | 149,070 | | | — | |
Purchase of federal home loan and federal reserve bank stock, net | Purchase of federal home loan and federal reserve bank stock, net | | 0 | | | (5) | | Purchase of federal home loan and federal reserve bank stock, net | | (27,708) | | | — | |
Purchase of premises and equipment | Purchase of premises and equipment | | (32) | | | (391) | | Purchase of premises and equipment | | (274) | | | (32) | |
Payments to acquire intangible assets | | Payments to acquire intangible assets | | (58,403) | | | — | |
| (Payments for) proceeds from derivative contracts, net | | (8,439) | | | 13,370 | | |
Other, net | | 0 | | | 128 | | |
Proceeds from (payments for) derivative contracts, net | | Proceeds from (payments for) derivative contracts, net | | 2,176 | | | (8,439) | |
| Net cash used in investing activities | Net cash used in investing activities | | (786,690) | | | (68,786) | | Net cash used in investing activities | | (3,918,588) | | | (786,690) | |
Cash flows from financing activities | Cash flows from financing activities | | | | | Cash flows from financing activities | | | | |
Net change in noninterest bearing deposits | Net change in noninterest bearing deposits | | 1,755,702 | | | 401,552 | | Net change in noninterest bearing deposits | | (889,937) | | | 1,755,702 | |
Net change in interest bearing deposits | Net change in interest bearing deposits | | (1,357) | | | (213,250) | | Net change in interest bearing deposits | | (4,529) | | | (1,357) | |
Net change in federal home loan bank advances | Net change in federal home loan bank advances | | 0 | | | (18,075) | | Net change in federal home loan bank advances | | 800,000 | | | — | |
| Payments made on notes payable | | 0 | | | (3,714) | | |
| Proceeds from common stock issuance, net | Proceeds from common stock issuance, net | | 423,540 | | | 0 | | Proceeds from common stock issuance, net | | (57) | | | 423,540 | |
| | Payments of preferred stock dividends | | Payments of preferred stock dividends | | (2,688) | | | — | |
Proceeds from stock option exercise | Proceeds from stock option exercise | | 261 | | | 0 | | Proceeds from stock option exercise | | 30 | | | 261 | |
Taxes paid related to net share settlement of equity awards | Taxes paid related to net share settlement of equity awards | | (1,960) | | | (1) | | Taxes paid related to net share settlement of equity awards | | (309) | | | (1,960) | |
Other, net | | 0 | | | 46 | | |
Net cash provided by financing activities | | 2,176,186 | | | 166,558 | | |
Net increase in cash and cash equivalents | | 1,369,435 | | | 32,596 | | |
| Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | | (97,490) | | | 2,176,186 | |
Net (decrease) increase in cash and cash equivalents | | Net (decrease) increase in cash and cash equivalents | | (4,002,437) | | | 1,369,435 | |
Cash and cash equivalents, beginning of period | Cash and cash equivalents, beginning of period | | 2,962,087 | | | 133,604 | | Cash and cash equivalents, beginning of period | | 5,387,946 | | | 2,962,087 | |
Cash and cash equivalents, end of period | Cash and cash equivalents, end of period | | $ | 4,331,522 | | | $ | 166,200 | | Cash and cash equivalents, end of period | | $ | 1,385,509 | | | $ | 4,331,522 | |
| Supplemental cash flow information: | Supplemental cash flow information: | | Supplemental cash flow information: | | | | |
Cash paid for interest | Cash paid for interest | | $ | 444 | | | $ | 4,928 | | Cash paid for interest | | $ | 454 | | | $ | 444 | |
Income taxes paid (refunded), net | Income taxes paid (refunded), net | | (6) | | | (22) | | Income taxes paid (refunded), net | | 146 | | | (6) | |
Supplemental noncash disclosures: | Supplemental noncash disclosures: | | Supplemental noncash disclosures: | |
Transfers of securities from available-for-sale to held-to-maturity | | Transfers of securities from available-for-sale to held-to-maturity | | $ | 1,534,713 | | | $ | — | |
Common stock issued in exchange for assets acquired | | Common stock issued in exchange for assets acquired | | 131,574 | | | — | |
Loans held-for-investment transferred to loans held-for-sale | Loans held-for-investment transferred to loans held-for-sale | | $ | 0 | | | $ | 30,792 | | Loans held-for-investment transferred to loans held-for-sale | | 22,938 | | | — | |
Loans held-for-sale transferred to loans held-for-investment | | 0 | | | 5,098 | | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | 71 | | | 0 | | |
|
See accompanying notes to unaudited consolidated financial statements
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, 2020,2021, included in the Company’s Annual Report on Form 10-K dated March 8, 2021.February 28, 2022. 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 uponconform with 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 effectiveIssued 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 (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, as of the ASU 2019-10 effective date, 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 prospectivelyprospectively. The new methodology replaces the other-than-temporary impairment model and requires the recognition of an allowance for existingreductions in a security’s fair value attributable to declines in credit quality, instead of a direct write-down of the security when a valuation decline is determined to be other-than-temporary. 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. In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. The amendment eliminates the accounting guidance for troubled debt restructurings by creditors in Subtopic 310-40, while enhancing disclosure requirements for certain loan refinancings and restructuring by creditors when a borrow is experiencing financial difficulty. In addition, the update requires public business entities to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination. In relation to the loan portfolio, 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. InOn March 5, 2021, the fourth quarterU.K. Financial Conduct Authority, the regulatory supervisor for ICE Benchmark Administration, the administrator of 2020 the Office of the Comptroller of the Currency, amongst others,LIBOR, 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.
In March 2022, the SEC released Staff Accounting Bulletin No. 121 (“SAB 121”), which provided interpretive guidance regarding accounting for obligations to safeguard crypto-assets an entity holds for platform users. The interpretive guidance requires an entity to recognize a liability on its balance sheet to reflect the obligation to safeguard the crypto-assets held for its platform users, along with a corresponding asset, both of which are measured at fair value. SAB 121 also requires disclosure of the nature and amount of crypto assets being safeguarded, how the fair value is determined, an entity’s accounting policy for safeguarding liabilities and corresponding assets and may require other information about risks and uncertainties arising from the entity’s safeguarding activities. SAB 121 is effective no later than the first interim or annual period ending after June 15, 2022, with retrospective application as of the beginning of the fiscal year. The Company is evaluating the impact that SAB 121 will have on its financial statements and disclosures.
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 infollowing tables summarize 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 aamortized cost, 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.
Available-for-sale
The fair value of available-for-sale securities and their relatedthe corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income and gross unrecognized gains and losses of available-for-sale and securities held-to-maturity at the dates indicated are as follows:
| | | | Available-for-sale securities | | March 31, 2022 |
| | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
March 31, 2021 | | |
Available-for-sale securities | | Available-for-sale securities | |
U.S. Treasuries | | U.S. Treasuries | | $ | 34,889 | | | $ | — | | | $ | (165) | | | $ | 34,724 | |
U.S. agency securities - excluding mortgage-backed securities | | U.S. agency securities - excluding mortgage-backed securities | | 1,548,367 | | | 7,627 | | | (7,333) | | | 1,548,661 | |
Residential mortgage-backed securities: | Residential mortgage-backed securities: | | Residential mortgage-backed securities: | |
Government agency mortgage-backed securities | Government agency mortgage-backed securities | | $ | 152,253 | | | $ | 167 | | | $ | (1,202) | | | $ | 151,218 | | Government agency mortgage-backed securities | | 1,781,961 | | | 62 | | | (30,103) | | | 1,751,920 | |
Government agency collateralized mortgage obligation | Government agency collateralized mortgage obligation | | 686,030 | | | 194 | | | (2,844) | | | 683,380 | | Government agency collateralized mortgage obligation | | 1,385,198 | | | 1 | | | (27,850) | | | 1,357,349 | |
Private-label collateralized mortgage obligation | Private-label collateralized mortgage obligation | | 18,688 | | | 530 | | | (170) | | | 19,048 | | Private-label collateralized mortgage obligation | | 1,342 | | | 12 | | | (14) | | | 1,340 | |
Commercial mortgage-backed securities: | Commercial mortgage-backed securities: | | Commercial mortgage-backed securities: | |
Government agency mortgage-backed securities | Government agency mortgage-backed securities | | 49,135 | | | 2 | | | (24) | | | 49,113 | | Government agency mortgage-backed securities | | 1,338,333 | | | 2,360 | | | (9,283) | | | 1,331,410 | |
Government agency collateralized mortgage obligation | Government agency collateralized mortgage obligation | | 42,435 | | | 0 | | | (35) | | | 42,400 | | Government agency collateralized mortgage obligation | | 70,839 | | | — | | | (60) | | | 70,779 | |
Private-label collateralized mortgage obligation | Private-label collateralized mortgage obligation | | 163,993 | | | 10,504 | | | 0 | | | 174,497 | | Private-label collateralized mortgage obligation | | 492,565 | | | — | | | (11,651) | | | 480,914 | |
Municipal bonds: | Municipal bonds: | | Municipal bonds: | |
Tax-exempt | Tax-exempt | | 318,132 | | | 18,801 | | | (13) | | | 336,920 | | Tax-exempt | | 2,900,600 | | | 65 | | | (236,505) | | | 2,664,160 | |
Taxable | | 14,206 | | | 1,485 | | | (48) | | | 15,643 | | |
| Asset backed securities: | Asset backed securities: | | Asset backed securities: | |
Government sponsored student loan pools | Government sponsored student loan pools | | 245,716 | | | 298 | | | (815) | | | 245,199 | | Government sponsored student loan pools | | 226,738 | | | — | | | (4,501) | | | 222,237 | |
Total available-for-sale | | Total available-for-sale | | $ | 9,780,832 | | | $ | 10,127 | | | $ | (327,465) | | | $ | 9,463,494 | |
| | $ | 1,690,588 | | | $ | 31,981 | | | $ | (5,151) | | | $ | 1,717,418 | | | | | | | | | |
| | | Amortized Cost | | Gross Unrecognized Gains | | Gross Unrecognized Losses | | Fair Value |
| | | (Dollars in thousands) |
Held-to-maturity securities | | Held-to-maturity securities | |
U.S. Treasuries | | U.S. Treasuries | | $ | 1,245,293 | | | $ | — | | | $ | (42,488) | | | $ | 1,202,805 | |
| Residential mortgage-backed securities: | | Residential mortgage-backed securities: | |
Government agency mortgage-backed securities | | Government agency mortgage-backed securities | | 547,423 | | | — | | | (34,896) | | | 512,527 | |
Government agency collateralized mortgage obligation | | Government agency collateralized mortgage obligation | | 113,921 | | | — | | | (7,192) | | | 106,729 | |
| Commercial mortgage-backed securities: | | Commercial mortgage-backed securities: | | |
| Government agency collateralized mortgage obligation | | Government agency collateralized mortgage obligation | | 53,408 | | | — | | | (5,179) | | | 48,229 | |
| Municipal bonds: | | Municipal bonds: | |
Tax-exempt | | Tax-exempt | | 393,965 | | | — | | | (44,265) | | | 349,700 | |
Taxable | | Taxable | | 397,615 | | | — | | | (38,629) | | | 358,986 | |
| Total held-to-maturity | | Total held-to-maturity | | $ | 2,751,625 | | | $ | — | | | $ | (172,649) | | | $ | 2,578,976 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | | 0 | | | 182,536 | |
Municipal bonds: | | | | | | | | |
Tax-exempt | | 246,159 | | | 24,200 | | | 0 | | | 270,359 | |
Taxable | | 15,307 | | | 695 | | | 0 | | | 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 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | | | | | |
| | (Dollars in thousands) |
Available-for-sale securities | | | | | | | | |
| | | | | | | | |
U.S. agency securities - excluding mortgage-backed securities | | $ | 1,177,452 | | | $ | 7,320 | | | $ | (6,005) | | | $ | 1,178,767 | |
Residential mortgage-backed securities: | | | | | | | | |
Government agency mortgage-backed securities | | 1,428,365 | | | 130 | | | (14,378) | | | 1,414,117 | |
Government agency collateralized mortgage obligation | | 1,659,125 | | | 1,617 | | | (15,739) | | | 1,645,003 | |
Private-label collateralized mortgage obligation | | 1,425 | | | 19 | | | (11) | | | 1,433 | |
Commercial mortgage-backed securities: | | | | | | | | |
Government agency mortgage-backed securities | | 1,106,680 | | | 1,886 | | | (4,962) | | | 1,103,604 | |
Government agency collateralized mortgage obligation | | 212,266 | | | 19 | | | (1,370) | | | 210,915 | |
Private-label collateralized mortgage obligation | | 144,204 | | | 227 | | | (797) | | | 143,634 | |
Municipal bonds: | | | | | | | | |
Tax-exempt | | 2,272,794 | | | 33,153 | | | (8,210) | | | 2,297,737 | |
Taxable | | 403,279 | | | 341 | | | (6,016) | | | 397,604 | |
Asset backed securities: | | | | | | | | |
Government sponsored student loan pools | | 233,374 | | | 97 | | | (1,026) | | | 232,445 | |
Total available-for-sale | | $ | 8,638,964 | | | $ | 44,809 | | | $ | (58,514) | | | $ | 8,625,259 | |
During the three months ended March 31, 2022, the Company transferred, at fair value, $1.5 billion of residential mortgage-backed securities, commercial mortgage-backed securities, and municipal bonds from available-for-sale to held-to-maturity securities. The decision to re-designate the securities was based on the Company’s ability and intent to hold these securities to maturity. Factors used in assessing the ability to hold these securities to maturity were 0 investmentfuture liquidity needs and sources of funding. The related net unrealized after-tax loss of $14.1 million remained in accumulated other comprehensive income and will be amortized as a yield adjustment through earnings over the remaining life of the securities, offsetting the related net amortization of premium on the transferred securities. No gain or loss was recognized at the time of the transfer.
Securities pledged for borrowings or for other purposes as required or permitted by law had a fair value of $1.2 billion as of March 31, 2021 and2022. There were no securities pledged as of December 31, 2020.2021.
At March 31, 2021, there were 0 holdings2022, the total fair value of securities of any oneissued by 1 individual issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.equity was $275.3 million.
Securities with unrealized and unrecognized losses as of the dates indicated, aggregated by investment category and length of time that individual securities have been in a continuous unrealized or unrecognized loss position, are as follows:
| | | | Available-for-sale securities | | March 31, 2022 |
| | | Less than 12 Months | | 12 Months or More | | Total | | | Less than 12 Months | | 12 Months or More | | Total |
| | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
March 31, 2021 | | |
Available-for-sale securities | | Available-for-sale securities | |
U.S. Treasuries | | U.S. Treasuries | | $ | 34,724 | | | $ | (165) | | | $ | — | | | $ | — | | | $ | 34,724 | | | $ | (165) | |
U.S. agency securities - excluding mortgage-backed securities | | U.S. agency securities - excluding mortgage-backed securities | | 781,759 | | | (7,101) | | | 12,977 | | | (232) | | | 794,736 | | | (7,333) | |
Residential mortgage-backed securities: | Residential mortgage-backed securities: | | Residential mortgage-backed securities: |
Government agency mortgage-backed securities | Government agency mortgage-backed securities | | $ | 102,614 | | | $ | (1,202) | | | $ | 0 | | | $ | 0 | | | $ | 102,614 | | | $ | (1,202) | | Government agency mortgage-backed securities | | 1,725,830 | | | (30,102) | | | 68 | | | (1) | | | 1,725,898 | | | (30,103) | |
Government agency collateralized mortgage obligation | Government agency collateralized mortgage obligation | | 478,392 | | | (2,699) | | | 52,294 | | | (145) | | | 530,686 | | | (2,844) | | Government agency collateralized mortgage obligation | | 1,155,505 | | | (24,377) | | | 199,890 | | | (3,473) | | | 1,355,395 | | | (27,850) | |
Private-label collateralized mortgage obligation | Private-label collateralized mortgage obligation | | 0 | | | 0 | | | 8,609 | | | (170) | | | 8,609 | | | (170) | | Private-label collateralized mortgage obligation | | 199 | | | (3) | | | 421 | | | (11) | | | 620 | | | (14) | |
Commercial mortgage-backed securities: | Commercial mortgage-backed securities: | Commercial mortgage-backed securities: |
Government agency mortgage-backed securities | Government agency mortgage-backed securities | | 18,203 | | | (24) | | | 0 | | | 0 | | | 18,203 | | | (24) | | Government agency mortgage-backed securities | | 871,284 | | | (9,283) | | | — | | | — | | | 871,284 | | | (9,283) | |
Government agency collateralized mortgage obligation | Government agency collateralized mortgage obligation | | 30,900 | | | (35) | | | 0 | | | 0 | | | 30,900 | | | (35) | | Government agency collateralized mortgage obligation | | 62,991 | | | (60) | | | — | | | — | | | 62,991 | | | (60) | |
Private-label collateralized mortgage obligation | | Private-label collateralized mortgage obligation | | 474,175 | | | (11,513) | | | 6,739 | | | (138) | | | 480,914 | | | (11,651) | |
Municipal bonds: | | Municipal bonds: | |
Tax-exempt | | Tax-exempt | | 2,627,812 | | | (236,505) | | | — | | | — | | | 2,627,812 | | | (236,505) | |
| Asset backed securities: | | Asset backed securities: | |
Government sponsored student loan pools | | Government sponsored student loan pools | | 186,833 | | | (4,054) | | | 35,405 | | | (447) | | | 222,238 | | | (4,501) | |
| | | $ | 7,921,112 | | | $ | (323,163) | | | $ | 255,500 | | | $ | (4,302) | | | $ | 8,176,612 | | | $ | (327,465) | |
| | | | Less than 12 Months | | 12 Months or More | | Total |
| | | Fair Value | | Unrecognized Losses | | Fair Value | | Unrecognized Losses | | Fair Value | | Unrecognized Losses |
| | | | (Dollars in thousands) |
Held-to-maturity securities | | Held-to-maturity securities | |
U.S. Treasuries | | U.S. Treasuries | | $ | 1,202,805 | | | $ | (42,488) | | | $ | — | | | $ | — | | | $ | 1,202,805 | | | $ | (42,488) | |
| Residential mortgage-backed securities: | | Residential mortgage-backed securities: |
Government agency mortgage-backed securities | | Government agency mortgage-backed securities | | 512,527 | | | (40,537) | | | — | | | — | | | 512,527 | | | (40,537) | |
Government agency collateralized mortgage obligation | | Government agency collateralized mortgage obligation | | 106,646 | | | (10,393) | | | — | | | — | | | 106,646 | | | (10,393) | |
| Commercial mortgage-backed securities: | | Commercial mortgage-backed securities: |
| Government agency collateralized mortgage obligation | | Government agency collateralized mortgage obligation | | 48,229 | | | (6,241) | | | — | | | — | | | 48,229 | | | (6,241) | |
| Municipal bonds: | Municipal bonds: | | Municipal bonds: | |
Tax-exempt | Tax-exempt | | 23,800 | | | (13) | | | 0 | | | 0 | | | 23,800 | | | (13) | | Tax-exempt | | 349,700 | | | (48,038) | | | — | | | — | | | 349,700 | | | (48,038) | |
Taxable | Taxable | | 5,767 | | | (48) | | | 0 | | | 0 | | | 5,767 | | | (48) | | Taxable | | 358,986 | | | (44,164) | | | — | | | — | | | 358,986 | | | (44,164) | |
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) | | |
| | | | $ | 2,578,893 | | | $ | (191,861) | | | $ | — | | | $ | — | | | $ | 2,578,893 | | | $ | (191,861) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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) | | | $ | 0 | | | $ | 0 | | | $ | 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 | | 0 | | | 0 | | | 240,825 | | | (3,149) | | | 240,825 | | | (3,149) | |
| | $ | 126,367 | | | $ | (234) | | | $ | 307,751 | | | $ | (3,524) | | | $ | 434,118 | | | $ | (3,758) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Less than 12 Months | | 12 Months or More | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
Available-for-sale securities | | | | | | | | | | | | |
| | | | | | | | | | | | |
U.S. agency securities - excluding mortgage-backed securities | | $ | 761,711 | | | $ | (6,005) | | | $ | — | | | $ | — | | | $ | 761,711 | | | $ | (6,005) | |
Residential mortgage-backed securities: | | | | | | | | | | | | |
Government agency mortgage-backed securities | | 1,357,080 | | | (14,378) | | | 70 | | | — | | | 1,357,150 | | | (14,378) | |
Government agency collateralized mortgage obligation | | 1,513,388 | | | (15,732) | | | 650 | | | (7) | | | 1,514,038 | | | (15,739) | |
Private-label collateralized mortgage obligation | | — | | | — | | | 433 | | | (11) | | | 433 | | | (11) | |
Commercial mortgage-backed securities: | | | | | | | | | | | | |
Government agency mortgage-backed securities | | 435,055 | | | (4,962) | | | — | | | — | | | 435,055 | | | (4,962) | |
Government agency collateralized mortgage obligation | | 189,397 | | | (1,370) | | | — | | | — | | | 189,397 | | | (1,370) | |
Private-label collateralized mortgage obligation | | 98,173 | | | (656) | | | 6,791 | | | (141) | | | 104,964 | | | (797) | |
Municipal bonds: | | | | | | | | | | | | |
Tax-exempt | | 1,025,689 | | | (8,210) | | | — | | | — | | | 1,025,689 | | | (8,210) | |
Taxable | | 339,041 | | | (6,016) | | | — | | | — | | | 339,041 | | | (6,016) | |
Asset backed securities: | | | | | | | | | | | | |
Government sponsored student loan pools | | 168,204 | | | (803) | | | 32,783 | | | (223) | | | 200,987 | | | (1,026) | |
| | $ | 5,887,738 | | | $ | (58,132) | | | $ | 40,727 | | | $ | (382) | | | $ | 5,928,465 | | | $ | (58,514) | |
As indicated in the tables above, as of March 31, 2021,2022, the Company’s investment securities had gross unrealized losses totaling approximately $5.2$519.3 million, compared to approximately $3.8$58.5 million at December 31, 2020.2021. 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
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, 2021.2022. Management continues to expect to recover the adjusted amortized cost basis of these bonds.securities.
As of March 31, 2021,2022, the Company had 51622 securities whose estimated fair value declined 0.58%4.61% from the Company’s amortized cost; at December 31, 2020,2021, the Company had 30323 securities whose estimated fair value declined 0.86%0.98% from the Company’s amortized cost. The Company’s securities that haveThese unrealized losses on securities are primarily due to widened credit spreads and changes in market interest rates or widening of credit spreads 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.
For the three months ended March 31, 2022, the Company received $432.1 million in proceeds and recognized $3.8 million of gains and $4.4 million losses on sales of available-for-sale securities. There were 0no 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 0 loss on sales and calls of securities.
There were 0no credit losses associated with our securities portfolio recognized in earnings for the three months ended March 31, 20212022 and 2020.2021.
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 | | March 31, 2022 | | December 31, 2021 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | | (Dollars in thousands) | | (Dollars in thousands) |
Available-for-sale securities | Available-for-sale securities | | Available-for-sale securities | |
Within one year | Within one year | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | Within one year | | $ | 34,889 | | | $ | 34,724 | | | $ | — | | | $ | — | |
After one year through five years | After one year through five years | | 0 | | | 0 | | | 0 | | | 0 | | After one year through five years | | 1,611 | | | 1,531 | | | 2,243 | | | 2,170 | |
After five years through ten years | After five years through ten years | | 56,363 | | | 57,091 | | | 14,021 | | | 15,694 | | After five years through ten years | | 1,503,068 | | | 1,502,618 | | | 1,406,395 | | | 1,401,733 | |
After ten years | After ten years | | 1,634,225 | | | 1,660,327 | | | 884,730 | | | 923,321 | | After ten years | | 8,241,264 | | | 7,924,621 | | | 7,230,326 | | | 7,221,356 | |
Total | Total | | $ | 1,690,588 | | | $ | 1,717,418 | | | $ | 898,751 | | | $ | 939,015 | | Total | | $ | 9,780,832 | | | $ | 9,463,494 | | | $ | 8,638,964 | | | $ | 8,625,259 | |
Held-to-maturity securities | | Held-to-maturity securities | | | | | | | | |
Within one year | | Within one year | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
After one year through five years | | After one year through five years | | 1,245,293 | | | 1,202,805 | | | — | | | — | |
After five years through ten years | | After five years through ten years | | 275,375 | | | 249,523 | | | — | | | — | |
After ten years | | After ten years | | 1,230,957 | | | 1,126,648 | | | — | | | — | |
Total | | Total | | $ | 2,751,625 | | | $ | 2,578,976 | | | $ | — | | | $ | — | |
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 includesinclude loans for which the Company holds one-to-four family, multi-family, commercial and construction real property as collateral. One-to-four family real estate loans primarily consist of non-qualified single-family residential mortgage loans and purchases of loan pools. Multi-family real estate loans have been offered for the purchase or refinancing of apartment properties located primarily in the Southern California market area. Commercial real estate lending activity is typically restricted to owner-occupied properties or tohas historically been primarily focused on 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 U.S. dollar denominated loans to businesses that are collateralized almost exclusively by bitcoin or U.S. dollars, also known as our core lending product, SEN Leverage. Commercial and industrial loans may also 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 calledBorrowers accessing SEN Leverage which allows Silvergate customersprovide bitcoin or U.S. dollars as collateral in an amount greater than the line of credit eligible to obtain U.S. dollar loans collateralized by bitcoin held at selectbe advanced. The Bank works with regulated digital currency exchanges and other custodians that are also customersindirect lenders, as the case may be, to both act as its collateral custodian for such loans, and to liquidate the collateral in the event of a decline in collateral coverage below levels required in the borrower’s loan agreement. At no time does the Bank directly hold the pledged bitcoin digital currency. The Bank sets collateral coverage ratios at levels intended to yield collateral liquidation proceeds in excess of the Bank.borrower’s loan amount, but the borrower remains obligated for the payment of any deficiency notwithstanding any change in the condition of the exchange, financial or otherwise. The outstanding balance of gross SEN Leverage loans was $117.3$435.0 million and $77.2$335.9 million at March 31, 20212022 and December 31, 2020,2021, respectively. Unfunded commitments on SEN Leverage loans were $635.1 million and $234.6 million at March 31, 2022 and December 31, 2021, 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
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 primarily for single-family residential mortgage loans originated by mortgage bankers or other lenders pending the sale oflenders. The Company holds legal title to such loans infrom the secondary market. The Company’s risk is mitigated by comprehensive policies, procedures, and controls governing this activity, partial loan fundingdate they are funded by the originating lender, guaranties or additional monies pledged toCompany until 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 subjectsold to written purchasesecondary market investors pursuant to pre-existing take out commitments, from takeout investors or are hedged.generally within a few weeks of origination, with loan sale proceeds applied to pay down Company funding. 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, 20212022 and December 31, 2020,2021, gross mortgage warehouse loans were approximately $973.2 million$1.0 billion and $963.9 million,$1.1 billion, respectively.
A summary of loans as of the periods presented are as follows:
| | | March 31, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
Real estate loans: | Real estate loans: | | Real estate loans: | |
One-to-four family | One-to-four family | | $ | 171,045 | | | $ | 187,855 | | One-to-four family | | $ | 94,161 | | | $ | 105,098 | |
Multi-family | Multi-family | | 74,003 | | | 77,126 | | Multi-family | | 9,368 | | | 56,751 | |
Commercial | Commercial | | 287,411 | | | 301,901 | | Commercial | | 80,279 | | | 210,136 | |
Construction | Construction | | 5,172 | | | 6,272 | | Construction | | — | | | 7,573 | |
Commercial and industrial | Commercial and industrial | | 118,598 | | | 78,909 | | Commercial and industrial | | 434,960 | | | 335,862 | |
| Reverse mortgage and other | Reverse mortgage and other | | 1,346 | | | 1,495 | | Reverse mortgage and other | | 1,137 | | | 1,410 | |
Mortgage warehouse | Mortgage warehouse | | 76,014 | | | 97,903 | | Mortgage warehouse | | 125,435 | | | 177,115 | |
Total gross loans held-for-investment | Total gross loans held-for-investment | | 733,589 | | | 751,461 | | Total gross loans held-for-investment | | 745,340 | | | 893,945 | |
Deferred fees, net | Deferred fees, net | | 1,717 | | | 2,206 | | Deferred fees, net | | (1,884) | | | 275 | |
Total loans held-for-investment | Total loans held-for-investment | | 735,306 | | | 753,667 | | Total loans held-for-investment | | 743,456 | | | 894,220 | |
Allowance for loan losses | Allowance for loan losses | | (6,916) | | | (6,916) | | Allowance for loan losses | | (4,442) | | | (6,916) | |
Total loans held-for-investment, net | Total loans held-for-investment, net | | $ | 728,390 | | | $ | 746,751 | | Total loans held-for-investment, net | | $ | 739,014 | | | $ | 887,304 | |
Total loans held-for-sale(1) | Total loans held-for-sale(1) | | $ | 897,227 | | | $ | 865,961 | | Total loans held-for-sale(1) | | $ | 937,140 | | | $ | 893,194 | |
________________________(1)Loans held-for-sale are comprised entirelyincludes $914.2 million and $893.2 million of mortgage warehouse loans for all periods presented.as of March 31, 2022 and December 31, 2021, respectively.
At March 31, 20212022 and December 31, 2020,2021, approximately $539.0$184.9 million and $574.5$381.0 million, respectively, of the Company’s loan portfolio wasgross loans held-for-investment were collateralized by various forms of real estate. A significant percentage of such loans are collateralized by propertiesestate, primarily located in California (64.7% and 68.8% as ofCalifornia. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. At March 31, 20212022 and December 31, 2020, respectively)2021, approximately $435.0 million and Arizona (4.4%$335.9 million, respectively, of the Company’s gross loans held-for-investment was collateralized primarily by bitcoin and 5.9%U.S. dollars. The loan to value ratio of these loans fluctuates in relation to value of bitcoin held as collateral, which may be volatile and there is no assurance that customers will be able to timely provide additional collateral under these loans in a scenario where the value of March 31, 2021 and December 31, 2020, respectively) with no other state greater than 5%.the bitcoin drops precipitously. The Company attempts to addressmonitors and mitigatemanages 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$2.5 million and $2.7 million and deferred fees totaled approximately $1.7 million and $2.2$3.3 million at March 31, 20212022 and December 31, 2020,2021, 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
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 | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | 0 | | | 0 | | | 0 | |
Recoveries | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | 0 | | | 0 | | | 0 | |
Provision for loan losses | | 389 | | | (50) | | | 1,441 | | | (97) | | | (1,571) | | | | | (21) | | | (91) | | | 0 | |
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 | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | 0 | | | 0 | | | 0 | |
Recoveries | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | 0 | | | 0 | | | 0 | |
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 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | | | $ | 7 | | | $ | 0 | | | $ | 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 | | | $ | 0 | | | $ | 9,830 | | | $ | 0 | | | $ | 237 | | | | | $ | 876 | | | $ | 0 | | | $ | 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 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | | | $ | 29 | | | $ | 0 | | | $ | 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 | | | $ | 0 | | | $ | 9,722 | | | $ | 0 | | | $ | 274 | | | | | $ | 869 | | | $ | 0 | | | $ | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 |
| | 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, 2021 | | $ | 1,023 | | | $ | 682 | | | $ | 2,017 | | | $ | 776 | | | $ | 1,566 | | | | | $ | 12 | | | $ | 840 | | | $ | 6,916 | |
Charge-offs | | — | | | — | | | — | | | — | | | — | | | | | — | | | — | | | — | |
Recoveries | | — | | | — | | | — | | | — | | | — | | | | | — | | | — | | | — | |
Provision for loan losses | | (223) | | | (582) | | | (1,542) | | | (776) | | | 933 | | | | | (1) | | | (283) | | | (2,474) | |
Balance, March 31, 2022 | | $ | 800 | | | $ | 100 | | | $ | 475 | | | $ | — | | | $ | 2,499 | | | | | $ | 11 | | | $ | 557 | | | $ | 4,442 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 |
| | 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 | | $ | 28 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | $ | — | | | $ | — | | | $ | 28 | |
General portfolio allocation | | 772 | | | 100 | | | 475 | | | — | | | 2,499 | | | | | 11 | | | 557 | | | 4,414 | |
Total allowance for loan losses | | $ | 800 | | | $ | 100 | | | $ | 475 | | | $ | — | | | $ | 2,499 | | | | | $ | 11 | | | $ | 557 | | | $ | 4,442 | |
Loans evaluated for impairment: | | | | | | | | | | | | | | | | | | |
Specifically evaluated | | $ | 4,126 | | | $ | — | | | $ | 1,236 | | | $ | — | | | $ | — | | | | | $ | 646 | | | $ | — | | | $ | 6,008 | |
Collectively evaluated | | 90,575 | | | 9,367 | | | 79,037 | | | — | | | 432,533 | | | | | 501 | | | 125,435 | | | 737,448 | |
Total loans held-for-investment | | $ | 94,701 | | | $ | 9,367 | | | $ | 80,273 | | | $ | — | | | $ | 432,533 | | | | | $ | 1,147 | | | $ | 125,435 | | | $ | 743,456 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 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 | | $ | 29 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | $ | — | | | $ | — | | | $ | 29 | |
General portfolio allocation | | 994 | | | 682 | | | 2,017 | | | 776 | | | 1,566 | | | | | 12 | | | 840 | | | 6,887 | |
Total allowance for loan losses | | $ | 1,023 | | | $ | 682 | | | $ | 2,017 | | | $ | 776 | | | $ | 1,566 | | | | | $ | 12 | | | $ | 840 | | | $ | 6,916 | |
Loans evaluated for impairment: | | | | | | | | | | | | | | | | | | |
Specifically evaluated | | $ | 4,229 | | | $ | — | | | $ | 1,956 | | | $ | — | | | $ | — | | | | | $ | 923 | | | $ | — | | | $ | 7,108 | |
Collectively evaluated | | 101,609 | | | 56,855 | | | 208,170 | | | 7,502 | | | 335,362 | | | | | 499 | | | 177,115 | | | 887,112 | |
Total loans held-for-investment | | $ | 105,838 | | | $ | 56,855 | | | $ | 210,126 | | | $ | 7,502 | | | $ | 335,362 | | | | | $ | 1,422 | | | $ | 177,115 | | | $ | 894,220 | |
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 | | | March 31, 2022 |
| | | Unpaid Principal Balance | | Recorded Investment | | Related Allowance | | | Unpaid Principal Balance | | Recorded Investment | | Related Allowance |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
With no related allowance recorded: | With no related allowance recorded: | | With no related allowance recorded: | |
Real estate loans: | Real estate loans: | | Real estate loans: | |
One-to-four family | One-to-four family | | $ | 5,742 | | | $ | 5,077 | | | $ | — | | One-to-four family | | $ | 3,866 | | | $ | 3,827 | | | $ | — | |
| Commercial | Commercial | | 9,830 | | | 9,830 | | | — | | Commercial | | 1,237 | | | 1,236 | | | — | |
| Commercial and industrial | | 237 | | | 237 | | | — | | |
| | Reverse mortgage and other | Reverse mortgage and other | | 801 | | | 800 | | | — | | Reverse mortgage and other | | 646 | | | 646 | | | — | |
| | | 16,610 | | | 15,944 | | | — | | | 5,749 | | | 5,709 | | | — | |
With an allowance recorded: | With an allowance recorded: | | With an allowance recorded: | |
Real estate loans: | Real estate loans: | | Real estate loans: | |
One-to-four family | One-to-four family | | 64 | | | 64 | | | 12 | | One-to-four family | | 296 | | | 299 | | | 28 | |
| Reverse mortgage and other | | 76 | | | 76 | | | 7 | | |
| | | | 140 | | | 140 | | | 19 | | | 296 | | | 299 | | | 28 | |
Total impaired loans | Total impaired loans | | $ | 16,750 | | | $ | 16,084 | | | $ | 19 | | Total impaired loans | | $ | 6,045 | | | $ | 6,008 | | | $ | 28 | |
| | | December 31, 2020 | | December 31, 2021 |
| | | Unpaid Principal Balance | | Recorded Investment | | Related Allowance | | | Unpaid Principal Balance | | Recorded Investment | | Related Allowance |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
With no related allowance recorded: | With no related allowance recorded: | | With no related allowance recorded: | |
Real estate loans: | Real estate loans: | | Real estate loans: | |
One-to-four family | One-to-four family | | $ | 6,432 | | | $ | 5,716 | | | $ | — | | One-to-four family | | $ | 4,616 | | | $ | 3,927 | | | $ | — | |
| Commercial | Commercial | | 9,723 | | | 9,722 | | | — | | Commercial | | 1,955 | | | 1,956 | | | — | |
| Commercial and industrial | | 274 | | | 274 | | | — | | |
| | Reverse mortgage and other | Reverse mortgage and other | | 523 | | | 523 | | | — | | Reverse mortgage and other | | 914 | | | 923 | | | — | |
| | | 16,952 | | | 16,235 | | | — | | | 7,485 | | | 6,806 | | | — | |
With an allowance recorded: | With an allowance recorded: | | With an allowance recorded: | |
Real estate loans: | Real estate loans: | | Real estate loans: | |
One-to-four family | One-to-four family | | 64 | | | 64 | | | 11 | | One-to-four family | | 323 | | | 302 | | | 29 | |
| Reverse mortgage and other | | 346 | | | 346 | | | 29 | | |
| | | | 410 | | | 410 | | | 40 | | | 323 | | | 302 | | | 29 | |
Total impaired loans | Total impaired loans | | $ | 17,362 | | | $ | 16,645 | | | $ | 40 | | Total impaired loans | | $ | 7,808 | | | $ | 7,108 | | | $ | 29 | |
| | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | | 2021 | | 2020 | | | 2022 | | 2021 |
| | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
With no related allowance recorded: | With no related allowance recorded: | | With no related allowance recorded: | |
Real estate loans: | Real estate loans: | | Real estate loans: | |
One-to-four family | One-to-four family | | $ | 4,979 | | | $ | 77 | | | $ | 3,731 | | | $ | 26 | | One-to-four family | | $ | 3,856 | | | $ | 17 | | | $ | 4,979 | | | $ | 77 | |
| Commercial | Commercial | | 9,795 | | | 128 | | | 1,941 | | | 21 | | Commercial | | 2,526 | | | 20 | | | 9,795 | | | 128 | |
| Commercial and industrial | Commercial and industrial | | 249 | | | 5 | | | 2,329 | | | 42 | | Commercial and industrial | | — | | | — | | | 249 | | | 5 | |
| Reverse mortgage and other | Reverse mortgage and other | | 616 | | | 0 | | | 511 | | | 0 | | Reverse mortgage and other | | 829 | | | — | | | 616 | | | — | |
| | | 15,639 | | | 210 | | | 8,512 | | | 89 | | | 7,211 | | | 37 | | | 15,639 | | | 210 | |
With an allowance recorded: | With an allowance recorded: | | With an allowance recorded: | |
Real estate loans: | Real estate loans: | | Real estate loans: | |
One-to-four family | One-to-four family | | 64 | | | 1 | | | 66 | | | 1 | | One-to-four family | | 300 | | | 1 | | | 64 | | | 1 | |
| Reverse mortgage and other | Reverse mortgage and other | | 258 | | | 0 | | | 338 | | | 0 | | Reverse mortgage and other | | — | | | — | | | 258 | | | — | |
| | | 322 | | | 1 | | | 404 | | | 1 | | | 300 | | | 1 | | | 322 | | | 1 | |
Total impaired loans | Total impaired loans | | $ | 15,961 | | | $ | 211 | | | $ | 8,916 | | | $ | 90 | | Total impaired loans | | $ | 7,511 | | | $ | 38 | | | $ | 15,961 | | | $ | 211 | |
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 | | | March 31, 2022 |
| | 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 | | 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) | | | (Dollars in thousands) |
Real estate loans: | Real estate loans: | | Real estate loans: | |
One-to-four family | One-to-four family | | $ | 2,773 | | | $ | 2,187 | | | $ | 2,834 | | | $ | 7,794 | | | $ | 163,251 | | | $ | 171,045 | | | $ | 4,457 | | | $ | 0 | | One-to-four family | | $ | 210 | | | $ | 189 | | | $ | 2,776 | | | $ | 3,175 | | | $ | 91,526 | | | $ | 94,701 | | | $ | 2,986 | | | $ | — | |
Multi-family | Multi-family | | 0 | | | 0 | | | 0 | | | 0 | | | 74,003 | | | 74,003 | | | 0 | | | 0 | | Multi-family | | — | | | — | | | — | | | — | | | 9,367 | | | 9,367 | | | — | | | — | |
Commercial | Commercial | | 0 | | | 0 | | | 0 | | | 0 | | | 287,411 | | | 287,411 | | | 0 | | | 0 | | Commercial | | — | | | — | | | — | | | — | | | 80,273 | | | 80,273 | | | — | | | — | |
Construction | Construction | | 0 | | | 0 | | | 0 | | | 0 | | | 5,172 | | | 5,172 | | | 0 | | | 0 | | Construction | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial and industrial | Commercial and industrial | | 0 | | | 0 | | | 0 | | | 0 | | | 118,598 | | | 118,598 | | | 0 | | | 0 | | Commercial and industrial | | — | | | — | | | — | | | — | | | 432,533 | | | 432,533 | | | — | | | — | |
| Reverse mortgage and other | Reverse mortgage and other | | 0 | | | 0 | | | 0 | | | 0 | | | 1,346 | | | 1,346 | | | 876 | | | 0 | | Reverse mortgage and other | | — | | | — | | | — | | | — | | | 1,147 | | | 1,147 | | | 646 | | | — | |
Mortgage warehouse | Mortgage warehouse | | 0 | | | 0 | | | 0 | | | 0 | | | 76,014 | | | 76,014 | | | 0 | | | 0 | | Mortgage warehouse | | — | | | — | | | — | | | — | | | 125,435 | | | 125,435 | | | — | | | — | |
Total gross loans held-for-investment | | $ | 2,773 | | | $ | 2,187 | | | $ | 2,834 | | | $ | 7,794 | | | $ | 725,795 | | | $ | 733,589 | | | $ | 5,333 | | | $ | 0 | | |
Total loans held-for-investment | | Total loans held-for-investment | | $ | 210 | | | $ | 189 | | | $ | 2,776 | | | $ | 3,175 | | | $ | 740,281 | | | $ | 743,456 | | | $ | 3,632 | | | $ | — | |
| | | | December 31, 2020 | | | December 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 | | | 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) | | | (Dollars in thousands) |
Real estate loans: | Real estate loans: | | Real estate loans: | |
One-to-four family | One-to-four family | | $ | 992 | | | $ | 85 | | | $ | 3,820 | | | $ | 4,897 | | | $ | 182,958 | | | $ | 187,855 | | | $ | 4,113 | | | $ | 0 | | One-to-four family | | $ | 1,176 | | | $ | — | | | $ | 2,985 | | | $ | 4,161 | | | $ | 101,677 | | | $ | 105,838 | | | $ | 3,080 | | | $ | — | |
Multi-family | Multi-family | | 206 | | | 0 | | | 0 | | | 206 | | | 76,920 | | | 77,126 | | | 0 | | | 0 | | Multi-family | | — | | | — | | | — | | | — | | | 56,855 | | | 56,855 | | | — | | | — | |
Commercial | Commercial | | 0 | | | 0 | | | 0 | | | 0 | | | 301,901 | | | 301,901 | | | 0 | | | 0 | | Commercial | | — | | | — | | | — | | | — | | | 210,126 | | | 210,126 | | | — | | | — | |
Construction | Construction | | 0 | | | 0 | | | 0 | | | 0 | | | 6,272 | | | 6,272 | | | 0 | | | 0 | | Construction | | — | | | — | | | — | | | — | | | 7,502 | | | 7,502 | | | — | | | — | |
Commercial and industrial | Commercial and industrial | | 0 | | | 0 | | | 0 | | | 0 | | | 78,909 | | | 78,909 | | | 0 | | | 0 | | Commercial and industrial | | — | | | — | | | — | | | — | | | 335,362 | | | 335,362 | | | — | | | — | |
| Reverse mortgage and other | Reverse mortgage and other | | 0 | | | 0 | | | 0 | | | 0 | | | 1,495 | | | 1,495 | | | 869 | | | 0 | | Reverse mortgage and other | | — | | | — | | | — | | | — | | | 1,422 | | | 1,422 | | | 923 | | | — | |
Mortgage warehouse | Mortgage warehouse | | 0 | | | 0 | | | 0 | | | 0 | | | 97,903 | | | 97,903 | | | 0 | | | 0 | | Mortgage warehouse | | — | | | — | | | — | | | — | | | 177,115 | | | 177,115 | | | — | | | — | |
Total gross loans held-for-investment | | $ | 1,198 | | | $ | 85 | | | $ | 3,820 | | | $ | 5,103 | | | $ | 746,358 | | | $ | 751,461 | | | $ | 4,982 | | | $ | 0 | | |
Total loans held-for-investment | | Total loans held-for-investment | | $ | 1,176 | | | $ | — | | | $ | 2,985 | | | $ | 4,161 | | | $ | 890,059 | | | $ | 894,220 | | | $ | 4,003 | | | $ | — | |
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, 20212022 and December 31, 2020,2021, the Company had a recorded investment in TDRs of $1.5 million and $1.5 million, respectively.$1.7 million. The Company has allocated $11,000$28,000 of specific allowance for those loans at March 31, 20212022 and $11,000$29,000 at December 31, 2020.2021. The Company has not committed to lendadvance additional amounts toon these TDRs. NaNNo loans were modified as TDRs during the three months ended March 31, 20212022 or 2020.2021.
A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. There were 0no loans modified as TDRs for which there was a payment default within twelve months during the three months ended March 31, 20212022 or 2020.2021. There was 0no 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.2021.
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
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 | | | Credit Risk Grades |
| | | Pass | | Special Mention | | Substandard | | Doubtful | | Total | | | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
March 31, 2021 | | |
March 31, 2022 | | March 31, 2022 | |
Real estate loans: | Real estate loans: | | Real estate loans: | |
One-to-four family | One-to-four family | | $ | 163,313 | | | $ | 3,275 | | | $ | 4,457 | | | $ | 0 | | | $ | 171,045 | | One-to-four family | | $ | 91,166 | | | $ | 549 | | | $ | 2,986 | | | $ | — | | | $ | 94,701 | |
Multi-family | Multi-family | | 74,003 | | | 0 | | | 0 | | | 0 | | | 74,003 | | Multi-family | | 9,367 | | | — | | | — | | | — | | | 9,367 | |
Commercial | Commercial | | 265,135 | | | 14,402 | | | 7,874 | | | 0 | | | 287,411 | | Commercial | | 65,305 | | | 13,732 | | | 1,236 | | | — | | | 80,273 | |
Construction | Construction | | 5,172 | | | 0 | | | 0 | | | 0 | | | 5,172 | | Construction | | — | | | — | | | — | | | — | | | — | |
Commercial and industrial | Commercial and industrial | | 118,361 | | | 0 | | | 237 | | | 0 | | | 118,598 | | Commercial and industrial | | 432,533 | | | — | | | — | | | — | | | 432,533 | |
| Reverse mortgage and other | Reverse mortgage and other | | 470 | | | 0 | | | 876 | | | 0 | | | 1,346 | | Reverse mortgage and other | | 501 | | | — | | | 646 | | | — | | | 1,147 | |
Mortgage warehouse | Mortgage warehouse | | 76,014 | | | 0 | | | 0 | | | 0 | | | 76,014 | | Mortgage warehouse | | 125,435 | | | — | | | — | | | — | | | 125,435 | |
Total gross loans held-for-investment | | $ | 702,468 | | | $ | 17,677 | | | $ | 13,444 | | | $ | 0 | | | $ | 733,589 | | |
Total loans held-for-investment | | Total loans held-for-investment | | $ | 724,307 | | | $ | 14,281 | | | $ | 4,868 | | | $ | — | | | $ | 743,456 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Credit Risk Grades |
| | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
| | | | | | | | | | |
| | (Dollars in thousands) |
December 31, 2021 | | | | | | | | | | |
Real estate loans: | | | | | | | | | | |
One-to-four family | | $ | 102,307 | | | $ | 451 | | | $ | 3,080 | | | $ | — | | | $ | 105,838 | |
Multi-family | | 56,855 | | | — | | | — | | | — | | | 56,855 | |
Commercial | | 199,598 | | | 10,528 | | | — | | | — | | | 210,126 | |
Construction | | 7,502 | | | — | | | — | | | — | | | 7,502 | |
Commercial and industrial | | 335,362 | | | — | | | — | | | — | | | 335,362 | |
| | | | | | | | | | |
Reverse mortgage and other | | 499 | | | — | | | 923 | | | — | | | 1,422 | |
Mortgage warehouse | | 177,115 | | | — | | | — | | | — | | | 177,115 | |
Total loans held-for-investment | | $ | 879,238 | | | $ | 10,979 | | | $ | 4,003 | | | $ | — | | | $ | 894,220 | |
Purchases and Sales
The following table presents loans held-for-investment purchased and/or sold during the year by portfolio segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
| | Purchases | | Sales(1) | | Purchases | | Sales |
| | | | | | | | |
| | (Dollars in thousands) |
Real estate loans: | | | | | | | | |
| | | | | | | | |
Multi-family | | $ | — | | | $ | 54,227 | | | $ | — | | | $ | — | |
Commercial | | — | | | 155,011 | | | — | | | — | |
Construction | | — | | | 6,823 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | $ | — | | | $ | 216,061 | | | $ | — | | | $ | — | |
________________________(1)In conjunction with the loan sale during the three months ended March 31, 2022, the Company purchased a participating interest of $67.6 million of the loans sold to the buyer.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | | $ | 0 | | | $ | 187,855 | |
Multi-family | | 77,126 | | | 0 | | | 0 | | | 0 | | | 77,126 | |
Commercial | | 288,309 | | | 5,825 | | | 7,767 | | | 0 | | | 301,901 | |
Construction | | 6,272 | | | 0 | | | 0 | | | 0 | | | 6,272 | |
Commercial and industrial | | 78,635 | | | 0 | | | 274 | | | 0 | | | 78,909 | |
| | | | | | | | | | |
Reverse mortgage and other | | 626 | | | 0 | | | 869 | | | 0 | | | 1,495 | |
Mortgage warehouse | | 97,903 | | | 0 | | | 0 | | | 0 | | | 97,903 | |
Total gross loans held-for-investment | | $ | 729,329 | | | $ | 9,109 | | | $ | 13,023 | | | $ | 0 | | | $ | 751,461 | |
Related Party Loans
The Company had no outstanding balance of related party loans with anat March 31, 2022 and $7.7 million outstanding balance of $5.5 million and $5.0 million as of March 31, 2021 and December 31, 2020, respectively.2021. During the three months ended March 31, 2021,2022, the Company advanced $2.0received $7.7 million of related party loansin proceeds from loan sales 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 | | 0 | | | 0 | |
Weighted average interest rate at period-end | | 0 | | | 0 | |
Maximum month-end balance during the period | | 0 | | | $ | 360,000 | |
Average balance outstanding during the period | | 0 | | | $ | 68,522 | |
Weighted average interest rate during the period | | 0 | | | 0.50 | % |
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 | | Year Ended December 31, 2021 |
| | | | |
| | (Dollars in thousands) |
Amount outstanding at period-end | | $ | 800,000 | | | $ | — | |
Weighted average interest rate at period-end | | 0.43 | % | | — | |
FHLB advances areor borrowing capacity can be secured with eligible collateral consisting of certainqualifying real estate loans.loans or certain securities. Advances from the FHLB are subject to the FHLB’s collateral and underwriting requirements and as of March 31, 20212022 and December 31, 2020,2021, were limited in the aggregate to 35% of the Company’sBank’s total assets. Loans with carrying valuesand securities of approximately $1.4$2.4 billion and $1.5$1.4 billion were pledged to the FHLB as of March 31, 20212022 and December 31, 2020,2021, respectively. Unused borrowing capacity based on the lesser of the percentage of total assets and pledged collateral was approximately $866.7 million$1.2 billion and $893.0 million$1.0 billion as of March 31, 20212022 and December 31, 2020,2021, respectively.
FRB Advances
The CompanyBank 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$5.2 million and $6.3$6.0 million were pledged to the FRB at March 31, 20212022 and December 31, 2020,2021, respectively. The Company’sBank’s borrowing capacity under the Federal Reserve’s discount window program was approximately $5.1$2.9 million and $4.8$5.2 million as of March 31, 20212022 and December 31, 2020,2021, respectively. At March 31, 20212022 and December 31, 2020,2021, there were 0 borrowings outstanding under any of these lines.no FRB advances outstanding.
Federal Funds Purchased
The CompanyBank may borrow up to an aggregate $68.0$108.0 million, overnight on an unsecured basis, from 32 of its correspondent banks. Access to these funds is subject to liquidity availability, market conditions and any negative material change in the Company’sBank’s credit profile. As of March 31, 20212022 and December 31, 2020,2021, the Company had 0no outstanding balance of federal funds purchased.
Note 5—Intangible Assets
On January 31, 2022 the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) under which it acquired from the Libra Association, Diem Networks US HoldCo, Inc., Diem Networks US, Inc., Diem Networks II LLC, Diem LLC, and Diem Networks LLC, (collectively, the “Sellers”) certain intellectual property and other technology assets related to running a blockchain-based payment network. The assets acquired by the Company included development, deployment and operations infrastructure and tools for running a blockchain-based payment network designed to facilitate payments for commerce and cross-border remittances as well as proprietary software elements that are critical to running a regulatory-compliant stablecoin network. The technology is currently in a pre-launch phase, and no related amortization expense has been recorded for the acquired asset. The amortization period will begin when the developed technology is available for intended use.
Under the terms of the Purchase Agreement, the aggregate purchase price for the acquired assets consisted of (i) $50.0 million in cash consideration and (ii) 1,221,217 shares of the Company’s Class A common stock. The value of the total transaction consideration was $181.6 million. The Company accounted for the purchase as an asset acquisition and capitalized direct transaction costs related to the purchase of $8.4 million, bringing the total intangible asset to $190.0 million at March 31, 2022.
Note 6—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, 2021,2022, the interest rate for the Company’s next scheduled payment was 3.98%4.19%, based on six-month LIBOR of 0.23%0.44%. 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, 2021,2022, the interest rate for the Company’s next scheduled payment was 2.03%2.68%, based on three-month LIBOR of 0.18%0.83%. 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 costcosts as of March 31, 20212022 and $15.8 million, net of $0.1 million unamortized debt issuance costs as of December 31, 2020.2021.
Note 6—7—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 accumulated other comprehensive income (“OCI”AOCI”), 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 changeschange in fair value of the hedged item is recorded as a basis adjustment to the hedged assets or liabilities. The amount included as a basis adjustmentsadjustment 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 2 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. In October 2021, the Company sold the swaps and related securities, which resulted in a gain of $0.9 million related to the swaps to be recognized immediately. The gain was recorded in other noninterest income on the statement of operations. The Swap Agreements arewere based on three-month LIBOR and expirehad original expiration dates 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
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 1326 interest rate cap agreements with a total notional amount of $205.0$552.8 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$24.7 million. The Company expects the Federal Funds Rate Cap Agreements to remain effective during the remaining term of the respective agreements. During the three months ended March 31, 2022, the Company sold certain tax-exempt municipal bonds and $16.5 million notional amount of the related interest rate caps for $1.1 million in proceeds for the interest rate caps and recognized a gain of $0.4 million which was recognized immediately in other noninterest income on the statement of operations.
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 $3.0 million LIBOR Cap Agreement matured during the three months ended March 31, 2022. The remaining $12.5 million LIBOR Cap Agreement expires July 25, 2022. The Company utilized these 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 debenturedebentures and six-month LIBOR beyond 0.75% for the $12.5 million subordinated debenture.debentures. 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 | | | March 31, 2022 | | December 31, 2021 |
| | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| | | (Dollars in thousands) | | (Dollars in thousands) |
Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: | | | Derivatives designated as hedging instruments: | | |
Cash flow hedge interest rate floor | Cash flow hedge interest rate floor | | Derivative assets | | $ | 22,451 | | | Derivative assets | | $ | 30,766 | | Cash flow hedge interest rate floor | | Derivative assets | | $ | 13,671 | | | Derivative assets | | $ | 18,992 | |
Cash flow hedge interest rate cap | Cash flow hedge interest rate cap | | Derivative assets | | 0 | | | Derivative assets | | 0 | | Cash flow hedge interest rate cap | | Derivative assets | | — | | | Derivative assets | | — | |
| Fair value hedge interest rate swap | | Derivative assets | | 1,410 | | | Derivative assets | | 338 | | |
| Fair value hedge interest rate cap | Fair value hedge interest rate cap | | Derivative assets | | 10,581 | | | Derivative assets | | 0 | | Fair value hedge interest rate cap | | Derivative assets | | 32,744 | | | Derivative assets | | 15,064 | |
The following table presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of those items as of the periods presented.
| | | Carrying Amount of the Hedged Asset (Liability) | | Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of Hedged Assets/(Liabilities) | | Carrying Amount of the Hedged Asset (Liability) | | Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of Hedged Assets/(Liabilities) |
| | March 31, 2021 | | December 31, 2020 | | March 31, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 | | March 31, 2022 | | December 31, 2021 |
| | | (Dollars in thousands) | | (Dollars in thousands) |
Line Item in the Statement of Financial Condition of Hedged Item: | Line Item in the Statement of Financial Condition of Hedged Item: | | Line Item in the Statement of Financial Condition of Hedged Item: | |
Securities available-for-sale | Securities available-for-sale | | $ | 204,627 | | | $ | 15,367 | | | $ | (2,153) | | | $ | (278) | | Securities available-for-sale | | $ | 742,461 | | | $ | 697,437 | | | $ | (3,347) | | | $ | — | |
The following table summarizes the effects of derivatives in cash flow and fair value hedging relationships designated as hedging instruments on the Company’s OCIAOCI and consolidated statements of operations for the periods presented.
| | | Amount of Gain (Loss) Recognized in OCI | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain (Loss) Recognized in OCI | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income |
| | Three Months Ended March 31, | | | | Three Months Ended March 31, | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | | (Dollars in thousands) | | (Dollars in thousands) |
Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: | | | | | Derivatives designated as hedging instruments: | | | | |
Cash flow hedge interest rate floor | Cash flow hedge interest rate floor | | $ | (1,450) | | | $ | 6,096 | | | Interest income - Other interest earning assets | | $ | 136 | | | $ | 125 | | Cash flow hedge interest rate floor | | $ | (857) | | | $ | (1,450) | | | Interest income - Other interest earning assets | | $ | 131 | | | $ | 136 | |
Cash flow hedge interest rate floor | Cash flow hedge interest rate floor | | (5,800) | | | 17,666 | | | Interest income - Taxable securities | | 1,052 | | | 117 | | Cash flow hedge interest rate floor | | (3,426) | | | (5,800) | | | Interest income - Taxable securities | | 1,032 | | | 1,052 | |
Cash flow hedge interest rate cap | Cash flow hedge interest rate cap | | 0 | | | (280) | | | Interest expense - Subordinated debentures | | (99) | | | (55) | | Cash flow hedge interest rate cap | | — | | | — | | | Interest expense - Subordinated debentures | | (96) | | | (99) | |
| Fair value hedge interest rate cap(1) | Fair value hedge interest rate cap(1) | | 375 | | | 0 | | | | | Fair value hedge interest rate cap(1) | | 19,448 | | | 375 | | |
________________________(1)Represents amounts excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in other comprehensive income.
The Company estimates that approximately $4.8$1.6 million of net derivative gain for cash flow hedges included in OCIAOCI will be reclassified into earnings within the next 12 months. No gain or loss was reclassified from OCIAOCI into earnings as a result of forecasted transactions that failed to occur during the periods presented.
The following table presents the effect of fair value hedge accounting on the Company’s consolidated statements of operations for the periods presented.
| | | Location and Amount of Gain or (Loss) Recognized in Income on Fair Value Hedging Relationships | | Location and Amount of Gain or (Loss) Recognized in Income on Fair Value Hedging Relationships |
| | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| | Interest income - Taxable securities | | Interest income - Tax-exempt securities | | Interest income - Taxable securities | | Interest income - Tax-exempt securities | | Interest income - Taxable securities | | Interest income - Tax-exempt securities | | Interest income - Taxable securities | | Interest income - Tax-exempt securities |
| | | (Dollars in thousands) | | (Dollars in thousands) |
Total interest income presented in the statement of operations in which the effects of fair value hedges are recorded | Total interest income presented in the statement of operations in which the effects of fair value hedges are recorded | | $ | 3,592 | | | $ | 1,695 | | | $ | 6,048 | | | $ | 48 | | Total interest income presented in the statement of operations in which the effects of fair value hedges are recorded | | $ | 17,779 | | | $ | 13,184 | | | $ | 3,592 | | | $ | 1,695 | |
Effects of fair value hedging relationships | Effects of fair value hedging relationships | | Effects of fair value hedging relationships | | | | | | | | |
Interest rate contracts: | Interest rate contracts: | | Interest rate contracts: | |
Hedged items | Hedged items | | $ | (1,072) | | | $ | (743) | | | $ | 0 | | | $ | 0 | | Hedged items | | $ | — | | | $ | (3,701) | | | $ | (1,072) | | | $ | (743) | |
Derivatives designated as hedging instruments | Derivatives designated as hedging instruments | | 1,053 | | | 743 | | | 0 | | | 0 | | Derivatives designated as hedging instruments | | — | | | 3,701 | | | 1,053 | | | 743 | |
Amount excluded from effectiveness testing recognized in earnings based on amortization approach | Amount excluded from effectiveness testing recognized in earnings based on amortization approach | | — | | | (25) | | | — | | | 0 | | Amount excluded from effectiveness testing recognized in earnings based on amortization approach | | — | | | (610) | | | — | | | (25) | |
Note 7—8—Income Taxes
Comparison of the federal statutory income tax rates to the Company’s effective income tax rates for the periods presented are as follows:
| | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | | 2021 | | 2020 | | | 2022 | | 2021 |
| | | Amount | | Rate | | Amount | | Rate | | | Amount | | Rate | | Amount | | Rate |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
Statutory federal tax | Statutory federal tax | | $ | 2,415 | | | 21.0 | % | | $ | 1,295 | | | 21.0 | % | Statutory federal tax | | $ | 7,222 | | | 21.0 | % | | $ | 2,415 | | | 21.0 | % |
State tax, net of federal benefit | State tax, net of federal benefit | | (451) | | | (3.9) | % | | 494 | | | 8.0 | % | State tax, net of federal benefit | | 2,840 | | | 8.3 | % | | (451) | | | (3.9) | % |
| Tax credits | Tax credits | | (41) | | | (0.4) | % | | (56) | | | (0.9) | % | Tax credits | | (38) | | | (0.1) | % | | (41) | | | (0.4) | % |
Tax-exempt income | | (347) | | | (3.0) | % | | 0 | | | 0 | | |
Tax-exempt income, net | | Tax-exempt income, net | | (2,994) | | | (8.7) | % | | (347) | | | (3.0) | % |
Excess tax benefit from stock-based compensation | Excess tax benefit from stock-based compensation | | (3,003) | | | (26.1) | % | | 0 | | | 0 | | Excess tax benefit from stock-based compensation | | (29) | | | (0.1) | % | | (3,003) | | | (26.1) | % |
Other items, net | Other items, net | | 216 | | | 1.9 | % | | 41 | | | 0.7 | % | Other items, net | | 14 | | | 0.0 | % | | 216 | | | 1.9 | % |
Actual tax (benefit) expense | | $ | (1,211) | | | (10.5) | % | | $ | 1,774 | | | 28.8 | % | |
Actual tax expense (benefit) | | Actual tax expense (benefit) | | $ | 7,015 | | | 20.4 | % | | $ | (1,211) | | | (10.5) | % |
Income tax expense was $7.0 million for the three months ended March 31, 2022 compared to a benefit wasof $1.2 million for the three months ended March 31, 2021 compared to an expense of $1.8 million for the three months ended March 31, 2020.2021. The effective tax rates for the three months ended March 31, 2022 and 2021 were 20.4% and 2020 were (10.5)% and 28.8%, respectively. The decrease in the income tax expense and the Company’s effective tax rate was primarily related to excess tax benefit from stock-based compensation andfor the three months ended March 31, 2022 were reduced by a significant increase in tax-exempt income earned on certain municipal bonds.bonds compared to the three months ended March 31, 2021. The lower effective tax rate for the three months ended March 31, 2021 was due to higher excess tax benefits recognized on the exercise of stock options.
The deferred tax liabilityasset balance as of March 31, 20212022 was $10.2$97.1 million compared to $15.4$6.5 million as of December 31, 2020.2021. The primary changeincrease in balance was duethe deferred tax asset is attributable to the decrease in unrealized gainslosses on the available-for-sale securities portfolio and derivative assets.portfolio.
Note 89 —Commitments and Contingencies
Off-Balance Sheet Items
In the normal course of business, the Company enters into various transactions, which, in accordance with GAAP, are not included in the consolidated statements of financial condition. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and issue letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk exceeding the amounts recognized on the consolidated statements of financial condition. The Company’s exposure to credit loss is represented by the contractual amounts of these commitments. The same credit policies and procedures are used in making these commitments as for on-balance sheet instruments. The Company is not aware of any accounting loss to be incurred by funding these commitments, however, an allowance for off-balance sheet credit risk is recorded in other liabilities on the statements of financial condition. The allowance for these commitments amounted to approximately $0.3$1.6 million and $0.1$0.6 million at March 31, 20212022 and December 31, 2020,2021, respectively.
The Company’s commitments associated with outstanding letters of credit and commitments to extend credit expiring by period as of the date indicated are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
| | | March 31, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
Unfunded lines of credit | Unfunded lines of credit | | $ | 119,931 | | | $ | 49,487 | | Unfunded lines of credit | | $ | 643,609 | | | $ | 248,092 | |
Letters of credit | Letters of credit | | 133 | | | 133 | | Letters of credit | | 821 | | | 484 | |
Total credit extension commitments | Total credit extension commitments | | $ | 120,064 | | | $ | 49,620 | | Total credit extension commitments | | $ | 644,430 | | | $ | 248,576 | |
Unfunded lines of credit represent unused credit facilities to the Company’s current borrowers that represent no change in credit risk that exist in the Company’s portfolio. Lines of credit generally have variable interest rates. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Company would be entitled to seek recovery from the client from the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, bitcoin, cash and/or marketable securities. The Company’s policies generally require that letter
of credit arrangements contain security and debt covenants like those contained in loan agreements and our credit risk associated with issuing letters of credit is essentially the same as the risk involved in extending loan facilities to customers.
The Company minimizes its exposure to loss under letters of credit and credit commitments by subjecting them to the same credit approval and monitoring procedures used for on-balance sheet instruments. The effect on the Company’s revenue, expenses, cash flows and liquidity of the unused portions of these letters of credit commitments cannot be precisely predicted because there is no guarantee that the lines of credit will be used.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract, for a specific purpose. Commitments generally have variable interest rates, fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management’s credit evaluation of the customer.
Litigation
The Company is involved in various matters of litigation which have arisen in the ordinary course of its business. In the opinion of management, the disposition of such pending litigation will not have a material adverse effect on the Company’s financial statements.
Note 9—10—Stock-based Compensation
In June 2018, the Company adopted the 2018 Equity Compensation Plan, or 2018 Plan, that permits the Compensation Committee, in its sole discretion, to grant various forms of incentive awards. Under the 2018 Plan, the Compensation Committee has the power to grant stock options, stock appreciation rights, or SARs, restricted stock and restricted stock units. The number of shares that may be issued pursuant to awards under the 2018 Plan is 1,596,753.
In accordance with authoritative guidance for stock-based compensation, compensation expense is recognized only for those shares expected to vest, based on the Company’s historical experience and future expectations. The Company has elected a policy of estimating expected forfeitures.
Total stock-based compensation expense was $0.3$0.7 million and $0.2$0.3 million for the three months ended March 31, 2022 and 2021, and 2020, respectively.
Stock Options
A summary of stock option activity as of March 31, 20212022 and changes during the three months ended March 31, 20212022 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value (in thousands) |
Outstanding at January 1, 2021 | | 595,303 | | | $ | 8.01 | | | | | |
Granted | | 18,585 | | | 127.56 | | | | | |
Exercised | | (159,122) | | | 4.76 | | | | | |
Forfeited or expired | | (2,272) | | | 16.09 | | | | | |
Outstanding at March 31, 2021 | | 452,494 | | | $ | 14.03 | | | 4.6 years | | $ | 57,984 | |
Exercisable at March 31, 2021 | | 292,311 | | | $ | 6.10 | | | 2.4 years | | $ | 39,775 | |
Vested or Expected to Vest at March 31, 2021 | | 436,078 | | | $ | 13.49 | | | 4.5 years | | $ | 56,113 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value (in thousands) |
Outstanding at January 1, 2022 | | 191,191 | | | $ | 24.97 | | | | | |
Granted | | 29,117 | | | 110.84 | | | | | |
Exercised | | (1,840) | | | 16.09 | | | | | |
Forfeited or expired | | (1,511) | | | 16.09 | | | | | |
Outstanding at March 31, 2022 | | 216,957 | | | $ | 36.63 | | | 7.3 years | | $ | 24,720 | |
Exercisable at March 31, 2022 | | 99,654 | | | $ | 19.28 | | | 6.0 years | | $ | 13,083 | |
Vested or Expected to Vest at March 31, 2022 | | 209,715 | | | $ | 36.34 | | | 7.2 years | | $ | 23,956 | |
As of March 31, 2021,2022, there was $1.4$2.2 million of total unrecognized compensation cost related to nonvested stock options which is expected to be recognized over a weighted-average period of 2.82.4 years.
Restricted Stock Units
A summary of the status of the Company’s nonvested restricted stock unit awards as of March 31, 2021,2022, and changes during the three months ended March 31, 2021,2022, is presented below:
| | | Number of Shares | | Weighted-Average Grant Date Fair Value Per Share | | Number of Shares | | Weighted-Average Grant Date Fair Value Per Share |
Nonvested at January 1, 2021 | | 58,690 | | | $ | 15.61 | | |
Nonvested at January 1, 2022 | | Nonvested at January 1, 2022 | | 56,871 | | | $ | 72.53 | |
Granted | Granted | | 25,722 | | | $ | 127.56 | | Granted | | 43,165 | | | $ | 110.84 | |
Vested | Vested | | (294) | | | $ | 14.89 | | Vested | | (7,128) | | | $ | 122.91 | |
Forfeited | Forfeited | | (849) | | | $ | 26.33 | | Forfeited | | (1,029) | | | $ | 71.99 | |
Nonvested at March 31, 2021 | | 83,269 | | | $ | 50.08 | | |
Nonvested at March 31, 2022 | | Nonvested at March 31, 2022 | | 91,879 | | | $ | 86.63 | |
At March 31, 2021,2022, there was approximately $3.2$6.1 million of total unrecognized compensation expense related to nonvested restricted stock unit awards, which is expected to be recognized over a weighted-average period of 3.02.6 years.
Note 10—11—Regulatory Capital
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. As of January 1, 2019, the capital conservation buffer had fully phased in to 2.50%. Inclusive of the fully phased-in capital conservation buffer, the common equity tier 1 capital ratio, tier 1 risk-based capital ratio and total risk-based capital ratio minimums are 7.00%, 8.50% and 10.50%, respectively. The Company and the Bank’s regulatory capital reflects the one-time AOCI opt-out election made in the first reporting period after it was subject to capital requirements and therefore the net unrealized gain or loss on available for sale securities and derivatives are not included in computing regulatory capital. Management believes, as of March 31, 2021,2022, the Company and the Bank met all capital adequacy requirements to which they were subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. For the periods presented, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.
Actual capital amounts and ratios for the Company and the Bank as of March 31, 20212022 and December 31, 2020,2021, are presented in the following tables:
| | | | Actual | | Minimum capital adequacy(1) | | To be well capitalized | | | Actual | | Minimum capital adequacy(1) | | To be well capitalized |
| | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
March 31, 2021 | | |
March 31, 2022 | | March 31, 2022 | |
The Company | The Company | | The Company | |
Tier 1 leverage ratio | Tier 1 leverage ratio | | $ | 698,604 | | | 9.68 | % | | $ | 288,754 | | | 4.00 | % | | N/A | | N/A | Tier 1 leverage ratio | | $ | 1,597,946 | | | 9.68 | % | | $ | 660,633 | | | 4.00 | % | | N/A | | N/A |
Common equity tier 1 capital ratio | Common equity tier 1 capital ratio | | 683,104 | | | 53.03 | % | | 57,967 | | | 4.50 | % | | N/A | | N/A | Common equity tier 1 capital ratio | | 1,388,825 | | | 38.97 | % | | 160,360 | | | 4.50 | % | | N/A | | N/A |
Tier 1 risk-based capital ratio | Tier 1 risk-based capital ratio | | 698,604 | | | 54.23 | % | | 77,289 | | | 6.00 | % | | N/A | | N/A | Tier 1 risk-based capital ratio | | 1,597,946 | | | 44.84 | % | | 213,813 | | | 6.00 | % | | N/A | | N/A |
Total risk-based capital ratio | Total risk-based capital ratio | | 705,820 | | | 54.79 | % | | 103,052 | | | 8.00 | % | | N/A | | N/A | Total risk-based capital ratio | | 1,603,983 | | | 45.01 | % | | 285,084 | | | 8.00 | % | | N/A | | N/A |
The Bank | The Bank | | The Bank | |
Tier 1 leverage ratio | Tier 1 leverage ratio | | 685,463 | | | 9.50 | % | | 288,744 | | | 4.00 | % | | $ | 360,930 | | | 5.00 | % | Tier 1 leverage ratio | | 1,577,199 | | | 9.51 | % | | 663,196 | | | 4.00 | % | | $ | 828,995 | | | 5.00 | % |
Common equity tier 1 capital ratio | Common equity tier 1 capital ratio | | 685,463 | | | 53.24 | % | | 57,934 | | | 4.50 | % | | 83,682 | | | 6.50 | % | Common equity tier 1 capital ratio | | 1,577,199 | | | 44.28 | % | | 160,273 | | | 4.50 | % | | 231,505 | | | 6.50 | % |
Tier 1 risk-based capital ratio | Tier 1 risk-based capital ratio | | 685,463 | | | 53.24 | % | | 77,245 | | | 6.00 | % | | 102,994 | | | 8.00 | % | Tier 1 risk-based capital ratio | | 1,577,199 | | | 44.28 | % | | 213,697 | | | 6.00 | % | | 284,929 | | | 8.00 | % |
Total risk-based capital ratio | Total risk-based capital ratio | | 692,679 | | | 53.80 | % | | 102,994 | | | 8.00 | % | | 128,742 | | | 10.00 | % | Total risk-based capital ratio | | 1,583,236 | | | 44.45 | % | | 284,929 | | | 8.00 | % | | 356,161 | | | 10.00 | % |
| | | | Actual | | Minimum capital adequacy(1) | | To be well capitalized | | | Actual | | Minimum capital adequacy(1) | | To be well capitalized |
| | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
December 31, 2020 | | |
December 31, 2021 | | December 31, 2021 | |
The Company | The Company | | The Company | |
Tier 1 leverage ratio | Tier 1 leverage ratio | | $ | 263,763 | | | 8.29 | % | | $ | 127,338 | | | 4.00 | % | | N/A | | N/A | Tier 1 leverage ratio | | $ | 1,631,257 | | | 11.07 | % | | $ | 589,614 | | | 4.00 | % | | N/A | | N/A |
Common equity tier 1 capital ratio | Common equity tier 1 capital ratio | | 248,263 | | | 21.53 | % | | 51,882 | | | 4.50 | % | | N/A | | N/A | Common equity tier 1 capital ratio | | 1,422,136 | | | 49.53 | % | | 129,198 | | | 4.50 | % | | N/A | | N/A |
Tier 1 risk-based capital ratio | Tier 1 risk-based capital ratio | | 263,763 | | | 22.88 | % | | 69,176 | | | 6.00 | % | | N/A | | N/A | Tier 1 risk-based capital ratio | | 1,631,257 | | | 56.82 | % | | 172,264 | | | 6.00 | % | | N/A | | N/A |
Total risk-based capital ratio | Total risk-based capital ratio | | 270,803 | | | 23.49 | % | | 92,234 | | | 8.00 | % | | N/A | | N/A | Total risk-based capital ratio | | 1,638,794 | | | 57.08 | % | | 229,686 | | | 8.00 | % | | N/A | | N/A |
The Bank | The Bank | | The Bank | |
Tier 1 leverage ratio | Tier 1 leverage ratio | | 261,791 | | | 8.22 | % | | 127,344 | | | 4.00 | % | | $ | 159,180 | | | 5.00 | % | Tier 1 leverage ratio | | 1,546,693 | | | 10.49 | % | | 589,595 | | | 4.00 | % | | $ | 736,994 | | | 5.00 | % |
Common equity tier 1 capital ratio | Common equity tier 1 capital ratio | | 261,791 | | | 22.71 | % | | 51,869 | | | 4.50 | % | | 74,923 | | | 6.50 | % | Common equity tier 1 capital ratio | | 1,546,693 | | | 53.89 | % | | 129,162 | | | 4.50 | % | | 186,567 | | | 6.50 | % |
Tier 1 risk-based capital ratio | Tier 1 risk-based capital ratio | | 261,791 | | | 22.71 | % | | 69,159 | | | 6.00 | % | | 92,212 | | | 8.00 | % | Tier 1 risk-based capital ratio | | 1,546,693 | | | 53.89 | % | | 172,216 | | | 6.00 | % | | 229,622 | | | 8.00 | % |
Total risk-based capital ratio | Total risk-based capital ratio | | 268,831 | | | 23.32 | % | | 92,212 | | | 8.00 | % | | 115,265 | | | 10.00 | % | Total risk-based capital ratio | | 1,554,230 | | | 54.15 | % | | 229,622 | | | 8.00 | % | | 287,027 | | | 10.00 | % |
________________________(1)Minimum capital adequacy for common equity tier 1 capital ratio, tier 1 risk-based capital ratio and total risk-based capital ratio excludes the capital conservation buffer.
The Bank is restricted as to the amount of dividends that it can pay to the Company. Dividends declared in excess of the lesser of the Bank’s undivided profits or the Bank’s net income for its last three fiscal years less the amount of any distribution made to the Bank’s shareholder during the same period must be approved by the California DFPI. Also, the Bank may not pay dividends that would result in capital levels being reduced below the minimum requirements shown above.
Note 11—12—Fair Value
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This standard’s fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1—Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2—Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3—Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Financial Instruments Required To Be Carried At Fair Value
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:
Securities. The fair values of securities available-for-sale and trading securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or. For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing which is a mathematical technique commonly used widely in the industry to valueprice debt securities that are not actively traded, which values debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2)2 inputs).
Derivatives. The Company’s derivative assets and liabilities are carried at fair value as required by GAAP. The estimated fair values of the derivative assets and liabilities are based on current market prices for similar instruments. Given the meaningful level of secondary market activity for derivative contracts, active pricing is available for similar assets and accordingly, the Company classifies its derivative assets and liabilities as Level 2.
Impaired loans (collateral-dependent). The Company does not record impaired loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect (1) partial write-downs, through charge-offs or specific allowances, that are based on the current appraised or market-quoted value of the underlying collateral or (2) the full charge-off of the loan carrying value. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for collateral-dependent impaired loans are obtained from real estate brokers or other third-party consultants. These appraisals may utilize a single valuation approach or a combination of approaches, which generally include various Level 3 inputs. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available and such adjustments are typically significant. Appraisals may be adjusted by management for qualitative factors such as economic factors and estimated liquidation expenses. The range of these possible adjustments may vary. Impaired loans presented in the table below as of the periods presented include impaired loans with specific allowances as well as impaired loans that have been partially charged-off.
Other real estate owned. Fair value estimates for foreclosed real estate are obtained from real estate brokers or other third-party consultants (Level 3). When a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value as a result of known changes in the market or the collateral and there is no observable market price, such valuation inputs result in a fair value measurement that is categorized as a Level 3 measurement. To the extent a negotiated sales price or reduced listing price represents a significant discount to an observable market price, such valuation input would result in a fair value measurement that is also considered a Level 3 measurement.
The following tables provide the hierarchy and fair value for each class of assets and liabilities measured at fair value at March 31, 2021 and December 31, 2020.for the periods presented.
As of March 31, 20212022 and December 31, 2020,2021, assets and liabilities measured at fair value on a recurring basis are as follows:
| | | | Fair Value Measurements Using | | | Fair Value Measurements Using |
| | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | |
| | | Level 1 | | Level 2 | | Level 3 | | Total | | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
March 31, 2021 | | |
March 31, 2022 | | March 31, 2022 | |
Assets | Assets | | Assets | |
Trading securities | | $ | 1,990 | | | $ | 0 | | | $ | 0 | | | $ | 1,990 | | |
| Securities available-for-sale | Securities available-for-sale | | 0 | | | 1,717,418 | | | 0 | | | 1,717,418 | | Securities available-for-sale | | $ | 176,343 | | | $ | 9,287,151 | | | $ | — | | | $ | 9,463,494 | |
Derivative assets | Derivative assets | | 0 | | | 34,442 | | | 0 | | | 34,442 | | Derivative assets | | — | | | 46,415 | | | — | | | 46,415 | |
| | $ | 1,990 | | | $ | 1,751,860 | | | $ | 0 | | | $ | 1,753,850 | | | $ | 176,343 | | | $ | 9,333,566 | | | $ | — | | | $ | 9,509,909 | |
|
| | | | Fair Value Measurements Using | | | Fair Value Measurements Using |
| | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | |
| | | Level 1 | | Level 2 | | Level 3 | | Total | | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
December 31, 2020 | | |
December 31, 2021 | | December 31, 2021 | |
Assets | Assets | | Assets | |
| Securities available-for-sale | Securities available-for-sale | | $ | 0 | | | $ | 939,015 | | | $ | 0 | | | $ | 939,015 | | Securities available-for-sale | | $ | — | | | $ | 8,625,259 | | | $ | — | | | $ | 8,625,259 | |
Derivative assets | Derivative assets | | 0 | | | 31,104 | | | 0 | | | 31,104 | | Derivative assets | | — | | | 34,056 | | | — | | | 34,056 | |
| | $ | 0 | | | $ | 970,119 | | | $ | 0 | | | $ | 970,119 | | | $ | — | | | $ | 8,659,315 | | | $ | — | | | $ | 8,659,315 | |
|
As of March 31, 2021 and December 31, 2020, assets measured at fair value on a non-recurring basis are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using |
| | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
| | (Dollars in thousands) |
March 31, 2021 | | | | | | | | |
Assets | | | | | | | | |
Impaired loans: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Reverse mortgage | | $ | 0 | | | $ | 0 | | | $ | 69 | | | $ | 69 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | |
December 31, 2020 | | | | | | | | |
Assets | | | | | | | | |
Impaired loans: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Reverse mortgage | | $ | 0 | | | $ | 0 | | | $ | 317 | | | $ | 317 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Quantitative Information about Level 3 Fair Value Measurements
The following table presents the valuation methodology and unobservable inputs for Level 3There were no assets measured at fair value on a nonrecurring basis as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value | | Valuation Technique(s) | | Significant Unobservable Inputs | | Range | | Weighted Average(1) |
| | | | | | | | | | |
| | (Dollars in thousands) |
March 31, 2021 | | | | | | | | | | |
Collateral-dependent impaired loans | | $ | 69 | | | Market comparable properties | | Marketability discount | | 10.0 | % | | 10.0 | % |
| | | | | | Selling cost | | 8.0 | % | | 8.0 | % |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
December 31, 2020 | | | | | | | | | | |
Collateral-dependent impaired loans | | $ | 317 | | | Market comparable properties | | Marketability discount | | 10.0 | % | | 10.0 | % |
| | | | | | Selling cost | | 8.0 | % | | 8.0 | % |
| | | | | | | | | | |
| | | | | | | | | | |
________________________(1)Unobservable inputs were weighted by the relative fair value of the instruments.
March 31, 2022 and December 31, 2021. Financial Instruments Not Required To Be Carried At Fair Value
FASB ASC Topic 825, Financial Instruments, requires the disclosure of the estimated fair value of financial instruments. The Company’s estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts the Company could have realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The following tables present information about the Company’s assets and liabilities that are not measured at fair value in the consolidated statements of financial condition as of the dates presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying Amount | | Fair Value Measurements Using |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | | | |
| | (Dollars in thousands) |
March 31, 2021 | | | | | | | | | | |
Financial assets: | | | | | | | | | | |
Cash and due from banks | | $ | 16,422 | | | $ | 16,422 | | | $ | 0 | | | $ | 0 | | | $ | 16,422 | |
Interest earning deposits | | 4,315,100 | | | 4,315,100 | | | 0 | | | 0 | | | 4,315,100 | |
| | | | | | | | | | |
Loans held-for-sale | | 897,227 | | | 0 | | | 897,227 | | | 0 | | | 897,227 | |
Loans held-for-investment, net | | 728,390 | | | 0 | | | 0 | | | 732,754 | | | 732,754 | |
Accrued interest receivable | | 9,432 | | | 119 | | | 2,797 | | | 6,516 | | | 9,432 | |
Financial liabilities: | | | | | | | | | | |
Deposits | | $ | 7,002,371 | | | $ | 0 | | | $ | 7,269,900 | | | $ | 0 | | | $ | 7,269,900 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Subordinated debentures, net | | 15,834 | | | 0 | | | 15,333 | | | 0 | | | 15,333 | |
Accrued interest payable | | 107 | | | 0 | | | 107 | | | 0 | | | 107 | |
| | | | Carrying Amount | | Fair Value Measurements Using | | | Carrying Amount | | Fair Value Measurements Using |
| | | Level 1 | | Level 2 | | Level 3 | | Total | | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
December 31, 2020 | | |
March 31, 2022 | | March 31, 2022 | |
Financial assets: | Financial assets: | | Financial assets: | |
Cash and due from banks | Cash and due from banks | | $ | 16,405 | | | $ | 16,405 | | | $ | 0 | | | $ | 0 | | | $ | 16,405 | | Cash and due from banks | | $ | 207,304 | | | $ | 207,304 | | | $ | — | | | $ | — | | | $ | 207,304 | |
Interest earning deposits | Interest earning deposits | | 2,945,682 | | | 2,945,682 | | | 0 | | | 0 | | | 2,945,682 | | Interest earning deposits | | 1,178,205 | | | 1,178,205 | | | — | | | — | | | 1,178,205 | |
| Securities held-to-maturity | | Securities held-to-maturity | | 2,751,625 | | | 1,202,805 | | | 1,376,171 | | | — | | | 2,578,976 | |
Loans held-for-sale | Loans held-for-sale | | 865,961 | | | 0 | | | 865,961 | | | 0 | | | 865,961 | | Loans held-for-sale | | 937,140 | | | — | | | 937,140 | | | — | | | 937,140 | |
Loans held-for-investment, net | Loans held-for-investment, net | | 746,751 | | | 0 | | | 0 | | | 751,165 | | | 751,165 | | Loans held-for-investment, net | | 739,014 | | | — | | | — | | | 742,784 | | | 742,784 | |
Accrued interest receivable | Accrued interest receivable | | 8,698 | | | 8 | | | 2,630 | | | 6,060 | | | 8,698 | | Accrued interest receivable | | 62,573 | | | 158 | | | 17,070 | | | 45,345 | | | 62,573 | |
Financial liabilities: | Financial liabilities: | | Financial liabilities: | |
Deposits | Deposits | | $ | 5,248,026 | | | $ | 0 | | | $ | 5,458,900 | | | $ | 0 | | | $ | 5,458,900 | | Deposits | | $ | 13,396,162 | | | $ | — | | | $ | 12,839,700 | | | $ | — | | | $ | 12,839,700 | |
| FHLB advances | | FHLB advances | | 800,000 | | | — | | | 800,000 | | | — | | | 800,000 | |
| Subordinated debentures, net | Subordinated debentures, net | | 15,831 | | | 0 | | | 15,231 | | | 0 | | | 15,231 | | Subordinated debentures, net | | 15,848 | | | — | | | 15,745 | | | — | | | 15,745 | |
Accrued interest payable | Accrued interest payable | | 260 | | | 0 | | | 260 | | | 0 | | | 260 | | Accrued interest payable | | 111 | | | — | | | 111 | | | — | | | 111 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying Amount | | Fair Value Measurements Using |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | | | |
| | (Dollars in thousands) |
December 31, 2021 | | | | | | | | | | |
Financial assets: | | | | | | | | | | |
Cash and due from banks | | $ | 208,193 | | | $ | 208,193�� | | | $ | — | | | $ | — | | | $ | 208,193 | |
Interest earning deposits | | 5,179,753 | | | 5,179,753 | | | — | | | — | | | 5,179,753 | |
| | | | | | | | | | |
Loans held-for-sale | | 893,194 | | | — | | | 893,194 | | | — | | | 893,194 | |
Loans held-for-investment, net | | 887,304 | | | — | | | — | | | 891,166 | | | 891,166 | |
Accrued interest receivable | | 40,370 | | | 41 | | | 8,980 | | | 31,349 | | | 40,370 | |
Financial liabilities: | | | | | | | | | | |
Deposits | | $ | 14,290,628 | | | $ | — | | | $ | 14,167,200 | | | $ | — | | | $ | 14,167,200 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Subordinated debentures, net | | 15,845 | | | — | | | 15,646 | | | — | | | 15,646 | |
Accrued interest payable | | 223 | | | — | | | 223 | | | — | | | 223 | |
Note 12—13—Earnings Per Share
The computation of basic and diluted earnings per share is shown below.
| | | | Three Months Ended March 31, | | | Three Months Ended March 31, |
| | | 2021 | | 2020 | | | 2022 | | 2021 |
| | | | (In thousands, except per share data) | | | (In thousands, except per share data) |
Basic | Basic | | | | Basic | | | |
Net income | Net income | | | $ | 12,710 | | | $ | 4,393 | | Net income | | | $ | 27,386 | | | $ | 12,710 | |
| Less: Dividends paid to preferred shareholders | | Less: Dividends paid to preferred shareholders | | | 2,688 | | | — | |
Net income available to common shareholders | | Net income available to common shareholders | | | $ | 24,698 | | | $ | 12,710 | |
Weighted average common shares outstanding | Weighted average common shares outstanding | | | 22,504 | | | 18,668 | | Weighted average common shares outstanding | | | 31,219 | | | 22,504 | |
Basic earnings per common share | Basic earnings per common share | | | $ | 0.56 | | | $ | 0.24 | | Basic earnings per common share | | | $ | 0.79 | | | $ | 0.56 | |
Diluted | Diluted | | | | | | Diluted | | | | | |
Net income | | | $ | 12,710 | | | $ | 4,393 | | |
Net income available to common shareholders | | Net income available to common shareholders | | | $ | 24,698 | | | $ | 12,710 | |
Weighted average common shares outstanding for basic earnings per common share | Weighted average common shares outstanding for basic earnings per common share | | | 22,504 | | | 18,668 | | Weighted average common shares outstanding for basic earnings per common share | | | 31,219 | | | 22,504 | |
Add: Dilutive effects of stock-based awards | Add: Dilutive effects of stock-based awards | | | 506 | | | 449 | | Add: Dilutive effects of stock-based awards | | | 182 | | | 506 | |
Average shares and dilutive potential common shares | Average shares and dilutive potential common shares | | | 23,010 | | | 19,117 | | Average shares and dilutive potential common shares | | | 31,401 | | | 23,010 | |
Dilutive earnings per common share | Dilutive earnings per common share | | | $ | 0.55 | | | $ | 0.23 | | Dilutive earnings per common share | | | $ | 0.79 | | | $ | 0.55 | |
Stock-based awards for 44,00048,000 and 235,00044,000 shares of common stock for the three months ended March 31, 20212022 and 2020,2021, respectively, were excluded from the computation of diluted earnings per share, because they were anti-dilutive.
Note 13—Subsequent Events14—Shareholders’ Equity
AsThe Company’s Articles of May 11,Incorporation, as amended, or Articles, authorize the Company to issue up to (i) 125,000,000 shares of Class A Common Stock, par value $0.01 per share (“Class A Common Stock”), (ii) 25,000,000 shares of Class B Non-Voting Common Stock, par value $0.01 per share (“Class B Non-Voting Common Stock”), and (iii) 10,000,000 shares of Preferred Stock, par value $0.01 per share.
Preferred Stock
The Company, upon authorization of the board of directors, may issue shares of one or more series of preferred stock from time to time. The board of directors may, without any action by holders of Class A and Class B Common Stock or, except as may be otherwise provided in the terms of any series of preferred stock of which there are shares outstanding, holders of preferred stock adopt resolutions to designate and establish a new series of preferred stock. Upon establishing such a series of preferred stock, the board will determine the number of shares of preferred stock of that series that may be issued and the rights and preferences of that series of preferred stock. The rights of any series of preferred stock may include, among others, general or special voting rights; preferential liquidation or preemptive rights; preferential cumulative or noncumulative dividend rights; redemption or put rights; and conversion or exchange rights.
On August 4, 2021, the Company issued and sold 515,2398,000,000 depositary shares (the “Depositary Shares”), each representing a 1/40th interest in a share of 5.375% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share (the “Series A Preferred Stock”), with a liquidation preference of $1,000 per share of Series A Preferred Stock, equivalent to $25 per Depositary Share. The aggregate gross proceeds of the offering were $200.0 million and net proceeds to the Company were approximately $193.6 million after deducting underwriting discounts and offering expenses. When, as and if declared by the board of directors of the Company, or a duly authorized board committee, dividends will be payable from the date of issuance, quarterly in arrears, beginning on November 15, 2021. The Company may redeem the Series A Preferred Stock at its option, subject to regulatory approval, on or after August 15, 2026.
Preferred Stock Dividend
On October 14, 2021, the Company’s Board of Directors declared the first quarterly dividend payment of $15.08 per share, equivalent to $0.377 per depositary share, on its Series A Preferred Stock, for the period covering August 4, 2021 through November 14, 2021 for a total dividend of $3.0 million. The depositary shares representing the Series A Preferred Stock are traded on the New York Stock Exchange under the symbol “SI PRA.” The dividend was paid on November 15, 2021 to shareholders of record of the preferred stock as of October 29, 2021.
On January 14, 2022, the Company’s Board of Directors declared a quarterly dividend payment of $13.44 per share, equivalent to $0.336 per depositary share, on its Series A Preferred Stock, for the period covering November 15, 2021 through February 14, 2022 for a total dividend of $2.7 million. The depositary shares representing the Series A Preferred Stock are traded on the New York Stock Exchange under the symbol “SI PRA.” The dividend was paid on February 15, 2022 to shareholders of record of the preferred stock as of January 31, 2022.
Common Stock
Class A Voting Common Stock. Each holder of Class A Common Stock is entitled to one vote for each share on all matters submitted to a vote of shareholders, except as otherwise required by law and subject to the rights and preferences of the holders of any outstanding shares of our preferred stock. The members of the Company’s board of directors are elected by a plurality of the votes cast. The Company’s Articles expressly prohibit cumulative voting.
Class B Non-Voting Common Stock. Class B Non-Voting Common Stock is non-voting while held by the initial holder with certain limited exceptions. Each share of Class B Non-Voting Common Stock will automatically convert into a share of Class A Common Stock upon certain sales or transfers by the initial holder of such shares including to an unaffiliated third-party and in a widely dispersed public offering. If Class B Non-Voting Common Stock is sold or transferred to an affiliate of the initial holder, the Class B Non-Voting Common Stock would not convert into Class A Common Stock.
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 $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 could 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” equity offering program, or ATM Offering. As of June 30, 2021, the Company had completed the ATM Offering with a total of 2,793,826 shares of Class A common stock sold at an average price of $118.10 under$107.38. The transactions resulted in net proceeds to the ATM Program that resultedCompany of $295.1 million after deducting commissions and expenses.
On December 9, 2021, the Company completed its underwritten public offering of 3,806,895 shares of Class A common stock at a price of $145.00 per share, including 496,551 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 $60.8the offering were $552.0 million and net proceeds to the Company were $530.3 million after deducting underwriting discounts and offering expenses.
On January 31, 2022 the Company issued 1,221,217 shares of the Company’s Class A common stock to the Sellers for the purchase of certain technology assets, at a price of $107.74 per share for a total value of $131.6 million.
Note 15—Subsequent Event
Preferred Stock Dividend
On April 11, 2022, the Company’s Board of Directors declared a quarterly dividend payment of $13.44 per share, equivalent to $0.336 per depositary share, on its Series A Preferred Stock, for the period covering February 15, 2022 through May 14, 2022, for a total dividend of $2.7 million. The depositary shares representing the Series A Preferred Stock are traded on the New York Stock Exchange under the symbol “SI PRA.” The dividend will be payable on May 16, 2022 to shareholders of record of the Series A Preferred Stock as of April 29, 2022.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the related notes and the Company’s Annual Report on Form 10-K, which contains audited financial statements of the Company as of and for the year ended December 31, 2020,2021, previously filed with the Securities and Exchange Commission (“SEC”). Results for the three months ended March 31, 20212022 are not necessarily indicative of results for the year ending December 31, 20212022 or any future period.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “projection,” “forecast,” “goal,” “target,” “would,” “aim” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry and management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. The inclusion of these forward-looking statements should not be regarded as a representation by us or any other person that such expectations, estimates and projections will be achieved. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence. In addition, we cannot assess the impact of each risk and uncertainty on our business or the extent to which any risk or uncertainty, or combination of risks and uncertainties, may cause actual results to differ materially from those contained in any forward-looking statements. Further, given itsWhile there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: changes in general economic, political, or industry conditions; geopolitical concerns, including the ongoing war in Ukraine; the magnitude and dynamic nature, it is difficult to predict the full impact of the Coronavirus Disease 2019 (or “COVID-19”) outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be fully reopened. As the resultduration of the COVID-19 pandemic and related variants and mutations and their impact on the related adverse localglobal economy and national economic consequences, we could be subject to anyfinancial market conditions and our business, results of operations, and financial condition; uncertainty in U.S. fiscal and monetary policy, including the interest rate policies of the following risks, anyBoard of which could have a material, adverse effect on our business, financial condition, liquidity, and resultsGovernors of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to fully reopen as planned, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in the Federal Reserve Board’s (“Federal Reserve”System; inflation/deflation, interest rate, market, and monetary fluctuations; volatility and disruptions in global capital and credit markets; the transition away from USD London Interbank Offered Rate (or “LIBOR”) target federal funds rate to near 0%,and uncertainty regarding potential alternative reference rates, including SOFR; competitive pressures on product pricing and services; success, impact, and timing of our business strategies, including market acceptance of any new products or services; the yield on our assets may decline to a greater extent thanimpact of changes in financial services policies, laws, and regulations, including those concerning taxes, banking, securities, digital currencies and insurance, and the decline in ourapplication thereof by regulatory bodies; cybersecurity threats and the cost of interest-bearing liabilities, reducingdefending against them, including the costs of compliance with potential legislation to combat cybersecurity at a state, national, or global level; and other factors that may affect our net interest margin and spread and reducing net income; our cybersecurity risks are increased as the result of an increase in the number of employees working remotely; and FDIC premiums may increase if the agency experiences additional resolution costs.future results.
If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports and registration statements filed by us with the SEC. For information on the factors that could cause actual results to differ from the expectations stated in the forward- looking statements, see “Risk Factors” under Part I, Item 1A of our 20202021 Form 10-K as filed with the SEC.
Any forward-looking statement speaks only as of the date of this report, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether because of new information, future developments or otherwise, except as required by law.
Overview
Silvergate Capital Corporation is the holding company for our wholly-owned subsidiary, Silvergate Bank, which we believe is the leading provider of innovative financial infrastructure solutions and services to participants in the nascent and expanding digital currency industry. Key to our leadership position and growth strategy is the Silvergate Exchange Network (“SEN”), our proprietary, virtually instantaneous payment network for participants in the digital currency industry which serves as a platform for the development of additional products and services. The SEN has a powerful network effect that makes it more valuable as participants and utilization increase. The SEN has enabled us to significantly grow our noninterest bearing deposits fromdeposit product for digital currency industry participants, which has provided the majority of our funding over the last three fouryears. This unique source of funding is a distinctivedistinct advantage over most traditional financial institutions and allows us to generate
revenue from a conservative portfolio of investments in cash, short term securities and certain types of loans that we believe
generate attractive risk-adjusted returns. In addition, use of the SEN has resulted in an increase in noninterest income that we believe will become a valuable source of additional revenue as we develop and deploy fee-based solutions in connection with our digital currency initiative. We are also evaluating additional products or product enhancements specifically targeted at providing further financial infrastructure solutions to our customers and strengthening SEN network effects.
The Company is a Maryland corporation whose assets consist primarily of its investment in the Bank and its primary activities are conducted through the Bank. 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 supervision 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”).
The Bank provides financial services that include commercial banking, commercial and residential real estate lending, mortgage warehouse lending and commercial business lending. Our client base is diverse and consists of business and individual clients in California and other states and includes digital currency-related customers in the United States and internationally. Following the Bank’s 2009 conversion from an industrial bank to a commercial bankIn 2013, we began introducing an expanded array of relationship-oriented business products and services, which inexploring the past five years has been significantly augmented by our digital currency initiative. Whileindustry and have significantly expanded and reoriented our commercial real estate lending activities are concentrated in California, we have a broader, nationwide focus onproduct and service menus since that time to support our growing digital currency initiative, including the implementation of deposit and cash management services for digital currency related businesses, as well asdomestically and internationally. Because of our focus on the digital currency industry in recent years and the unique value-add solutions and services we provide, we have experienced a significant increase in our noninterest bearing deposits which has allowed us to generate attractive returns on lower risk assets through increased investments in interest earning deposits in other banks and securities. Correspondingly, we have significantly de-emphasized our real estate lending and, currently, our lending activities are focused on digital currency collateralized loans or SEN Leverage, and mortgage warehouse lending. Beginning in Julyloans. In fact, our SEN Leverage lending product, which was piloted during 2020, we ceased issuing purchase commitments for residential real estate loans through our former correspondentis now one of the Company’s core lending unit, but will continue to service existing loans currently on our balance sheet.products.
Digital Currency Initiative
We leverage the SEN and our management team’s expertise in the digital currency industry to develop, implement and maintain critical financial infrastructure solutions and services for many of the largest U.S. digital currency exchanges and global investors, as well as other digital currency infrastructure providers that utilize the Company as a foundational layer for their products. The SEN is a central element of the operations of our digital currency related customers, which enables us to grow with our existing customers and to attract new customers who can benefit from our innovative solutions and services. We believe that our vision and advanced approach to compliance complement the SEN and empower us to extend our leadership position in the industry by developing additional infrastructure solutions and services that will facilitate growth in our business.
We began exploring the digital currency industry in 2013 based on market dynamics which we believed were highly attractive:
•Significant and Growing Industry: Digital currency presented a revolutionary model for executing financial transactions with substantial potential for growth.
•Infrastructure Needs: In order to become widely adopted, digital currency would need to rely on many traditional elements of financial services, including those services that support funds transfers, customer account controls and other security measures.
•Regulatory Complexity as a Barrier to Entry: Providing infrastructure solutions and services to the digital currency industry would require specialized compliance capabilities and a management team with a deep understanding of both the digital currency and the financial services industries.
These insights have been proven correct and we believe they remain true today. In fact, we believe that the market opportunity for digital currencies, the need for infrastructure solutions and services and the regulatory complexity have all expanded significantly since 2013. Our ability to address these market dynamics over the past seveneight years has provided us with a first-mover advantage within the digital currency industry that is the cornerstone of our leadership position today.
Digital Currency Customers
Our customer base has grown rapidly, as many customers proactively approach us due to our reputation as the leading provider of innovative financial infrastructure solutions and services to participants in the digital currency industry, which includes our unique technology solutions. As of March 31, 2021,2022, we had over 200300 prospective digital currency customer leads in various stages of our customer onboarding process and pipeline, which includes extensive regulatory compliance diligence and integrating of the customer’s technology stack for those new digital currency customers interested in using our proprietary, cloud-based application programming interface (“API”).
The following list sets forth summary information regarding the types of market participants thatwho are our primary customers:
•Digital Currency Exchanges: Exchanges through which digital currencies are bought and sold; includes over-the-counter or OTC,(“OTC”) trading desks.
•Institutional Investors: Hedge funds, venture capital funds, private equity funds, family offices and traditional asset managers, thatwhich are investing in digital currencies as an asset class.
•Other Customers: Companies developing new protocols, platforms and applications; mining operations; and providers of other services.
Our customers include some of the largest U.S. exchanges and global investors in the digital currency industry. These market participants generally hold either or both of two distinct types of funds: (i) those funds that market participants use for digital currency investment activities, which we refer to as investor funds, and (ii) those funds that market participants use for business operations, which we refer to as operating funds.
Our customer ecosystem also includes software developers, digital currency miners, custodians and general industry participants that need our solutions and services.
Silvergate Exchange Network
The following table presentsFor the numberthree months ended March 31, 2022, there were $142.3 billion of transactions and the U.S. dollar volume of transactionstransfers that occurred on the SEN, compared to $166.5 billion during the three months ended March 31, 2021.
Financial Results
In November 2020, the SEC adopted amendments to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K, which became effective on February 10, 2021. One update to Item 303 of Regulation S-K allows registrants to compare the results of the most recently completed quarter to the results of either the immediately preceding quarter or the corresponding quarter of the preceding year. We have elected to adopt this rule change, as management believes that comparing current quarter results to those of the immediately preceding quarter is more useful in identifying current business trends and provides a more meaningful comparison. Accordingly, we have compared the results for the periods presented:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2021 | | 2020 |
| | | | | | | | |
| | | | | | (Dollars in millions) |
# of SEN Transactions | | | | | | 166,772 | | | 31,405 | |
$ of Volume of SEN Transfers | | | | | | $ | 166,506 | | | $ | 17,372 | |
three months ended March 31, 2022 and December 31, 2021, where applicable, throughout this Management's Discussion and Analysis. As required, we continue to compare our year-to-date results to the corresponding year-to-date results of the preceding year.
Financial Results
The following table presents the components of results of operations, performance ratios and share data for the periods indicated:
| | | | Three Months Ended March 31, | | Three Months Ended | |
| | | 2021 | | 2020 | | March 31, 2022 | | December 31, 2021 | | March 31, 2021 | |
| | | | (In thousands, except per share data) | | (In thousands, except per share data) |
Statement of Operations Data: | Statement of Operations Data: | | | | Statement of Operations Data: | | |
Interest income | Interest income | | | $ | 23,306 | | | $ | 20,062 | | Interest income | | $ | 50,838 | | | $ | 38,482 | | | $ | 23,306 | | |
Interest expense | Interest expense | | | 291 | | | 4,584 | | Interest expense | | 343 | | | 276 | | | 291 | | |
Net interest income | Net interest income | | | 23,015 | | | 15,478 | | Net interest income | | 50,495 | | | 38,206 | | | 23,015 | | |
Provision for loan losses | | | — | | | 367 | | |
Reversal of provision for loan losses | | Reversal of provision for loan losses | | (2,474) | | | — | | | — | | |
Net interest income after provision | Net interest income after provision | | | 23,015 | | | 15,111 | | Net interest income after provision | | 52,969 | | | 38,206 | | | 23,015 | | |
Noninterest income | Noninterest income | | | 8,090 | | | 4,931 | | Noninterest income | | 9,450 | | | 11,055 | | | 8,090 | | |
Noninterest expense | Noninterest expense | | | 19,606 | | | 13,875 | | Noninterest expense | | 28,018 | | | 25,656 | | | 19,606 | | |
Income before income taxes | Income before income taxes | | | 11,499 | | | 6,167 | | Income before income taxes | | 34,401 | | | 23,605 | | | 11,499 | | |
Income tax (benefit) expense | | | (1,211) | | | 1,774 | | |
Income tax expense (benefit) | | Income tax expense (benefit) | | 7,015 | | | 2,214 | | | (1,211) | | |
Net income | Net income | | | $ | 12,710 | | | $ | 4,393 | | Net income | | 27,386 | | | 21,391 | | | 12,710 | | |
Dividends on preferred stock | | Dividends on preferred stock | | 2,688 | | | 3,016 | | | — | | |
Net income available to common shareholders | | Net income available to common shareholders | | $ | 24,698 | | | $ | 18,375 | | | $ | 12,710 | | |
Financial Ratios(1): | Financial Ratios(1): | | | | | | Financial Ratios(1): | | | | | | | |
Return on average assets (ROAA) | Return on average assets (ROAA) | | | 0.71 | % | | 0.79 | % | Return on average assets (ROAA) | | 0.60 | % | | 0.50 | % | | 0.71 | % | |
Return on average equity (ROAE) | Return on average equity (ROAE) | | | 9.76 | % | | 7.14 | % | Return on average equity (ROAE) | | 6.06 | % | | 6.08 | % | | 9.76 | % | |
Return on average common equity (ROACE) | | Return on average common equity (ROACE) | | 6.87 | % | | 7.25 | % | | 9.76 | % | |
Net interest margin(2) | Net interest margin(2) | | | 1.33 | % | | 2.86 | % | Net interest margin(2) | | 1.36 | % | | 1.11 | % | | 1.33 | % | |
Noninterest income to average assets | Noninterest income to average assets | | | 0.45 | % | | 0.89 | % | Noninterest income to average assets | | 0.23 | % | | 0.30 | % | | 0.45 | % | |
Noninterest expense to average assets | Noninterest expense to average assets | | | 1.10 | % | | 2.50 | % | Noninterest expense to average assets | | 0.68 | % | | 0.69 | % | | 1.10 | % | |
Efficiency ratio(3) | Efficiency ratio(3) | | | 63.03 | % | | 67.98 | % | Efficiency ratio(3) | | 46.74 | % | | 52.08 | % | | 63.03 | % | |
Loan yield(4) | Loan yield(4) | | | 4.31 | % | | 5.15 | % | Loan yield(4) | | 4.51 | % | | 4.32 | % | | 4.31 | % | |
Cost of deposits | Cost of deposits | | | 0.00 | % | | 0.87 | % | Cost of deposits | | 0.00 | % | | 0.00 | % | | 0.00 | % | |
Cost of funds | Cost of funds | | | 0.02 | % | | 0.94 | % | Cost of funds | | 0.01 | % | | 0.01 | % | | 0.02 | % | |
Share Data: | Share Data: | | | | Share Data: | | |
Basic earnings per share | | | $ | 0.56 | | | $ | 0.24 | | |
Diluted earnings per share | | | $ | 0.55 | | | $ | 0.23 | | |
Basic earnings per common share | | Basic earnings per common share | | $ | 0.79 | | | $ | 0.67 | | | $ | 0.56 | | |
Diluted earnings per common share | | Diluted earnings per common share | | $ | 0.79 | | | $ | 0.66 | | | $ | 0.55 | | |
Basic weighted average shares outstanding | Basic weighted average shares outstanding | | | 22,504 | | | 18,668 | | Basic weighted average shares outstanding | | 31,219 | | | 27,527 | | | 22,504 | | |
Diluted weighted average shares outstanding | Diluted weighted average shares outstanding | | | 23,010 | | | 19,117 | | Diluted weighted average shares outstanding | | 31,401 | | | 27,744 | | | 23,010 | | |
________________________(1)Data has been annualized except for efficiency ratio.
(2)Net interest margin is a ratio calculated as annualized net interest income, on a fully taxable equivalent basis for interest income on tax-exempt securities using the federal statutory tax rate of 21.0%, divided by average interest earning assets for the same period.
(3)Efficiency ratio is calculated by dividing noninterest expenses by net interest income plus noninterest income.
(4)Includes nonaccrual loans and loans 90 days and more past due.
The following table presents the components of financial condition and ratios at the dates indicated:
| | | March 31, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
| | | | (Dollars in thousands, except per share data) | | | (Dollars in thousands, except per share data) |
Statement of Financial Condition Data: | Statement of Financial Condition Data: | | Statement of Financial Condition Data: | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 4,331,522 | | | $ | 2,962,087 | | Cash and cash equivalents | | $ | 1,385,509 | | | $ | 5,387,946 | |
Securities available-for-sale, at fair value | | 1,717,418 | | | 939,015 | | |
Securities | | Securities | | 12,215,119 | | | 8,625,259 | |
Loans held-for-sale | Loans held-for-sale | | 897,227 | | | 865,961 | | Loans held-for-sale | | 937,140 | | | 893,194 | |
Loans held-for-investment, net | Loans held-for-investment, net | | 728,390 | | | 746,751 | | Loans held-for-investment, net | | 739,014 | | | 887,304 | |
Other | Other | | 82,595 | | | 72,421 | | Other | | 521,231 | | | 211,792 | |
Total assets | Total assets | | $ | 7,757,152 | | | $ | 5,586,235 | | Total assets | | $ | 15,798,013 | | | $ | 16,005,495 | |
Deposits | Deposits | | $ | 7,002,371 | | | $ | 5,248,026 | | Deposits | | $ | 13,396,162 | | | $ | 14,290,628 | |
Borrowings | Borrowings | | 15,834 | | | 15,831 | | Borrowings | | 815,848 | | | 15,845 | |
Other liabilities | Other liabilities | | 25,326 | | | 28,079 | | Other liabilities | | 39,507 | | | 90,186 | |
Total liabilities | Total liabilities | | 7,043,531 | | | 5,291,936 | | Total liabilities | | 14,251,517 | | | 14,396,659 | |
Total shareholders’ equity | Total shareholders’ equity | | 713,621 | | | 294,299 | | Total shareholders’ equity | | 1,546,496 | | | 1,608,836 | |
Total liabilities and shareholders' equity | Total liabilities and shareholders' equity | | $ | 7,757,152 | | | $ | 5,586,235 | | Total liabilities and shareholders' equity | | $ | 15,798,013 | | | $ | 16,005,495 | |
Nonperforming Assets: | Nonperforming Assets: | | | | | Nonperforming Assets: | | | | |
Nonperforming loans | | $ | 5,333 | | | $ | 4,982 | | |
Nonaccrual loans | | Nonaccrual loans | | $ | 3,632 | | | $ | 4,003 | |
Troubled debt restructurings | Troubled debt restructurings | | $ | 1,484 | | | $ | 1,525 | | Troubled debt restructurings | | $ | 1,703 | | | $ | 1,713 | |
Other real estate owned, net | Other real estate owned, net | | — | | | — | | Other real estate owned, net | | — | | | — | |
Nonperforming assets | Nonperforming assets | | $ | 5,333 | | | $ | 4,982 | | Nonperforming assets | | $ | 3,632 | | | $ | 4,003 | |
Asset Quality Ratios: | Asset Quality Ratios: | | Asset Quality Ratios: | |
Nonperforming assets to total assets | Nonperforming assets to total assets | | 0.07 | % | | 0.09 | % | Nonperforming assets to total assets | | 0.02 | % | | 0.03 | % |
Nonperforming loans to gross loans(1) | | 0.73 | % | | 0.66 | % | |
Nonperforming assets to gross loans and other real estate owned(1) | | 0.73 | % | | 0.66 | % | |
Nonperforming loans to total loans(1) | | Nonperforming loans to total loans(1) | | 0.49 | % | | 0.45 | % |
Net charge-offs to average total loans(1) | Net charge-offs to average total loans(1) | | 0.00 | % | | 0.00 | % | Net charge-offs to average total loans(1) | | 0.00 | % | | 0.00 | % |
Allowance for loan losses to gross loans(1) | | 0.94 | % | | 0.92 | % | |
Allowance for loan losses to nonperforming loans | | 129.68 | % | | 138.82 | % | |
Allowance for loan losses to total loans(1) | | Allowance for loan losses to total loans(1) | | 0.60 | % | | 0.77 | % |
Allowance for loan losses to nonaccrual loans | | Allowance for loan losses to nonaccrual loans | | 122.30 | % | | 172.77 | % |
Company Capital Ratios: | Company Capital Ratios: | | Company Capital Ratios: | |
Tier 1 leverage ratio | Tier 1 leverage ratio | | 9.68 | % | | 8.29 | % | Tier 1 leverage ratio | | 9.68 | % | | 11.07 | % |
Common equity tier 1 capital ratio | Common equity tier 1 capital ratio | | 53.03 | % | | 21.53 | % | Common equity tier 1 capital ratio | | 38.97 | % | | 49.53 | % |
Tier 1 risk-based capital ratio | Tier 1 risk-based capital ratio | | 54.23 | % | | 22.88 | % | Tier 1 risk-based capital ratio | | 44.84 | % | | 56.82 | % |
Total risk-based capital ratio | Total risk-based capital ratio | | 54.79 | % | | 23.49 | % | Total risk-based capital ratio | | 45.01 | % | | 57.08 | % |
Total shareholders’ equity to total assets | | 9.20 | % | | 5.27 | % | |
Book value per share | | $ | 28.75 | | | $ | 15.63 | | |
Common equity to total assets | | Common equity to total assets | | 8.56 | % | | 8.84 | % |
Book value per common share | | Book value per common share | | $ | 42.77 | | | $ | 46.55 | |
Bank Capital Ratios: | Bank Capital Ratios: | | Bank Capital Ratios: | |
Tier 1 leverage ratio | Tier 1 leverage ratio | | 9.50 | % | | 8.22 | % | Tier 1 leverage ratio | | 9.51 | % | | 10.49 | % |
Common equity tier 1 capital ratio | Common equity tier 1 capital ratio | | 53.24 | % | | 22.71 | % | Common equity tier 1 capital ratio | | 44.28 | % | | 53.89 | % |
Tier 1 risk-based capital ratio | Tier 1 risk-based capital ratio | | 53.24 | % | | 22.71 | % | Tier 1 risk-based capital ratio | | 44.28 | % | | 53.89 | % |
Total risk-based capital ratio | Total risk-based capital ratio | | 53.80 | % | | 23.32 | % | Total risk-based capital ratio | | 44.45 | % | | 54.15 | % |
Other: | Other: | | Other: | |
Total headcount | Total headcount | | 222 | | | 218 | | Total headcount | | 308 | | | 279 | |
________________________(1)Loans exclude loans held-for-sale at each of the dates presented.
Critical Accounting Policies and Estimates
The accompanying management’s discussion and analysis of results of operations and financial condition is based upon our unaudited interim consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. We evaluate our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. Other than ongoing uncertainty related to COVID-19, thereThere have been no significant changes during the three months ended March 31, 20212022 to the items that we disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2021.February 28, 2022.
Accounting policies, as described in detail in the notes to our consolidated financial statements, included in the Company’s Annual Report on Form 10-K, are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that those critical accounting policies and estimates require us to make difficult, subjective or complex judgments about matters that are inherently uncertain. Changes in these estimates, which are likely to occur from period to period, or use of different estimates that we could have reasonably used in the current period, would have a material impact on our financial position, results of operations or liquidity.
Results of Operations
Net Income
The following table sets forth the principal components of net income for the periods indicated.
| | | | Three Months Ended March 31, | | Three Months Ended | | Three Months Ended |
| | | 2021 | | 2020 | | % Increase/ (Decrease) | | March 31, 2022 | | December 31, 2021 | | % Increase/ (Decrease) | | March 31, 2022 | | March 31, 2021 | | % Increase/ (Decrease) |
| | | | (Dollars in thousands) | | (Dollars in thousands) |
Interest income | Interest income | | | $ | 23,306 | | | $ | 20,062 | | | 16.2 | % | Interest income | | $ | 50,838 | | | $ | 38,482 | | | 32.1 | % | | $ | 50,838 | | | $ | 23,306 | | | 118.1 | % |
Interest expense | Interest expense | | | 291 | | | 4,584 | | | (93.7) | % | Interest expense | | 343 | | | 276 | | | 24.3 | % | | 343 | | | 291 | | | 17.9 | % |
Net interest income | Net interest income | | | 23,015 | | | 15,478 | | | 48.7 | % | Net interest income | | 50,495 | | | 38,206 | | | 32.2 | % | | 50,495 | | | 23,015 | | | 119.4 | % |
Provision for loan losses | | | — | | | 367 | | | N/M | |
Reversal of provision for loan losses | | Reversal of provision for loan losses | | (2,474) | | | — | | | N/M | | (2,474) | | | — | | | N/M |
Net interest income after provision | Net interest income after provision | | | 23,015 | | | 15,111 | | | 52.3 | % | Net interest income after provision | | 52,969 | | | 38,206 | | | 38.6 | % | | 52,969 | | | 23,015 | | | 130.1 | % |
Noninterest income | Noninterest income | | | 8,090 | | | 4,931 | | | 64.1 | % | Noninterest income | | 9,450 | | | 11,055 | | | (14.5) | % | | 9,450 | | | 8,090 | | | 16.8 | % |
Noninterest expense | Noninterest expense | | | 19,606 | | | 13,875 | | | 41.3 | % | Noninterest expense | | 28,018 | | | 25,656 | | | 9.2 | % | | 28,018 | | | 19,606 | | | 42.9 | % |
Income before income taxes | Income before income taxes | | | 11,499 | | | 6,167 | | | 86.5 | % | Income before income taxes | | 34,401 | | | 23,605 | | | 45.7 | % | | 34,401 | | | 11,499 | | | 199.2 | % |
Income tax (benefit) expense | | | (1,211) | | | 1,774 | | | (168.3) | % | |
Income tax expense (benefit) | | Income tax expense (benefit) | | 7,015 | | | 2,214 | | | 216.8 | % | | 7,015 | | | (1,211) | | | (679.3) | % |
Net income | Net income | | | $ | 12,710 | | | $ | 4,393 | | | 189.3 | % | Net income | | $ | 27,386 | | | $ | 21,391 | | | 28.0 | % | | $ | 27,386 | | | $ | 12,710 | | | 115.5 | % |
________________________N/M—Not meaningful
Net income for the three months ended March 31, 20212022 was $12.7$27.4 million, an increase of $8.3$6.0 million or 189.3%28.0% from net income of $4.4$21.4 million for the three months ended December 31, 2021. The increase was primarily due to a $12.3 million increase in net interest income and a $2.5 million reversal of provision for loan losses offset by a $1.6 million decrease in noninterest income, a $4.8 million increase in income tax expense and a $2.4 million increase in noninterest expense, all as described below.
Net income for the three months ended March 31, 2022 was $27.4 million, an increase of $14.7 million or 115.5% from net income of $12.7 million for the three months ended March 31, 2020.2021. The increase was primarily due to a $7.5$27.5 million increase in net interest income, a $3.2$2.5 million reversal of provision for loan losses and a $1.4 million increase in noninterest income andoffset by a $3.0$8.2 million decreaseincrease in income tax expense offset byand a $5.7$8.4 million increase in noninterest expense, all as described below.
Net Interest Income and Net Interest Margin Analysis (Taxable Equivalent Basis)
We analyze our ability to maximize income generated from interest earning assets and control the interest expenses of our liabilities, measured as net interest income, through our net interest margin and net interest spread. Net interest income is the difference between the interest and fees earned on interest earning assets, such as loans, interest earning deposits in other banks and securities, and the interest expense incurred on interest bearing liabilities, such as deposits and borrowings, which are used to fund those assets.
Changes in market interest rates and the interest rates we earn on interest earning assets or pay on interest bearing liabilities, as well as in the volume and types of interest earning assets, interest bearing and noninterest bearing liabilities and
shareholders’ equity, are usually the largest drivers of periodic changes in net interest income, net interest margin and net interest spread. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in the Southern California region, developments affecting the real estate, technology, hospitality, tourism and financial services sectors within our target markets and throughout the Southern California region, the volume and availability of residential loan pools and non-qualified residential loans and mortgage banker relationships. Our ability to respond to changes in these factors by using effective asset-liability management techniques is critical to maintaining the stability of our net interest income and net interest margin as our primary sources of earnings.
The following tables show the average outstanding balance of each principal category of our assets, liabilities and shareholders’ equity, together with the average yields on our assets and the average costs of our liabilities for the periods indicated. Such yields and costcosts are calculated by dividing income or expense by the average daily balances of the associated assets or liabilities for the same period.
Tax-exempt income from securities is calculated on a taxable equivalent basis. Net interest income, net interest spread and net interest margin are presented on a taxable equivalent basis to consistently reflect income from taxable securities and tax-exempt securities based on the federal statutory tax rate of 21.0%.
AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
| | | Three Months Ended March 31, | | Three Months Ended |
| | 2021 | | 2020 | | March 31, 2022 | | December 31, 2021 |
| | Average Outstanding Balance | | Interest Income/ Expense | | Average Yield/ Rate | | Average Outstanding Balance | | Interest Income/ Expense | | Average Yield/ Rate | | Average Outstanding Balance | | Interest Income/ Expense | | Average Yield/ Rate | | Average Outstanding Balance | | Interest Income/ Expense | | Average Yield/ Rate |
| | | (Dollars in thousands) | | (Dollars in thousands) |
Assets | Assets | | Assets | |
Interest earning assets: | Interest earning assets: | | Interest earning assets: | |
Interest earning deposits in other banks | Interest earning deposits in other banks | | $ | 4,450,110 | | | $ | 1,279 | | | 0.12 | % | | $ | 234,356 | | | $ | 724 | | | 1.24 | % | Interest earning deposits in other banks | | $ | 3,067,054 | | | $ | 1,385 | | | 0.18 | % | | $ | 5,282,661 | | | $ | 2,166 | | | 0.16 | % |
Taxable securities | Taxable securities | | 850,558 | | | 3,592 | | | 1.71 | % | | 902,165 | | | 6,048 | | | 2.70 | % | Taxable securities | | 8,492,768 | | | 17,779 | | | 0.85 | % | | 5,735,932 | | | 10,178 | | | 0.70 | % |
Tax-exempt securities(1) | Tax-exempt securities(1) | | 270,711 | | | 2,146 | | | 3.21 | % | | 6,611 | | | 61 | | | 3.71 | % | Tax-exempt securities(1) | | 2,887,072 | | | 16,689 | | | 2.34 | % | | 1,728,862 | | | 9,454 | | | 2.17 | % |
Loans(2)(3) | Loans(2)(3) | | 1,559,989 | | | 16,597 | | | 4.31 | % | | 1,024,982 | | | 13,121 | | | 5.15 | % | Loans(2)(3) | | 1,644,604 | | | 18,287 | | | 4.51 | % | | 1,641,345 | | | 17,892 | | | 4.32 | % |
Other | Other | | 15,331 | | | 143 | | | 3.78 | % | | 10,746 | | | 121 | | | 4.53 | % | Other | | 41,751 | | | 203 | | | 1.97 | % | | 34,490 | | | 777 | | | 8.94 | % |
Total interest earning assets | Total interest earning assets | | 7,146,699 | | | 23,757 | | | 1.35 | % | | 2,178,860 | | | 20,075 | | | 3.71 | % | Total interest earning assets | | 16,133,249 | | | 54,343 | | | 1.37 | % | | 14,423,290 | | | 40,467 | | | 1.11 | % |
Noninterest earning assets | Noninterest earning assets | | 72,155 | | | | | | | 49,307 | | | | | | Noninterest earning assets | | 500,299 | | | | | | | 295,841 | | | | | |
Total assets | Total assets | | $ | 7,218,854 | | | $ | 2,228,167 | | | Total assets | | $ | 16,633,548 | | | $ | 14,719,131 | | |
Liabilities and Shareholders’ Equity | Liabilities and Shareholders’ Equity | | | | | | Liabilities and Shareholders’ Equity | | | | | |
Interest bearing liabilities: | Interest bearing liabilities: | | Interest bearing liabilities: | |
Interest bearing deposits | Interest bearing deposits | | $ | 117,228 | | | $ | 46 | | | 0.16 | % | | $ | 441,682 | | | $ | 4,051 | | | 3.69 | % | Interest bearing deposits | | $ | 76,663 | | | $ | 21 | | | 0.11 | % | | $ | 77,564 | | | $ | 27 | | | 0.14 | % |
FHLB advances and other borrowings | FHLB advances and other borrowings | | — | | | — | | | — | | | 63,986 | | | 227 | | | 1.43 | % | FHLB advances and other borrowings | | 71,111 | | | 70 | | | 0.40 | % | | 12 | | | — | | | 0.00 | % |
Subordinated debentures and other | | 15,832 | | | 245 | | | 6.28 | % | | 19,061 | | | 306 | | | 6.46 | % | |
Subordinated debentures | | Subordinated debentures | | 15,846 | | | 252 | | | 6.45 | % | | 15,843 | | | 249 | | | 6.24 | % |
Total interest bearing liabilities | Total interest bearing liabilities | | 133,060 | | | 291 | | | 0.89 | % | | 524,729 | | | 4,584 | | | 3.51 | % | Total interest bearing liabilities | | 163,620 | | | 343 | | | 0.85 | % | | 93,419 | | | 276 | | | 1.17 | % |
Noninterest bearing liabilities: | Noninterest bearing liabilities: | | | | | | | | | | | | | Noninterest bearing liabilities: | | | | | | | | | | | | |
Noninterest bearing deposits | Noninterest bearing deposits | | 6,526,555 | | | 1,436,062 | | | Noninterest bearing deposits | | 14,781,601 | | | 13,377,552 | | |
Other liabilities | Other liabilities | | 30,911 | | | 19,900 | | | Other liabilities | | 36,770 | | | 49,023 | | |
Shareholders’ equity | Shareholders’ equity | | 528,328 | | | 247,476 | | | Shareholders’ equity | | 1,651,557 | | | 1,199,137 | | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | | $ | 7,218,854 | | | $ | 2,228,167 | | | Total liabilities and shareholders’ equity | | $ | 16,633,548 | | | $ | 14,719,131 | | |
Net interest spread(4) | Net interest spread(4) | | | | 0.46 | % | | | | 0.20 | % | Net interest spread(4) | | | | 0.52 | % | | | | (0.06) | % |
Net interest income, taxable equivalent basis | Net interest income, taxable equivalent basis | | $ | 23,466 | | | | | $ | 15,491 | | | | Net interest income, taxable equivalent basis | | $ | 54,000 | | | | | $ | 40,191 | | | |
Net interest margin(5) | Net interest margin(5) | | | | 1.33 | % | | | | 2.86 | % | Net interest margin(5) | | | | 1.36 | % | | | | 1.11 | % |
Reconciliation to reported net interest income: | Reconciliation to reported net interest income: | | | | | Reconciliation to reported net interest income: | | | | |
Adjustments for taxable equivalent basis | Adjustments for taxable equivalent basis | | (451) | | | (13) | | | Adjustments for taxable equivalent basis | | (3,505) | | | (1,985) | | |
Net interest income, as reported | Net interest income, as reported | | $ | 23,015 | | | $ | 15,478 | | | Net interest income, as reported | | $ | 50,495 | | | $ | 38,206 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2022 | | March 31, 2021 |
| | Average Outstanding Balance | | Interest Income/ Expense | | Average Yield/ Rate | | Average Outstanding Balance | | Interest Income/ Expense | | Average Yield/ Rate |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
Assets | | | | | | | | | | | | |
Interest earning assets: | | | | | | | | | | | | |
Interest earning deposits in other banks | | $ | 3,067,054 | | | $ | 1,385 | | | 0.18 | % | | $ | 4,450,110 | | | $ | 1,279 | | | 0.12 | % |
Taxable securities | | 8,492,768 | | | 17,779 | | | 0.85 | % | | 850,558 | | | 3,592 | | | 1.71 | % |
Tax-exempt securities(1) | | 2,887,072 | | | 16,689 | | | 2.34 | % | | 270,711 | | | 2,146 | | | 3.21 | % |
Loans(2)(3) | | 1,644,604 | | | 18,287 | | | 4.51 | % | | 1,559,989 | | | 16,597 | | | 4.31 | % |
Other | | 41,751 | | | 203 | | | 1.97 | % | | 15,331 | | | 143 | | | 3.78 | % |
Total interest earning assets | | 16,133,249 | | | 54,343 | | | 1.37 | % | | 7,146,699 | | | 23,757 | | | 1.35 | % |
Noninterest earning assets | | 500,299 | | | | | | | 72,155 | | | | | |
Total assets | | $ | 16,633,548 | | | | | | | $ | 7,218,854 | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | | | | | |
Interest bearing liabilities: | | | | | | | | | | | | |
Interest bearing deposits | | $ | 76,663 | | | $ | 21 | | | 0.11 | % | | $ | 117,228 | | | $ | 46 | | | 0.16 | % |
FHLB advances and other borrowings | | 71,111 | | | 70 | | | 0.40 | % | | — | | | — | | | — | |
Subordinated debentures and other | | 15,846 | | | 252 | | | 6.45 | % | | 15,832 | | | 245 | | | 6.28 | % |
Total interest bearing liabilities | | 163,620 | | | 343 | | | 0.85 | % | | 133,060 | | | 291 | | | 0.89 | % |
Noninterest bearing liabilities: | | | | | | | | | | | | |
Noninterest bearing deposits | | 14,781,601 | | | | | | | 6,526,555 | | | | | |
Other liabilities | | 36,770 | | | | | | | 30,911 | | | | | |
Shareholders’ equity | | 1,651,557 | | | | | | | 528,328 | | | | | |
Total liabilities and shareholders’ equity | | $ | 16,633,548 | | | | | | | $ | 7,218,854 | | | | | |
Net interest spread(4) | | | | | | 0.52 | % | | | | | | 0.46 | % |
Net interest income, taxable equivalent basis | | | | $ | 54,000 | | | | | | | $ | 23,466 | | | |
Net interest margin(5) | | | | | | 1.36 | % | | | | | | 1.33 | % |
Reconciliation to reported net interest income: | | | | | | | | | | | | |
Adjustments for taxable equivalent basis | | | | (3,505) | | | | | | | (451) | | | |
Net interest income, as reported | | | | $ | 50,495 | | | | | | | $ | 23,015 | | | |
________________________(1)Interest income on tax-exempt securities is presented on a taxable equivalent basis using the federal statutory tax rate of 21.0% for all periods presented.
(2)Loans include nonaccrual loans and loans held-for-sale, net of deferred fees and before allowance for loan losses.
(3)Interest income includes amortization of deferred loan fees, net of deferred loan costs.
(4)Net interest spread is the difference between interest rates earned on interest earning assets and interest rates paid on interest bearing liabilities.
(5)Net interest margin is a ratio calculated as annualized net interest income, on a taxable equivalent basis, divided by average interest earning assets for the same period.
Information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest bearing liabilities and distinguishes between the changes
attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been proportionately allocated to both volume and rate.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
| | | | | For the Three Months Ended March 31, 2021 Compared to 2020 | | | For the Three Months Ended March 31, 2022 Compared to December 31, 2021 | | For the Three Months Ended March 31, 2022 Compared to March 31, 2021 |
| | | | Change Due To | | Interest Variance | | | Change Due To | | Interest Variance | | Change Due To | | Interest Variance |
| | | | Volume | | Rate | | | | Volume | | Rate | Interest Variance | | Volume | | Rate | Interest Variance |
| | | | | (Dollars in thousands) | | | (Dollars in thousands) |
Interest Income: | Interest Income: | | | | Interest Income: | |
Interest earning deposits in other banks | Interest earning deposits in other banks | | | $ | 1,779 | | | $ | (1,224) | | | $ | 555 | | Interest earning deposits in other banks | | $ | (936) | | | $ | 155 | | | $ | (781) | | | $ | (398) | | | $ | 504 | | | $ | 106 | |
Taxable securities | Taxable securities | | | (329) | | | (2,127) | | | (2,456) | | Taxable securities | | 4,564 | | | 3,037 | | | 7,601 | | | 32,274 | | | (18,087) | | | 14,187 | |
Tax-exempt securities(1) | Tax-exempt securities(1) | | | 2,095 | | | (10) | | | 2,085 | | Tax-exempt securities(1) | | 5,990 | | | 1,245 | | | 7,235 | | | 20,731 | | | (6,188) | | | 14,543 | |
Loans | Loans | | | 5,975 | | | (2,499) | | | 3,476 | | Loans | | (354) | | | 749 | | | 395 | | | 1,933 | | | (243) | | | 1,690 | |
Other | Other | | | 45 | | | (23) | | | 22 | | Other | | 143 | | | (717) | | | (574) | | | 246 | | | (186) | | | 60 | |
Total interest income | Total interest income | | | 9,565 | | | (5,883) | | | 3,682 | | Total interest income | | 9,407 | | | 4,469 | | | 13,876 | | | 54,786 | | | (24,200) | | | 30,586 | |
Interest Expense: | Interest Expense: | | | | | | | | Interest Expense: | | | | | | | | | | | | |
Interest bearing deposits | Interest bearing deposits | | | (3,854) | | | (151) | | | (4,005) | | Interest bearing deposits | | — | | | (6) | | | (6) | | | (14) | | | (11) | | | (25) | |
FHLB advances and other borrowings | FHLB advances and other borrowings | | | (227) | | | — | | | (227) | | FHLB advances and other borrowings | | 32 | | | 38 | | | 70 | | | 26 | | | 44 | | | 70 | |
Subordinated debentures | | | — | | | (61) | | | (61) | | |
Subordinated debentures and other | | Subordinated debentures and other | | (5) | | | 8 | | | 3 | | | — | | | 7 | | | 7 | |
Total interest expense | Total interest expense | | | (4,081) | | | (212) | | | (4,293) | | Total interest expense | | 27 | | | 40 | | | 67 | | | 12 | | | 40 | | | 52 | |
Net interest income, taxable equivalent basis | Net interest income, taxable equivalent basis | | | $ | 13,646 | | | $ | (5,671) | | | $ | 7,975 | | Net interest income, taxable equivalent basis | | $ | 9,380 | | | $ | 4,429 | | | $ | 13,809 | | | $ | 54,774 | | | $ | (24,240) | | | $ | 30,534 | |
________________________(1)Interest income on tax-exempt securities is presented on a taxable equivalent basis using the federal statutory tax rate of 21.0% for all periods presented.
Net interest income on a taxable equivalent basis increased $8.0$13.8 million to $54.0 million for the three months ended March 31, 2022, compared to $40.2 million for the three months ended December 31, 2021, due to an increase of $13.9 million in interest income partially offset by an increase of $0.1 million in interest expense.
Average total interest earning assets increased $1.7 billion or 11.9% for the three months ended March 31, 2022, compared to the three months ended December 31, 2021, primarily due to increased securities offset by decreased interest earning deposits in other banks. The average annualized yield on total interest earning assets increased from 1.11% for the three months ended December 31, 2021, to 1.37% for the three months ended March 31, 2022, primarily due to a higher proportion of securities and a lower proportion of interest earning deposits in other banks as a percentage of interest earning assets, as well as higher yields on recently purchased securities.
Average interest bearing liabilities increased $70.2 million or 75.1% for the three months ended March 31, 2022, compared to the three months ended December 31, 2021, due to increased FHLB advances. The average annualized rate on total interest bearing liabilities decreased from 1.17% for the three months ended December 31, 2021 to 0.85% for the three months ended March 31, 2022, primarily due to a higher proportion of low cost FHLB borrowings as a percentage of total interest bearing liabilities.
For the three months ended March 31, 2022, the net interest spread was 0.52% and the net interest margin was 1.36%, compared to (0.06)% and 1.11%, respectively, for the three months ended December 31, 2021. The increase in the net interest spread and net interest margin from the three months ended December 31, 2021 was primarily driven by a higher proportion of securities and a lower proportion of interest earning deposits in other banks as a percentage of total interest earning assets, as well as higher yields on recently purchased securities.
Net interest income on a taxable equivalent basis increased $30.5 million to $54.0 million for the three months ended March 31, 2022, compared to $23.5 million for the three months ended March 31, 2021, compareddue to $15.5an increase of $30.6 million in interest income partially offset by an increase of $0.1 million in interest expense.
Average total interest earning assets increased $9.0 billion or 125.7% for the three months ended March 31, 2020, due to a decrease of $4.3 million in interest expense and an increase of $3.7 million in interest income.
Average total interest earning assets increased $5.0 billion or 228.0% for the three months ended March 31, 2021,2022, compared to the same period in 2020,2021, primarily due to an increaseincreased securities balances funded by growth in interest earning deposits in other banks and loans, with loan growth driving the increase in interest income.digital currency related deposits. The average annualized yield on total interest earning assets decreasedincreased from 3.71% for the three months ended March 31, 2020, to 1.35% for the three months ended March 31, 2021, primarily due to interest earning deposits in other banks being a greater percentage of interest earning assets, and lower yields being realized on interest earning deposits, loans and securities. The lower yields were due to declines in federal funds rate and LIBOR which was partially offset by the interest rate floors. In February 2020, the Company sold $200.0 million of its total $400.0 million notional amount of interest rate floors, which resulted in a net gain of $8.4 million, which is being recognized over the weighted average remaining term of 4.1 years. The sale of the floors secured the benefit of lower interest rates at the time of the sale.
Average interest bearing liabilities decreased $391.7 million or 74.6%1.37% for the three months ended March 31, 2021,2022, primarily due to a higher proportion of securities and a lower proportion of interest earning deposits in other banks as a percentage of interest earning assets, partially offset by lower
yields on the securities portfolio due to the majority of the securities in the portfolio being acquired in the last 12 months within a lower rate environment.
Average interest bearing liabilities increased $30.6 million or 23.0% for the three months ended March 31, 2022, compared to the same period in 2020, primarily2021, due to calling the remaining balanceincreased FHLB advances offset by lower balances of brokered certificates of deposit in the second quarter of 2020.interest bearing deposits. The average annualized rate on total interest bearing liabilities decreased to 0.89%0.85% for the three months ended March 31, 2021,2022, compared to 3.51%0.89% for the same period in 2020,2021, primarily due to the impacta higher proportion of callinglow cost FHLB borrowings as a portionpercentage of brokered certificates of deposits in the first quarter of 2020, which included $2.1 million of accelerated premium expense in addition to $1.6 million of coupon interest expense for the first quarter of 2020.bearing liabilities.
For the three months ended March 31, 2021,2022, the net interest spread was 0.46%0.52% and the net interest margin was 1.33%1.36%, compared to 0.20%0.46% and 2.86%1.33%, respectively, for the comparable period in 2020.2021. The increase in the net interest spread inand net interest margin for the three months ended March 31, 2021 was primarily due to calling the outstanding brokered certificatesa higher proportion of securities and a lower proportion of interest earning deposits in the second quarterother banks as a percentage of 2020,interest earning assets, partially offset by lower yields on interest earning deposits, loans andthe securities due to a declining interest rate environment. The decrease in the net interest margin compared to the three months ended March 31, 2020 was primarily due to lower yields on interest earning deposits, loans and securities due to a declining interest rate environment, and to a lesser extent due to a greater proportion of lower yielding cash and cash equivalents as a percentage of total interest earning assets, which was driven by the increase in noninterest bearing digital currency customer deposits.portfolio.
Provision for Loan Losses
The provision for loan losses is a charge to income to bring our allowance for loan losses to a level deemed appropriate by management. For a description of the factors considered by our management in determining the allowance for loan losses see “—Financial Condition—Allowance for Loan Losses”.
We recorded no additionala $2.5 million reversal of provision for loan losses and an expense of $0.4 million for the three months ended March 31, 2022 compared to no provision for the three months ended December 31, 2021 and 2020, respectively.March 31, 2021. The allowance for loan losses to total gross loans held-for-investment was 0.94%0.60% at March 31, 2021,2022, compared to 0.96%0.77% and 0.94% at December 31, 2021 and March 31, 2020. Management determined that no provision for2021, respectively. The reversal during the three months ended March 31, 20212022 was necessary based on our historically strong credit qualitydue to the changes in loan product and minimal loan charge-offs, and the loan-to-value ratiossegment mix in the low- to mid-50% range in our commercial, multi-family and one-to-four family residentialportfolio, including the net decrease of approximately $148.5 million of gross real estate held-for-investment loan portfolios as of March 31, 2021.loans sold during the period, partially offset by an increase in SEN Leverage loans.
Noninterest Income
The following table presents, for the periods indicated, the major categories of noninterest income:
NONINTEREST INCOME
| | | | | Three Months Ended March 31, | | | Three Months Ended | | Three Months Ended |
| | | | 2021 | | 2020 | | % Increase/ (Decrease) | | | March 31, 2022 | | December 31, 2021 | | % Increase/ (Decrease) | | March 31, 2022 | | March 31, 2021 | | % Increase/ (Decrease) |
| | | | | (Dollars in thousands) | | | (Dollars in thousands) |
Noninterest income: | Noninterest income: | | | | Noninterest income: | |
Deposit related fees | | Deposit related fees | | $ | 8,968 | | | $ | 9,378 | | | (4.4) | % | | $ | 8,968 | | | $ | 7,124 | | | 25.9 | % |
Mortgage warehouse fee income | Mortgage warehouse fee income | | | $ | 954 | | | $ | 382 | | | 149.7 | % | Mortgage warehouse fee income | | 651 | | | 684 | | | (4.8) | % | | 651 | | | 954 | | | (31.8) | % |
Service fees related to off-balance sheet deposits | | | — | | | 70 | | | N/M | |
Deposit related fees | | | 7,124 | | | 1,766 | | | 303.4 | % | |
Gain on sale of securities, net | | | — | | | 1,197 | | | N/M | |
Gain on sale of loans, net | | | — | | | 506 | | | N/M | |
Gain on extinguishment of debt | | | — | | | 925 | | | N/M | |
| (Loss) gain on sale of securities, net | | (Loss) gain on sale of securities, net | | (605) | | | 56 | | | N/M | | (605) | | | — | | | N/M |
| Other income | Other income | | | 12 | | | 85 | | | (85.9) | % | Other income | | 436 | | | 937 | | | (53.5) | % | | 436 | | | 12 | | | N/M |
Total noninterest income | Total noninterest income | | | $ | 8,090 | | | $ | 4,931 | | | 64.1 | % | Total noninterest income | | $ | 9,450 | | | $ | 11,055 | | | (14.5) | % | | $ | 9,450 | | | $ | 8,090 | | | 16.8 | % |
________________________N/M—Not meaningful
Noninterest income increased $3.2decreased $1.6 million or 64.1%14.5% for the three months ended March 31, 2021,2022, compared to the three months ended December 31, 2021. This decrease was primarily due to a $0.6 million loss on sale of securities and a decrease of $0.4 million in deposit related fees as a result of lower foreign exchange fees attributed in part to the geopolitical environment, which negatively impacted trading volume. Additionally, there was a $0.5 million decrease in other income due to a gain on sale of other assets of $0.4 million for the three months ended March 31, 2022 compared to a gain on sale of other assets of $0.9 million recognized in the three months ended December 31, 2021.
Noninterest income increased $1.4 million or 16.8% for the three months ended March 31, 2022, compared to the three months ended March 31, 2020.2021. This increase was primarily due to an increase of $5.4$1.8 million in deposit related fees substantially alland an increase of which are fees from our digital currency customers, and$0.4 million in other income due to a gain on sale of other assets, partially offset by a $0.6 million increaseloss on sale of securities and a $0.3 million decrease in mortgage warehouse fee income, partially offset by a $1.2 million decrease in gain on sale of securities, a $0.9 million decrease in gain on extinguishment of debt, and a $0.5 million decrease in gain on sale of loans due to the exit of our correspondent lending division in March 2020.income. The $5.4 million increase in deposit related fees was primarily due to increases in cash management, foreign exchange, and SEN related fees associated with our digital currency initiative.
Noninterest Expense
The following table presents, for the periods indicated, the major categories of noninterest expense:
NONINTEREST EXPENSE
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | | | 2021 | | 2020 | | % Increase/ (Decrease) |
| | | | | | | | | | | | |
| | | | | | | | (Dollars in thousands) |
Noninterest expense: | | | | | | | | | | | | |
Salaries and employee benefits | | | | | | | | $ | 10,990 | | | $ | 8,955 | | | 22.7 | % |
Occupancy and equipment | | | | | | | | 614 | | | 907 | | | (32.3) | % |
Communications and data processing | | | | | | | | 1,621 | | | 1,261 | | | 28.5 | % |
Professional services | | | | | | | | 1,717 | | | 985 | | | 74.3 | % |
Federal deposit insurance | | | | | | | | 2,296 | | | 123 | | | N/M |
Correspondent bank charges | | | | | | | | 497 | | | 373 | | | 33.2 | % |
Other loan expense | | | | | | | | 174 | | | 122 | | | 42.6 | % |
Other general and administrative | | | | | | | | 1,697 | | | 1,149 | | | 47.7 | % |
Total noninterest expense | | | | | | | | $ | 19,606 | | | $ | 13,875 | | | 41.3 | % |
________________________N/M—Not meaningful | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended |
| | March 31, 2022 | | December 31, 2021 | | % Increase/ (Decrease) | | March 31, 2022 | | March 31, 2021 | | % Increase/ (Decrease) |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
Noninterest expense: | | | | | | | | | | | | |
Salaries and employee benefits | | $ | 15,544 | | | $ | 13,815 | | | 12.5 | % | | $ | 15,544 | | | $ | 10,990 | | | 41.4 | % |
Occupancy and equipment | | 586 | | | 728 | | | (19.5) | % | | 586 | | | 614 | | | (4.6) | % |
| | | | | | | | | | | | |
Communications and data processing | | 2,762 | | | 1,862 | | | 48.3 | % | | 2,762 | | | 1,621 | | | 70.4 | % |
Professional services | | 2,954 | | | 2,994 | | | (1.3) | % | | 2,954 | | | 1,717 | | | 72.0 | % |
Federal deposit insurance | | 1,762 | | | 3,100 | | | (43.2) | % | | 1,762 | | | 2,296 | | | (23.3) | % |
Correspondent bank charges | | 828 | | | 634 | | | 30.6 | % | | 828 | | | 497 | | | 66.6 | % |
Other loan expense | | 384 | | | 364 | | | 5.5 | % | | 384 | | | 174 | | | 120.7 | % |
Other general and administrative | | 3,198 | | | 2,159 | | | 48.1 | % | | 3,198 | | | 1,697 | | | 88.5 | % |
Total noninterest expense | | $ | 28,018 | | | $ | 25,656 | | | 9.2 | % | | $ | 28,018 | | | $ | 19,606 | | | 42.9 | % |
Noninterest expense increased $5.7$2.4 million or 41.3%9.2% for the three months ended March 31, 2021,2022, compared to the three months ended MarchDecember 31, 2020,2021, primarily due to increases in salaries and employee benefits, professional services, federal deposit insurancecommunications and data processing, and other general and administrative expense, offset by a decrease in federal deposit insurance expense. The increase of $2.0$1.7 million or 22.7%12.5% in salaries and employee benefits was primarily due to an increase in headcount. The Company’s average full-time equivalent employees increased by 10.9% from 265 for the three months ended December 31, 2021 to 294 for the three months ended March 31, 2022. Communications and data processing increased $0.9 million or 48.3% primarily due to blockchain infrastructure hosting costs related to the stablecoin initiative as well as continued investment in enterprise cloud storage solutions and scalable cloud-based software solutions. Federal deposit insurance expense decreased $1.3 million due to a slower growth rate in deposit levels. Other general and administrative expense increased $1.0 million or 48.1% primarily due to an increase in the provision for off-balance sheet commitments driven by growth in SEN Leverage and an increase for expanded coverage of insurance.
Noninterest expense increased $8.4 million or 42.9% for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to increases in salaries and employee benefits, communications and data processing, professional services, and other general and administrative expense. The increase of $4.6 million or 41.4% in salaries and employee benefits was primarily due to an increase in headcount and in cost per full-time equivalent employee. The Company’s average full-time equivalent employees increased by 34.2% from 210 for the three months ended March 31, 2020 to 219 for the three months ended March 31, 2021. Occupancy and equipment decreased $0.3 million or 32.3%, due2021 to a reduction in costs related to our leased office space and fixed assets no longer in use that were written off during294 for the three months ended DecemberMarch 31, 2020.2022. Communications and data processing increased $0.4$1.1 million or 28.5%70.4% primarily due to blockchain infrastructure hosting costs related to the Stablecoin initiative as well as continued investment in complianceenterprise cloud storage solutions and scalable cloud-based software to support our digital currency related customer base and additional core processing expense due to higher transaction volumes. We continue to invest in cloud based scalable technology to expand our banking platform with solutions to complement our API-enabled SEN.solutions. Professional services increased $0.7$1.2 million or 74.3%72.0% due primarily to consulting costs around corporate governance, legal fees for projects related to our strategic growth initiatives.associated with the stablecoin initiative and increased talent acquisition costs. Federal deposit insurance expense increased $2.2decreased $0.5 million due to a slower growth rate increase driven by the significant growth in deposits.deposit levels. Other general and administrative expense increased $0.5$1.5 million or 47.7%88.5% primarily due to a legal settlement, increasesan increase in provision for off-balance sheet commitments driven by growth in SEN Leverage and an increase for expanded coverage in insurance and an increase in the provision for unfunded commitments related to the increase in SEN Leverage loans total lines of credit, partially offset by a decrease in travel related expenses due to the impact of the COVID-19 pandemic.insurance.
Income Tax Expense (Benefit)
Income tax benefitexpense was $1.2$7.0 million for the three months ended March 31, 2021,2022, compared to an expense of $1.8$2.2 million for the three months ended MarchDecember 31, 2020.2021. Our effective tax rates for the three months ended March 31, 2022 and December 31, 2021 were 20.4% and 2020 were (10.5)% and 28.8%9.4%, respectively. The decreaseincrease in income tax expense was primarily due to an increase in pre-tax income and oura decrease in tax benefits recognized on exercise of stock options. The increase in the effective tax raterates was primarily relateddue to significantlower excess tax benefits recognized on the exercise of stock options when compared to the three months ended December 31, 2021.
Income tax expense was $7.0 million for the three months ended March 31, 2022, compared to a benefit of $1.2 million for the three months ended March 31, 2021. Our effective tax rates for the three months ended March 31, 2022 and 2021 were 20.4% and (10.5)%, respectively. The increase in income tax expense was primarily due to an increase in pre-tax income and a
decrease in tax benefits recognized on exercise of stock options. The increase in the impacteffective tax rates was due to less excess tax benefits recognized on the exercise of tax-exempt income.stock options when compared to the three months ended March 31, 2021.
Financial Condition
As of March 31, 2021,2022, our total assets increaseddecreased to $7.8$15.8 billion compared to $5.6$16.0 billion as of December 31, 2020.2021. Shareholders’ equity increased $419.3 million,decreased $0.1 billion, or 142.5%3.9%, to $713.6 million$1.5 billion at March 31, 2021,2022, compared to $294.3 million$1.6 billion at December 31, 2020.2021. A summary of the individual components driving the changes in total assets, total liabilities and shareholders' equity is set forth below.
Interest Earning Deposits in Other Banks
Interest earning deposits in other banks increaseddecreased from $2.9$5.2 billion at December 31, 20202021 to $4.3$1.2 billion at March 31, 2021.2022. The majority of the Company’s interest earning deposits in other banks is cash held at the Federal Reserve Bank earning 0.10% at March 31, 2021 and December 31, 2020.Bank. The increasedecrease in interest earning deposits is due to growthwas driven by the purchase of securities as discussed in total deposits exceeding growth in total loans and securities.
Securities Available-for-sale
We use our securities portfolio to primarily provide a source of liquidity, provide an appropriatea return on funds invested and manage interest rate risk, meet collateral requirements and meet regulatory capital requirements.risk.
Management classifies investment securities primarily as either held-to-maturity or available-for-sale based on our intentions and the Company’s ability to hold such securities until maturity. In determining such classifications, securities that management has the positive intent and the Company has the ability to hold until maturity are classified as held to maturity and carried at amortized cost. All other securities are designated as available-for-sale and carried at estimated fair value with unrealized gains and losses included in shareholders’ equity on an after-tax basis. For the periods presented, substantially all
Total securities were classified as available-for-sale.
Our securities available-for-sale increased $778.4 million,$3.6 billion, or 82.9%41.6%, from $939.0 million$8.6 billion at December 31, 20202021 to $1.7$12.2 billion at March 31, 2021.2022. To supplement interest income earned on our loan portfolio, we invest in high quality mortgage-backed securities, collateralized mortgage obligations, other asset backed securities and municipal bonds. During the three months ended March 31, 2021, the Company2022, we purchased $817.7 million$4.6 billion of securities, including $651.1 million$1.3 billion of U.S. Treasuries, $1.1 billion of tax-exempt municipal bonds, $1.1 billion of agency residential mortgage-backed securities, $92.4$432.6 million of U.S. agency securities excluding mortgage-backed securities, $348.3 million of private label commercial mortgage-backed securities and $256.4 million of agency commercial mortgage-backed securities. During the three months ended March 31, 2022, we sold $432.1 million of longer duration securities and $74.2recognized a net loss of $0.6 million. The securities sold were part of a restructuring that is projected to have a positive impact on future earnings when compared to securities purchased in the first quarter of 2022. In addition, we sold the related interest rate cap contracts that hedged a portion of the securities that were sold and a realized gain on sale of $0.4 million was recognized in other noninterest income.
During the three months ended March 31, 2022, we transferred, at fair value, $1.5 billion of tax-exemptresidential mortgage-backed securities, commercial mortgage-backed securities, and municipal bonds.bonds from available-for-sale to held-to-maturity securities. Our decision to re-designate the securities was based on our ability and intent to hold these securities to maturity. Factors used in assessing the ability to hold these securities to maturity were future liquidity needs and sources of funding. The related net unrealized after-tax loss of $14.1 million remained in accumulated other comprehensive income and will be amortized as a yield adjustment through earnings over the remaining life of the securities, offsetting the related net amortization of premium on the transferred securities. No gain or loss was recognized at the time of the transfer.
The following tables summarize the contractual maturities and weighted-average yields of investment securities at March 31, 20212022 and the amortized cost and carryingfair value of those securities as of the indicated dates. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Residential and commercial mortgage-backed securities are classified below based on the final maturity date, however these are amortizing securities with expected average lives primarily less than ten years. The weighted average yield is a prospective yield computed using the amortized cost of fixed income investment securities. Actual yields earned may differ significantly based upon actual prepayments.
SECURITIES
| | | | One Year or Less | | More Than One Year Through Five Years | | More Than Five Years Through 10 Years | | More Than 10 Years | | Total | | | One Year or Less | | More Than One Year Through Five Years | | More Than Five Years Through 10 Years | | More Than 10 Years | | Total |
| | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Fair Value | | Weighted Average Yield | | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Fair Value | | Weighted Average Yield |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
March 31, 2021 | | | |
March 31, 2022 | | March 31, 2022 | | |
Securities Available-for-Sale: | Securities Available-for-Sale: | | | Securities Available-for-Sale: |
U.S. Treasuries | | U.S. Treasuries | | $ | 34,889 | | | 0.48 | % | | $ | — | | | — | | | $ | — | | | — | | | $ | — | | | — | | | $ | 34,889 | | | $ | 34,724 | | | 0.48 | % |
U.S. agency securities - excluding mortgage-backed securities | | U.S. agency securities - excluding mortgage-backed securities | | — | | | — | | | 1,611 | | | (0.22) | % | | 1,432,229 | | | 0.46 | % | | 114,527 | | | 0.57 | % | | 1,548,367 | | | 1,548,661 | | | 0.47 | % |
Residential mortgage-backed securities: | Residential mortgage-backed securities: | Residential mortgage-backed securities: |
Government agency mortgage-backed securities | Government agency mortgage-backed securities | | $ | — | | | — | | | $ | — | | | — | | | $ | — | | | — | | | $ | 152,253 | | | 1.62 | % | | $ | 152,253 | | | $ | 151,218 | | | 1.62 | % | Government agency mortgage-backed securities | | — | | | — | | | — | | | — | | | — | | | — | | | 1,781,961 | | | 1.36 | % | | 1,781,961 | | | 1,751,920 | | | 1.36 | % |
Government agency collateralized mortgage obligation | Government agency collateralized mortgage obligation | | — | | | — | | | — | | | — | | | 150 | | | 1.34 | % | | 685,880 | | | 0.71 | % | | 686,030 | | | 683,380 | | | 0.71 | % | Government agency collateralized mortgage obligation | | — | | | — | | | — | | | — | | | — | | | — | | | 1,385,198 | | | 0.23 | % | | 1,385,198 | | | 1,357,349 | | | 0.23 | % |
Private-label collateralized mortgage obligation | Private-label collateralized mortgage obligation | | — | | | — | | | — | | | — | | | — | | | — | | | 18,688 | | | 2.65 | % | | 18,688 | | | 19,048 | | | 2.65 | % | Private-label collateralized mortgage obligation | | — | | | — | | | — | | | — | | | — | | | — | | | 1,342 | | | 2.67 | % | | 1,342 | | | 1,340 | | | 2.67 | % |
Commercial mortgage-backed securities: | Commercial mortgage-backed securities: | Commercial mortgage-backed securities: |
Government agency mortgage-backed securities | Government agency mortgage-backed securities | | — | | | — | | | — | | | — | | | — | | | — | | | 49,135 | | | 0.51 | % | | 49,135 | | | 49,113 | | | 0.51 | % | Government agency mortgage-backed securities | | — | | | — | | | — | | | — | | | — | | | — | | | 1,338,333 | | | 0.65 | % | | 1,338,333 | | | 1,331,410 | | | 0.65 | % |
Government agency collateralized mortgage obligation | Government agency collateralized mortgage obligation | | — | | | — | | | — | | | — | | | 42,435 | | | 0.22 | % | | — | | | — | | | 42,435 | | | 42,400 | | | 0.22 | % | Government agency collateralized mortgage obligation | | — | | | — | | | — | | | — | | | 70,839 | | | 0.27 | % | | — | | | — | | | 70,839 | | | 70,779 | | | 0.27 | % |
Private-label collateralized mortgage obligation | Private-label collateralized mortgage obligation | | — | | | — | | | — | | | — | | | — | | | — | | | 163,993 | | | 3.21 | % | | 163,993 | | | 174,497 | | | 3.21 | % | Private-label collateralized mortgage obligation | | — | | | — | | | — | | | — | | | — | | | — | | | 492,565 | | | 1.42 | % | | 492,565 | | | 480,914 | | | 1.42 | % |
Municipal bonds: | Municipal bonds: | | | Municipal bonds: | | |
Tax-exempt | Tax-exempt | | — | | | — | | | — | | | — | | | 13,778 | | | 3.15 | % | | 304,354 | | | 2.53 | % | | 318,132 | | | 336,920 | | | 2.56 | % | Tax-exempt | | — | | | — | | | — | | | — | | | — | | | — | | | 2,900,600 | | | 1.89 | % | | 2,900,600 | | | 2,664,160 | | | 1.89 | % |
Taxable | | — | | | — | | | — | | | — | | | — | | | — | | | 14,206 | | | 2.72 | % | | 14,206 | | | 15,643 | | | 2.72 | % | |
| Asset backed securities: | Asset backed securities: | | | Asset backed securities: | | |
Government sponsored student loan pools | Government sponsored student loan pools | | — | | | — | | | — | | | — | | | — | | | — | | | 245,716 | | | 0.78 | % | | 245,716 | | | 245,199 | | | 0.78 | % | Government sponsored student loan pools | | — | | | — | | | — | | | — | | | — | | | — | | | 226,738 | | | 0.83 | % | | 226,738 | | | 222,237 | | | 0.83 | % |
Total securities available-for-sale | | Total securities available-for-sale | | $ | 34,889 | | | 0.48 | % | | $ | 1,611 | | | (0.22) | % | | $ | 1,503,068 | | | 0.45 | % | | $ | 8,241,264 | | | 1.22 | % | | $ | 9,780,832 | | | $ | 9,463,494 | | | 1.10 | % |
| Securities Held-to-Maturity: | | Securities Held-to-Maturity: |
U.S. Treasuries | | U.S. Treasuries | | $ | — | | | — | | | $ | 1,245,293 | | | 1.33 | % | | $ | — | | | — | | | $ | — | | | — | | | $ | 1,245,293 | | | $ | 1,202,805 | | | 1.33 | % |
| Residential mortgage-backed securities: | | Residential mortgage-backed securities: |
Government agency mortgage-backed securities | | Government agency mortgage-backed securities | | — | | | — | | | — | | | — | | | — | | | — | | | 547,423 | | | 1.34 | % | | 547,423 | | | 512,527 | | | 1.34 | % |
Government agency collateralized mortgage obligation | | Government agency collateralized mortgage obligation | | — | | | — | | | — | | | — | | | 50 | | | 1.93 | % | | 113,871 | | | 0.90 | % | | 113,921 | | | 106,729 | | | 0.90 | % |
| Commercial mortgage-backed securities: | | Commercial mortgage-backed securities: |
| Government agency collateralized mortgage obligation | | Government agency collateralized mortgage obligation | | — | | | — | | | — | | | — | | | 53,408 | | | 1.53 | % | | — | | | — | | | 53,408 | | | 48,229 | | | 1.53 | % |
| Municipal bonds: | | Municipal bonds: | | |
Tax-exempt | | Tax-exempt | | — | | | — | | | — | | | — | | | — | | | — | | | 393,965 | | | 1.81 | % | | 393,965 | | | 349,700 | | | 1.81 | % |
Taxable | | Taxable | | — | | | — | | | — | | | — | | | 221,917 | | | 1.87 | % | | 175,698 | | | 2.34 | % | | 397,615 | | | 358,986 | | | 2.08 | % |
| Total securities held-to-maturity | | Total securities held-to-maturity | | $ | — | | | — | | | $ | 1,245,293 | | | 1.33 | % | | $ | 275,375 | | | 1.80 | % | | $ | 1,230,957 | | | 1.59 | % | | $ | 2,751,625 | | | $ | 2,578,976 | | | 1.50 | % |
Total securities | Total securities | | $ | — | | | — | | | $ | — | | | — | | | $ | 56,363 | | | 0.94 | % | | $ | 1,634,225 | | | 1.43 | % | | $ | 1,690,588 | | | $ | 1,717,418 | | | 1.41 | % | Total securities | | $ | 34,889 | | | 0.48 | % | | $ | 1,246,904 | | | 1.33 | % | | $ | 1,778,443 | | | 0.66 | % | | $ | 9,472,221 | | | 1.27 | % | | $ | 12,532,457 | | | $ | 12,042,470 | | | 1.19 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | | | | | | | |
| | (Dollars in thousands) |
Securities Available-for-Sale: | | | | | | | | |
Residential mortgage-backed securities: | | | | | | | | |
Government agency mortgage-backed securities | | $ | 152,253 | | | $ | 151,218 | | | $ | 5,701 | | | $ | 5,664 | |
Government agency collateralized mortgage obligation | | 686,030 | | | 683,380 | | | 197,978 | | | 198,051 | |
Private-label collateralized mortgage obligation | | 18,688 | | | 19,048 | | | 20,544 | | | 20,687 | |
Commercial mortgage-backed securities: | | | | | | | | |
Government agency mortgage-backed securities | | 49,135 | | | 49,113 | | | — | | | — | |
Government agency collateralized mortgage obligation | | 42,435 | | | 42,400 | | | — | | | — | |
Private-label collateralized mortgage obligation | | 163,993 | | | 174,497 | | | 164,214 | | | 182,536 | |
Municipal bonds: | | | | | | | | |
Tax-exempt | | 318,132 | | | 336,920 | | | 246,159 | | | 270,359 | |
Taxable | | 14,206 | | | 15,643 | | | 15,307 | | | 16,002 | |
Asset backed securities: | | | | | | | | |
Government sponsored student loan pools | | 245,716 | | | 245,199 | | | 248,848 | | | 245,716 | |
| | | | | | | | |
| | | | | | | | |
Total securities | | $ | 1,690,588 | | | $ | 1,717,418 | | | $ | 898,751 | | | $ | 939,015 | |
Loan Portfolio
Our primary source of income is derived from interest earned on loans. Our loan portfolio consists primarily of mortgage warehouse loans, loans secured by real estate and mortgage warehouse loans. Our loan customers primarily consist of small- to medium-sized businesses, professionals, real estate investors, small residential builders and individuals. Our owner-occupied and investment commercial real estate loans, multi-family loans and commercial and industrial loans provide us with higher risk-adjusted returns, relatively shorter maturities and more sensitivity to interest rate fluctuations, andbitcoin which are complemented by our relatively lower risk residential real estate loans to individuals. Our commercial real estate, multi-family real estate, and construction lending activities are primarily directed to our market area of Southern California. Our one-to-four family residential loans and warehouse loans are sourced throughout the United States.
In 2020, we 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. Our SEN Leverage product enables our digital currency customers to borrow U.S. dollars directly from the Bank to purchase bitcoin using bitcoin as the collateral for these loans, which we refer to as SEN Leverage direct lending. In the SEN Leverage direct lending structure, a Bank exchange customer, acting as custodian, holds the borrower’s bitcoin and the Bank uses the SEN to fund the loan directly to the borrower’s account at the exchange. In addition to providing SEN Leverage direct lending, the Bank also provides loans collateralized with bitcoin to certain third-party digital currency industry lenders for loans to their customers, which we refer to as SEN Leverage indirect lending. In the SEN Leverage indirect lending structure, the lender uses bitcoin to collateralize its loan with the Bank and the funding of the loan and liquidation of the collateral may or may not occur via the SEN. The Bank uses a custodian to custody the bitcoin collateral and a separate digital currency service provider to monitor the bitcoin collateral coverage ratio and, if necessary, to liquidate the bitcoin collateral. We believe our SEN Leverage product is unique in the digital currency industry, creating both deeper relationships with our clients and an attractive source of potential future revenue growth. The outstanding balance of SEN Leverage loans was $117.3 million and $77.2 million at March 31, 2021 and December 31, 2020, respectively, and is included in the commercial and industrial loan segment.
segment and loans secured by real estate. The following table summarizes our loan portfolio by loan segment as of the dates indicated:
COMPOSITION OF LOAN PORTFOLIO
| | | | March 31, 2021 | | December 31, 2020 | | | March 31, 2022 | | December 31, 2021 |
| | | Amount | | Percent | | Amount | | Percent | | | Amount | | Percent | | Amount | | Percent |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
Real estate: | Real estate: | | Real estate: | |
One-to-four family | One-to-four family | | $ | 171,045 | | | 23.3 | % | | $ | 187,855 | | | 25.0 | % | One-to-four family | | $ | 94,161 | | | 12.6 | % | | $ | 105,098 | | | 11.8 | % |
Multi-family | Multi-family | | 74,003 | | | 10.1 | % | | 77,126 | | | 10.3 | % | Multi-family | | 9,368 | | | 1.3 | % | | 56,751 | | | 6.3 | % |
Commercial | Commercial | | 287,411 | | | 39.2 | % | | 301,901 | | | 40.2 | % | Commercial | | 80,279 | | | 10.8 | % | | 210,136 | | | 23.5 | % |
Construction | Construction | | 5,172 | | | 0.7 | % | | 6,272 | | | 0.8 | % | Construction | | — | | | — | | | 7,573 | | | 0.8 | % |
Commercial and industrial(1) | Commercial and industrial(1) | | 118,598 | | | 16.2 | % | | 78,909 | | | 10.5 | % | Commercial and industrial(1) | | 434,960 | | | 58.3 | % | | 335,862 | | | 37.6 | % |
| Reverse mortgage and other | Reverse mortgage and other | | 1,346 | | | 0.2 | % | | 1,495 | | | 0.2 | % | Reverse mortgage and other | | 1,137 | | | 0.2 | % | | 1,410 | | | 0.2 | % |
Mortgage warehouse | Mortgage warehouse | | 76,014 | | | 10.3 | % | | 97,903 | | | 13.0 | % | Mortgage warehouse | | 125,435 | | | 16.8 | % | | 177,115 | | | 19.8 | % |
Total gross loans held-for-investment | Total gross loans held-for-investment | | 733,589 | | | 100.0 | % | | 751,461 | | | 100.0 | % | Total gross loans held-for-investment | | 745,340 | | | 100.0 | % | | 893,945 | | | 100.0 | % |
Deferred fees, net | Deferred fees, net | | 1,717 | | | 2,206 | | | Deferred fees, net | | (1,884) | | | 275 | | |
Total loans held-for-investment | Total loans held-for-investment | | 735,306 | | | 753,667 | | | Total loans held-for-investment | | 743,456 | | | 894,220 | | |
Allowance for loan losses | Allowance for loan losses | | (6,916) | | | (6,916) | | | Allowance for loan losses | | (4,442) | | | (6,916) | | |
Total net loans held-for-investment | Total net loans held-for-investment | | $ | 728,390 | | | $ | 746,751 | | | Total net loans held-for-investment | | $ | 739,014 | | | $ | 887,304 | | |
Loans held-for-sale(1)(2) | Loans held-for-sale(1)(2) | | $ | 897,227 | | | $ | 865,961 | | | Loans held-for-sale(1)(2) | | $ | 937,140 | | | $ | 893,194 | | |
________________________(1)Commercial and industrial loans includes $435.0 million and $335.9 million of SEN Leverage loans as of March 31, 2022 and December 31, 2021, respectively.
(2)Loans held-for-sale are comprised entirelyincludes $914.2 million and $893.2 million of mortgage warehouse loans for all periods presented.as of March 31, 2022 and December 31, 2021, respectively.
In March 2022, the Company sold $216.1 million of commercial real estate, multi-family real estate and construction loans gross loans, and purchased a participating interest of $67.6 million of those loans, which decreased overall gross loans by approximately $148.5 million compared to December 31, 2021. In addition, there were $22.9 million of commercial real estate and construction loans transferred to held-for-sale as of March 31, 2022.
The repayment of loans is a source of additional liquidity for the Bank. The following table details maturities and sensitivity to interest rate changes for our loans held-for-investment at March 31, 2021:2022:
LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES
| | | | March 31, 2021 | | | March 31, 2022 |
| | | Due in One Year or Less | | Due in One to Five Years | | Due After Five Years | | Total | | | Due in One Year or Less | | Due in One to Five Years | | Due After Five Years to 15 Years | | Due After 15 Years | | Total |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
Real estate: | Real estate: | | Real estate: | |
One-to-four family | One-to-four family | | $ | 18 | | | $ | 405 | | | $ | 170,622 | | | $ | 171,045 | | One-to-four family | | $ | 16 | | | $ | 642 | | | $ | 6,472 | | | $ | 87,571 | | | $ | 94,701 | |
Multi-family | Multi-family | | 2,503 | | | 41,585 | | | 29,915 | | | 74,003 | | Multi-family | | — | | | 8,827 | | | 540 | | | — | | | 9,367 | |
Commercial | Commercial | | 40,001 | | | 146,917 | | | 100,493 | | | 287,411 | | Commercial | | 11,877 | | | 51,565 | | | 16,831 | | | — | | | 80,273 | |
Construction | | 1,261 | | | 3,911 | | | — | | | 5,172 | | |
| Commercial and industrial | Commercial and industrial | | 118,598 | | | — | | | — | | | 118,598 | | Commercial and industrial | | 185,796 | | | 246,733 | | | 4 | | | — | | | 432,533 | |
| Reverse mortgage and other | Reverse mortgage and other | | — | | | — | | | 1,346 | | | 1,346 | | Reverse mortgage and other | | — | | | — | | | — | | | 1,147 | | | 1,147 | |
Mortgage warehouse | Mortgage warehouse | | 76,014 | | | — | | | — | | | 76,014 | | Mortgage warehouse | | 125,435 | | | — | | | — | | | — | | | 125,435 | |
Total gross loans held-for-investment | | $ | 238,395 | | | $ | 192,818 | | | $ | 302,376 | | | $ | 733,589 | | |
Total loans held-for-investment | | Total loans held-for-investment | | $ | 323,124 | | | $ | 307,767 | | | $ | 23,847 | | | $ | 88,718 | | | $ | 743,456 | |
Amounts with fixed rates | Amounts with fixed rates | | $ | 201,739 | | | $ | 176,551 | | | $ | 47,991 | | | $ | 426,281 | | Amounts with fixed rates | | $ | 7,518 | | | $ | 60,433 | | | $ | 4,408 | | | $ | 2,959 | | | $ | 75,318 | |
Amounts with floating rates | Amounts with floating rates | | $ | 36,656 | | | $ | 16,267 | | | $ | 254,385 | | | $ | 307,308 | | Amounts with floating rates | | $ | 315,606 | | | $ | 247,334 | | | $ | 19,439 | | | $ | 85,759 | | | $ | 668,138 | |
Nonperforming Assets
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether such loans are actually past due. In general, we place loans on nonaccrual status when they become 90 days past due. We also place loans on nonaccrual status if they are less than 90 days past due if the collection
of principal or interest is in doubt. When interest accrual is discontinued, all unpaid accrued interest is reversed from income. Interest income is subsequently recognized only to the extent cash payments received exceed principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are, in management’s opinion, reasonably assured. Any loan which the Bank deems to be uncollectible, in whole or in part, is charged off to the extent of the anticipated loss. Loans that are past due for 180 days or more are charged off unless the loan is well secured and in the process of collection.
We believe our disciplined lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have several procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our loan officers, and we also monitor our delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
NonperformingNonaccrual loans increaseddecreased to $5.3$3.6 million, or 0.73%0.49% of total loans, at March 31, 2021,2022, compared to $5.0$4.0 million, or 0.66%0.45% of total loans, at December 31, 2020.2021. The increasedecrease in nonperformingnonaccrual loans during the three months ended March 31, 20212022 was due primarily to an increasea decrease in one-to-four family real estatenonaccrual reverse mortgage loans.
Total nonperforming assets were $5.3$3.6 million and $5.0$4.0 million at March 31, 20212022 and December 31, 2020,2021, respectively, or 0.07%0.02% and 0.09%0.03%, respectively, of total assets.
The following table presents information regarding nonperforming assets at the dates indicated:
NONPERFORMING ASSETS
| | | | March 31, 2021 | | December 31, 2020 | | | March 31, 2022 | | December 31, 2021 |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
Nonaccrual loans | Nonaccrual loans | | Nonaccrual loans | |
Real estate: | Real estate: | | Real estate: | |
One-to-four family | One-to-four family | | $ | 4,457 | | | $ | 4,113 | | One-to-four family | | $ | 2,986 | | | $ | 3,080 | |
| Reverse mortgage and other | Reverse mortgage and other | | 876 | | | 869 | | Reverse mortgage and other | | 646 | | | 923 | |
| Total nonaccrual loans | | Total nonaccrual loans | | 3,632 | | | 4,003 | |
Accruing loans 90 or more days past due | Accruing loans 90 or more days past due | | — | | | — | | Accruing loans 90 or more days past due | | — | | | — | |
Total gross nonperforming loans | | 5,333 | | | 4,982 | | |
Total nonperforming loans | | Total nonperforming loans | | 3,632 | | | 4,003 | |
Other real estate owned, net | Other real estate owned, net | | — | | | — | | Other real estate owned, net | | — | | | — | |
Total nonperforming assets | Total nonperforming assets | | $ | 5,333 | | | $ | 4,982 | | Total nonperforming assets | | $ | 3,632 | | | $ | 4,003 | |
Ratio of nonperforming loans to total loans(1) | | 0.73 | % | | 0.66 | % | |
Ratio of nonaccrual loans to total loans(1) | | Ratio of nonaccrual loans to total loans(1) | | 0.49 | % | | 0.45 | % |
Ratio of allowance for loan losses to nonaccrual loans | | Ratio of allowance for loan losses to nonaccrual loans | | 122.30 | % | | 172.77 | % |
Ratio of nonperforming assets to total assets | Ratio of nonperforming assets to total assets | | 0.07 | % | | 0.09 | % | Ratio of nonperforming assets to total assets | | 0.02 | % | | 0.03 | % |
| Troubled debt restructurings | Troubled debt restructurings | | Troubled debt restructurings | |
Restructured loans-nonaccrual | Restructured loans-nonaccrual | | $ | 564 | | | $ | 564 | | Restructured loans-nonaccrual | | $ | 563 | | | $ | 564 | |
Restructured loans-accruing | Restructured loans-accruing | | 920 | | | 961 | | Restructured loans-accruing | | 1,140 | | | 1,149 | |
Total troubled debt restructurings | Total troubled debt restructurings | | $ | 1,484 | | | $ | 1,525 | | Total troubled debt restructurings | | $ | 1,703 | | | $ | 1,713 | |
________________________(1)Total loans exclude loans held-for-sale at each of the dates presented.
COVID-19 UpdateImpaired Loans and TDRs.
In March 2020, the World Health Organization declared the outbreak of the COVID-19 virus as a pandemic. The effects of the outbreak are still evolving, and the ultimate severity and duration of the pandemic and the implications on global economic conditions remains uncertain. The following is a summary of the impact and potential effects of COVID-19 on the Company’s loan portfolio.
At March 31, 2021, our grossImpaired loans held-for-investment portfolio was $733.6 million, with its largest segments consisting of commercial real estate and one-to-four-family residential real estate loans. Although there is significant uncertainty in the current economic environment due to the impact of the COVID-19 pandemic, our relatively low to moderate loan-to-value ratios provide a lower probability of loss in the event of defaults in our loan portfolio. We will continue to monitor trends in our loan portfolio segments for any known or probable adverse conditions with an emphasis on our retail and hospitality loans within our commercial real estate loan portfolio.
Additional information at March 31, 2021 related to our loan segments, including the weighted average loan-to-values for our real estate portfolio, is set forth below. Weighted average loan-to-value ratios are based on current loan balances and appraised values obtained either at loan origination or based on a more current updated appraisal.
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 |
| | Loan Balance At Period End | | Weighted Average Loan-to-Value | | Percentage of Gross Loans Held-for-Investment |
| | | | | | |
Loan Segment: | | (Dollars in thousands) |
Real estate loans: | | | | | | |
One-to-four family | | $ | 171,045 | | | 54 | % | | 23.3 | % |
Multi-family | | 74,003 | | | 51 | % | | 10.1 | % |
Commercial industry sectors: | | | | | | |
Retail | | 75,585 | | | 54 | % | | 10.3 | % |
Hospitality | | 46,640 | | | 44 | % | | 6.4 | % |
Office | | 47,823 | | | 64 | % | | 6.5 | % |
Industrial | | 63,813 | | | 60 | % | | 8.7 | % |
Other | | 53,550 | | | 43 | % | | 7.3 | % |
Total commercial | | 287,411 | | | 53 | % | | 39.2 | % |
Construction | | 5,172 | | | 56 | % | | 0.7 | % |
Other | | 195,958 | | | N/A | | 26.7 | % |
Total gross loans held-for-investment | | $ | 733,589 | | | N/A | | 100.0 | % |
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 onalso include certain loans that were currenthave been modified as of December 31, 2019 are not troubled debt restructurings, (“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. None of the modified loans met the criteria of a TDR under the CARES Act or the related interagency statement.
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. Due to the fluid nature of COVID-19, this program has been evolving in order to provide maximum relief to bank borrowers.TDRs. As of March 31, 2022 and December 31, 2021, the remainingCompany held eight loans totaling $1.7 million that were TDRs.
A loan is identified as a 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
deferralthe restructuring that it would not otherwise consider. 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
COVID-19the payment of principal or interest. All TDRs 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
follows: | | | | | | | | | | | | | | |
| | Loan Balance At Period End | | Percentage of Gross Loans Held-for-Investment |
| | | | |
| | (Dollars in thousands) |
COVID-19 related modifications: | | | | |
Real estate loans: | | | | |
One-to-four family | | $ | 6,928 | | | 0.9 | % |
| | | | |
Commercial industry sectors: | | | | |
Retail | | 10,492 | | | 1.4 | % |
Hospitality | | 40,019 | | | 5.5 | % |
Office | | 7,874 | | | 1.1 | % |
| | | | |
| | | | |
Total commercial | | 58,385 | | | 8.0 | % |
| | | | |
| | | | |
Total modifications outstanding | | $ | 65,313 | | | 8.9 | % |
a nonaccrual loan. Loans classified as TDRs are reported as impaired loans. Loans Grading
From a credit risk standpoint, we grade watchlist and problem loans into one of five categories: pass, special mention, substandard, doubtful or loss. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. We review the ratings on credits regularly. Ratings are adjusted regularly to reflect the degree of risk and loss that our
management believes to be appropriate for each credit. Our methodology is structured so that specific reserve allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss). The Bank uses the following definitions for risk ratings:
•Special Mention. A special mention loan has potential weaknesses deserving of management’s close attention. If uncorrected, such weaknesses may result in deterioration of the repayment prospects for the asset or in our credit position at some future date.
•Substandard. A substandard loan is inadequately protected by the current financial condition 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 we will sustain some loss if deficiencies are not corrected.
•Doubtful. A doubtful loan has all weaknesses inherent in one classified as substandard, with the added characteristic that weaknesses make collection or liquidation in full, on the basis of existing facts, conditions, and values, highly questionable and improbable.
•Loss. Credits rated as loss are charged-off. We have no expectation of the recovery of any payments in respect of credits rated as loss.
The following table presents the loan balances by segment as well as risk rating. No assets were classified as loss during the periods presented.
LOAN CLASSIFICATION
| | | Credit Risk Grades | | Credit Risk Grades |
| | | Pass | | Special Mention | | Substandard | | Doubtful | | Total | | | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
March 31, 2021 | | |
March 31, 2022 | | March 31, 2022 | |
Real estate loans: | Real estate loans: | | Real estate loans: | |
One-to-four family | One-to-four family | | $ | 163,313 | | | $ | 3,275 | | | $ | 4,457 | | | $ | — | | | $ | 171,045 | | One-to-four family | | $ | 91,166 | | | $ | 549 | | | $ | 2,986 | | | $ | — | | | $ | 94,701 | |
Multi-family | Multi-family | | 74,003 | | | — | | | — | | | — | | | 74,003 | | Multi-family | | 9,367 | | | — | | | — | | | — | | | 9,367 | |
Commercial | Commercial | | 265,135 | | | 14,402 | | | 7,874 | | | — | | | 287,411 | | Commercial | | 65,305 | | | 13,732 | | | 1,236 | | | — | | | 80,273 | |
Construction | | 5,172 | | | — | | | — | | | — | | | 5,172 | | |
| Commercial and industrial | Commercial and industrial | | 118,361 | | | — | | | 237 | | | — | | | 118,598 | | Commercial and industrial | | 432,533 | | | — | | | — | | | — | | | 432,533 | |
| Reverse mortgage and other | Reverse mortgage and other | | 470 | | | — | | | 876 | | | — | | | 1,346 | | Reverse mortgage and other | | 501 | | | — | | | 646 | | | — | | | 1,147 | |
Mortgage warehouse | Mortgage warehouse | | 76,014 | | | — | | | — | | | — | | | 76,014 | | Mortgage warehouse | | 125,435 | | | — | | | — | | | — | | | 125,435 | |
Total gross loans held-for-investment | | $ | 702,468 | | | $ | 17,677 | | | $ | 13,444 | | | $ | — | | | $ | 733,589 | | |
Total loans held-for-investment | | Total loans held-for-investment | | $ | 724,307 | | | $ | 14,281 | | | $ | 4,868 | | | $ | — | | | $ | 743,456 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Loan Reviews and Problem Loan Management
Our credit administration staff conducts meetings at least four times a year to review asset quality and loan delinquencies. The Bank’s Loan Portfolio Management Procedure prescribes loan review frequency and scope through a risk-based approach that considers loan amount, type, risk rating and payment status. Individual loan reviews encompass a loan’s payment status and history, current and projected paying capacity of the borrower and/or guarantor(s), current condition and estimated value of any collateral, sufficiency of credit and collateral documentation, and compliance with Bank and regulatory lending standards. Loan reviewers assign an overall loan risk rating from one of the Bank’s loan rating categories and prepare a written report summarizing the review.
Once a loan is identified as a problem loan or a loan requiring a workout, the Bank makes an evaluation and develops a plan for handling the loan. In developing such a plan, management reviews all relevant information from the loan file and any loan review reports. We have a conversation with the borrower and update current and projected financial information (including borrower global cash flows when possible) and collateral valuation estimates. Following analysis of all available relevant information, management adopts an action plan from the following alternatives: (a) continuation of loan collection efforts on their existing terms, (b) a restructure of the loan’s terms, (c) a sale of the loan, (d) a charge off or partial charge off, (e) foreclosure on pledged collateral, or (f) acceptance of a deed in lieu of foreclosure.
Impaired Loans and TDRs. Impaired loans also include certain loans that have been modified as TDRs. As of March 31, 2021, the Company held seven loans totaling $1.5 million that were TDRs, compared to seven loans totaling to $1.5 million at December 31, 2020.
A loan is identified as a 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. 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 TDRs 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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Credit Risk Grades |
| | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
| | | | | | | | | | |
| | (Dollars in thousands) |
December 31, 2021 | | | | | | | | | | |
Real estate loans: | | | | | | | | | | |
One-to-four family | | $ | 102,307 | | | $ | 451 | | | $ | 3,080 | | | $ | — | | | $ | 105,838 | |
Multi-family | | 56,855 | | | — | | | — | | | — | | | 56,855 | |
Commercial | | 199,598 | | | 10,528 | | | — | | | — | | | 210,126 | |
Construction | | 7,502 | | | — | | | — | | | — | | | 7,502 | |
Commercial and industrial | | 335,362 | | | — | | | — | | | — | | | 335,362 | |
| | | | | | | | | | |
Reverse mortgage and other | | 499 | | | — | | | 923 | | | — | | | 1,422 | |
Mortgage warehouse | | 177,115 | | | — | | | — | | | — | | | 177,115 | |
Total loans held-for-investment | | $ | 879,238 | | | $ | 10,979 | | | $ | 4,003 | | | $ | — | | | $ | 894,220 | |
Allowance for Loan Losses
We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks inherent in our loan portfolio. The amount of the allowance for loan losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts, or at all. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.
In reviewing our loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements we consider include:
•For residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt-to-income ratio and employment and income stability, the loan-to-value ratio, and the age, condition and marketability of the collateral;
•For commercial and multi-family mortgage loans, the debt service coverage ratio, operating results of the owner in the case of owner-occupied properties, the loan-to-value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type;
•For construction loans, the perceived feasibility of the project including the ability to sell improvements constructed for resale, the quality and nature of contracts for presale, if any, experience and ability of the builder, loan-to-cost ratio and loan-to-value ratio;
•For commercial and industrial loans, the debt service coverage ratio (income from the business exceeding operating expenses compared to loan repayment requirements), the operating results of the commercial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral, risks related to new product offerings such as loans secured by bitcoin and the volatility of this particular collateral type; and
•For mortgage warehouse loans held-for-investment, despite our negligible loss history, we provide a loss allowance factor subject to quarterly adjustment. Mortgage warehouse loans held-for-sale are not subject to any loan loss allowance and are recorded at lower of cost or fair market value.
The following table presents a summary of changes in the allowance for loan losses for the periods and dates indicated:
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
| | | | Three Months Ended March 31, | | | Three Months Ended |
| | | 2021 | | 2020 | | | March 31, 2022 | | December 31, 2021 | | | March 31, 2021 |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
Allowance for loan losses at beginning of period | Allowance for loan losses at beginning of period | | $ | 6,916 | | | $ | 6,191 | | Allowance for loan losses at beginning of period | | $ | 6,916 | | | $ | 6,916 | | | | $ | 6,916 | |
| Total charge-offs | | — | | | — | | |
| Total recoveries | | — | | | — | | |
| Net charge-offs | Net charge-offs | | — | | | — | | Net charge-offs | | — | | | — | | | | — | |
Provision for loan losses | | — | | | 367 | | |
Reversal of provision for loan losses | | Reversal of provision for loan losses | | (2,474) | | | — | | | | — | |
Allowance for loan losses at period end | Allowance for loan losses at period end | | $ | 6,916 | | | $ | 6,558 | | Allowance for loan losses at period end | | $ | 4,442 | | | $ | 6,916 | | | | $ | 6,916 | |
| Total gross loans outstanding (end of period) | | $ | 733,589 | | | $ | 683,214 | | |
Total loans outstanding (end of period) | | Total loans outstanding (end of period) | | $ | 743,456 | | | $ | 894,220 | | | | $ | 735,306 | |
Average loans outstanding | Average loans outstanding | | $ | 744,557 | | | $ | 664,040 | | Average loans outstanding | | $ | 792,071 | | | $ | 779,244 | | | | $ | 744,557 | |
| Allowance for loan losses to period end loans | Allowance for loan losses to period end loans | | 0.94 | % | | 0.96 | % | Allowance for loan losses to period end loans | | 0.60 | % | | 0.77 | % | | | 0.94 | % |
Net charge-offs to average loans | Net charge-offs to average loans | | 0.00 | % | | 0.00 | % | Net charge-offs to average loans | | 0.00 | % | | 0.00 | % | | | 0.00 | % |
|
Our allowance for loan losses at March 31, 2022, December 31, 2021 and March 31, 20202021 was $4.4 million, $6.9 million and $6.6$6.9 million, respectively, or 0.94%0.60%, 0.77% and 0.96%0.94% of loans held-for-investment for each respective period-end. The decrease in the ratio of the allowance for loan losses to gross loans held-for-investment from March 31, 20202021 was primarily due to changes inthe lower risk profile of the loan product and segment mix.portfolio as a result of the loan sale discussed above.
We had no charge-offs and no recoveries for the three months ended March 31, 2021 and March 31, 2020.all periods presented.
Although we believe that we have established our allowance for loan losses in accordance with GAAP and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for loan losses will be subject to ongoing evaluations of the risks in our loan portfolio.
The following table shows the allocation of the allowance for loan losses among loan categories and certain other informationpercent of loans in each category to total loans as of the dates indicated. The total allowance is available to absorb losses from any loan category.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
| | | | March 31, 2021 | | December 31, 2020 | | | March 31, 2022 | | December 31, 2021 |
| | | Amount | | Percent(1) | | Amount | | Percent(1) | | | Amount | | Percent(1) | | Amount | | Percent(1) |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
Real estate: | Real estate: | | Real estate: | |
One-to-four family | One-to-four family | | $ | 1,634 | | | 0.22 | % | | $ | 1,245 | | | 0.17 | % | One-to-four family | | $ | 800 | | | 12.6 | % | | $ | 1,023 | | | 11.8 | % |
Multi-family | Multi-family | | 828 | | | 0.11 | % | | 878 | | | 0.12 | % | Multi-family | | 100 | | | 1.3 | % | | 682 | | | 6.3 | % |
Commercial | Commercial | | 3,251 | | | 0.44 | % | | 1,810 | | | 0.24 | % | Commercial | | 475 | | | 10.8 | % | | 2,017 | | | 23.5 | % |
Construction | Construction | | 493 | | | 0.07 | % | | 590 | | | 0.08 | % | Construction | | — | | | 0.0 | % | | 776 | | | 0.8 | % |
Commercial and industrial | Commercial and industrial | | 360 | | | 0.05 | % | | 1,931 | | | 0.24 | % | Commercial and industrial | | 2,499 | | | 58.3 | % | | 1,566 | | | 37.6 | % |
| Reverse mortgage and other | Reverse mortgage and other | | 18 | | | 0.00 | % | | 39 | | | 0.01 | % | Reverse mortgage and other | | 11 | | | 0.2 | % | | 12 | | | 0.2 | % |
Mortgage warehouse | Mortgage warehouse | | 332 | | | 0.05 | % | | 423 | | | 0.06 | % | Mortgage warehouse | | 557 | | | 16.8 | % | | 840 | | | 19.8 | % |
Total allowance for loan losses | | $ | 6,916 | | | 0.94 | % | | $ | 6,916 | | | 0.92 | % | |
Total | | Total | | $ | 4,442 | | | 100.0 | % | | $ | 6,916 | | | 100.0 | % |
________________________(1)Loan amount as a percentage of total gross loans.
Deposits
Deposits are the major source of funding for the Company. We offer a variety of deposit products including interest and noninterest bearing demand accounts, money market and savings accounts and certificates of deposit,Company, substantially all of which we market at competitive pricing. We generate depositsare derived from our customers on a relationship basis and through the efforts of our commercial lending officers.digital currency customer base. Deposits increased $1.8decreased $0.9 billion or 33.4%6.3% to $7.0$13.4 billion at March 31, 2021,2022, compared to $5.2$14.3 billion at December 31, 2020.2021. Noninterest bearing deposits totaled $6.9$13.3 billion, representing approximately 98.4%99.5% of total deposits at March 31, 2021,2022, compared to $5.1$14.2 billion, representing approximately 97.8%99.5% of total deposits at December 31, 2020.2021.
At March 31, 2021,2022, deposits by foreign depositors amounted to $2.8$4.3 billion or 39.7%31.8% of total deposits, compared to $1.4$4.0 billion, or 27.6%28.0% of total deposits, at December 31, 2020.The increase in total deposits from the prior year end was driven by an increase in deposits from digital currency exchanges, institutional investors in digital assets and other fintech related customers, with elevated client activity evidenced by the record volume of SEN transactions during the quarter.2021. The Bank’s 10 largest depositors accounted for $2.8$6.5 billion in deposits, or approximately 40.6%48.2% of total deposits at March 31, 20212022 compared to $2.5$6.5 billion in deposits, or approximately 47.5%45.3% of total deposits at December 31, 2020, substantially all2021.
Deposits that meet or exceed the FDIC insurance limit of $250,000 and over totaled $13.2 billion at March 31, 2022. The amounts stated for uninsured deposits as of the reported period are estimates due to the impracticability of precisely measuring amounts of uninsured deposits for accounts held through fiduciary relationships, some portion of which are customers operating in the digital currency industry.may qualify for “pass-through” insurance coverage under FDIC regulations. Accordingly, a portion of our reported uninsured deposits may be eligible for pass-through deposit insurance coverage. There were no uninsured certificates of deposit at March 31, 2022.
Our continued growth has been accompanied by significant fluctuations in the level of our deposits, in particular our deposits from customers in the digital currency industry, as our customers in this industry typically carry higher balances over the weekend to take advantage of the 24/7 availability of the SEN, and carry lower balances during the business week.industry. The Bank’s average total digital currency deposits during the three months ended March 31, 20212022 amounted to $6.4$14.7 billion, the high and low daily total digital currency deposit levels during such time were $8.4$16.2 billion and $13.2 billion, respectively, compared to an average of $10.2 billion during the three months ended December 31, 2021, and the high and low daily deposit levels were $16.0 billion and $4.6 billion, respectively.
Demand for new deposit accounts is generated by the Company’s banking platform for innovators that includes the SEN, which is enabled through Silvergate’s proprietary API, and other cash management solutions. These tools enable Silvergate’s clients to grow their business and scale operations. The following table presents a breakdown of our digital currency customer base and the deposits held by such customers at the dates noted below:
| | | March 31, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
| | Number of Customers | | Total Deposits(1) | | Number of Customers | | Total Deposits(1) | | Number of Customers | | Total Deposits(1) | | Number of Customers | | Total Deposits(1) |
| | | (Dollars in millions) | | (Dollars in millions) |
Digital currency exchanges | Digital currency exchanges | | 85 | | | $ | 2,993 | | | 76 | | | $ | 2,479 | | Digital currency exchanges | | 96 | | | $ | 7,960 | | | 94 | | | $ | 8,288 | |
Institutional investors | Institutional investors | | 695 | | | 2,166 | | | 607 | | | 1,811 | | Institutional investors | | 966 | | | 3,109 | | | 894 | | | 4,220 | |
Other customers | Other customers | | 324 | | | 1,634 | | | 286 | | | 749 | | Other customers | | 441 | | | 2,126 | | | 393 | | | 1,603 | |
Total | Total | | 1,104 | | | $ | 6,793 | | | 969 | | | $ | 5,039 | | Total | | 1,503 | | | $ | 13,195 | | | 1,381 | | | $ | 14,111 | |
________________________(1)Total deposits may not foot due to rounding.
Our cost of total deposits and our cost of funds was 0.00% and 0.01%, respectively, for the three months ended March 31, 2022, compared to 0.00% and 0.02%, respectively, for the three months ended March 31, 2021, compared to 0.87% and 0.94%, respectively, for the three months ended March 31, 2020. The decrease in the weighted average cost of deposits compared to the prior period was driven by the absence of any interest expense associated with brokered certificates of deposit, which were called in the second quarter of 2020.
The following table presents the average balances and average rates paid on deposits for the periods indicated:
COMPOSITION OF DEPOSITS
| | | | Three Months Ended March 31, 2021 | | Year Ended December 31, 2020 | | | Three Months Ended March 31, 2022 | | Year Ended December 31, 2021 |
| | Average Balance | | Average Rate | | Average Balance | | Average Rate | | Average Balance | | Average Rate | | Average Balance | | Average Rate |
| | | (Dollars in thousands) | | (Dollars in thousands) |
Noninterest bearing demand accounts(1) | Noninterest bearing demand accounts(1) | | $ | 6,526,555 | | | — | | | $ | 1,931,310 | | | — | | Noninterest bearing demand accounts(1) | | $ | 14,781,601 | | | — | | | $ | 10,319,141 | | | — | |
Interest bearing accounts: | Interest bearing accounts: | | Interest bearing accounts: | |
Interest bearing demand accounts | Interest bearing demand accounts | | 42,197 | | | 0.13 | % | | 44,991 | | | 0.14 | % | Interest bearing demand accounts | | 5,531 | | | 0.07 | % | | 21,310 | | | 0.12 | % |
Money market and savings accounts(2) | Money market and savings accounts(2) | | 74,318 | | | 0.16 | % | | 71,432 | | | 0.46 | % | Money market and savings accounts(2) | | 70,632 | | | 0.11 | % | | 70,215 | | | 0.15 | % |
Certificates of deposit: | | |
Brokered certificates of deposit | | — | | | — | | | 95,611 | | | 5.65 | % | |
Other | | 713 | | | 0.57 | % | | 1,311 | | | 0.92 | % | |
| Certificates of deposit | | Certificates of deposit | | 500 | | | 0.81 | % | | 612 | | | 0.65 | % |
Total interest bearing deposits | Total interest bearing deposits | | 117,228 | | | 0.16 | % | | 213,345 | | | 2.72 | % | Total interest bearing deposits | | 76,663 | | | 0.11 | % | | 92,137 | | | 0.15 | % |
Total deposits | Total deposits | | $ | 6,643,783 | | | 0.00 | % | | $ | 2,144,655 | | | 0.27 | % | Total deposits | | $ | 14,858,264 | | | 0.00 | % | | $ | 10,411,278 | | | 0.00 | % |
The following table presents________________________
(1)Noninterest bearing demand accounts includes an average balance of $4.8 billion and $3.1 billion of foreign deposits for the maturities of our certificates of deposit as ofthree months ended March 31, 2021:2022 and the year ended December 31, 2021, respectively
(2)Money market and savings accounts includes an average balance of $0.6 million and $0.5 million of foreign deposits with an average rate paid of 0.01% and 0.05% for the three months ended March 31, 2022 and the year ended December 31, 2021, respectively.
MATURITIES OF CERTIFICATES OF DEPOSIT
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months or Less | | Over Three Through Six Months | | Over Six Through Twelve Months | | Over Twelve Months | | Total |
| | | | | | | | | | |
| | (Dollars in thousands) |
$100,000 or more | | $ | — | | | $ | — | | | $ | — | | | $ | 306 | | | $ | 306 | |
Less than $100,000 | | 67 | | | 53 | | | 100 | | | 111 | | | 331 | |
Total | | $ | 67 | | | $ | 53 | | | $ | 100 | | | $ | 417 | | | $ | 637 | |
Borrowings
We primarily utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below.
FHLB Advances. The FHLB allows us to borrow up to 35% of the Bank’s assets on a blanket floating lien status collateralized by certain securities and loans. AtAs of March 31, 2021,2022, approximately $1.4$2.4 billion in real estate loans and securities were pledged as collateral for our FHLB borrowings. We utilizemay use these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio. AtAs of March 31, 2021,2022, we had no$800.0 million of outstanding FHLB advances and had an additional $866.7 million$1.2 billion in available borrowing capacity from the FHLB.
The following table sets forth certain information on our FHLB borrowings during the periods presented:
FHLB ADVANCES
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 20212022 | | Year Ended December 31, 20202021 |
| | | | |
| | (Dollars in thousands) |
Amount outstanding at period-end | | —$ | 800,000 | | | $ | — | |
Weighted average interest rate at period-end | | —0.43 | % | | — | |
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 | % |
Federal Reserve Bank of San Francisco. The FRB has an available borrower in custody arrangement that allows us to borrow on a collateralized basis. The Company’sBank’s borrowing capacity under the Federal Reserve’s discount window program was $5.1$2.9 million as of March 31, 2021.2022. Certain commercial loans are pledged under this arrangement. We maintain this
borrowing arrangement to meet liquidity needs pursuant to our contingency funding plan. No advances were outstanding under this facility as of March 31, 2021.2022.
The Company has also issued subordinated debentures and has access to borrow federal funds or lines of credit with correspondent banks. At March 31, 2021,2022, these outstanding borrowings amounted to $15.8 million.
Subordinated Debentures. 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 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, 2021,2022, the interest rate for the Company’s next scheduled payment was 3.98%4.19%, based on six-month LIBOR of 0.23%0.44%. 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 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, 2021,2022, the interest rate for the Company’s next scheduled payment was 2.03%2.68%, based on three-month LIBOR of 0.18%0.83%. 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.
Other Borrowings. At March 31, 2021,2022, the Company had no outstanding balance of federal funds purchased and had available lines of credit of $68.0$108.0 million with other correspondent banks.
Liquidity and Capital Resources
Liquidity
Liquidity is defined as the Bank’s capacity to meet its cash and collateral obligations at a reasonable cost. Maintaining an adequate level of liquidity depends on the Bank’s ability to meet both expected and unexpected cash flows and collateral needs efficiently without adversely affecting either daily operations or the financial condition of the Bank. Liquidity risk is the risk that we will be unable to meet our obligations as they become due because of an inability to liquidate assets or obtain adequate
funding. The Bank’s obligations, and the funding sources used to meet them, depend significantly on our business mix, balance sheet structure and the cash flow profiles of our on- and off-balance sheet obligations. In managing our cash flows, management regularly confronts situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints on the ability to convert assets into cash or in accessing sources of funds (i.e., market liquidity) and contingent liquidity events. Changes in economic conditions or exposure to credit, market, operation, legal and reputational risks also could affect the Bank’s liquidity risk profile and are considered in the assessment of liquidity and asset/liability management.
We maintain high levels of liquidity for our customers who operate in the digital currency industry, as these deposits are subject to potentially dramatic fluctuations due to certain factors that may be outside of our control. As a result, our investment portfolio iswe have a significant amount of liquid assets such as interest earning deposits in other banks and available-for-sale securities which are comprised primarily of mortgage-backed securities backed by government-sponsored entities, collateralized mortgage obligations, municipal bonds and asset-backed securities.
Management has established a comprehensive management process for identifying, measuring, monitoring and controlling liquidity risk. Because of its critical importance to the viability of the Bank, liquidity risk management is fully integrated into our risk management processes. Critical elements of our liquidity risk management include: effective corporate governance consisting of oversight by the board of directors and active involvement by management; appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are commensurate with the complexity and business activities of the Bank; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of cash and cash equivalents and highly liquid marketable securities free of legal, regulatory or operational impediments, that can be used to meet liquidity needs in stressful situations; comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency cash flow
requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the institution’s liquidity risk management process.
The movement of funds on our balance sheet among different SEN deposit customers does not reduce the Bank’s deposits and thus does not result in liquidity issues or require any borrowing by the Company or the Bank. In addition, to the extent that SEN participants fully withdraw funds from the Bank, no material liquidity issues or borrowing needs would arise since the majority of SEN participants deposits are held in liquid assets, such as available-for-sale securities and cash, or used to fund short-term mortgage warehouse loans.
We expect funds to be available from basic banking activity sources, including the core deposit base, the repayment and maturity of loans and investment security cash flows. Other potential funding sources include borrowings from the FHLB, the FRB, other lines of credit and brokered certificates of deposit. AtAs of March 31, 2021,2022, we had $866.7 million$1.2 billion of available borrowing capacity from the FHLB, $5.1$2.9 million of available borrowing capacity from the FRB and available lines of credit of $68.0$108.0 million with other correspondent banks. Cash and cash equivalents at March 31, 20212022 were $4.3$1.4 billion. Accordingly, our liquidity resources were at sufficient levels to fund loans and meet other cash needs as necessary.
Off-Balance Sheet Items
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated statements of financial condition. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and issue letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk exceeding the amounts recognized in our consolidated statements of financial condition. Our exposure to credit loss is represented by the contractual amounts of these commitments. The same credit policies and procedures are used in making these commitments as for on-balance sheet instruments. At March 31, 2022, we had $644.4 million of credit extension commitments. For details of our commitments to extend credit, and commercial and standby letters of credit, please refer to “Note 9—Commitments and Contingencies—Off-Balance Sheet Items” of the “Notes to Unaudited Consolidated Financial Statements” under Part I, Item 1 of this Quarterly Report on Form 10-Q.
Capital Resources
Shareholders’ equity increased $419.3decreased $62.3 million to $713.6 million$1.5 billion at March 31, 2021,2022, compared to $294.3 million$1.6 billion at December 31, 2020.2021. The increasedecrease in shareholders’ equity was primarily due to two equity offerings, which resulteda decrease in accumulated other comprehensive income of $219.0 million due to the issuance ofdecrease in unrealized gains on available-for-sale securities portfolio and derivative assets, partially offset by a total of 5,860,858 shares of Class A$132.0 million increase in additional paid-in capital driven by common stock issuance in exchange for aggregate gross proceeds of $441.1 millionassets acquired and net proceeds of $423.5 million after deducting underwriting discounts and offering expenses, as applicable, in addition to net income for the three months ended March 31, 2021, which amounted to $12.7 million, partially offset by a decrease in accumulated other comprehensive income2022 of $15.5 million.
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 May 11, 2021, the ATM program has a remaining availability of approximately $85.6$27.4 million.
The Company and the Bank isare subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of common equity Tier 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1,250%. The Bank is also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.
As of March 31, 2021,2022, the Company and the Bank waswere in compliance with all applicable regulatory capital requirements to which it wasthey were subject, and the Bank was classified as “well capitalized” for purposes of the prompt corrective action regulations. As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we intend to monitor and control our growth to remain in compliance with all regulatory capital standards applicable to us.
The following table presents the regulatory capital ratios for the Company and the Bank as of the dates indicated:
| | | | Actual | | Minimum capital adequacy(1) | | To be well capitalized | | | Actual | | Minimum capital adequacy(1) | | To be well capitalized |
| | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
March 31, 2021 | | |
March 31, 2022 | | March 31, 2022 | |
The Company | The Company | | The Company | |
Tier 1 leverage ratio | Tier 1 leverage ratio | | $ | 698,604 | | | 9.68 | % | | $ | 288,754 | | | 4.00 | % | | N/A | | N/A | Tier 1 leverage ratio | | $ | 1,597,946 | | | 9.68 | % | | $ | 660,633 | | | 4.00 | % | | N/A | | N/A |
Common equity tier 1 capital ratio | Common equity tier 1 capital ratio | | 683,104 | | | 53.03 | % | | 57,967 | | | 4.50 | % | | N/A | | N/A | Common equity tier 1 capital ratio | | 1,388,825 | | | 38.97 | % | | 160,360 | | | 4.50 | % | | N/A | | N/A |
Tier 1 risk-based capital ratio | Tier 1 risk-based capital ratio | | 698,604 | | | 54.23 | % | | 77,289 | | | 6.00 | % | | N/A | | N/A | Tier 1 risk-based capital ratio | | 1,597,946 | | | 44.84 | % | | 213,813 | | | 6.00 | % | | N/A | | N/A |
Total risk-based capital ratio | Total risk-based capital ratio | | 705,820 | | | 54.79 | % | | 103,052 | | | 8.00 | % | | N/A | | N/A | Total risk-based capital ratio | | 1,603,983 | | | 45.01 | % | | 285,084 | | | 8.00 | % | | N/A | | N/A |
The Bank | The Bank | | The Bank | |
Tier 1 leverage ratio | Tier 1 leverage ratio | | 685,463 | | | 9.50 | % | | 288,744 | | | 4.00 | % | | $ | 360,930 | | | 5.00 | % | Tier 1 leverage ratio | | 1,577,199 | | | 9.51 | % | | 663,196 | | | 4.00 | % | | $ | 828,995 | | | 5.00 | % |
Common equity tier 1 capital ratio | Common equity tier 1 capital ratio | | 685,463 | | | 53.24 | % | | 57,934 | | | 4.50 | % | | 83,682 | | | 6.50 | % | Common equity tier 1 capital ratio | | 1,577,199 | | | 44.28 | % | | 160,273 | | | 4.50 | % | | 231,505 | | | 6.50 | % |
Tier 1 risk-based capital ratio | Tier 1 risk-based capital ratio | | 685,463 | | | 53.24 | % | | 77,245 | | | 6.00 | % | | 102,994 | | | 8.00 | % | Tier 1 risk-based capital ratio | | 1,577,199 | | | 44.28 | % | | 213,697 | | | 6.00 | % | | 284,929 | | | 8.00 | % |
Total risk-based capital ratio | Total risk-based capital ratio | | 692,679 | | | 53.80 | % | | 102,994 | | | 8.00 | % | | 128,742 | | | 10.00 | % | Total risk-based capital ratio | | 1,583,236 | | | 44.45 | % | | 284,929 | | | 8.00 | % | | 356,161 | | | 10.00 | % |
| | | | Actual | | Minimum capital adequacy(1) | | To be well capitalized | | | Actual | | Minimum capital adequacy(1) | | To be well capitalized |
| | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | | | (Dollars in thousands) | | | (Dollars in thousands) |
December 31, 2020 | | |
December 31, 2021 | | December 31, 2021 | |
The Company | The Company | | The Company | |
Tier 1 leverage ratio | Tier 1 leverage ratio | | $ | 263,763 | | | 8.29 | % | | $ | 127,338 | | | 4.00 | % | | N/A | | N/A | Tier 1 leverage ratio | | $ | 1,631,257 | | | 11.07 | % | | $ | 589,614 | | | 4.00 | % | | N/A | | N/A |
Common equity tier 1 capital ratio | Common equity tier 1 capital ratio | | 248,263 | | | 21.53 | % | | 51,882 | | | 4.50 | % | | N/A | | N/A | Common equity tier 1 capital ratio | | 1,422,136 | | | 49.53 | % | | 129,198 | | | 4.50 | % | | N/A | | N/A |
Tier 1 risk-based capital ratio | Tier 1 risk-based capital ratio | | 263,763 | | | 22.88 | % | | 69,176 | | | 6.00 | % | | N/A | | N/A | Tier 1 risk-based capital ratio | | 1,631,257 | | | 56.82 | % | | 172,264 | | | 6.00 | % | | N/A | | N/A |
Total risk-based capital ratio | Total risk-based capital ratio | | 270,803 | | | 23.49 | % | | 92,234 | | | 8.00 | % | | N/A | | N/A | Total risk-based capital ratio | | 1,638,794 | | | 57.08 | % | | 229,686 | | | 8.00 | % | | N/A | | N/A |
The Bank | The Bank | | The Bank | |
Tier 1 leverage ratio | Tier 1 leverage ratio | | 261,791 | | | 8.22 | % | | 127,344 | | | 4.00 | % | | $ | 159,180 | | | 5.00 | % | Tier 1 leverage ratio | | 1,546,693 | | | 10.49 | % | | 589,595 | | | 4.00 | % | | $ | 736,994 | | | 5.00 | % |
Common equity tier 1 capital ratio | Common equity tier 1 capital ratio | | 261,791 | | | 22.71 | % | | 51,869 | | | 4.50 | % | | 74,923 | | | 6.50 | % | Common equity tier 1 capital ratio | | 1,546,693 | | | 53.89 | % | | 129,162 | | | 4.50 | % | | 186,567 | | | 6.50 | % |
Tier 1 risk-based capital ratio | Tier 1 risk-based capital ratio | | 261,791 | | | 22.71 | % | | 69,159 | | | 6.00 | % | | 92,212 | | | 8.00 | % | Tier 1 risk-based capital ratio | | 1,546,693 | | | 53.89 | % | | 172,216 | | | 6.00 | % | | 229,622 | | | 8.00 | % |
Total risk-based capital ratio | Total risk-based capital ratio | | 268,831 | | | 23.32 | % | | 92,212 | | | 8.00 | % | | 115,265 | | | 10.00 | % | Total risk-based capital ratio | | 1,554,230 | | | 54.15 | % | | 229,622 | | | 8.00 | % | | 287,027 | | | 10.00 | % |
________________________(1)Minimum capital adequacy for common equity tier 1 capital ratio, tier 1 risk-based capital ratio and total risk-based capital ratio excludes the capital conservation buffer.
In the normal course
Table of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated statements of financial condition. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and issue letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk exceeding the amounts recognized in our consolidated statements of financial condition. Our exposure to credit loss is represented by the contractual amounts of these commitments. The same credit policies and procedures are used in making these commitments as for on-balance sheet instruments. We are not aware of any accounting loss to be incurred by funding these commitments; however, we maintain an allowance for off-balance sheet credit risk which is recorded in other liabilities on the consolidated statements of financial condition. For details of our commitments to extend credit, and commercial and standby letters of credit, please refer to “Note 8—Commitments and Contingencies—Off-Balance Sheet Items” of the “Notes to Unaudited Consolidated Financial Statements” under Part I, Item 1 of this Quarterly Report on Form 10-Q.Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our Asset Liability Management Policy sets forth guidelines for effective funds management and establishes an approach for measuring and monitoring our net interest rate sensitivity.
Interest rate risk is the probability of an increase or decline in the value of an asset or liability due to fluctuations in interest rates. These fluctuations have an impact on both the level of interest income and interest expense as well as the market value of all interest earning assets and liabilities. The objective is to measure the impact that different interest rate scenarios have on net interest income and ensure that the results are within policy limits while maximizing income. The results can be reflected as an increase or decrease of future net interest income or an increase or decrease of current fair market value.
Exposure to interest rates is managed by structuring the balance sheet in a ‘business as usual’ or ‘base case’ scenario. We do not enter into instruments such as leveraged derivatives, financial options or financial future contracts for the purpose of reducing interest rate risk. We hedge interest rate risk by utilizing interest rate floors interest rate caps and interest rate swaps.caps. The interest rate floors hedge our cash and securities and the interest rate caps hedge our securities and subordinated debentures and the interest rate swaps hedge our taxable municipal bonds.debentures. Based on the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
Exposure to interest rate risk is managed by the Bank’s Asset Liability Management Committee in accordance with policies approved by the board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital under the current interest rate outlook, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans, and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits, and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk that include an analysis of relationships between interest earning assets and interest-bearing liabilities as well as utilizing an interest rate simulation model where various rate scenarios can be analyzed.
The following table indicates that, for periods less than one year, rate-sensitive assets exceed rate-sensitive liabilities, resulting in an asset-sensitive position. For a bank with an asset-sensitive position, or positive gap, rising interest rates would generally be expected to have a positive effect on net interest income, and falling interest rates would generally be expected to have the opposite effect. Due to ourWhile the Company is asset sensitive, position, we have implemented a hedging strategy tovarious instruments that help reduce our interest rate risk exposure in a declining rate environment.environment, such as interest rate floors and fixed-rate securities.
INTEREST SENSITIVITY GAP
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Within One Month | | After One Month Through Three Months | | After Three Through Twelve Months | | Within One Year | | Greater Than One Year or Non -Sensitive | | Total |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
March 31, 2021 | | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
Interest earning assets | | | | | | | | | | | | |
Loans(1) | | $ | 1,136,583 | | | $ | 45,817 | | | $ | 185,535 | | | $ | 1,367,935 | | | $ | 264,598 | | | $ | 1,632,533 | |
Securities(2) | | 935,858 | | | 4,517 | | | 25,921 | | | 966,296 | | | 767,963 | | | 1,734,259 | |
Interest earning deposits in other banks | | 4,309,544 | | | 1,275 | | | — | | | 4,310,819 | | | 4,281 | | | 4,315,100 | |
Total earning assets | | $ | 6,381,985 | | | $ | 51,609 | | | $ | 211,456 | | | $ | 6,645,050 | | | $ | 1,036,842 | | | $ | 7,681,892 | |
Liabilities | | | | | | | | | | | | |
Interest bearing liabilities | | | | | | | | | | | | |
Interest bearing deposits | | $ | 112,071 | | | $ | — | | | $ | — | | | $ | 112,071 | | | $ | 382 | | | $ | 112,453 | |
Certificates of deposit | | 67 | | | — | | | 153 | | | 220 | | | 417 | | | 637 | |
Total interest bearing deposits | | 112,138 | | | — | | | 153 | | | 112,291 | | | 799 | | | 113,090 | |
| | | | | | | | | | | | |
Total interest bearing liabilities | | $ | 112,138 | | | $ | — | | | $ | 153 | | | $ | 112,291 | | | $ | 799 | | | $ | 113,090 | |
Period gap | | $ | 6,269,847 | | | $ | 51,609 | | | $ | 211,303 | | | $ | 6,532,759 | | | $ | 1,036,043 | | | $ | 7,568,802 | |
Cumulative gap | | $ | 6,269,847 | | | $ | 6,321,456 | | | $ | 6,532,759 | | | $ | 6,532,759 | | | $ | 7,568,802 | | | |
Ratio of cumulative gap to total earning assets | | 81.62 | % | | 82.29 | % | | 85.04 | % | | 85.04 | % | | 98.53 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Within One Month | | After One Month Through Three Months | | After Three Through Twelve Months | | Within One Year | | Greater Than One Year or Non -Sensitive | | Total |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
March 31, 2022 | | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
Interest earning assets | | | | | | | | | | | | |
Loans(1) | | $ | 1,487,345 | | | $ | 11,778 | | | $ | 62,976 | | | $ | 1,562,099 | | | $ | 118,497 | | | $ | 1,680,596 | |
Securities(2) | | 6,112,349 | | | 14,010 | | | 200,703 | | | 6,327,062 | | | 5,949,776 | | | 12,276,838 | |
Interest earning deposits in other banks | | 1,173,924 | | | 135 | | | 1,130 | | | 1,175,189 | | | 3,016 | | | 1,178,205 | |
Total earning assets | | $ | 8,773,618 | | | $ | 25,923 | | | $ | 264,809 | | | $ | 9,064,350 | | | $ | 6,071,289 | | | $ | 15,135,639 | |
Liabilities | | | | | | | | | | | | |
Interest bearing liabilities | | | | | | | | | | | | |
Interest bearing deposits | | $ | 71,871 | | | $ | — | | | $ | — | | | $ | 71,871 | | | $ | 316 | | | $ | 72,187 | |
Certificates of deposit | | 41 | | | — | | | 307 | | | 348 | | | 92 | | | 440 | |
Total interest bearing deposits | | 71,912 | | | — | | | 307 | | | 72,219 | | | 408 | | | 72,627 | |
FHLB advances | | 800,000 | | | — | | | — | | | 800,000 | | | — | | | 800,000 | |
Total interest bearing liabilities | | $ | 871,912 | | | $ | — | | | $ | 307 | | | $ | 872,219 | | | $ | 408 | | | $ | 872,627 | |
Period gap | | $ | 7,901,706 | | | $ | 25,923 | | | $ | 264,502 | | | $ | 8,192,131 | | | $ | 6,070,881 | | | $ | 14,263,012 | |
Cumulative gap | | $ | 7,901,706 | | | $ | 7,927,629 | | | $ | 8,192,131 | | | $ | 8,192,131 | | | $ | 14,263,012 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ratio of cumulative gap to total earning assets | | 52.21 | % | | 52.38 | % | | 54.12 | % | | 54.12 | % | | 94.23 | % | | |
________________________(1)Includes loans held-for-sale.
(2)Includes trading and available-for-sale securities, FHLB and FRB stock.
We use quarterly Interest Rate Risk, or IRR, simulations to assess the impact of changing interest rates on our net interest income and net income under a variety of scenarios and time horizons. These simulations utilize both instantaneous and parallel changes in the level of interest rates, as well as non-parallel changes such as changing slopes and twists of the yield curve. Static simulation models are based on current exposures and assume a constant balance sheet with no new growth. Dynamic simulation models are also utilized that rely on detailed assumptions regarding changes in existing lines of business, new business, and changes in management and client behavior.
We also use economic value-based methodologies to measure the degree to which the economic values of the Bank’s positions change under different interest rate scenarios. The economic-value approach focuses on a longer-term time horizon and captures all future cash flows expected from existing assets and liabilities. The economic value model utilizes a static approach in that the analysis does not incorporate new business; rather, the analysis shows a snapshot in time of the risk inherent in the balance sheet.
Many assumptions are used to calculate the impact of interest rate fluctuations on our net interest income, such as asset prepayments, non-maturity deposit price sensitivity and decay rates, and key rate drivers. Because of the inherent use of these estimates and assumptions in the model, our actual results may, and most likely will, differ from our static IRR results. In addition, static IRR results do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates or client behavior. For example, as part of our asset/liability management strategy, management can increase asset duration and decrease liability duration to reduce asset sensitivity, or to decrease asset duration and increase liability duration in order to increase asset sensitivity.
The following table summarizes the results of our IRR analysis in simulating the change in net interest income and fair value of equity over a 12-month horizon as of March 31, 2021:2022:
IMPACT ON NET INTEREST INCOME UNDER A STATIC BALANCE SHEET, PARALLEL INTEREST RATE SHOCK
| Earnings at Risk as of: | Earnings at Risk as of: | | -100 bps | | Flat | | +100 bps | | +200 bps | | +300 bps | Earnings at Risk as of: | | -100 bps | | Flat | | +100 bps | | +200 bps | | +300 bps |
March 31, 2021 | | (11.27) | % | | 0.00 | % | | 63.41 | % | | 126.46 | % | | 191.71 | % | |
March 31, 2022 | | March 31, 2022 | | (24.87) | % | | 0.00 | % | | 31.47 | % | | 62.62 | % | | 91.34 | % |
|
Utilizing an economic value of equity, or EVE, approach, we analyze the risk to capital from the effects of various interest rate scenarios through a long-term discounted cash flow model. This measures the difference between the economic value of our assets and the economic value of our liabilities, which is a proxy for our liquidation value. While this provides some value as a risk measurement tool, management believes IRR is more appropriate in accordance with the going concern principle.
The following table illustrates the results of our EVE analysis as of March 31, 2021.2022.
ECONOMIC VALUE OF EQUITY ANALYSIS UNDER A STATIC BALANCE SHEET, PARALLEL INTEREST RATE SHOCK
| As of: | As of: | | -100 bps | | Flat | | +100 bps | | +200 bps | | +300 bps | As of: | | -100 bps | | Flat | | +100 bps | | +200 bps | | +300 bps |
March 31, 2021 | | (20.26) | % | | 0.00 | % | | 17.39 | % | | 39.04 | % | | 61.12 | % | |
March 31, 2022 | | March 31, 2022 | | 3.50 | % | | 0.00 | % | | (8.82) | % | | (16.11) | % | | (24.43) | % |
|
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2021.2022.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 20212022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently subject to any material legal proceedings. We are from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as well as claims or litigation relating to intellectual property, securities, breach of contract and tort. We intend to defend ourselves vigorously against any pending or future claims and litigation.
In the current opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on our results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020,2021, as filed with the SEC on March 8, 2021.February 28, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.On January 31, 2022, the Company issued 1,221,217 shares of the Company’s Class A common stock (the “Shares”) in reliance upon the exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 506 of Regulation D promulgated thereunder. The Shares were issued as part of the consideration in the Company’s acquisition of certain intellectual property and other technology assets from the Libra Association. For additional information, see the Company’s Current Report on Form 8-K filed with the SEC on February 4, 2022.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| | | | | | | | |
Number | | Description |
| |
2.1 | | Asset Purchase Agreement, dated January 31, 2022, by and among Silvergate Capital Corporation, Libra Association, Diem Networks US HoldCo, Inc., Diem Networks US, Inc., Diem Networks II LLC, Diem Networks LLC, and Diem LLC(incorporated by reference to Exhibit 2.1 to Silvergate Capital Corporation’s Current Report on Form 8-K filed on February 4, 2022) |
3.1 | | |
3.2 | | |
10.13.3 | | |
| | |
10.210.1 | | |
10.3 | | |
31.1 | | |
31.2 | | |
32.1 | | |
101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | XBRL Taxonomy Extension Definitions Linkbase Document |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | | | | |
| | | | |
| | SILVERGATE CAPITAL CORPORATION |
| | | |
Date: | May 11, 20219, 2022 | By: | | /s/ Alan J. Lane |
| | | | Alan J. Lane |
| | | | President and Chief Executive Officer (Principal Executive Officer) |
| | | | |
Date: | May 11, 20219, 2022 | By: | | /s/ Antonio Martino |
| | | | Antonio Martino |
| | | | Chief Financial Officer (Principal Financial and Accounting Officer) |