~~Table of Contents~~

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ending September 30, ~~2019~~2021



☐			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	~~Maryland~~		33-0227337
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4250 Executive Square,, Suite 300,, La Jolla,, CA92037

(Address of principal executive offices, including zip code)

(~~858~~) (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 ~~act~~Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☐☒ No☒☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Emerging growth company

☒

Non-accelerated Filer

☒

Smaller reporting company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of November ~~27, 2019,~~2, 2021, the registrant had ~~17,775,160~~26,578,499 shares of Class A voting common stock ~~and 892,836 shares of Class B non-voting common stock~~ outstanding.

SILVERGATE CAPITAL CORPORATION

FORM 10-Q

TABLE OF CONTENTS


			Page

PART I—FINANCIAL INFORMATION

		~~Page~~

~~PART I—FINANCIAL INFORMATION~~	3

Item 1. Financial Statements (Unaudited)		32
Consolidated Statements of Financial Condition			32
Consolidated Statements of Operations			43
Consolidated Statements of Comprehensive Income			54
Consolidated Statements of Shareholders’ Equity			65
~~Condensed~~ Consolidated Statements of Cash Flows			87
Notes to Unaudited Consolidated Financial Statements			98
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
Item 3. Quantitative and Qualitative Disclosures About Market Risk			58
Item 4. Controls and Procedures			6061

PART II—OTHER INFORMATION			61

Item 1. Legal Proceedings			6162
Item 1A. Risk Factors			6162
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			6162
Item 3. Defaults Upon Senior Securities			6162
Item 4. Mine Safety Disclosures			6162
Item 5. Other Information			6162
Item 6. Exhibits			6263

SIGNATURES			6364

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)

September 30,
2019 December 31,
2018
ASSETS
Cash and due from banks $ 4,098
$ 4,177
Interest earning deposits in other banks 156,160
670,243
Cash and cash equivalents 160,258
674,420
Securities available-for-sale, at fair value 909,917
357,178
Securities held-to-maturity, at amortized cost (fair value of $72 as of December 31, 2018) —
73
Loans held-for-investment, net of allowance for loan losses of $6,191 and $6,723 at September 30, 2019 and December 31, 2018, respectively 691,990
592,781
Loans held-for-sale, at lower of cost or fair value 311,410
350,636
Federal home loan and federal reserve bank stock, at cost 10,264
9,660
Accrued interest receivable 5,875
5,770
Other real estate owned, net 81
31
Premises and equipment, net 3,224
3,656
Operating lease right-of-use assets 4,927
—
Derivative assets 30,885
999
Low income housing tax credit investment 981
1,044
Deferred tax assets —
3,329
Other assets 7,032
4,741
Total assets $ 2,136,844
$ 2,004,318
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing demand accounts $ 1,394,433
$ 1,525,922
Interest bearing accounts 453,662
152,911
Deposits held-for-sale —
104,172
Total deposits 1,848,095
1,783,005
Federal home loan bank advances 20,000
—
Notes payable 4,000
4,857
Subordinated debentures, net 15,813
15,802
Operating lease liabilities 5,237
—
Accrued expenses and other liabilities 13,085
9,408
Total liabilities 1,906,230
1,813,072
Commitments and contingencies

Preferred stock, $0.01 par value—authorized 10,000 shares; no shares issued or outstanding at September 30, 2019 and December 31, 2018 —
—
Class A common stock, $0.01 par value—authorized 125,000 shares; 16,654 and 16,629 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively 167
166
Class B non-voting common stock, $0.01 par value—authorized 25,000 shares; 1,190 and 1,190 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively 12
12
Additional paid-in capital 125,573
125,665
Retained earnings 88,712
67,464
Accumulated other comprehensive income (loss) 16,150
(2,061 )
Total shareholders’ equity 230,614
191,246
Total liabilities and shareholders’ equity $ 2,136,844
$ 2,004,318


	September 30, 2021		December 31, 2020
ASSETS
Cash and due from banks	$	168,628	$	16,405
Interest earning deposits in other banks	3,615,860		2,945,682
Cash and cash equivalents	3,784,488		2,962,087

Securities available-for-sale, at fair value	7,234,216		939,015

Loans held-for-sale, at lower of cost or fair value	818,447		865,961
Loans held-for-investment, net of allowance for loan losses of $6,916 at September 30, 2021 and December 31, 2020	809,745		746,751
Federal home loan and federal reserve bank stock, at cost	34,010		14,851
Accrued interest receivable	32,154		8,698
Premises and equipment, net	1,483		2,072
Derivative assets	37,210		31,104
Other assets	24,868		15,696
Total assets	$	12,776,621	$	5,586,235
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing demand accounts	$	11,586,318	$	5,133,579
Interest bearing accounts	76,202		114,447

Total deposits	11,662,520		5,248,026


Subordinated debentures, net	15,841		15,831
Accrued expenses and other liabilities	26,179		28,079
Total liabilities	11,704,540		5,291,936
Commitments and contingencies	0		0
Preferred stock, $0.01 par value—authorized 10,000 shares; $1,000 per share liquidation preference, 200 and 0 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively	2		—
Class A common stock, $0.01 par value—authorized 125,000 shares; 26,536 and 18,770 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively	265		188
Class B non-voting common stock, $0.01 par value—authorized 25,000 shares; 0 and 64 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively	—		1
Additional paid-in capital	891,611		129,726
Retained earnings	175,485		118,348
Accumulated other comprehensive income	4,718		46,036
Total shareholders’ equity	1,072,081		294,299
Total liabilities and shareholders’ equity	$	12,776,621	$	5,586,235

See accompanying notes to unaudited consolidated financial statements

Table of Contents

SILVERGATE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,				Nine Months Ended September 30,
	2019			2018			2019			2018			2021		2020		2021		2020
Interest income												Interest income
Loans, including fees	$	13,574		$	12,726		$	38,369		$	35,357	Loans, including fees	$	16,972	$	13,527	$	50,727	$	38,358
Securities	6,510			1,941			14,044			5,016
Taxable securities												Taxable securities	14,000		3,746		25,916		13,917
Tax-exempt securities												Tax-exempt securities	5,014		1,720		9,832		3,345
Other interest earning assets	1,183			3,921			8,038			10,386		Other interest earning assets	1,755		196		4,633		1,325
Dividends and other	121			119			472			392		Dividends and other	195		116		804		437
Total interest income	21,388			18,707			60,923			51,151		Total interest income	37,936		19,305		91,912		57,382
Interest expense												Interest expense
Deposits	2,385			400			3,920			1,386		Deposits	26		57		107		5,760
Federal home loan bank advances	172			—			172			19		Federal home loan bank advances	—		65		—		336
Notes payable and other	117			98			702			315
Subordinated debentures	271			239			802			671
Subordinated debentures and other												Subordinated debentures and other	247		257		744		830
Total interest expense	2,945			737			5,596			2,391		Total interest expense	273		379		851		6,926
Net interest income before provision for loan losses	18,443			17,970			55,327			48,760		Net interest income before provision for loan losses	37,663		18,926		91,061		50,456
(Reversal of) provision for loan losses	(858		)	—			(439		)	148
Provision for loan losses												Provision for loan losses	—		—		—		589
Net interest income after provision for loan losses	19,301			17,970			55,766			48,612		Net interest income after provision for loan losses	37,663		18,926		91,061		49,867
Noninterest income												Noninterest income
Mortgage warehouse fee income	373			393			1,085			1,152		Mortgage warehouse fee income	665		758		2,372		1,590
Service fees related to off-balance sheet deposits	283			573			1,454			1,683		Service fees related to off-balance sheet deposits	—		1		—		78
Deposit related fees	1,657			688			3,815			1,655		Deposit related fees	8,171		3,293		26,603		7,497
Gain on sale of loans	248			416			593			699
Gain on sale of branch, net	—			—			5,509			—
Gain on sale of securities, net												Gain on sale of securities, net	5,182		—		5,182		3,753
(Loss) gain on sale of loans, net												(Loss) gain on sale of loans, net	—		(96)		—		354
Gain on extinguishment of debt												Gain on extinguishment of debt	—		—		—		925
Other income	38			114			168			383		Other income	24		8		44		132
Total noninterest income	2,599			2,184			12,624			5,572		Total noninterest income	14,042		3,964		34,201		14,329
Noninterest expense												Noninterest expense
Salaries and employee benefits	8,277			7,259			25,124			21,335		Salaries and employee benefits	10,729		8,899		31,979		26,856
Occupancy and equipment	892			742			2,777			2,251		Occupancy and equipment	523		845		1,736		2,646
Communications and data processing	1,298			703			3,458			2,149		Communications and data processing	1,793		1,389		5,210		3,963
Professional services	889			1,507			3,407			3,918		Professional services	2,471		1,207		6,782		3,297
Federal deposit insurance	39			214			382			1,078		Federal deposit insurance	4,297		209		10,437		514
Correspondent bank charges	288			240			868			914		Correspondent bank charges	572		403		1,881		1,123
Other loan expense	47			57			290			198		Other loan expense	299		60		753		281
Other real estate owned expense (recovery)	75			(10		)	80			42
Other general and administrative	806			705			2,432			2,461		Other general and administrative	1,655		1,121		4,686		3,300
Total noninterest expense	12,611			11,417			38,818			34,346		Total noninterest expense	22,339		14,133		63,464		41,980
Income before income taxes	9,289			8,737			29,572			19,838		Income before income taxes	29,366		8,757		61,798		22,216
Income tax expense	2,633			2,458			8,324			5,525		Income tax expense	5,874		1,697		4,661		5,297
Net income	$	6,656		$	6,279		$	21,248		$	14,313	Net income	23,492		7,060		57,137		16,919
Basic earnings per share	$	0.37		$	0.35		$	1.19		$	0.89
Diluted earnings per share	$	0.36		$	0.34		$	1.16		$	0.86
Weighted average shares outstanding:
Dividends on preferred stock												Dividends on preferred stock	—		—		—		—
Net income available to common shareholders												Net income available to common shareholders	$	23,492	$	7,060	$	57,137	$	16,919
Basic earnings per common share												Basic earnings per common share	$	0.89	$	0.38	$	2.29	$	0.91
Diluted earnings per common share												Diluted earnings per common share	$	0.88	$	0.37	$	2.26	$	0.88
Weighted average common shares outstanding:												Weighted average common shares outstanding:
Basic	17,840			17,808			17,830			16,113		Basic	26,525		18,682		24,927		18,674
Diluted	18,246			18,254			18,252			16,607		Diluted	26,766		19,134		25,308		19,119

See accompanying notes to unaudited consolidated financial statements


	Class A Common Stock		Class B Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
		Shares	Amount		Shares									Amount
Balance at January 1, 2020		17,775,160	$	178	892,836	$	9	$	132,138	$	92,310	$	6,401		$	231,036
Total comprehensive income, net of tax		—	—		—	—		—		4,393		9,125			13,518





Conversion of Class B common stock to Class A common stock		596,000	6		(596,000)	(6)		—		—		—			—
Stock-based compensation		—	—		—	—		199		—		—			199
Exercise of stock options, net of shares withheld for employee taxes		134	—		—	—		(1)		—		—			(1)

Balance at March 31, 2020		18,371,294	184		296,836	3		132,336		96,703		15,526			244,752
Total comprehensive income, net of tax		—	—		—	—		—		5,466		17,744			23,210






Stock-based compensation		—	—		—	—		201		—		—			201
Exercise of stock options, net of shares withheld for employee taxes		7,569	—		—	—		(58)		—		—			(58)

Balance at June 30, 2020		18,378,863	184		296,836	3		132,479		102,169		33,270			268,105
Total comprehensive income, net of tax		—	—		—	—		—		7,060		8,428			15,488





Conversion of Class B common stock to Class A common stock		232,639	2		(232,639)	(2)		—		—		—			—
Stock-based compensation		—	—		—	—		259		—		—			259
Exercise of stock options, net of shares withheld for employee taxes		15,290	—		—	—		(91)		—		—			(91)

Balance at September 30, 2020		18,626,792	$	186	64,197	$	1	$	132,647	$	109,229	$	41,698		$	283,761

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, 2018 6,189,206
$ 62
3,035,004
$ 30
$ 29,794
$ 45,131
$ (1,217 ) $ 73,800
Total comprehensive income, net of tax —
—
—
—
—
3,543
(840 ) 2,703
Net proceeds from stock issuance 9,500,000
95
—
—
107,789
—
—
107,884
Repurchase of common stock (317,050 ) (3 ) (680,456 ) (7 ) (11,361 ) —
—
(11,371 )
Shareholder exchanges of Class A common stock for Class B common stock 1,165,000
11
(1,165,000 ) (11 ) —
—
—
Stock-based compensation —
—
—
—
2
—
—
2
Exercise of stock options, net of shares withheld for employee taxes 10,000
—
—
—
41
—
—
41
Balance at March 31, 2018 16,547,156
165
1,189,548
12
126,265
48,674
(2,057 ) 173,059
Total comprehensive income, net of tax —
—
—
—
—
4,491
(152 ) 4,339
Stock-based compensation —
—
—
—
78
—
—
78
Exercise of stock options, net of shares withheld for employee taxes 69,285
1
—
—
(768 ) —
—
(767 )
Balance at June 30, 2018 16,616,441
166
1,189,548
12
125,575
53,165
(2,209 ) 176,709
Total comprehensive income, net of tax —
—
—
—
—
6,279
361
6,640
Stock-based compensation —
—
—
—
17
—
—
17
Exercise of stock options, net of shares withheld for employee taxes 2,500
—
—
—
18
—
—
18
Balance at September 30, 2018 16,618,941
$ 166
1,189,548
$ 12
$ 125,610
$ 59,444
$ (1,848 ) $ 183,384

Table of Contents

~~See accompanying notes to unaudited consolidated financial statements~~

SILVERGATE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Continued)

(In Thousands, Except Share Data)

(Unaudited)

Class A Common Stock Class B Common Stock Additional
Paid-In
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Total
Shareholders’
Equity
Shares Amount Shares Amount
Balance at January 1, 2019 16,628,941
$ 166
1,189,548
$ 12
$ 125,665
$ 67,464
$ (2,061 ) $ 191,246
Total comprehensive income, net of tax —
—
—
—
—
9,436
436
9,872
Stock-based compensation —
—
—
—
19
—
—
19
Balance at March 31, 2019 16,628,941
166
1,189,548
12
125,684
76,900
(1,625 ) 201,137
Total comprehensive income, net of tax —
—
—
—
—
5,156
8,540
13,696
Stock-based compensation —
—
—
—
30
—
—
30
Exercise of stock options, net of shares withheld for employee taxes 18,099
—
—
—
(115 ) —
—
(115 )
Balance at June 30, 2019 16,647,040
166
1,189,548
12
125,599
82,056
6,915
214,748
Total comprehensive income, net of tax —
—
—
—
—
6,656
9,235
15,891
Stock-based compensation —
—
—
—
17
—
—
17
Exercise of stock options, net of shares withheld for employee taxes 6,803
1
—
—
(43 ) —
—
(42 )
Balance at September 30, 2019 16,653,843
$ 167
1,189,548
$ 12
$ 125,573
$ 88,712
$ 16,150
$ 230,614


	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, 2021	—	$	—	18,769,771	$	188	64,197	$	1	$	129,726	$	118,348	$	46,036	$	294,299
Total comprehensive income (loss), net of tax	—	—		—	—		—	—		—		12,710		(15,519)		(2,809)



Net proceeds from stock issuance	—	—		5,860,858	58		—	—		423,482		—		—		423,540

Conversion of Class B common stock to Class A common stock	—	—		64,197	1		(64,197)	(1)		—		—		—		—
Stock-based compensation	—	—		—	—		—	—		290		—		—		290
Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes	—	—		125,142	1		—	—		(1,700)		—		—		(1,699)

Balance at March 31, 2021	—	—		24,819,968	248		—	—		551,798		131,058		30,517		713,621
Total comprehensive income, net of tax	—	—		—	—		—	—		—		20,935		(9,338)		11,597



Net proceeds from stock issuance	—	—		1,496,461	15		—	—		143,990		—		—		144,005


Stock-based compensation	—	—		—	—		—	—		496		—		—		496
Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes	—	—		191,226	2		—	—		786		—		—		788

Balance at June 30, 2021	—	—		26,507,655	265		—	—		697,070		151,993		21,179		870,507
Total comprehensive income, net of tax	—	—		—	—		—	—		—		23,492		(16,461)		7,031



Net proceeds from stock issuance	200,000	2		—	—		—	—		193,627		—		—		193,629


Stock-based compensation	—	—		—	—		—	—		587		—		—		587
Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes	—	—		27,956	—		—	—		327		—		—		327

Balance at September 30, 2021	200,000	$	2	26,535,611	$	265	—	$	—	$	891,611	$	175,485	$	4,718	$	1,072,081

See accompanying notes to unaudited consolidated financial statements

Table of Contents

SILVERGATE CAPITAL CORPORATION

~~CONDENSED~~ CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)


	Nine Months Ended September 30,							Nine Months Ended September 30,
	2019			2018				2021		2020
Cash flows from operating activities							Cash flows from operating activities
Net income	$	21,248		$	14,313		Net income	$	57,137	$	16,919
Adjustments to reconcile net income to net cash (used in) provided by 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	771			848			Depreciation and amortization	1,900		2,535
Amortization of securities premiums and discounts, net	1,261			308			Amortization of securities premiums and discounts, net	28,069		2,941
Amortization of loan premiums and discounts and deferred loan origination fees and costs, net	666			280			Amortization of loan premiums and discounts and deferred loan origination fees and costs, net	422		689
Stock-based compensation	66			97			Stock-based compensation	1,373		659
Deferred income tax benefit	(190		)	(451		)
(Reversal of) provision for loan losses	(439		)	148
Gain on sale of loans	(593		)	(699		)
Originations/purchases of loans held-for-sale	(2,323,891		)	(2,102,054		)
Provision for loan losses							Provision for loan losses	—		589
Originations of loans held-for-sale							Originations of loans held-for-sale	(9,440,843)		(4,516,366)
Proceeds from sales of loans held-for-sale	2,235,558			2,112,629			Proceeds from sales of loans held-for-sale	9,488,357		4,216,094
Gain on sale of branch, net	(5,509		)	—

Other gains, net							Other gains, net	(7,650)		(7,432)
Other, net	2,108			(67		)	Other, net	(655)		428
Changes in operating assets and liabilities:							Changes in operating assets and liabilities:
Accrued interest receivable	372			(481		)
Other assets	12,687			(827		)
Accrued interest receivable and other assets							Accrued interest receivable and other assets	(24,216)		(7,242)
Accrued expenses and other liabilities	(617		)	3,051			Accrued expenses and other liabilities	15,238		2,634
Net cash (used in) provided by operating activities	(56,502		)	27,095
Net cash provided by (used in) operating activities							Net cash provided by (used in) operating activities	119,132		(287,552)
Cash flows from investing activities							Cash flows from investing activities
Proceeds from paydowns and maturities of securities available-for-sale	18,351			13,412
Purchases of securities available-for-sale	(589,031		)	(125,569		)	Purchases of securities available-for-sale	(6,921,562)		(278,641)
Proceeds from sale of securities available-for-sale	31,088			—			Proceeds from sale of securities available-for-sale	338,851		216,355
Loan originations and payments, net	(128,832		)	(23,126		)
Proceeds from paydowns and maturities of securities available-for-sale							Proceeds from paydowns and maturities of securities available-for-sale	215,278		40,915
Loan originations/purchases and payments, net							Loan originations/purchases and payments, net	(63,415)		(98,259)
Proceeds from sale of loans held-for-sale previously classified as held-for-investment	41,963			20,532			Proceeds from sale of loans held-for-sale previously classified as held-for-investment	—		36,400
Purchase of federal home loan and federal reserve bank stock, net	(603		)	(2,308		)	Purchase of federal home loan and federal reserve bank stock, net	(19,160)		(4,575)
Proceeds from sale of other real estate owned	77			2,370
Purchase of premises and equipment	(942		)	(1,484		)	Purchase of premises and equipment	(267)		(788)
Proceeds from sale of branch, net of cash	32,555			—
Purchases of derivative contracts, net of proceeds	(20,663		)	—

(Payments for) proceeds from derivative contracts, net							(Payments for) proceeds from derivative contracts, net	(21,540)		15,311
Other, net	10			38			Other, net	—		109
Net cash used in investing activities	(616,027		)	(116,135		)	Net cash used in investing activities	(6,471,815)		(73,173)
Cash flows from financing activities							Cash flows from financing activities
Net change in noninterest bearing deposits	(144,737		)	244,436			Net change in noninterest bearing deposits	6,452,739		820,659
Net change in interest bearing deposits	284,277			(82,256		)	Net change in interest bearing deposits	(38,245)		(354,206)
Net change in federal home loan bank advances	20,000			(15,000		)	Net change in federal home loan bank advances	—		(38,075)

Payments made on notes payable	(857		)	(857		)	Payments made on notes payable	—		(3,714)
Proceeds from common stock issuance, net	—			107,884			Proceeds from common stock issuance, net	567,521		—
Payment of deferred offering costs	(384		)	(429		)
Repurchase of common stock	—			(11,371		)

Proceeds from preferred stock issuance, net							Proceeds from preferred stock issuance, net	193,653		—

Proceeds from stock option exercise	—			87			Proceeds from stock option exercise	1,559		—
Taxes paid related to net share settlement of equity awards	(158		)	(796		)	Taxes paid related to net share settlement of equity awards	(2,143)		(150)
Other, net	226			—			Other, net	—		89
Net cash provided by financing activities	158,367			241,698			Net cash provided by financing activities	7,175,084		424,603
Net (decrease) increase in cash and cash equivalents	(514,162		)	152,658
Cash and cash equivalents, beginning of year	674,420			797,668
Cash and cash equivalents, end of year	$	160,258		$	950,326
Net increase in cash and cash equivalents							Net increase in cash and cash equivalents	822,401		63,878
Cash and cash equivalents, beginning of period							Cash and cash equivalents, beginning of period	2,962,087		133,604
Cash and cash equivalents, end of period							Cash and cash equivalents, end of period	$	3,784,488	$	197,482
Supplemental cash flow information:							Supplemental cash flow information:
Cash paid for interest							Cash paid for interest	$	1,004	$	7,366
Income taxes paid, net							Income taxes paid, net	3,702		3,945
Supplemental noncash disclosures:							Supplemental noncash disclosures:
Loans held-for-investment transferred to loans held-for-sale							Loans held-for-investment transferred to loans held-for-sale	$	—	$	30,792
Loans held-for-sale transferred to loans held-for-investment							Loans held-for-sale transferred to loans held-for-investment	—		5,098
Loans transferred to other real estate owned							Loans transferred to other real estate owned	—		51

Right-of-use assets obtained in exchange for new operating lease liabilities							Right-of-use assets obtained in exchange for new operating lease liabilities	77		—

See accompanying notes to unaudited consolidated financial statements

Note 1—1—Nature of Business and Summary of Significant Accounting Policies

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. ~~At the same time, the~~The Company ~~also became~~is a registered bank holding company ~~under~~that is subject to supervision by the ~~federal Bank Holding Company Act. The Bank became a member~~Board of Governors of the Federal Reserve ~~System in December 2012.~~(“Federal Reserve”). The Bank is subject to regulation by the California Department of ~~Business Oversight~~Financial Protection and Innovation, Division of Financial Institutions (“~~DBO”~~DFPI”), and, as a Federal Reserve member bank since 2012, the Federal Reserve Bank of San Francisco (“FRB”)~~, and its~~. 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 $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 ~~applicable legal limits.~~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 $107.38. The transactions resulted in net proceeds to the Company of $295.1 million after deducting commissions and expenses.

On August 4, 2021, the Company issued and sold 8,000,000 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 $193.7 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, ~~2018, the Company and the Bank entered into a purchase and assumption agreement to sell the Bank’s retail branch located in San Marcos, California and business loan portfolio to HomeStreet Bank.~~2021. The Company ~~completed~~may redeem the ~~sale in March 2019, which included the reduction of $115.4 million in loans and $74.5 million in deposits and resulted in a pre-tax gain~~Series A Preferred Stock at its option, subject to regulatory approval, on ~~sale of $5.5 million.~~or after August 15, 2026. See “Note 13—Subsequent Event”, for more information.

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 ~~presentation~~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, ~~2018,~~2020, included in the Company’s ~~prospectus~~Annual Report on Form 10-K dated ~~November 6, 2019 and filed with the SEC on November~~March 8, ~~2019, relating to its initial public offering (“IPO”).~~2021. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.

The consolidated financial statements include the accounts of the Company and all other entities in which it has a controlling financial interest. All significant intercompany accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company include its wholly owned subsidiaries. The accounting and reporting policies of the Company are based upon GAAP and conform to predominant practices within the financial services industry.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s financial statements and the accompanying notes. We evaluate estimates on an ongoing basis including the economic impact of Coronavirus Disease 2019 (or “COVID-19”). Actual results could materially differ from those estimates.

~~Deferred Offering Costs~~

~~The Company capitalizes certain legal,~~Recently issued accounting and other third-party fees that are directly associated with in-process equity financings until such financings are consummated. After consummation of the equity financing, these costs are recorded in equity as a reduction from the proceeds of the offering. Should the equity financing for which those costs relate no longer be considered probable of being consummated, all deferred offering costs will be charged to operating expenses in the statement of operations. As of September 30, 2019 and December 31, 2018, the Company has recorded $2.2 million and $1.5 million, respectively, of deferred offering costs within other assets in the accompanying consolidated statement of financial condition. Subsequent to September 30, 2019, these costs were recorded in equity as a reduction to the gross proceeds in conjunction with the Company’s IPO on November 7, 2019. See “Note 15—Subsequent Events” for more information.

~~Adopted~~ ~~Accounting Pronouncements~~pronouncements not yet effective

In ~~February~~June 2016, the Financial Accounting Standards Board ~~(or~~(the “FASB”) issued Accounting Standards Update (or “ASU”) 2016-02, Leases (Topic 842). This guidance amended existing guidance that requires lessees recognize the following for all leases at the commencement date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease equal to the present value of lease payments; and (2) A right-of-use asset, which is an asset that represents the lessee’s

right to use, or control the use of, a specified asset for the lease term, based upon the amount of the lease liability. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. In July 2018 the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topics 842) Targeted Improvements, that updated narrow aspects of ASU 2016-02, include an additional transition method for adoption that results in initial recognition of a cumulative effect adjustment to retained earnings in the year of adoption and a practical expedient for lessors. These amendments were effective for fiscal years beginning after December 15, 2018. The Company has operating leases for its headquarters and bank branches that fall under Topic 842. The Company elected certain practical expedients upon transition, including retaining the lease classification for any leases that existed prior to adoption of the standard, the transition method with the application date at the beginning of the adoption period, which was January 1, 2019, elected to separate non-lease components and not to recognize short term leases. The impact of the adoption was an increase in assets and liabilities of approximately $5.5 million on its consolidated statement of financial condition. See “Note 9—Commitments and Contingencies—Operating Leases” for more information.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). This ASU requires that implementation costs incurred by customers in a cloud computing arrangement be deferred and recognized over the non-cancellable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider, if those costs would have been capitalized in a software licensing arrangement under the internal-use software guidance under ASC 350-40. For public business entities, amendments in this update are effective for fiscal years ending after December 15, 2020. Early adoption is permitted, including adoption in any interim period, for all entities. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted the guidance prospectively as of January 1, 2019. During the nine months ended September 30, 2019 the Company deferred approximately $1.6 million under the new guidance.

~~Recently~~ ~~issued accounting pronouncements not yet effective~~

~~In June 2016, the FASB issued 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~~Instruments—Credit Losses ~~(Topic326)~~(Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which finalized the delay of the effective date for smaller reporting companies, such as the Company to apply the standards related to CECL, until fiscal years beginning after December 15, 2022. For debt securities with other than temporary impairment (OTTI), the guidance will be applied prospectively and for existing purchased credit impaired (PCI) assets will be grandfathered and classified as purchased credit deteriorated (PCD) assets at the date of adoption. The asset will be grossed up for the allowance for expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit discount in interest income based on the yield such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance. For all other assets with the scope of CECL, the cumulative effect adjustment will be recognized in retained earnings as of the beginning of the first reporting period in which the guidance is effective. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial ~~Instruments-Credit~~Instruments—Credit Losses, which clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The Company formed a CECL implementation committee in 2018 which prepared a project plan to migrate towards the adoption date. As part of the project plan, the Company contracted a third-party vendor to assist in the application and analysis of ASU 2016-13 as well as a third party vendor to perform an independent model validation. As part of this process, the Company has determined preliminary loan pool segmentation under CECL, as well as evaluated the key economic loss drivers for each segment. The Company continues to work through the implementation plan and has made significant progress by performing data gap assessments, completed remediation efforts and established preliminary decisions regarding economic scenarios. The Company operationalized an initial CECL model during the second quarter of 2019 and ~~plans to run the~~is running this preliminary CECL model alongside the existing incurred loss ~~methodology~~methodology. The Company intends to continue to refine and run the model until the expected adoption date ~~of adoption. The Company expects to continually address any gaps in interpretations, methodology, data and operational processes based upon reviews and tests.~~on January 1, 2023. The Company continues to evaluate the effects of ASU 2016-13 on its financial statements and ~~disclosures and whether or not to early adopt the guidance in 2021 or 2022.~~

In ~~August 2018,~~March 2020, the FASB issued ASU ~~2018-13, Fair Value Measurement~~2020-04, Reference Rate Reform (Topic ~~820)~~848): ~~Disclosure Framework-Changes~~Facilitation of the Effects of Reference Rate Reform on Financial Reporting (or “ASU 2020-04”), which provides temporary, optional guidance to ease the ~~Disclosure Requirements~~potential burden in accounting for, ~~Fair Value Measurement.~~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. On March 5, 2021, the U.K. Financial Conduct Authority, the regulatory supervisor for ICE Benchmark Administration, the administrator of 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 ~~updated~~ guidance ~~improves~~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 ~~disclosure requirements on fair value measurements.~~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 ~~updated guidance if effective~~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 ~~fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures.~~these changes. The Company is ~~currently assessing~~evaluating the ~~timing and~~ impact ~~of adopting the updated provisions.~~that ASU 2020-04 will have on those financial assets where LIBOR is used as an index rate.

~~With the exception of~~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.

The fair value of available-for-sale securities and their related gross unrealized gains and losses at the dates indicated are as follows:

~~The amortized cost, unrealized gains and losses, and fair value of securities held-to-maturity at the dates indicated are as follows:~~

Held-to-maturity securities
Amortized Cost Gross
Unrecognized
Gains Gross
Unrecognized
Losses Fair Value

(Dollars in thousands)
September 30, 2019
Collateralized mortgage obligations $ —
$ —
$ —
$ —
December 31, 2018
Collateralized mortgage obligations $ 73
$ —
$ (1 ) $ 72

~~At September 30, 2019 and December 31, 2018, the Company had 0 private-label held-to-maturity collateralized mortgage obligations.~~

~~At September 30, 2019, there were 0 investment securities pledged for borrowings.~~ There were 0no investment securities pledged for borrowings or for other purposes as required or permitted by law as of September 30, 2021 and December 31, ~~2018.~~2020.

~~At September 30, 2019, the total fair value~~

Securities with unrealized losses as of the dates indicated, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

As indicated in the tables above, as of September 30, ~~2019,~~2021, the Company’s investment securities had gross unrealized losses totaling approximately ~~$5.5~~$44.3 million, compared to approximately ~~$2.8~~$3.8 million at December 31, ~~2018.~~2020. The Company ~~analyzed~~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. In analyzing the issuer’s financial condition, 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 the results of review of the issuer’s financial condition. When performing a cash flow analysis, the Company uses models that project prepayments, default rates, and loss severities on the collateral supporting the security, based on underlying loan level borrower and loan characteristics and interest rate assumptions. ~~In addition, the Company has contracted with third party companies to perform independent cash flow analyses of its securities portfolio as needed.~~ Based on these analyses and reviews conducted by the Company, and

assisted by independent third parties, the Company determined that none of its securities required an other-than-temporary impairment charge at September 30, ~~2019 or December 31, 2018.~~2021. Management continues to expect to recover the adjusted amortized cost basis of these bonds.

As of September 30, ~~2019,~~2021, the Company had 31255 securities whose estimated fair value declined ~~1.26%~~0.85% from the Company’s amortized cost; at December 31, ~~2018,~~2020, the Company had 3230 securities whose estimated fair value declined ~~0.92%~~0.86% from the Company’s amortized cost. ~~The~~These unrealized losses ~~relate principally~~on securities are primarily due to ~~the general change~~widening of credit spreads and changes in market interest rates since ~~the~~their purchase ~~dates and such unrecognized~~dates. Current unrealized losses ~~will continue to vary with general market interest rate fluctuations in the future. Fair values~~ are expected to recover as the securities approach their respective maturity ~~dates and management~~dates. Management believes it iswill more than likely not ~~more likely than not it will~~ be required to sell before recovery of the amortized cost basis.

For ~~both~~ the three and nine months ended September 30, ~~2019~~2021, the Company received ~~$31.1~~$338.9 million in proceeds and recognized ~~$16,000 in~~$5.2 million of gains and no losses on sales of ~~available for sale~~available-for-sale securities. There were no sales ~~and~~or calls of securities ~~during the~~ for the three ~~and~~months ended September 30, 2020. For the nine months ended September 30, ~~2018.~~2020, the Company received $216.4 million in proceeds and recognized a $4.7 million gain and $0.9 million loss on sales and calls of securities.

There were 0no credit losses associated with our securities portfolio recognized in earnings for the three and nine months ended September 30, ~~2019~~2021 and ~~2018.~~2020.

The amortized cost and estimated fair value of investment securities as of the periods presented by contractual maturity are shown below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the following table, the entire outstanding balance of residential and commercial mortgage-backed securities is categorized based on the final maturity date.


	September 30, 2021				December 31, 2020
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

	(Dollars in thousands)
Available-for-sale securities
Within one year	$	—	$	—	$	—	$	—
After one year through five years	2,710		2,641		—		—
After five years through ten years	1,022,607		1,023,876		14,021		15,694
After ten years	6,207,708		6,207,699		884,730		923,321
Total	$	7,233,025	$	7,234,216	$	898,751	$	939,015

The following disclosure reports the Company’s loan portfolio segments and classes. Segments are groupings of similar loans at a level in which the Company has adopted systematic methods of documentation for determining its allowance for loan and credit losses. Classes are a disaggregation of the portfolio segments. The Company’s loan portfolio segments are:

Real ~~estate loans.~~estate. Real estate ~~includes~~loans include loans for which the Company holds one-to-four family, multi-family, commercial and construction real property as collateral. Commercial real estate lending activity is ~~typically restricted to owner-occupied properties or to~~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 loans and lines of credit to ~~small and medium-sized~~ businesses ~~in a wide variety of industries, including distributors, manufacturers, software developers business services companies and independent finance companies. Commercial and industrial loans~~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. ~~Risk~~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. ~~Since the March 2019 sale of our business loan portfolio,~~Currently, commercial and industrial loans consist primarily of digital currency asset based loans.

~~Consumer and other.~~ ~~Consumer~~ In January 2020, the Company began offering a new lending product called SEN Leverage, which allows Silvergate customers to obtain U.S. dollar loans ~~consist of consumer loans~~collateralized by bitcoin held at select digital currency exchanges and other custodians. The outstanding balance of SEN Leverage loans ~~secured by personal property.~~was $254.5 million and $77.2 million at September 30, 2021 and December 31, 2020, respectively.

Reverse ~~mortgage.~~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.~~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. In mid-2014,~~loans when the ~~Bank ceased purchases~~outstanding loan balance exceeds collateral value at the time the loan is required to be repaid. Other loans consist of ~~reverse mortgage~~consumer loans and ~~began selling its remaining~~ loans ~~in the secondary market. At September 30, 2019, the Bank owned $1.6 million of reverse mortgage loans.~~secured by personal property.

Mortgage warehouse. The Company’s mortgage warehouse lending division provides short-term interim funding for single-family residential mortgage loans originated by mortgage bankers or other ~~lenders pending the sale of~~lenders. 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 funding~~date they are funded by the ~~originating lender, guaranties or additional monies pledged to~~Company 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 subject~~sold to ~~written purchase~~secondary 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 $23.7 million and $19.9 million of loans to participants during the three months ended September 30, 2019 and 2018, respectively. The Company sold approximately $124.3 million and $130.0 million of loans to participants during the nine months ended September 30, 2019 and 2018, respectively. At September 30, ~~2019~~2021 and December 31, ~~2018,~~2020, gross mortgage warehouse loans were approximately ~~$368.6~~$947.4 million and ~~$252.6~~$963.9 million, respectively.

A summary of loans as of the periods presented are as follows:

Total loans held-for-sale⁽¹⁾

Total loans held-for-sale(1)

(1)Loans held-for-sale are comprised entirely of mortgage warehouse loans for all periods presented.

At September 30, ~~2019~~2021 and December 31, ~~2018,~~2020, approximately ~~$618.7~~$432.2 million and ~~$546.7~~$574.5 million, respectively, of the Company’s ~~loan portfolio were~~gross loans held-for-investment was collateralized by various forms of real ~~estate. A significant percentage of such loans are collateralized by properties~~estate, primarily located in California (66.6% and 69.7% as of September 30, 2019 and December 31, 2018, respectively), Arizona (8.4% and 7.3% as of September 30, 2019 and December 31, 2018, respectively), and Florida (5.6% and 3.4% as of September 30, 2019 and December 31, 2018, respectively)~~with no other state greater than 5%.~~California. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The Company ~~attempts to address~~monitors and ~~mitigate~~manages 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, Florida 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, and net due to immateriality. Accrued interest on loans held-for-investment totaled approximately ~~$2.4~~$3.2 million and ~~$2.1~~$2.7 million and deferred fees totaled approximately ~~$3.0~~$0.9 million and ~~$2.5~~$2.2 million at September 30, ~~2019~~2021 and December 31, ~~2018,~~2020, respectively.

Allowance for Loan Losses

During the three months ended March 31, 2021, the Company updated the allowance for loan loss model to remove historical loss data which is no longer relevant for the commercial and industrial loan segment, reflecting the growth of digital currency asset 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:

September 30, 2019
One-to
-Four
Family Multi-
Family Commercial
Real Estate Construction Commercial
and Industrial Consumer
and Other Reverse
Mortgage Mortgage
Warehouse Total

(Dollars in thousands)
Amount of allowance attributed to:
Specifically evaluated impaired loans $ 10
$ —
$ —
$ —
$ —
$ —
$ 29
$ —
$ 39
General portfolio allocation 2,041
653
2,791
96
312
1
8
250
6,152
Total allowance for loan losses $ 2,051
$ 653
$ 2,791
$ 96
$ 312
$ 1
$ 37
$ 250
$ 6,191
Loans evaluated for impairment:
Specifically evaluated $ 4,425
$ —
$ 7,385
$ —
$ 3,763
$ —
$ 1,074
$ —
$ 16,647
Collectively evaluated 208,015
77,901
315,348
3,986
10,800
76
555
61,856
678,537
Total gross loans held-for-investment $ 212,440
$ 77,901
$ 322,733
$ 3,986
$ 14,563
$ 76
$ 1,629
$ 61,856
$ 695,184

December 31, 2018
One-to
-Four
Family Multi-
Family Commercial
Real Estate Construction Commercial
and Industrial Consumer
and Other Reverse
Mortgage Mortgage
Warehouse Total

(Dollars in thousands)
Amount of allowance attributed to:
Specifically evaluated impaired loans $ —
$ —
$ —
$ —
$ —
$ —
$ 47
$ —
$ 47
General portfolio allocation 1,848
483
3,854
98
156
1
7
229
6,676
Total allowance for loan losses $ 1,848
$ 483
$ 3,854
$ 98
$ 156
$ 1
$ 54
$ 229
$ 6,723
Loans evaluated for impairment:
Specifically evaluated $ 3,342
$ —
$ 7,946
$ —
$ 3,596
$ —
$ 1,223
$ —
$ 16,107
Collectively evaluated 187,543
40,584
301,709
3,847
4,990
150
519
41,586
580,928
Total gross loans held-for-investment $ 190,885
$ 40,584
$ 309,655
$ 3,847
$ 8,586
$ 150
$ 1,742
$ 41,586
$ 597,035


	December 31, 2020
	One-to -Four Family		Multi- Family		Commercial Real Estate		Construction		Commercial and Industrial		Reverse Mortgage and Other		Mortgage Warehouse		Total

	(Dollars in thousands)
Amount of allowance attributed to:
Specifically evaluated impaired loans	$	11	$	—	$	—	$	—	$	—	$	29	$	—	$	40
General portfolio allocation	1,234		878		1,810		590		1,931		10		423		6,876
Total allowance for loan losses	$	1,245	$	878	$	1,810	$	590	$	1,931	$	39	$	423	$	6,916
Loans evaluated for impairment:
Specifically evaluated	$	5,780	$	—	$	9,722	$	—	$	274	$	869	$	—	$	16,645
Collectively evaluated	182,075		77,126		292,179		6,272		78,635		626		97,903		734,816
Total gross loans held-for-investment	$	187,855	$	77,126	$	301,901	$	6,272	$	78,909	$	1,495	$	97,903	$	751,461

The following tables provide a summary of the Company’s investment in impaired loans as of and for the periods presented:


	December 31, 2020
	Unpaid Principal Balance		Recorded Investment		Related Allowance

	(Dollars in thousands)
With no related allowance recorded:
Real estate loans:
One-to-four family	$	6,432	$	5,716	$	—

Commercial	9,723		9,722		—

Commercial and industrial	274		274		—

Reverse mortgage and other	523		523		—

	16,952		16,235		—
With an allowance recorded:
Real estate loans:
One-to-four family	64		64		11





Reverse mortgage and other	346		346		29

	410		410		40
Total impaired loans	$	17,362	$	16,645	$	40


	Three Months Ended September 30,
	2021				2020
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

	(Dollars in thousands)
With no related allowance recorded:
Real estate loans:
One-to-four family	$	6,873	$	50	$	3,312	$	34

Commercial	9,970		135		4,710		377

Commercial and industrial	174		3		1,474		29

Reverse mortgage and other	893		—		518		—

	17,910		188		10,014		440
With an allowance recorded:
Real estate loans:
One-to-four family	301		6		65		1





Reverse mortgage and other	—		—		345		—

	301		6		410		1
Total impaired loans	$	18,211	$	194	$	10,424	$	441

Three Months Ended September 30,
2019 2018
Average
Recorded
Investment Interest
Income
Recognized Average
Recorded
Investment Interest
Income
Recognized

(Dollars in thousands)
With no related allowance recorded:
Real estate loans:
One-to-four family $ 4,393
$ 26
$ 3,677
$ 34
Commercial 7,663
79
9,094
93
Commercial and industrial 2,662
164
4,489
17
Reverse mortgage 776
—
951
—
15,494
269
18,211
144
With an allowance recorded:
Real estate loans:
One-to-four family 22
4
27
—
Commercial —
—
648
—
Reverse mortgage 290
—
348
—
312
4
1,023
—
Total impaired loans $ 15,806
$ 273
$ 19,234
$ 144

Nine Months Ended September 30,
2019 2018
Average
Recorded
Investment Interest
Income
Recognized Average
Recorded
Investment Interest
Income
Recognized

(Dollars in thousands)
With no related allowance recorded:
Real estate loans:
One-to-four family $ 4,021
$ 155
$ 3,519
$ 87
Commercial 7,792
275
9,593
369
Commercial and industrial 2,492
234
2,579
144
Reverse mortgage 794
—
1,215
—
15,099
664
16,906
600
With an allowance recorded:
Real estate loans:
One-to-four family 10
4
29
1
Commercial —
—
1,513
—
Reverse mortgage 361
—
342
—
371
4
1,884
1
Total impaired loans $ 15,470
$ 668
$ 18,790
$ 601


	Nine Months Ended September 30,
	2021				2020
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

	(Dollars in thousands)
With no related allowance recorded:
Real estate loans:
One-to-four family	$	6,261	$	190	$	3,477	$	131

Commercial	9,890		396		2,864		419

Commercial and industrial	212		12		1,949		102

Reverse mortgage and other	796		—		515		—

	17,159		598		8,805		652
With an allowance recorded:
Real estate loans:
One-to-four family	243		9		65		4





Reverse mortgage and other	86		—		341		—

	329		9		406		4
Total impaired loans	$	17,488	$	607	$	9,211	$	656

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 ~~both smaller balance homogeneous loans that are collectively evaluated for impairment and~~ individually evaluated impaired ~~loans. Nonperforming~~ loans, ~~consist of~~ loans ~~on nonaccrual status~~ for which the accrual of interest has been discontinued and loans 90 days or more past due and still accruing interest.

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:

December 31, 2018
30-59
Days
Past Due 60-89
Days
Past Due Greater
than 89
Days
Past Due Total
Past Due Current Total Nonaccruing Loans
Receivable > 89
Days and
Accruing

(Dollars in thousands)
Real estate loans:
One-to-four family $ —
$ 49
$ 2,991
$ 3,040
$ 187,845
$ 190,885
$ 3,062
$ —
Multi-family —
—
—
—
40,584
40,584
—
—
Commercial —
—
—
—
309,655
309,655
422
—
Construction —
—
—
—
3,847
3,847
—
—
Commercial and industrial —
—
—
—
8,586
8,586
3,596
—
Consumer and other —
—
—
—
150
150
—
—
Reverse mortgage —
—
—
—
1,742
1,742
1,223
—
Mortgage warehouse —
—
—
—
41,586
41,586
—
—
Total gross loans held-for-investment $ —
$ 49
$ 2,991
$ 3,040
$ 593,995
$ 597,035
$ 8,303
$ —


	December 31, 2020
	30-59 Days Past Due		60-89 Days Past Due		Greater than 89 Days Past Due		Total Past Due		Current		Total		Nonaccruing		Loans Receivable > 89 Days and Accruing

	(Dollars in thousands)
Real estate loans:
One-to-four family	$	992	$	85	$	3,820	$	4,897	$	182,958	$	187,855	$	4,113	$	—
Multi-family	206		—		—		206		76,920		77,126		—		—
Commercial	—		—		—		—		301,901		301,901		—		—
Construction	—		—		—		—		6,272		6,272		—		—
Commercial and industrial	—		—		—		—		78,909		78,909		—		—

Reverse mortgage and other	—		—		—		—		1,495		1,495		869		—
Mortgage warehouse	—		—		—		—		97,903		97,903		—		—
Total gross loans held-for-investment	$	1,198	$	85	$	3,820	$	5,103	$	746,358	$	751,461	$	4,982	$	—

Troubled Debt Restructurings

A loan is identified as a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulties and, for economic or legal reasons related to these difficulties, the Company grants a concession to the borrower in the restructuring that it would not otherwise consider. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. The Company has granted a concession when, as a result of the restructuring, it does not expect to collect all amounts due or within the time periods originally due under the original contract, including one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a temporary forbearance with regard to the payment of principal or interest. All troubled debt restructurings are reviewed for potential impairment. Generally, a nonaccrual loan that is restructured remains on nonaccrual status for a minimum period of six months to demonstrate that the borrower can perform under the restructured terms. If the borrower’s performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan. Loans classified as TDRs are reported as impaired loans.

As of September 30, ~~2019~~2021 and December 31, ~~2018,~~2020, the Company had a recorded investment in ~~TDR’s~~TDRs of ~~$1.8~~$1.9 million and ~~$0.5~~$1.5 million, respectively. The Company has ~~not~~ allocated ~~any amount~~$31,000 of specific allowance for those loans at September 30, ~~2019~~2021 and ~~has allocated a negligible amount of specific allowance for those loans~~$11,000 at December 31, ~~2018.~~2020. The Company has not committed to ~~lend~~advance additional amounts toon these TDRs. ~~NaN~~No loans were modified as TDRs ~~during the three months ended September 30, 2019 or~~ during the three and nine months ended September 30, ~~2018.~~2020.

Modifications of loans classified as TDRs during the periods presented, are as follows:

The TDR’s described above had noan immaterial impact the allowance for loan losses and no impact to charge-offs during the three and nine months ended September 30, ~~2019.~~2021.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. There were no loans modified as TDRs for which there was a payment default within twelve months during the three and nine months ended

September 30, ~~2019~~2021 or ~~2018.~~2020. There was no provision for loan loss or charge-offs for TDR’s that subsequently defaulted during the three orand nine months ended September 30, ~~2019~~2021 or ~~2018.~~2020.

COVID-19 Related Modifications

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. As of September 30, 2021, loans representing $0.2 million in loan balances 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:

The following tables present by portfolio class the Company’s internal risk grading system as well as certain other information concerning the credit quality of the Company’s recorded investment in loans held-for-investment as of the periods presented. No assets were classified as loss or doubtful during the periods presented.

Credit Risk Grades
Pass Special Mention Substandard Doubtful Total

(Dollars in thousands)
December 31, 2018
Real estate loans:
One-to-four family $ 187,823
$ —
$ 3,062
$ —
$ 190,885
Multi-family 40,584
—
—
—
40,584
Commercial 309,233
—
422
—
309,655
Construction 3,847
—
—
—
3,847
Commercial and industrial 4,630
360
3,596
—
8,586
Consumer and other 150
—
—
—
150
Reverse mortgage 214
305
1,223
—
1,742
Mortgage warehouse 41,586
—
—
—
41,586
Total gross loans held-for-investment $ 588,067
$ 665
$ 8,303
$ —
$ 597,035


	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

The Company had related party loans with an outstanding balance of ~~$4.6~~$5.3 million and $5.0 million as of September 30, ~~2019~~2021 and December 31, ~~2018,~~2020, respectively. ~~During the three months ended September 30, 2019, the balance of related party loans decreased by $19,000 due to principal payments.~~ During the nine months ended September 30, ~~2019,~~2021, the ~~balance~~Company advanced $2.4 million of related party loans ~~decreased by $0.3~~and received $2.1 million ~~due to changes in composition of related parties and the Company received $58,000~~ 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:

FHLB advances are secured with eligible collateral consisting of certain real estate loans. Advances from the FHLB are subject to the FHLB’s collateral and underwriting requirements and as of September 30, ~~2019~~2021 and December 31, ~~2018,~~2020, were limited in the aggregate to 35% of the ~~Company’s~~Bank’s total assets. Loans with carrying values of approximately ~~$695.7 million~~$1.3 billion and ~~$625.3 million~~$1.5 billion were pledged to the FHLB as of September 30, ~~2019~~2021 and December 31, ~~2018,~~2020, respectively. Unused borrowing capacity based on the lesser of the percentage of total assets and pledged collateral was approximately ~~$529.4~~$818.2 million and ~~$472.3~~$893.0 million as of September 30, ~~2019~~2021 and December 31, ~~2018,~~2020, respectively.

The ~~Company~~Bank 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 ~~$10.1~~$6.1 million and ~~$19.0~~$6.3 million were pledged to the FRB at September 30, ~~2019~~2021 and December 31, ~~2018,~~2020, respectively. The ~~Company’s~~Bank’s borrowing capacity under the Federal Reserve’s discount window program was ~~$7.4~~approximately $5.1 million and $4.8 million as of September 30, ~~2019.~~2021 and December 31, 2020, respectively. At September 30, ~~2019~~2021 and December 31, ~~2018,~~2020, there were 0no borrowings outstanding under any of these lines.

~~Repurchase Agreements~~

During the nine months ended September 30, 2019, the Bank had repurchase agreements with brokers, accounted for as secured borrowings, with an average outstanding balance of $24.9 million. The repurchase agreements matured in July 2019 and as of September 30, 2019 there was 0 outstanding balance.

Federal Funds Purchased

The ~~Company~~Bank may borrow up to an aggregate ~~$32.0~~$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’s~~Bank’s credit profile. As of September 30, ~~2019,~~2021 and December 31, 2020, the Company had 0no outstanding balance of federal funds purchased.

Note 5—~~Notes Payable~~

On January 29, 2016, the Company entered into a term loan with a commercial bank for a single principal advance of $8.0 million due to mature on January 29, 2021. Loan interest and principal is payable quarterly commencing April 2016 and accrues interest at an annual rate equal to 2.60% plus the greater of 0 percent and the one-month LIBOR rate. The proceeds were used to redeem preferred stock and can be prepaid at any time. The outstanding principal balance at September 30, 2019 and December 31, 2018 was $4.0 million and $4.9 million, respectively. Annual principal payments on outstanding borrowings are $1.1 million in 2019, $1.1 million in 2020 and $2.6 million in 2021.

~~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 September 30, ~~2019,~~2021, the interest rate for the Company’s next scheduled payment was ~~5.94%~~3.91%, based on six-month LIBOR of ~~2.19%~~0.16%. 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 September 30, ~~2019,~~2021, the interest rate for the Company’s next scheduled payment was ~~3.97%~~1.97%, based on three-month LIBOR of ~~2.12%~~0.12%. On the 15th day of any March, June, September, or December, the Company may redeem the 2005 subordinated debentures at 100% of principal amount plus accrued interest. The 2005 subordinated debentures mature on March 15, 2035.

The Company also retained a 3% minority interest in each of these trusts which is included in subordinated debentures. The balance of the equity in the trusts is comprised of mandatorily redeemable preferred securities. The subordinated debentures may be included in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations. The Company has the right to defer interest payments on the subordinated debentures from time to time for a period not to exceed five years.

The outstanding balance of the subordinated debentures was $15.8 million, net of $0.1 million unamortized debt issuance cost as of September 30, 2021 and $15.8 million, net of $0.1 million unamortized debt issuance costs as of December 31, 2020.

Note 7—6—Derivative and Hedging Activities

The Company is exposed to certain risks relating to its ongoing business operations. The Company utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the derivative does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual derivative agreements. In accordance with accounting guidance, changes in the fair value of derivatives designated and that qualify as cash flow hedges are initially recorded in other comprehensive income (“OCI”), reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. ~~The~~For cash flow and fair value hedges, the initial fair value of hedge components excluded from the assessment of effectiveness is recognized in ~~the statement of financial condition~~earnings under a systematic and rational method over the life of the hedging instrument and is presented in the same income statement line item as the earnings effect of the hedged item. Any difference between the change in the fair value of the hedge components excluded from the assessment of effectiveness and the amounts recognized in earnings is recorded as a component of other comprehensive income. For a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. The changes in fair value of the hedged item is recorded as a basis adjustment to the hedged assets or liabilities. The amount included as basis adjustments would be reclassified to current earnings on a straight-line basis over the original life of the hedged item should the hedges no longer be considered effective.

Interest rate swaps. In 2020, the Company entered into 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. The Swap Agreements are based on three-month LIBOR and expire in 2030 and 2031. The Company expects the Swap Agreements to remain effective during the remaining term of the Swap Agreements. The Company may receive collateral or may be required to post collateral based upon the market valuation. As of September 30, 2021, the Company held $0.3 million in cash collateral posted by the counterparty.

Interest rate ~~floor.~~floors. In 2019, the Company entered into 20 interest rate floor agreements (the ~~"Floor Agreements"~~“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 ~~June~~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 ~~fed~~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 ~~cap.~~caps. In 2021, the Company entered into 26 interest rate cap agreements with a total notional amount of $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 $24.7 million. The Company expects the Federal Funds Rate Cap Agreements to remain effective during the remaining term of the respective agreements.

In 2012, the Company entered into a $12.5 million and a $3.0 million notional forward interest rate cap agreement (the ~~“Cap~~“LIBOR Cap Agreements”) to hedge its variable rate subordinated debentures. The LIBOR Cap Agreements expire July 25, 2022 and March 15, 2022, respectively. The Company utilizes interest rate caps as hedges against adverse changes in cash flows on the designated preferred trusts attributable to fluctuations in three-month LIBOR beyond 0.50% for the $3.0 million subordinated debenture and six-month LIBOR beyond 0.75% for the $12.5 million subordinated debenture. The ~~caps~~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 Company held approximately $0.4 million and $1.2 million of restricted cash at September 30, 2019 and December 31, 2018, respectively, which served as collateral for the expected payments under these Cap Agreements; such cash fluctuates based on the expected present value of the future payments and will be refunded to the counterparty upon termination or maturity of the Cap Agreements.

The table below presents the fair value of the Company’s derivative financial instruments as well as the classification within the consolidated ~~balance sheets.~~statements of financial condition.

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.

September 30,
2019 December 31,
2018
Balance Sheet
Location Fair Value Balance Sheet
Location Fair Value

(Dollars in thousands)
Derivatives designated as hedging instruments:
Cash flow hedge interest rate floor Derivative assets $ 30,476
Derivative assets $ —
Cash flow hedge interest rate cap Derivative assets 409
Derivative assets 999

The following table summarizes the effects of derivatives in cash flow and fair value hedging relationships designated as hedging instruments on the Company’s OCI 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
	Three Months Ended September 30,					Three Months Ended September 30,
	2021		2020			2021		2020

	(Dollars in thousands)
Derivatives designated as hedging instruments:
Cash flow hedge interest rate floor	$	(216)	$	(120)	Interest income - Other interest earning assets	$	142	$	134
Cash flow hedge interest rate floor	(863)		(480)		Interest income - Taxable securities	1,089		1,056
Cash flow hedge interest rate cap	—		(3)		Interest expense - Subordinated debentures	(101)		(90)

Fair value hedge interest rate cap(1)	459		—

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
September 30, Three Months Ended
September 30,
2019 2018 2019 2018

(Dollars in thousands) (Dollars in thousands)
Derivatives designated as hedging instruments:
Cash flow hedge interest rate floor $ (11,413 ) $ —
Interest income - Other interest earning assets $ (154 ) $ —
Cash flow hedge interest rate floor 16,839
—
Interest income - Securities (374 ) —
Cash flow hedge interest rate cap (35 ) 70
Interest expense - Subordinated debentures (31 ) (28 )

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
Nine Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018

(Dollars in thousands) (Dollars in thousands)
Derivatives designated as hedging instruments:
Cash flow hedge interest rate floor $ (8,897 ) $ —
Interest income - Other interest earning assets $ (345 ) $ —
Cash flow hedge interest rate floor 18,710
—
Interest income - Securities (491 ) —
Cash flow hedge interest rate cap (428 ) 401
Interest expense - Subordinated debentures (127 ) (111 )
Cash flow hedge interest rate swap —
24
Interest expense - FHLB advances —
54

Fair value hedge interest rate cap(1)

(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 ~~$0.2~~$4.8 million of net derivative gain for cash flow hedges included in OCI will be reclassified into earnings within the next 12 months. No gain or loss was reclassified from OCI 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.

Note 8—7—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 September 30,
	2021				2020
	Amount		Rate		Amount		Rate

	(Dollars in thousands)
Statutory federal tax	$	6,167	21.0	%	$	1,840	21.0	%
State tax, net of federal benefit	2,049		7.0	%	629		7.2	%

Tax credits	(61)		(0.2)	%	5		0.1	%
Tax-exempt income	(1,731)		(5.9)	%	(493)		(5.6)	%
Excess tax benefit from stock-based compensation	(523)		(1.8)	%	(42)		(0.5)	%
Other items, net	(27)		(0.1)	%	(242)		(2.8)	%
Actual tax expense	$	5,874	20.0	%	$	1,697	19.4	%

Three Months Ended September 30,
2019 2018
Amount Rate Amount Rate

(Dollars in thousands)
Statutory federal tax $ 1,950
21.0 % $ 1,835
21.0 %
State tax, net of federal benefit 724
7.8 % 651
7.5 %
Tax credits (43 ) (0.5 )% (43 ) (0.5 )%
Excess tax benefit from stock-based compensation (28 ) (0.3 )% —
—
Other items, net 30
0.3 % 15
0.1 %
Actual tax expense $ 2,633
28.3 % $ 2,458
28.1 %

Nine Months Ended September 30,
2019 2018
Amount Rate Amount Rate

(Dollars in thousands)
Statutory federal tax $ 6,210
21.0 % $ 4,166
21.0 %
State tax, net of federal benefit 2,261
7.6 % 1,479
7.5 %
Tax credits (128 ) (0.4 )% (128 ) (0.6 )%
Excess tax benefit from stock-based compensation (114 ) (0.4 )% —
—
Other items, net 95
0.3 % 8
0.0 %
Actual tax expense $ 8,324
28.1 % $ 5,525
27.9 %


	Nine Months Ended September 30,
	2021				2020
	Amount		Rate		Amount		Rate

	(Dollars in thousands)
Statutory federal tax	$	12,978	21.0	%	$	4,666	21.0	%
State tax, net of federal benefit	1,939		3.1	%	1,736		7.8	%

Tax credits	(118)		(0.2)	%	(118)		(0.5)	%
Tax-exempt income	(2,483)		(4.0)	%	(740)		(3.3)	%
Excess tax benefit from stock-based compensation	(7,572)		(12.3)	%	(62)		(0.3)	%
Other items, net	(83)		(0.1)	%	(185)		(0.9)	%
Actual tax expense	$	4,661	7.5	%	$	5,297	23.8	%

Income tax expense was ~~$2.6~~$5.9 million for the three months ended September 30, ~~2019~~2021 compared to ~~$2.5~~$1.7 million for the three months ended September 30, ~~2018. The increase was primarily related to increased pre-tax income.~~2020. The effective tax rates for the three months ended September 30, ~~2019~~2021 and ~~September 30, 2018~~2020 were ~~28.3%~~20.0% and ~~28.1%~~19.4%, respectively.

Income tax expense was ~~$8.3~~$4.7 million for the nine months ended September 30, ~~2019~~2021 compared to ~~$5.5~~$5.3 million for the nine months ended September 30, ~~2018. The increase was primarily related to increased pre-tax income.~~2020. The effective tax rates for the nine months ended September 30, ~~2019~~2021 and ~~September 30, 2018~~2020 were ~~28.1%~~7.5% and ~~27.9%~~23.8%, respectively. The ~~increase~~decrease in the income tax expense and the Company’s effective tax rate for the nine months ended September 30, 2021 was primarily related to ~~an increase in state blended~~higher excess tax ~~rate~~benefit from stock-based compensation and ~~non-deductible tax treatment of~~tax-exempt income earned on certain ~~noninterest expenses.~~municipal bonds.

The deferred tax asset balance as of September 30, ~~2019~~2021 was $1.7 million compared to a liability of ~~$3.8 million compared to an asset of $3.3~~$15.4 million as of December 31, ~~2018.~~2020. The primary change in balance was due to the ~~increase~~decrease in unrealized gains on available-for-sale securities portfolio and derivative assets.

Note 98 —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 $0.2 million and $0.1 million ~~as of~~at September 30, ~~2019~~2021 and December 31, ~~2018.~~

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.

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.

~~Operating leases~~

The Company leases all of its office facilities under operating lease arrangements. The leases provide that the Company pays real estate taxes, insurance, and certain other operating expenses applicable to the leased premises in addition to the monthly minimum payments.

~~The weighted average remaining lease term and discount rate were as follows:~~

~~The components of lease expense were as follows:~~

Three Months Ended
September 30, 2019 Nine Months Ended
September 30, 2019

(Dollars in thousands)
Operating lease cost $ 398
$ 1,156
Variable lease cost 13
32
Short-term lease cost⁽¹⁾
18
144
Sublease income (32 ) (32 )
Total lease cost $ 397
$ 1,300

~~____________~~

~~(1) Short-term lease cost are for leases with a term of one year or less including terms of one month or less per accounting policy election.~~

~~Maturities of lease liabilities were as follows:~~

Operating leases September 30,
2019

Period / Year Ending December 31, (Dollars in thousands)
2019 $ 410
2020 1,676
2021 1,748
2022 1,548
2023 215
2024 26
Total lease payments 5,623
Less: imputed lease interest (386 )
Total lease liabilities $ 5,237

~~As of September 30, 2019, the Company had 0 additional operating lease commitments for office facilities that have not yet commenced.~~

~~Supplemental cash flow and other information related to leases was as follows:~~

Nine Months Ended
September 30, 2019

(Dollars in thousands)
Cash paid for amounts included in the measurement of operating lease liabilities $ 1,113
Right-of-use assets obtained in exchange for new operating lease liabilities 6,599

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 ~~10—~~9—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 2010, the Company adopted an equity compensation plan, or 2010 Plan, that provides for the grant of stock options to employees, directors, and other persons referred to in Rule 701 under the U.S. Securities Act of 1933. The number of shares that may be issued pursuant to awards under the 2010 Plan is 730,784. The Compensation Committee of the Company’s Board of Directors is responsible for administrating the 2010 Plan and determining the terms of all awards under it, including their vesting, except that in the case of a change in control of the Company all options granted under the 2010 Plan shall become 100% vested. As of September 30, 2019, there are 0 shares available for issuance under the 2010 Plan.

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 ~~cost charged against income~~expense was ~~$17,000~~$0.6 million and ~~$17,000~~$0.3 million for the three months ended September 30, ~~2019~~2021 and ~~2018,~~2020, respectively. Total stock-based compensation ~~cost charged against income~~expense was ~~$66,000~~$1.4 million and ~~$97,000~~$0.7 million for the nine months ended September 30, ~~2019~~2021 and ~~2018,~~2020, respectively.

A summary of stock option activity as of September 30, ~~2019~~2021 and changes during the nine months ended September 30, ~~2019~~2021 is presented ~~below.~~below:

Number of
Options Weighted
Average Exercise
Price
Weighted
Average
Remaining
Contractual Life
(in years)

Aggregate
Intrinsic Value
(in thousands)
Outstanding at January 1, 2019 816,616
$ 5.54

Exercised (73,457 ) 5.78

Forfeited/Expired (1,500 ) 12.00

Outstanding at September 30, 2019 741,659
$ 5.50
3.3 years $ 4,817
Exercisable at September 30, 2019 681,909
$ 4.97
2.8 years $ 4,793
Vested or Expected to Vest at September 30, 2019 737,224
$ 5.47
3.2 years $ 4,816


	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	(361,952)	5.17
Forfeited or expired	(8,095)	16.09
Outstanding at September 30, 2021	243,841	$	21.07	6.3 years	$	23,250
Exercisable at September 30, 2021	109,272	$	8.28	3.9 years	$	11,716
Vested or Expected to Vest at September 30, 2021	233,063	$	20.66	6.2 years	$	22,311

As of September 30, ~~2019,~~2021, there was ~~$0.1~~$1.1 million of total unrecognized compensation cost related to ~~non-vested~~nonvested stock options which is expected to be recognized over a weighted-average period of ~~1.7~~2.3 years.

Restricted Stock Units

A summary of the status of the Company’s nonvested restricted stock unit awards as of September 30, 2021, and changes during the nine months ended September 30, 2021, is presented below:

At September 30, 2021, there was approximately $3.0 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 2.3 years.

Note ~~11—~~10—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. ~~The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019.~~ 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 net unrealized gain or loss on available for sale securities and derivatives are not included in computing regulatory capital. Management believes, as of September 30, ~~2019,~~2021, the Company and the Bank ~~meet~~met all capital adequacy requirements to which they ~~are~~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 September 30, ~~2019~~2021 and December 31, ~~2018,~~2020, are presented in the following tables:

Actual Minimum capital
adequacy To be well
capitalized
Amount Ratio Amount Ratio Amount Ratio

(Dollars in thousands)
December 31, 2018
The Company
Tier 1 leverage ratio $ 208,807
9.00 % $ 92,812
4.00 % N/A
N/A
Common equity tier 1 capital ratio 193,307
23.10 % 37,650
4.50 % N/A
N/A
Tier 1 risk-based capital ratio 208,807
24.96 % 50,200
6.00 % N/A
N/A
Total risk-based capital ratio 215,638
25.77 % 66,933
8.00 % N/A
N/A
The Bank
Tier 1 leverage ratio 197,175
8.51 % 92,637
4.00 % 115,796
5.00 %
Common equity tier 1 capital ratio 197,175
23.68 % 37,472
4.50 % 54,127
6.50 %
Tier 1 risk-based capital ratio 197,175
23.68 % 49,963
6.00 % 66,618
8.00 %
Total risk-based capital ratio 204,006
24.50 % 66,618
8.00 % 83,272
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 ~~shareholders~~shareholder during the same period must be approved by the California ~~DBO.~~DFPI. Also, the Bank may not pay dividends that would result in capital levels being reduced below the minimum requirements shown above. In addition, under the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (BASEL III rules), a new “capital conservation buffer” is being phased in through 2019 with different and generally higher limits than the well capitalized limits noted above. This may further restrict dividend and executive bonus distributions, should the Company’s capital ratios fall below the minimums required.

Note ~~12—~~11—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 11—~~-Quoted~~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 22—~~-Significant~~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 33—~~-Significant~~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:

~~Investments~~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 matrix pricing, which is a mathematical technique used widely in the industry to value 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).

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 (Level 3).~~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 ~~September 30, 2019 and December 31, 2018,~~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)~~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)~~Level 3 measurement.

The following tables provide the hierarchy and fair value for each class of assets and liabilities measured at fair value at September 30, ~~2019~~2021 and December 31, ~~2018. There were no transfers of assets between Level 1 and Level 2 of the fair value hierarchy for the periods presented.~~2020.

As of September 30, ~~2019~~2021 and December 31, ~~2018,~~2020, assets and liabilities measured at fair value on a recurring basis are 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)
September 30, 2019
Assets
Securities available-for-sale $ —
$ 909,917
$ —
$ 909,917
Derivative assets —
30,885
—
30,885
$ —
$ 940,802
$ —
$ 940,802

December 31, 2018
Assets
Securities available-for-sale $ —
$ 357,178
$ —
$ 357,178
Derivative assets —
999
—
999
$ —
$ 358,177
$ —
$ 358,177

There were no assets measured at fair value on a nonrecurring basis as of September 30, ~~2019 and~~2021. As of December 31, ~~2018,~~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)
September 30, 2019
Assets
Impaired loans:
Real estate:
One-to-four family $ —
$ —
$ 56
$ 56
Reverse mortgage —
—
308
308
Other real estate owned —
—
81
81
$ —
$ —
$ 445
$ 445
Quantitative Information about Level 3 Fair Value Measurements

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis as of the date indicated:

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)
December 31, 2018
Assets
Impaired loans:
Real estate:
One-to-four family $ —
$ —
$ 24
$ 24
Reverse mortgage —
—
379
379
Other real estate owned —
—
31
31
$ —
$ —
$ 434
$ 434

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)
December 31, 2018
Financial assets:
Cash and due from banks $ 4,177
$ 4,177
$ —
$ —
$ 4,177
Interest earning deposits 670,243
670,243
—
—
670,243
Securities held-to-maturity 73
—
72
—
72
Loans held-for-investment, net 592,781
—
—
591,315
591,315
Loans held-for-sale 350,636
—
351,115
—
351,115
FHLB and FRB stock 9,660
N/A
N/A
N/A
N/A
Accrued interest receivable 5,770
571
1,430
3,769
5,770
Financial liabilities:
Deposits $ 1,678,833
$ —
$ 1,621,138
$ —
$ 1,621,138
Deposits held-for-sale 104,172
—
95,215
—
95,215
Notes payable 4,857
—
4,857
—
4,857
Subordinated debentures 15,802
—
15,414
—
15,414
Accrued interest payable 451
—
451
—
451

Note ~~13—~~12—Earnings Per Share

The computation of basic and diluted earnings per share is shown below.

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018

(In thousands, except per share data)
Basic
Net income $ 6,656
$ 6,279
$ 21,248
$ 14,313
Weighted average common shares outstanding 17,840
17,808
17,830
16,113
Basic earnings per common share $ 0.37
$ 0.35
$ 1.19
$ 0.89
Diluted
Net income $ 6,656
$ 6,279
$ 21,248
$ 14,313
Weighted average common shares outstanding for basic earnings per common share 17,840
17,808
17,830
16,113
Add: Dilutive effects of assumed exercise of stock options 406
446
422
494
Average shares and dilutive potential common shares 18,246
18,254
18,252
16,607
Dilutive earnings per common share $ 0.36
$ 0.34
$ 1.16
$ 0.86

~~Stock options~~Stock-based awards for ~~110,000~~44,000 and ~~114,000~~165,000 shares of common stock for the three months ended September 30, ~~2019~~2021 and ~~2018,~~2020, respectively, and ~~110,000~~44,000 and ~~76,000~~213,000 shares of common stock for the nine months ended September 30, ~~2019~~2021 and ~~2018,~~2020, respectively, were excluded from the computation of diluted earnings per share, because they were anti-dilutive.

Note ~~14—Shareholders’ Equity~~

The Company’s Articles of 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.13—Subsequent Event

Preferred Stock Dividend

~~The Company, upon authorization~~On October 14, 2021, the Company’s Board of Directors declared the ~~board~~first quarterly dividend payment of ~~directors, may issue shares of one or more series of preferred stock from time~~$15.08 per share, equivalent 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 board of directors has not designated or established any 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.

~~Voting. Each holder of Class A Common Stock is entitled to one vote for each~~$0.377 per depositary share, on ~~all matters submitted to~~its Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, for the period covering August 4, 2021 through November 14, 2021 for a ~~vote~~total dividend 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 February 23, 2018, the Company completed a private placement of 9.5 million shares of the Company’s Class A common stock, generating gross proceeds of $114.0 million. Costs incurred with the private placement were $6.1$3.0 million. The ~~private placement raised net proceeds of $107.9 million of common equity, $60.0 million of which was contributed as equity capital to~~depositary shares representing the ~~Bank during the first quarter of 2018. Proceeds from this placement also funded a stock repurchase of 997,506 shares of Class~~Series A ~~and Class B common stock for $11.4 million, resulting in a net increase in shareholders’ equity of $96.5 million.~~

~~In March 2018, 1,165,000 shares of Class B common stock were sold by the Company’s shareholders and reissued as Class A common stock.~~

~~Note 15~~ ~~—Subsequent Events~~

~~The Company completed its IPO of 3,333,333 shares of its Class A common stock at a public offering price of $12.00 per share on November 7, 2019. The common stock is~~Preferred Stock are traded on the New York Stock Exchange under the ~~ticker~~ symbol ~~“SI.~~“SI PRA.” The IPO generated aggregate gross proceeds to the Company of $9.9 million before deducting underwriting discounts and estimated offering expenses, and estimated aggregate net proceeds to the Company of approximately $6.8 million after deducting underwriting discounts and estimated offering expenses, which expenses are not yet finalized. Of the offered shares, 824,605 shares were offered by Silvergate and 2,508,728 shares were offered by selling shareholders. Ondividend will be payable on November 15, ~~2019, the underwriters purchased an additional 499,999 shares~~2021 to shareholders of record of the ~~Company’s Class A common~~preferred stock from the Company’s selling shareholders in connection with the exercise in full of their option to purchase additional shares. The Company did not receive any proceeds from the sale of shares by the selling shareholders. The Company intends to use the net proceeds to support continued growth, including organic growth and for general corporate purposes, which could include repayment of long-term debt, future acquisitions and other growth initiatives.

~~Callable Brokered Certificates of Deposit~~

As of September 30, 2019, the Company had issued $325.0 million of callable brokered certificates of deposit related to the hedging strategy. The callable brokered certificates of deposit had an unamortized premium of $2.3 million and have an average life of 4.2 years as of ~~September 30, 2019. These certificates~~October 29, 2021.

Table of deposit are initially callable six months after issuance and monthly thereafter. The initial call dates for all callable brokered certificates of deposit are from October 2019 through January 2020. At September 30, 2019, the Company held a total of $196.0 million in callable certificates of deposit and $1.3 million of related unamortized premium, which was subsequently called after the end of third quarter.Contents

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 ~~Registration Statement~~Annual Report on Form ~~S-1,~~10-K, which contains audited financial statements of the Company as of and for the year ended December 31, ~~2018,~~2020, previously filed with the Securities and Exchange Commission (“SEC”). Results for the three and nine ~~month periods~~months ended September 30, ~~2019~~2021 are not necessarily indicative of results for the year ending December 31, ~~2019~~2021 or any future period.

Cautionary Note Regarding ~~Forward Looking~~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. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. Any forward-looking statement speaks only as of the date of this shareholder letter, 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. 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 its ongoing 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 result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results 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”) target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing 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.

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 2020 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. ~~Instrumental~~Key to our leadership position and growth strategy is the Silvergate Exchange Network ~~or SEN,~~(“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 ~~focus on~~ significantly ~~growing~~grow our noninterest bearing ~~deposit product for~~deposits from digital currency industry participants, which has provided the majority of our funding over the last ~~two~~three years. This unique source of funding is a distinctive advantage over most traditional financial institutions and allows us to generate

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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 ~~that is the parent company of Silvergate Bank. The Company’s~~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.~~Reserve (“Federal Reserve”). The Bank is subject to supervision by the California Department of ~~Business Oversight,~~Financial Protection and Innovation, Division of Financial Institutions ~~or DBO~~(“DFPI”) and, as a Federal Reserve member bank since 2012, the Federal Reserve Bank of San Francisco ~~or FRB.~~(“FRB”). The Bank’s deposits are insured up to legal limits by the Federal Deposit Insurance Corporation ~~or FDIC.~~(“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 bank we began introducing an expanded array of relationship-oriented business products and services, which in the past five years has been significantly augmented by our digital currency initiative. While our commercial real estate lending activities are concentrated in California, we have a broader, nationwide

focus on deposit and cash management services for digital ~~currency-related~~currency related businesses, as well as mortgage warehouse ~~and~~lending. Beginning in July 2020, we ceased issuing purchase commitments for residential real estate loans through our former correspondent ~~residential lending. Our goal is~~lending unit, but will continue to ~~establish profitable long-term banking relationships.~~

In March 2019, the Company and the Bank completed the sale of the Bank’s retail branch located in San Marcos, California and business loan portfolio to HomeStreet Bank. This transaction generated a pre-tax gainservice existing loans currently on sale of $5.5 million and reduced total loans by $115.4 million and total deposits by $74.5 million. Further, on June 28, 2019, the Company consolidated its La Mesa Business Banking Center into its La Jolla headquarters branch office, resulting in the Company having only one branch location.our balance sheet.

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 ~~management team’s~~ vision and ~~our~~ 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.

• ~~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 ~~six~~seven 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 September 30, ~~2019,~~2021, we had ~~250~~over 200 prospective digital currency ~~customers~~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 ~~API.~~proprietary, cloud-based application programming interface (“API”).

The following ~~chart~~list sets forth summary information regarding the types of market participants ~~who~~that are our primary customers:


•	~~Digital Currency Exchanges:~~ ~~Exchanges through which digital currencies are bought and sold; includes over-the-counter, or OTC, trading desks.~~


•	~~Institutional Investors:~~ ~~Hedge funds, venture capital funds, private equity funds, family offices and traditional asset managers, which are investing in digital currencies as an asset class.~~

•

~~Other Customers:~~ Digital Currency Exchanges: Exchanges through which digital currencies are bought and sold; includes over-the-counter, or OTC, trading desks.

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•Institutional Investors: Hedge funds, venture capital funds, private equity funds, family offices and traditional asset managers, that 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 presents~~For the ~~number~~three and nine months ended September 30, 2021, there were $162.0 billion and $568.1 billion, respectively, of ~~transactions and the~~ U.S. dollar ~~volume of transactions~~transfers that occurred on the SEN, ~~for~~compared to $36.7 billion and $76.5 billion, respectively, during the ~~periods presented:~~three and nine months ended September 30, 2020.

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018

(Dollars in millions)
# SEN Transactions 12,312
1,453
31,663
2,892
$ Volume of SEN Transactions $ 10,425
$ 1,680
$ 23,126
$ 4,359

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Financial Results

The following table presents the components of results of operations, performance ratios and share data for the periods indicated:


	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018				2021			2020			2021			2020

	(In thousands, except per share data)													(In thousands, except per share data)
Statement of Operations Data:													Statement of Operations Data:
Interest income	$	21,388		$	18,707		$	60,923		$	51,151		Interest income	$	37,936		$	19,305		$	91,912		$	57,382
Interest expense	2,945			737			5,596			2,391			Interest expense	273			379			851			6,926
Net interest income	18,443			17,970			55,327			48,760			Net interest income	37,663			18,926			91,061			50,456
(Reversal of) provision for loan losses	(858		)	—			(439		)	148
Provision for loan losses													Provision for loan losses	—			—			—			589
Net interest income after provision	19,301			17,970			55,766			48,612			Net interest income after provision	37,663			18,926			91,061			49,867
Noninterest income	2,599			2,184			12,624			5,572			Noninterest income	14,042			3,964			34,201			14,329
Noninterest expense	12,611			11,417			38,818			34,346			Noninterest expense	22,339			14,133			63,464			41,980
Income before income taxes	9,289			8,737			29,572			19,838			Income before income taxes	29,366			8,757			61,798			22,216
Income tax expense	2,633			2,458			8,324			5,525			Income tax expense	5,874			1,697			4,661			5,297
Net income	$	6,656		$	6,279		$	21,248		$	14,313		Net income	23,492			7,060			57,137			16,919
Dividends on preferred stock													Dividends on preferred stock	—			—			—			—
Net income available to common shareholders													Net income available to common shareholders	$	23,492		$	7,060		$	57,137		$	16,919
Financial Ratios⁽¹⁾:													Financial Ratios(1):
Return on average assets (ROAA)⁽²⁾	1.20		%	1.27		%	1.38		%	1.00		%
Return on average equity (ROAE)⁽²⁾	11.78		%	13.74		%	13.61		%	12.09		%
Net interest margin⁽³⁾	3.39		%	3.67		%	3.64		%	3.45		%
Noninterest income to average assets⁽²⁾	0.47		%	0.44		%	0.82		%	0.39		%
Return on average assets (ROAA)													Return on average assets (ROAA)	0.75		%	1.13		%	0.75		%	0.99		%
Return on average equity (ROAE)													Return on average equity (ROAE)	9.19		%	10.14		%	9.73		%	8.73		%
Return on average common equity (ROACE)													Return on average common equity (ROACE)	10.45		%	10.14		%	10.27		%	8.73		%
Net interest margin(2)													Net interest margin(2)	1.26		%	3.19		%	1.24		%	3.07		%
Noninterest income to average assets													Noninterest income to average assets	0.45		%	0.63		%	0.45		%	0.83		%
Noninterest expense to average assets	2.27		%	2.32		%	2.52		%	2.41		%	Noninterest expense to average assets	0.71		%	2.26		%	0.83		%	2.45		%
Efficiency ratio⁽²⁾⁽⁴⁾	59.93		%	56.65		%	57.13		%	63.22		%
Loan yield⁽⁵⁾	5.50		%	5.64		%	5.56		%	5.47		%
Efficiency ratio(3)													Efficiency ratio(3)	43.20		%	61.74		%	50.67		%	64.80		%
Loan yield(4)													Loan yield(4)	4.51		%	4.45		%	4.43		%	4.74		%
Cost of deposits	0.50		%	0.09		%	0.29		%	0.11		%	Cost of deposits	0.00		%	0.01		%	0.00		%	0.40		%
Cost of funds	0.59		%	0.17		%	0.41		%	0.18		%	Cost of funds	0.01		%	0.07		%	0.01		%	0.46		%
Share Data:													Share Data:
Basic earnings per share	$	0.37		$	0.35		$	1.19		$	0.89
Diluted earnings per share	$	0.36		$	0.34		$	1.16		$	0.86
Basic earnings per common share													Basic earnings per common share	$	0.89		$	0.38		$	2.29		$	0.91
Diluted earnings per common share													Diluted earnings per common share	$	0.88		$	0.37		$	2.26		$	0.88
Basic weighted average shares outstanding	17,840			17,808			17,830			16,113			Basic weighted average shares outstanding	26,525			18,682			24,927			18,674
Diluted weighted average shares outstanding	18,246			18,254			18,252			16,607			Diluted weighted average shares outstanding	26,766			19,134			25,308			19,119

________________________


~~(1)~~	~~Data has been annualized except for efficiency ratio.~~


~~(2)~~	Excluding the gain attributed to the branch sale, net income would have been $17.3 million and ROAA, ROAE, noninterest income to average assets and efficiency ratio would have been 1.12%, 11.09%, 0.46% and 62.17%, respectively, for the nine months ended September 30, 2019. See “Non-GAAP Financial Measures” for a reconciliation of these metrics.


~~(3)~~	~~Net interest margin is a ratio calculated as net interest income divided by average interest earning assets for the same period.~~


~~(4)~~	~~Efficiency ratio is calculated by dividing noninterest expenses by net interest income plus noninterest income.~~


~~(5)~~	~~Includes nonaccrual loans and loans 90 days and more past due.~~

(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.

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The following table presents the components of financial condition and ratios at the dates indicated:


		September 30, 2019			December 31, 2018				September 30, 2021			December 31, 2020

		(Dollars in thousands)							(Dollars in thousands, except per share data)
Statement of Financial Condition Data:								Statement of Financial Condition Data:
Cash and cash equivalents		$	160,258		$	674,420		Cash and cash equivalents	$	3,784,488		$	2,962,087
Securities		909,917			357,251
Securities available-for-sale, at fair value								Securities available-for-sale, at fair value	7,234,216			939,015
Loans held-for-sale								Loans held-for-sale	818,447			865,961
Loans held-for-investment, net		691,990			592,781			Loans held-for-investment, net	809,745			746,751
Loans held-for-sale		311,410			350,636
Other assets		63,269			29,230
Other								Other	129,725			72,421
Total assets		$	2,136,844		$	2,004,318		Total assets	$	12,776,621		$	5,586,235
Deposits	��	$	1,848,095		$	1,783,005		Deposits	$	11,662,520		$	5,248,026
Borrowings		39,813			20,659			Borrowings	15,841			15,831
Other liabilities		18,322			9,408			Other liabilities	26,179			28,079
Total liabilities		1,906,230			1,813,072			Total liabilities	11,704,540			5,291,936
Total shareholders’ equity		230,614			191,246			Total shareholders’ equity	1,072,081			294,299
Total liabilities and shareholders' equity		$	2,136,844		$	2,004,318		Total liabilities and shareholders' equity	$	12,776,621		$	5,586,235
Nonperforming Assets:								Nonperforming Assets:
Nonperforming loans		$	6,707		$	8,303		Nonperforming loans	$	5,845		$	4,982
Troubled debt restructurings		$	1,840		$	514		Troubled debt restructurings	$	1,867		$	1,525
Other real estate owned, net		$	81		$	31		Other real estate owned, net	—			—
Nonperforming assets		$	6,788		$	8,334		Nonperforming assets	$	5,845		$	4,982
Asset Quality Ratios:								Asset Quality Ratios:
Nonperforming assets to total assets		0.32		%	0.42		%	Nonperforming assets to total assets	0.05		%	0.09		%
Nonperforming loans to gross loans⁽¹⁾		0.96		%	1.39		%	Nonperforming loans to gross loans(1)	0.72		%	0.66		%
Nonperforming assets to gross loans and other real estate owned⁽¹⁾		0.98		%	1.40		%	Nonperforming assets to gross loans and other real estate owned(1)	0.72		%	0.66		%
Net charge-offs (recoveries) to average total loans⁽¹⁾		0.01		%	(0.01		)%
Net charge-offs to average total loans(1)								Net charge-offs to average total loans(1)	0.00		%	0.00		%
Allowance for loan losses to gross loans⁽¹⁾		0.89		%	1.13		%	Allowance for loan losses to gross loans(1)	0.85		%	0.92		%
Allowance for loan losses to nonperforming loans		92.31		%	80.97		%	Allowance for loan losses to nonperforming loans	118.32		%	138.82		%
Company Capital Ratios:								Company Capital Ratios:
Tier 1 leverage ratio		10.43		%	9.00		%	Tier 1 leverage ratio	8.71		%	8.29		%
Common equity tier 1 capital ratio		23.57		%	23.10		%	Common equity tier 1 capital ratio	40.98		%	21.53		%
Tier 1 risk-based capital ratio		25.28		%	24.96		%	Tier 1 risk-based capital ratio	50.80		%	22.88		%
Total risk-based capital ratio		25.97		%	25.77		%	Total risk-based capital ratio	51.13		%	23.49		%
Total shareholders’ equity to total assets		10.79		%	9.54		%
Book value per share		$	12.92		$	10.73
Common equity to total assets								Common equity to total assets	6.88		%	5.27		%
Book value per common share								Book value per common share	$	33.10		$	15.63
Bank Capital Ratios:								Bank Capital Ratios:
Tier 1 leverage ratio		10.01		%	8.51		%	Tier 1 leverage ratio	8.24		%	8.22		%
Common equity tier 1 capital ratio		24.30		%	23.68		%	Common equity tier 1 capital ratio	48.04		%	22.71		%
Tier 1 risk-based capital ratio		24.30		%	23.68		%	Tier 1 risk-based capital ratio	48.04		%	22.71		%
Total risk-based capital ratio		25.00		%	24.50		%	Total risk-based capital ratio	48.37		%	23.32		%
Other:								Other:
Total headcount		209			209			Total headcount	249			218

________________________


~~(1)~~	~~Loans exclude loans held-for-sale at each of the dates presented.~~

(1)Loans exclude loans held-for-sale at each of the dates presented.

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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. ~~There~~Other than ongoing uncertainty related to COVID-19, there have been no significant changes during the nine months ended September 30, ~~2019~~2021 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 ~~prospectus dated November 6, 2019 and~~Annual Report on Form 10-K filed with the SEC on ~~November~~March 8, ~~2019, relating to its initial public offering (“IPO”).~~2021.

Accounting policies, as described in detail in the notes to our consolidated financial statements, included in the Company’s ~~prospectus dated November 6, 2019 and filed with the SEC~~Annual Report on ~~November 8, 2019,~~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 ~~the~~those critical accounting policies and estimates ~~discussed below~~ 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 September 30,							Nine Months Ended September 30,								Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018		% Increase/ (Decrease)		2019			2018		% Increase/ (Decrease)			2021		2020		% Increase/ (Decrease)		2021		2020		% Increase/ (Decrease)

	(Dollars in thousands)															(Dollars in thousands)
Interest income	$	21,388		$	18,707	14.3	%	$	60,923		$	51,151	19.1	%	Interest income	$	37,936	$	19,305	96.5	%	$	91,912	$	57,382	60.2	%
Interest expense	2,945			737		299.6	%	5,596			2,391		134.0	%	Interest expense	273		379		(28.0)	%	851		6,926		(87.7)	%
Net interest income	18,443			17,970		2.6	%	55,327			48,760		13.5	%	Net interest income	37,663		18,926		99.0	%	91,061		50,456		80.5	%
(Reversal of) provision for loan losses	(858		)	—		N/M		(439		)	148		(396.6	)%
Provision for loan losses															Provision for loan losses	—		—		—		—		589		N/M
Net interest income after provision	19,301			17,970		7.4	%	55,766			48,612		14.7	%	Net interest income after provision	37,663		18,926		99.0	%	91,061		49,867		82.6	%
Noninterest income	2,599			2,184		19.0	%	12,624			5,572		126.6	%	Noninterest income	14,042		3,964		254.2	%	34,201		14,329		138.7	%
Noninterest expense	12,611			11,417		10.5	%	38,818			34,346		13.0	%	Noninterest expense	22,339		14,133		58.1	%	63,464		41,980		51.2	%
Net income before income taxes	9,289			8,737		6.3	%	29,572			19,838		49.1	%
Income before income taxes															Income before income taxes	29,366		8,757		235.3	%	61,798		22,216		178.2	%
Income tax expense	2,633			2,458		7.1	%	8,324			5,525		50.7	%	Income tax expense	5,874		1,697		246.1	%	4,661		5,297		(12.0)	%
Net income	$	6,656		$	6,279	6.0	%	$	21,248		$	14,313	48.5	%	Net income	$	23,492	$	7,060	232.7	%	$	57,137	$	16,919	237.7	%

________________________

N/M—Not meaningful

Net income for the three months ended September 30, ~~2019~~2021 was ~~$6.7~~$23.5 million, an increase of ~~$0.4~~$16.4 million or ~~6.0%~~232.7% from net income of ~~$6.3~~$7.1 million for the three months ended September 30, ~~2018.~~2020. The increase was primarily due to ana $18.7 million increase ~~of $2.7 million or 14.3%~~ in net interest income, ~~a $0.9 million loan loss reversal~~ and a ~~$0.4~~$10.1 million increase in noninterest income, ~~partially~~ offset by a ~~$2.2 million increase or 299.6% in interest expense, a $1.2 million or 10.5% increase in noninterest expense and a $0.2~~$4.2 million increase in income tax expense, and a $8.2 million increase in noninterest expense, all as described below.

Net income for the nine months ended September 30, ~~2019~~2021 was ~~$21.2~~$57.1 million, an increase of ~~$6.9~~$40.2 million or ~~48.5%~~237.7% from net income of ~~$14.3~~$16.9 million for the nine months ended September 30, ~~2018.~~2020. The increase was primarily due to ana $40.6 million increase ~~of $9.8 million or 19.1%~~ in net interest income, ~~and~~ a ~~$7.1~~$19.9 million increase in noninterest income ~~partially~~and a $0.6 million decrease in income tax expense, offset by a ~~$3.2 million or 134.0% increase in interest expense, a $4.5 million or 13.0% increase in noninterest expense and a $2.8~~$21.5 million increase in ~~income tax~~noninterest expense, all as described below.

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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. Net interest margin is a ratio calculated as net interest income divided by average interest earning assets for the same period. Net interest spread is the difference between average interest rates earned on interest earning assets and average interest rates paid on interest bearing liabilities.

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 ~~cost~~costs 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%.

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AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS


	Three Months Ended September 30,
	2021						2020
	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	$	4,104,776	$	1,755	0.17	%	$	245,855	$	196	0.32	%
Taxable securities	5,449,202		14,000		1.02	%	679,277		3,746		2.19	%
Tax-exempt securities(1)	1,187,452		6,347		2.12	%	267,511		2,177		3.24	%
Loans(2)(3)	1,493,590		16,972		4.51	%	1,209,884		13,527		4.45	%
Other	31,028		195		2.49	%	15,112		116		3.05	%
Total interest earning assets	12,266,048		39,269		1.27	%	2,417,639		19,762		3.25	%
Noninterest earning assets	197,477						68,327
Total assets	$	12,463,525					$	2,485,966
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits	$	76,898	$	26	0.13	%	$	108,755	$	57	0.21	%
FHLB advances and other borrowings	1		—		0.00	%	124,886		65		0.21	%
Subordinated debentures	15,839		247		6.19	%	15,825		257		6.46	%
Total interest bearing liabilities	92,738		273		1.17	%	249,466		379		0.60	%
Noninterest bearing liabilities:
Noninterest bearing deposits	11,305,650						1,935,661
Other liabilities	50,657						23,860
Shareholders’ equity	1,014,480						276,979
Total liabilities and shareholders’ equity	$	12,463,525					$	2,485,966
Net interest spread(4)					0.10	%					2.65	%
Net interest income, taxable equivalent basis			$	38,996					$	19,383
Net interest margin(5)					1.26	%					3.19	%
Reconciliation to reported net interest income:
Adjustments for taxable equivalent basis			(1,333)						(457)
Net interest income, as reported			$	37,663					$	18,926

Three Months Ended September 30,
2019 2018
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 $ 234,606
$ 1,183
2.00 % $ 770,832
$ 3,921
2.02 %
Securities 935,263
6,510
2.76 % 266,718
1,941
2.89 %
Loans⁽¹⁾⁽²⁾
979,283
13,574
5.50 % 895,107
12,726
5.64 %
Other 10,742
121
4.47 % 10,140
119
4.66 %
Total interest earning assets 2,159,894
21,388
3.93 % 1,942,797
18,707
3.82 %
Noninterest earning assets 45,306
12,706

Total assets $ 2,205,200
$ 1,955,503

Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits $ 438,277
$ 2,385
2.16 % $ 234,044
$ 400
0.68 %
FHLB advances and other borrowings 43,642
289
2.63 % 6,622
98
5.87 %
Subordinated debentures 15,810
271
6.80 % 15,796
239
6.00 %
Total interest bearing liabilities 497,729
2,945
2.35 % 256,462
737
1.14 %
Noninterest bearing liabilities:
Noninterest bearing deposits 1,468,992
1,512,393

Other liabilities 14,400
5,297

Shareholders’ equity 224,079
181,351

Total liabilities and shareholders’ equity $ 2,205,200
$ 1,955,503

Net interest spread⁽³⁾
1.58 % 2.68 %
Net interest income $ 18,443
$ 17,970

Net interest margin⁽⁴⁾
3.39 % 3.67 %

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	Nine Months Ended September 30,
	2021						2020
	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	$	4,718,163	$	4,633	0.13	%	$	216,278	$	1,325	0.82	%
Taxable securities	3,095,984		25,916		1.12	%	757,132		13,917		2.46	%
Tax-exempt securities(1)	722,129		12,446		2.30	%	168,813		4,234		3.35	%
Loans(2)(3)	1,531,408		50,727		4.43	%	1,081,506		38,358		4.74	%
Other	25,308		804		4.25	%	13,035		437		4.48	%
Total interest earning assets	10,092,992		94,526		1.25	%	2,236,764		58,271		3.48	%
Noninterest earning assets	130,766						56,513
Total assets	$	10,223,758					$	2,293,277
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits	$	97,048	$	107	0.15	%	$	246,439	$	5,760	3.12	%
FHLB advances and other borrowings	15		—		0.00	%	89,177		336		0.50	%
Subordinated debentures and other	15,836		744		6.28	%	16,899		830		6.56	%
Total interest bearing liabilities	112,899		851		1.01	%	352,515		6,926		2.62	%
Noninterest bearing liabilities:
Noninterest bearing deposits	9,288,468						1,662,233
Other liabilities	37,124						19,625
Shareholders’ equity	785,267						258,904
Total liabilities and shareholders’ equity	$	10,223,758					$	2,293,277
Net interest spread(4)					0.24	%					0.86	%
Net interest income, taxable equivalent basis			$	93,675					$	51,345
Net interest margin(5)					1.24	%					3.07	%
Reconciliation to reported net interest income:
Adjustments for taxable equivalent basis			(2,614)						(889)
Net interest income, as reported			$	91,061					$	50,456

________________________

(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.

~~(2)~~(3)Interest income includes amortization of deferred loan fees, net of deferred loan costs.

~~(3)~~(4)Net interest spread is the difference between interest rates earned on interest earning assets and interest rates paid on interest bearing liabilities.

~~(4)~~(5)Net interest margin is a ratio calculated as annualized net interest income, ~~divided by average interest earning assets for the same period.~~

Nine Months Ended September 30,
2019 2018
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 $ 465,201
$ 8,038
2.31 % $ 770,368
$ 10,386
1.80 %
Securities 633,742
14,044
2.96 % 248,584
5,016
2.70 %
Loans⁽¹⁾⁽²⁾
921,982
38,369
5.56 % 863,967
35,357
5.47 %
Other 10,668
472
5.92 % 8,994
392
5.83 %
Total interest earning assets 2,031,593
60,923
4.01 % 1,891,913
51,151
3.61 %
Noninterest earning assets 31,705
12,771

Total assets $ 2,063,298
$ 1,904,684

Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits $ 303,730
$ 3,920
1.73 % $ 269,331
$ 1,386
0.69 %
FHLB advances and other borrowings 40,499
874
2.89 % 8,315
334
5.37 %
Subordinated debentures 15,807
802
6.78 % 15,793
671
5.68 %
Total interest bearing liabilities 360,036
5,596
2.08 % 293,439
2,391
1.09 %
Noninterest bearing liabilities:
Noninterest bearing deposits 1,482,317
1,447,404

Other liabilities 12,170
5,593

Shareholders’ equity 208,775
158,248

Total liabilities and shareholders’ equity $ 2,063,298
$ 1,904,684

Net interest spread⁽³⁾
1.93 % 2.52 %
Net interest income $ 55,327
$ 48,760

Net interest margin⁽⁴⁾
3.64 % 3.45 %

~~________________________~~

~~(1)Loans include nonaccrual loans and loans held-for-sale, net of deferred fees and before allowance for loan losses.~~

~~(2)Interest income includes amortization of deferred loan fees, net of deferred loan costs.~~

~~(3)Net interest spread is the difference between interest rates earned~~ on ~~interest earning assets and interest rates paid on interest bearing liabilities.~~

~~(4)Net interest margin is~~ a ~~ratio calculated as annualized net interest income~~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

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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 September 30, 2021 Compared to 2020						For the Nine Months Ended September 30, 2021 Compared to 2020
	Change Due To				Interest Variance		Change Due To				Interest Variance
	Volume		Rate				Volume		Rate

	(Dollars in thousands)
Interest Income:
Interest earning deposits in other banks	$	1,691	$	(132)	$	1,559	$	5,319	$	(2,011)	$	3,308
Taxable securities	13,248		(2,994)		10,254		23,087		(11,088)		11,999
Tax-exempt securities(1)	5,150		(980)		4,170		9,915		(1,703)		8,212
Loans	3,220		225		3,445		15,047		(2,678)		12,369
Other	103		(24)		79		391		(24)		367
Total interest income	23,412		(3,905)		19,507		53,759		(17,504)		36,255
Interest Expense:
Interest bearing deposits	(7)		(24)		(31)		(2,208)		(3,445)		(5,653)
FHLB advances and other borrowings	(65)		—		(65)		(168)		(168)		(336)
Subordinated debentures	—		(10)		(10)		(51)		(35)		(86)
Total interest expense	(72)		(34)		(106)		(2,427)		(3,648)		(6,075)
Net interest income, taxable equivalent basis	$	23,484	$	(3,871)	$	19,613	$	56,186	$	(13,856)	$	42,330

________________________

For the Three Months Ended
September 30, 2019 Compared to 2018
For the Nine Months Ended
September 30, 2019 Compared to 2018
Change Due To             Interest
    Variance     Change Due To             Interest
    Variance
Volume     Rate     Volume     Rate

(Dollars in thousands)
Interest Income:
Interest earning deposits in other banks $ (2,704 ) $ (34 ) $ (2,738 ) $ (4,791 ) $ 2,443
$ (2,348 )
Securities 4,657
(88 ) 4,569
8,490
538
9,028
Loans 1,173
(325 ) 848
2,406
606
3,012
Other 7
(5 ) 2
74
6
80
Total interest income $ 3,133
$ (452 ) $ 2,681
$ 6,179
$ 3,593
$ 9,772
Interest Expense:
Interest bearing deposits $ 567
$ 1,418
$ 1,985
$ 198
$ 2,336
$ 2,534
FHLB advances and other borrowings 272
(81 ) 191
758
(218 ) 540
Subordinated debentures —
32
32
(1 ) 132
131
Total interest expense 839
1,369
2,208
955
2,250
3,205
Net interest income $ 2,294
$ (1,821 ) $ 473
$ 5,224
$ 1,343
$ 6,567
(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 ~~$0.5~~$19.6 million to ~~$18.4~~$39.0 million for the three months ended September 30, ~~2019~~2021, compared to ~~$18.0~~$19.4 million for the three months ended September 30, ~~2018,~~2020, due to an increase of ~~$2.7~~$19.5 million in interest income ~~partially offset by an increase~~and a decrease of ~~$2.2~~$0.1 million in interest expense.

Average total interest earning assets increased ~~$217.1 million~~$9.8 billion or ~~11.2%, from $1.9 billion~~407.4% for the three months ended September 30, ~~2018~~2021, compared to ~~$2.2 billion for~~ the ~~three months ended September 30, 2019. The increase was primarily~~same period in 2020, due to an increase in ~~average balance~~noninterest bearing deposits, which resulted in higher levels of ~~securities loans, partly offset by a decrease in~~ interest earning deposits in other ~~banks. The increase in securities was driven~~banks and securities. In addition, average loans increased by ~~the purchase of fixed-rate commercial mortgage-backed securities and adjustable rate residential mortgage-backed securities, while the increase in loans was primarily driven by an increase~~23.4% due to increases in mortgage warehouse loans ~~partly offset~~driven by ~~a decrease in commercial loans related to the sale of the San Marcos branch~~elevated mortgage refinance activity, as well as increased SEN Leverage lending which was launched in the first quarter of 2019. Yields on earning assets benefited from the increase in securities relative to interest earnings deposits in other banks, and from an overall increase in higher yielding loans. Interest earning deposits in other banks decreased $305.2 million from $770.4 million for the three months ended September 30, 2018 to $465.2 million three months ended September 30, 2019. The movement in these asset classes was primarily due to the implementation of the Bank’s hedging strategy beginning in March 2019. For a further discussion of our hedging strategy, see “—Financial Condition—Securities.”2020. The average annualized yield on total interest earning assets ~~increased~~decreased from ~~3.82%~~3.25% for the three months ended September 30, ~~2018~~2020, to ~~3.93%~~1.27% for the three months ended September 30, ~~2019.~~2021, primarily due to interest earning deposits in other banks being a greater percentage of interest earning assets, and lower yields on recently purchased securities.

Average interest bearing liabilities ~~increased $241.3~~decreased $156.7 million or ~~94.1%~~62.8% for the three months ended September 30, ~~2019 as~~2021, compared to the same period in ~~2018 primarily~~2020, due to ~~the implementation~~reduced FHLB advances in 2021 and lower balances of ~~the Bank’s hedging strategy. The increase in~~ interest bearing deposits was primarily due to the issuance of callable brokered certificates of deposits, which were used to fund the fixed-rate commercial mortgage-backed securities, both associated with our hedging strategy.deposits.. The average annualized rate on total interest bearing liabilities increased ~~to 2.35%~~from 0.60% for the three months ended September 30, ~~2019 compared~~2020 to ~~1.14%~~1.17% for the ~~same period in 2018~~three months ended September 30, 2021, primarily due to the decrease in lower cost FHLB advances and interest ~~on callable brokered certificates~~bearing deposits, ~~associated with our hedging strategy.~~which resulted in a larger proportion of higher cost subordinated debentures as a percentage of total interest bearing liabilities.

For the three months ended September 30, ~~2019,~~2021, the net interest spread was ~~1.58%~~0.10% and the net interest margin was ~~3.39%~~1.26%, compared to ~~2.68%~~2.65% and ~~3.67%~~3.19%, respectively, for the comparable period in ~~2018.~~2020. The decrease in the net interest spread and net interest margin infrom the three months ended September 30, ~~2019~~2020 was primarily ~~due to~~driven by the ~~callable brokered certificates~~increase in proportion of interest earning deposits ~~associated with our hedging strategy.~~in other banks as a percentage of total interest earning assets, as well as lower yields on recently purchased securities.

Net interest income on a taxable equivalent basis increased ~~$6.6~~$42.3 million to ~~$55.3~~$93.7 million for the nine months ended September 30, ~~2019~~2021, compared to ~~$48.8~~$51.3 million for the nine months ended September 30, ~~2018,~~2020, due to an increase of ~~$9.8~~$36.3 million in interest income ~~partially offset by an increase~~and a decrease of ~~$3.2~~$6.1 million in interest expense.

Average total interest earning assets increased ~~$139.7 million~~$7.9 billion or ~~7.4%, from $1.9 billion~~351.2% for the nine months ended September 30, ~~2018~~2021, compared to ~~$2.0 billion for~~ the ~~nine months ended September 30, 2019. This increase was~~same period in 2020, primarily due to ~~the inflow of noninterest bearing deposits related to our digital currency initiative which were invested~~an increase in ~~securities and~~ interest earning ~~deposits. The average balance of securities increased from $248.6 million for the nine months ended September 30, 2018 to~~

~~$633.7 million for the nine months ended September 30, 2019 while the average balance of interest bearing~~ deposits in other banks decreased from $770.4 million to $465.2 million over the same time period. The movement in these asset classes was primarily due to the implementation of the Bank’s hedging strategy during the first nine months of 2019.and securities. The average annualized yield on total interest earning assets ~~increased~~decreased from ~~3.61%~~3.48% for the nine months ended September 30, ~~2018~~ 2020,

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to ~~4.01%~~1.25% for the nine months ended September 30, ~~2019~~2021, primarily due to interest earning deposits in other banks being a greater percentage of interest earning assets, and lower yields on ~~callable brokered certificates deposits associated with our hedging strategy.~~securities and interest earning deposits.

Average interest bearing liabilities ~~increased $66.6~~decreased $239.6 million or ~~22.7%~~68.0% for the nine months ended September 30, ~~2019 as~~2021, compared to the same period in ~~2018~~2020, primarily due to ~~an increase~~calling the remaining balance of brokered certificates of deposit in ~~interest bearing deposits between periods,~~the second quarter of 2020 and ~~an increase in~~lower FHLB ~~and other borrowings.~~advances. The average annualized rate on total interest bearing liabilities ~~increased~~decreased to ~~2.08%~~1.01% for the nine months ended September 30, ~~2019~~2021, compared to ~~1.09%~~2.62% for the same period in ~~2018~~.2020, primarily due to the impact of calling the remaining balance of brokered certificates of deposits in the first half of 2020.

For the nine months ended September 30, ~~2019,~~2021, the net interest spread was ~~1.93%~~0.24% and the net interest margin was ~~3.64%~~1.24%, compared to ~~2.52%~~0.86% and ~~3.45%~~3.07%, respectively, for the comparable period in ~~2018.~~2020. The decrease in the net interest spread infor the nine months ended September 30, ~~2019~~2021 compared to the nine months ended September 30, 2020 was primarily due to lower yields on securities and interest earning deposits due to a declining interest rate environment. The decrease in the ~~callable brokered certificates~~net interest margin was due to a greater proportion of lower yielding interest earning deposits ~~associated with our hedging strategy~~.as a percentage of total interest earning assets, which was driven by the increase in noninterest bearing digital currency customer deposits and due to lower yields on securities and interest earning deposits.

Provision for Loan Losses

The provision for loan losses is a charge ~~or reversal~~ 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 ~~a reversal of $0.9 million and~~ no additional provision for loan losses for the three and nine months ended September 30, ~~2019~~2021 and ~~2018, respectively. We recorded a reversal of $0.4 million and~~for the three months ended September 30, 2020, compared to a provision ~~for loan losses $0.1~~of $0.6 million for the nine months ended September 30, ~~2019 and 2018, respectively.~~2020. The allowance for loan losses to total gross loans held-for-investment was ~~0.89%~~0.85% at September 30, ~~2019~~2021, compared to ~~1.21%~~0.91% at September 30, ~~2018. The reversal~~2020. Management determined that no provision for the three and nine months ended September 30, 2021 was ~~due to improvements in qualitative factors related to~~necessary based on the mix of our loan portfolio, our historically strong credit quality and minimal loan charge-offs, and the ~~continued low charge-off rates.~~loan-to-value ratios in the low- to mid-50% range in our commercial, multi-family and one-to-four family residential real estate held-for-investment loan portfolios as of September 30, 2021.

Noninterest Income

The following table presents, for the periods indicated, the major categories of noninterest income:

NONINTEREST INCOME


	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		% Increase/ (Decrease)		2019		2018		% Increase/ (Decrease)			2021		2020		% Increase/ (Decrease)		2021		2020		% Increase/ (Decrease)

	(Dollars in thousands)													(Dollars in thousands)
Noninterest income:													Noninterest income:
Mortgage warehouse fee income	$	373	$	393	(5.1	)%	$	1,085	$	1,152	(5.8	)%	Mortgage warehouse fee income	$	665	$	758	(12.3)	%	$	2,372	$	1,590	49.2	%
Service fees related to off-balance sheet deposits	283		573		(50.6	)%	1,454		1,683		(13.6	)%	Service fees related to off-balance sheet deposits	—		1		N/M		—		78		N/M
Deposit related fees	1,657		688		140.8	%	3,815		1,655		130.5	%	Deposit related fees	8,171		3,293		148.1	%	26,603		7,497		254.8	%
Gain on sale of loans	248		416		(40.4	)%	593		699		(15.2	)%
Gain on sale of branch, net	—		—		—		5,509		—		N/M
Gain on sale of securities, net													Gain on sale of securities, net	5,182		—		N/M		5,182		3,753		38.1	%
(Loss) gain on sale of loans, net													(Loss) gain on sale of loans, net	—		(96)		N/M		—		354		N/M
Gain on extinguishment of debt													Gain on extinguishment of debt	—		—		—		—		925		N/M
Other income	38		114		(66.7	)%	168		383		(56.1	)%	Other income	24		8		200.0	%	44		132		(66.7)	%
Total noninterest income	$	2,599	$	2,184	19.0	%	$	12,624	$	5,572	126.6	%	Total noninterest income	$	14,042	$	3,964	254.2	%	$	34,201	$	14,329	138.7	%

________________________

N/M—Not meaningful

Noninterest income increased $10.1 million or 254.2% for the three months ended September 30, ~~2019 was $2.6 million, an increase of $0.4 million or 19.0%~~2021, compared to ~~noninterest income of $2.2 million for~~ the three months ended September 30, ~~2018. The~~2020. This increase was primarily due to an increase of $1.0 million, or 140.8%, in deposit related fees. The increase was partially offset by decreases in service fees related to off-balance sheet deposits, gain on sale of loans and other income. Deposit related fees increased primarily due to increases in transactional volume for cash management, SEN related fees~~and foreign exchange fee income associated with our digital currency initiative.~~

Noninterest income for the nine months ended September 30, 2019 was $12.6 million, an increase of $7.1 million or 126.6% compared to noninterest income of $5.6 million for the nine months ended September 30, 2018. This increase was

~~primarily due to~~ a ~~$5.5~~$5.2 million gain on sale of ~~branch~~securities and ~~a $2.2~~an increase of $4.9 million ~~increase~~ in deposit related fees, ~~partially~~substantially all of which are fees from our digital currency customers, offset by a ~~$0.2~~$0.1 million decrease in service fees related to off-balance sheet deposits. To further our digital currency initiative as the core of our strategy, the Bank completed the sale of its San Marcos branch and business loan portfolio to another bank in March 2019. This transaction generated a pre-tax gain on sale of $5.5 million, reduced total loans by $115.4 million and total deposits by $74.5 million, and resulted in twelve former employees being hired by the acquiring bank.mortgage warehouse fee income. The ~~$2.2 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. In

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Noninterest income increased $19.9 million or 138.7% for the ~~fourth quarter~~nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. This increase was primarily due to an increase of ~~2018 we began working with~~$19.1 million in deposit related fees, a $1.4 million increase in gain on sale of securities, and a $0.8 million increase in mortgage warehouse fee income, partially offset by a $0.9 million decrease in gain on extinguishment of debt, and a $0.4 million decrease in gain on sale of loans due to the exit of our correspondent ~~banking partners, including a leading global investment bank, to provide competitive foreign exchange alternatives to our clients.~~lending division in March 2020.

Noninterest Expense

The following table presents, for the periods indicated, the major categories of noninterest expense:

NONINTEREST EXPENSE


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021		2020		% Increase/ (Decrease)		2021		2020		% Increase/ (Decrease)

	(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits	$	10,729	$	8,899	20.6	%	$	31,979	$	26,856	19.1	%
Occupancy and equipment	523		845		(38.1)	%	1,736		2,646		(34.4)	%
Communications and data processing	1,793		1,389		29.1	%	5,210		3,963		31.5	%
Professional services	2,471		1,207		104.7	%	6,782		3,297		105.7	%
Federal deposit insurance	4,297		209		N/M		10,437		514		N/M
Correspondent bank charges	572		403		41.9	%	1,881		1,123		67.5	%
Other loan expense	299		60		398.3	%	753		281		168.0	%
Other general and administrative	1,655		1,121		47.6	%	4,686		3,300		42.0	%
Total noninterest expense	$	22,339	$	14,133	58.1	%	$	63,464	$	41,980	51.2	%

________________________

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 % Increase/
(Decrease) 2019 2018
% Increase/
(Decrease)

(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits $ 8,277
$ 7,259
14.0 % $ 25,124
$ 21,335
17.8 %
Occupancy and equipment 892
742
20.2 % 2,777
2,251
23.4 %
Communications and data processing 1,298
703
84.6 % 3,458
2,149
60.9 %
Professional services 889
1,507
(41.0 )% 3,407
3,918
(13.0 )%
Federal deposit insurance 39
214
(81.8 )% 382
1,078
(64.6 )%
Correspondent bank charges 288
240
20.0 % 868
914
(5.0 )%
Other loan expense 47
57
(17.5 )% 290
198
46.5 %
Other real estate owned expense 75
(10 ) 850.0 % 80
42
90.5 %
Other general and administrative 806
705
14.3 % 2,432
2,461
(1.2 )%
Total noninterest expense $ 12,611
$ 11,417
10.5 % $ 38,818
$ 34,346
13.0 %
N/M—Not meaningful

Noninterest expense increased ~~$1.2~~$8.2 million or ~~10.5%~~58.1% for the three months ended September 30, ~~2019~~2021, compared to the three months ended September 30, ~~2018~~2020, primarily due to increases in salaries and employee benefits, ~~occupancy and equipment and communications and data processing expense, offset by decreases in~~ professional services, ~~and~~ federal deposit insurance ~~expense. Salaries~~ and employee benefits increased by $1.0 million in the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to an increase in average cost per full-time equivalent employees, with significant increases in the Bank’s average full-time equivalent employees in project managementother general and operations to support the expansion of our technology driven platform, partially offset by a reduction in personnel as a result of the sale of the Bank’s San Marcos branch and business loan operations. Communications and data processing increased by $0.6 million in the three months ended September 30, 2019 compared to the three months ended September 30, 2018 due to enhancements to our IT infrastructure and expansion projects to support our digital currency initiative. Professional services decreased by $0.6 million in the three months ended September 30, 2019 compared to the three months ended September 30, 2018 due to decreased consulting and legaladministrative expense.

Noninterest expense increased $4.5 million or 13.0% for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to increases in salaries and employee benefits, occupancy and communications and data processing expense, partially offset by decreases in professional services and federal deposit insurance. The increase of ~~$3.8~~$1.8 million or ~~17.8%~~20.6% in salaries and employee benefits was primarily due to an increase in headcount and an increase in cost per full-time equivalent employee. The Company’s average full-time equivalent employees ~~with significant increases in~~increased from 207 for the ~~Bank’s average full-time equivalent employees in project management~~three months ended September 30, 2020 to 237 for the three months ended September 30, 2021. Occupancy and ~~operations, partially offset by~~equipment decreased $0.3 million or 38.1%, due to a reduction in ~~personnel as~~costs related to our leased office space and fixed assets no longer in use that were written off during the three months ended December 31, 2020. Communications and data processing increased $0.4 million or 29.1% primarily due to continued investment in scalable cloud-based software solutions and to a ~~result of~~lesser extent additional core processing expense due to higher transaction volumes. We continue to invest in technology to expand our banking platform with solutions to complement our API-enabled SEN. Professional services increased $1.3 million or 104.7% due primarily to legal and consulting fees for projects related to our strategic growth initiatives, including expenses related to our stablecoin project. Federal deposit insurance expense increased $4.1 million due to a rate increase driven by the ~~sale of the Bank’s San Marcos branch~~significant growth in assets. Other general and ~~business loan operations. Occupancy and equipment~~administrative expense increased $0.5 million or ~~23.4%~~47.6% primarily due to an increase for expanded coverage of insurance.

Noninterest expense increased $21.5 million or 51.2% for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to increases in salaries and employee benefits, professional services, federal deposit insurance and other general and administrative expense. The increase of $5.1 million or 19.1% in salaries and employee benefits was primarily due to an increase in ~~leased space~~cost per full-time equivalent employee. The Company’s average full-time equivalent employees increased from 209 for the ~~corporate headquarters partially offset by~~nine months ended September 30, 2020 to 225 for the ~~sale of~~nine months ended September 30, 2021. In addition, salaries and benefits expense increased due to stock based compensation and payroll taxes related to option exercises. Occupancy and equipment decreased $0.9 million or 34.4%, due to a reduction in costs related to our leased office space and fixed assets no longer in use that were written off during the ~~San Marcos branch.~~three months ended December 31, 2020. Communications and data processing increased ~~$1.3~~$1.2 million or ~~60.9%~~31.5% primarily due to ~~updating our IT infrastructure~~continued investment in scalable cloud-based software solutions, additional core processing expense due to higher transaction volumes and ~~expansion projects~~investments in compliance software to support our digital currency initiative. We continue to invest in scalable technology, and recently committed to expand our banking platform with a cloud-based API-enabled payment hub to complement our API-enabled SEN. Alongside the implementation of the Bank’s payments hub, the Bank is implementing a customer-facing foreign exchange platform. While we continue to invest in projects to strengthen our ability to operate efficiently and effectively while leveraging existing and new technology, professional service fees have decreased by $0.5related customers. Professional services increased $3.5 million or ~~13.0%~~105.7% due primarily to consulting and legal fees for projects related to our strategic growth initiatives, including expenses related to our stablecoin project. In addition, professional services increased due to ~~decreased consulting~~legal settlements and higher audit expense. ~~The decrease of $0.7 million or~~

~~64.6% in federal~~Federal deposit insurance ~~payments was~~expense increased $9.9 million due to a rate increase driven by the significant growth in assets.

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Correspondent bank charges increased $0.8 million or 67.5% due to increased wire volumes and expanded correspondent relationships. Other general and administrative expense increased $1.4 million or 42.0% primarily due to an ~~FDIC assessment credit as well as a reduction in the multiplier based on significant asset growth~~increase for ~~the prior fiscal year relative to the current comparable period.~~expanded coverage of insurance.

Income Tax Expense

The amount of income tax expense we incur is influenced by the amounts of our pre-tax income, and other nondeductible expenses. Deferred tax assets and liabilities are reflected at current income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, such as the Tax Cuts and Jobs Act of 2017, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Income tax expense was ~~$2.6~~$5.9 million for the three months ended September 30, ~~2019~~2021, compared to ~~$2.5~~$1.7 million for the three ~~nine~~ months ended September 30, ~~2018.~~2020. Our effective tax rates for the three months ended September 30, ~~2019~~2021 and ~~2018~~2020 were ~~28.3%~~20.0% and ~~28.1%~~19.4%, respectively. The increase in income tax expense was primarily related to an increase in pre-tax income.

Income tax expense was ~~$8.3~~$4.7 million for the nine months ended September 30, ~~2019~~2021, compared to ~~$5.5~~$5.3 million for the nine months ended September 30, ~~2018. The increase was primarily related to increased pre-tax income.~~2020. Our effective tax rates for the nine months ended September 30, ~~2019~~2021 and ~~2018~~2020 were ~~28.1%~~7.5% and ~~27.9%~~23.8%, respectively. The ~~increase~~decrease in income tax expense and our effective tax rate ~~was~~were primarily related to ~~an increase in our state blended~~significant tax ~~rate~~benefits recognized on the exercise of stock options and ~~non-deductible tax treatment~~the impact of ~~certain noninterest expenses.~~tax-exempt income.

Financial Condition

As of September 30, ~~2019,~~2021, our total assets increased to ~~$2.1~~$12.8 billion compared to ~~$2.0~~$5.6 billion as of December 31, ~~2018.~~2020. Shareholders’ equity increased ~~$39.4~~$777.8 million, or ~~20.6%~~264.3%, to ~~$230.6~~$1,072.1 million at September 30, ~~2019~~2021, compared to ~~$191.2~~$294.3 million at December 31, ~~2018.~~2020. A summary of the individual components driving the changes in total assets, total liabilities and shareholders' equity is ~~discussed~~set forth below.

Interest Earning Deposits in Other Banks

Interest earning deposits in other banks ~~decreased~~increased from ~~$670.2 million~~$2.9 billion at December 31, ~~2018~~2020 to ~~$156.2 million~~$3.6 billion at September 30, ~~2019.~~2021. The ~~decrease was~~majority of the Company’s interest earning deposits in other banks is cash held at the Federal Reserve Bank. The increase in interest earning deposits is due to ~~lower balances with the FRB~~growth in total deposits exceeding growth in total loans and ~~purchases of securities particularly during the first half of 2019 as the Bank implemented its hedging strategy, discussed below.~~securities.

Securities Available-for-sale

We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital ~~requirements and as part of our recently implemented hedging strategy.~~requirements.

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 ~~years~~periods presented, substantially all securities were classified as available-for-sale.

Our securities available-for-sale increased ~~$552.7 million,~~$6.3 billion, or ~~154.8%~~670.4%, from ~~$357.2~~$939.0 million at December 31, ~~2018~~2020 to ~~$909.9 million~~$7.2 billion at September 30, ~~2019.~~2021. To supplement interest income earned on our loan portfolio, we invest in high quality mortgage-backed securities, collateralized mortgage obligations, ~~and~~other asset backed ~~securities. Our~~ securities ~~portfolio has grown substantially due to~~and municipal bonds. During the ~~implementation~~nine months ended September 30, 2021, we purchased $6.9 billion of ~~a hedging strategy and utilizing cash to purchase high quality available-for-sale securities. In March 2019, the Bank implemented a hedging strategy that includes purchases~~securities, including $3.4 billion of ~~interest rate floors and commercial~~agency residential mortgage-backed securities, ~~primarily funded by callable brokered certificates~~$1.4 billion of ~~deposit. We entered into repurchase agreements to temporarily fund the purchase~~municipal bonds, $1.1 billion of U.S. agency securities, ~~while waiting for executed callable brokered certificates~~$333.2 million of deposit to settle. This hedging strategy is intended to reduce the Bank’s exposure to a decline in earnings in a declining interest rate environment with a minimal impact on current earnings. At September 30, 2019, we purchased $400.0U.S. Treasury securities, $584.9 million ~~in notional amount~~ of ~~interest rate floors, $350.4 million in fixed-rate~~agency commercial mortgage-backed securities, and ~~issued $325.0~~$73.7 million of callable brokered certificates of deposit related to this hedging strategy. The callable brokered certificates of deposit had an unamortized premium of $2.3 million and have an average life of 4.2 year as of September 30, 2019. These certificates of deposit are initially callable six months after issuance and monthly thereafter. The initial call dates for all callable brokered certificates of deposit are from October 2019 through January 2020. At September 30, 2019, we held a total of $196.0 million in callable certificates of deposit and $1.3 million of related unamortized premium, which was subsequently called after the end of the third quarter.private-label commercial mortgage-backed securities. In addition, we ~~purchased $214.8~~sold U.S. Treasury securities for $338.9 million ~~in adjustable rate residential mortgage-backed securities~~ during the nine months ended September 30, ~~2019~~2021 and ~~sold $30.0 million~~recognized a gain of ~~residential~~$5.2 million.

At September 30, 2021, there were no holdings of securities of any one issuer, other than the U.S. Government and ~~commercial government agency collateralized mortgage obligations.~~

its agencies, in an amount greater than 10% of shareholders’ equity.

The following tables summarize the contractual maturities and weighted-average yields of investment securities at September 30, ~~2019~~2021 and the amortized cost and carrying 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.

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SECURITIES


	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

	(Dollars in thousands)
September 30, 2021
Securities Available-for-Sale:

U.S. agency securities - excluding mortgage-backed securities	$	—	—	$	2,710	0.84	%	$	580,481	0.31	%	$	494,481	0.29	%	$	1,077,672	$	1,078,820	0.30	%
Residential mortgage-backed securities:
Government agency mortgage-backed securities	—		—	—		—		—		—		1,371,347		1.33	%	1,371,347		1,366,830		1.33	%
Government agency collateralized mortgage obligation	—		—	—		—		81		1.29	%	1,992,143		0.49	%	1,992,224		1,979,288		0.49	%
Private-label collateralized mortgage obligation	—		—	—		—		—		—		1,583		2.30	%	1,583		1,593		2.30	%
Commercial mortgage-backed securities:
Government agency mortgage-backed securities	—		—	—		—		—		—		396,500		0.42	%	396,500		395,882		0.42	%
Government agency collateralized mortgage obligation	—		—	—		—		218,078		0.57	%	—		—		218,078		217,696		0.57	%
Private-label collateralized mortgage obligation	—		—	—		—		21,026		0.61	%	232,267		2.80	%	253,293		265,322		2.62	%
Municipal bonds:
Tax-exempt	—		—	—		—		13,676		3.15	%	1,275,869		1.88	%	1,289,545		1,297,012		1.90	%
Taxable	—		—	—		—		189,265		1.67	%	205,981		2.19	%	395,246		394,585		1.94	%
Asset backed securities:
Government sponsored student loan pools	—		—	—		—		—		—		237,537		0.70	%	237,537		237,188		0.70	%


Total securities	$	—	—	$	2,710	0.84	%	$	1,022,607	0.66	%	$	6,207,708	1.09	%	$	7,233,025	$	7,234,216	1.03	%

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

(Dollars in thousands)
September 30, 2019
Securities Available-for-Sale:
Residential mortgage-backed securities:
Government agency mortgage-backed securities $ 5
2.25 % $ —
—
$ —
—
$ 778
4.28 % $ 783
$ 816
2.95 %
Government agency collateralized mortgage obligation —
—
—
—
—
—
246,689
2.67 % 246,689
246,323
2.67 %
Private-label collateralized mortgage obligation —
—
—
—
—
—
27,385
3.86 % 27,385
27,741
3.86 %
Commercial mortgage-backed securities:
Private-label collateralized mortgage obligation —
—
—
—
—
—
363,782
3.14 % 363,782
380,780
3.14 %
Asset backed securities:
Government sponsored student loan pools —
—
—
—
—
—
258,623
2.86 % 258,623
254,257
2.86 %
Total securities $ 5
2.25 % $ —
—
$ —
—
$ 897,257
2.95 % $ 897,262
$ 909,917
2.95 %


		September 30, 2019				December 31, 2018
		Total				Total					September 30, 2021				December 31, 2020
		Amortized Cost		Fair Value		Amortized Cost		Fair Value			Amortized Cost		Fair Value		Amortized Cost		Fair Value

		(Dollars in thousands)									(Dollars in thousands)
Securities Available-for-Sale:										Securities Available-for-Sale:

U.S. agency securities - excluding mortgage-backed securities										U.S. agency securities - excluding mortgage-backed securities	$	1,077,672	$	1,078,820	$	—	$	—
Residential mortgage-backed securities:										Residential mortgage-backed securities:
Government agency mortgage-backed securities		$	783	$	816	$	932	$	957	Government agency mortgage-backed securities	1,371,347		1,366,830		5,701		5,664
Government agency collateralized mortgage obligation		246,689		246,323		50,888		50,300		Government agency collateralized mortgage obligation	1,992,224		1,979,288		197,978		198,051
Private-label collateralized mortgage obligation		27,385		27,741		23,988		23,945		Private-label collateralized mortgage obligation	1,583		1,593		20,544		20,687
Commercial mortgage-backed securities:	Commercial mortgage-backed securities:									Commercial mortgage-backed securities:
Government agency mortgage-backed securities										Government agency mortgage-backed securities	396,500		395,882		—		—
Government agency collateralized mortgage obligation		—		—		23,817		22,752		Government agency collateralized mortgage obligation	218,078		217,696		—		—
Private-label collateralized mortgage obligation		363,782		380,780		—		—		Private-label collateralized mortgage obligation	253,293		265,322		164,214		182,536
Municipal bonds:										Municipal bonds:
Tax-exempt										Tax-exempt	1,289,545		1,297,012		246,159		270,359
Taxable										Taxable	395,246		394,585		15,307		16,002
Asset backed securities:										Asset backed securities:
Government sponsored student loan pools		258,623		254,257		260,050		259,224		Government sponsored student loan pools	237,537		237,188		248,848		245,716
Securities Held-to-Maturity:
Collateralized mortgage obligations		—		—		73		72

Total securities		$	897,262	$	909,917	$	359,748	$	357,250	Total securities	$	7,233,025	$	7,234,216	$	898,751	$	939,015

Loan Portfolio

Our ~~primary source of income is derived from interest earned on loans. Our~~ loan portfolio consists primarily of loans secured by real estate and, ~~mortgage warehouse~~as discussed further below, loans ~~as well as~~secured by bitcoin which are included in the commercial and industrial ~~loans.~~loan segment. Our loan customers primarily consist of small- to

Table of Contents

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, and are complemented by our relatively lower risk residential real estate loans to individuals. Our commercial real estate, multi-family real estate, ~~construction~~ and ~~commercial and industrial~~construction lending activities are ~~principally~~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. 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 digital currency service provider, 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, the Bank also provides loans collateralized by bitcoin to digital currency industry companies for corporate treasury and other business purposes, which we refer to as SEN Leverage indirect lending. In the 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 $254.5 million and $77.2 million at September 30, 2021 and December 31, 2020, respectively, and is included in the commercial and industrial loan segment.

The following table summarizes our loan portfolio by loan segment as of the dates indicated:

COMPOSITION OF LOAN PORTFOLIO


	September 30, 2021				December 31, 2020
	Amount		Percent		Amount		Percent

	(Dollars in thousands)
Real estate:
One-to-four family	$	119,817	14.7	%	$	187,855	25.0	%
Multi-family	54,636		6.7	%	77,126		10.3	%
Commercial	250,295		30.7	%	301,901		40.2	%
Construction	6,046		0.7	%	6,272		0.8	%
Commercial and industrial	254,624		31.2	%	78,909		10.5	%

Reverse mortgage and other	1,385		0.2	%	1,495		0.2	%
Mortgage warehouse	128,975		15.8	%	97,903		13.0	%
Total gross loans held-for-investment	815,778		100.0	%	751,461		100.0	%
Deferred fees, net	883				2,206
Total loans held-for-investment	816,661				753,667
Allowance for loan losses	(6,916)				(6,916)
Total net loans held-for-investment	$	809,745			$	746,751
Loans held-for-sale(1)	$	818,447			$	865,961

________________________

(1)Loans held-for-sale are comprised entirely of mortgage warehouse loans for all periods presented.

September 30,
2019 December 31,
2018
Amount Percent Amount Percent

(Dollars in thousands)
Real estate:
One-to-four family $ 212,440
30.6 % $ 190,885
32.0 %
Multi-family 77,901
11.2 % 40,584
6.8 %
Commercial 322,733
46.4 % 309,655
51.9 %
Construction 3,986
0.6 % 3,847
0.6 %
Commercial and industrial 14,563
2.1 % 8,586
1.4 %
Consumer and other 76
0.0 % 150
0.0 %
Reverse mortgage 1,629
0.2 % 1,742
0.3 %
Mortgage warehouse 61,856
8.9 % 41,586
7.0 %
Total gross loans held-for-investment 695,184
100.0 % 597,035
100.0 %
Deferred fees, net 2,997
2,469

Total loans held-for-investment 698,181
599,504

Allowance for loan losses (6,191 ) (6,723 )
Total net loans held-for-investment $ 691,990
$ 592,781

Loans held-for-sale $ 311,410
$ 350,636

Table of Contents

The repayment of loans is a source of additional liquidity for ~~us.~~the Bank. The following table details maturities and sensitivity to interest rate changes for our ~~loan portfolio~~loans held-for-investment at September 30, ~~2019:~~2021:

LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES


	September 30, 2019									September 30, 2021
	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		Total

	(Dollars in thousands)									(Dollars in thousands)
Real estate:									Real estate:
One-to-four family	$	7	$	835	$	211,598	$	212,440	One-to-four family	$	32	$	666	$	119,119	$	119,817
Multi-family	1,255		31,097		45,549		77,901		Multi-family	—		30,368		24,268		54,636
Commercial	38,265		128,332		156,136		322,733		Commercial	35,904		147,744		66,647		250,295
Construction	3,870		116		—		3,986		Construction	3,482		2,564		—		6,046
Commercial and industrial	12,515		2,048		—		14,563		Commercial and industrial	254,624		—		—		254,624
Consumer and other	76		—		—		76
Reverse mortgage	—		—		1,629		1,629

Reverse mortgage and other									Reverse mortgage and other	—		—		1,385		1,385
Mortgage warehouse	61,856		—		—		61,856		Mortgage warehouse	128,975		—		—		128,975
Total gross loans held-for-investment	$	117,844	$	162,428	$	414,912	$	695,184	Total gross loans held-for-investment	$	423,017	$	181,342	$	211,419	$	815,778
Amounts with fixed rates	$	87,638	$	129,680	$	83,893	$	301,211	Amounts with fixed rates	$	300,347	$	160,610	$	19,841	$	480,798
Amounts with floating rates	$	30,206	$	32,748	$	331,019	$	393,973	Amounts with floating rates	$	122,670	$	20,732	$	191,578	$	334,980

Nonperforming Assets


	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,				Nine Months Ended September 30,
	2019			2018			2019			2018				2021		2020		2021		2020
Net income	$	6,656		$	6,279		$	21,248		$	14,313		Net income	$	23,492	$	7,060	$	57,137	$	16,919
Other comprehensive income (loss):													Other comprehensive income (loss):
Change in net unrealized gain (loss) on available-for-sale securities	6,983			403			15,152			(1,333		)
Change in net unrealized (loss) gain on available-for-sale securities													Change in net unrealized (loss) gain on available-for-sale securities	(16,019)		13,557		(33,891)		29,434
Less: Reclassification adjustment for net gain included in net income													Less: Reclassification adjustment for net gain included in net income	(5,182)		—		(5,182)		(3,753)
Income tax effect	(1,997		)	(113		)	(4,332		)	367			Income tax effect	6,019		(3,898)		10,960		(7,366)
Unrealized gain (loss) on available-for-sale securities, net of tax	4,986			290			10,820			(966		)
Change in net unrealized gain on derivative assets	5,950			98			10,348			482
Unrealized (loss) gain on available-for-sale securities, net of tax													Unrealized (loss) gain on available-for-sale securities, net of tax	(15,182)		9,659		(28,113)		18,315
Change in net unrealized (loss) gain on derivative assets													Change in net unrealized (loss) gain on derivative assets	(1,234)		(1,187)		(16,768)		25,010
Less: Reclassification adjustment for net gain included in net income													Less: Reclassification adjustment for net gain included in net income	(516)		(516)		(1,530)		(1,197)
Income tax effect	(1,701		)	(27		)	(2,957		)	(147		)	Income tax effect	471		472		5,093		(6,831)
Unrealized gain on derivative instruments, net of tax	4,249			71			7,391			335
Other comprehensive income (loss)	9,235			361			18,211			(631		)
Unrealized (loss) gain on derivative instruments, net of tax													Unrealized (loss) gain on derivative instruments, net of tax	(1,279)		(1,231)		(13,205)		16,982
Other comprehensive (loss) income													Other comprehensive (loss) income	(16,461)		8,428		(41,318)		35,297
Total comprehensive income	$	15,891		$	6,640		$	39,459		$	13,682		Total comprehensive income	$	7,031	$	15,488	$	15,819	$	52,216


	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)
September 30, 2021

U.S. agency securities - excluding mortgage-backed securities	$	536,910	$	(4,772)	$	—	$	—	$	536,910	$	(4,772)
Residential mortgage-backed securities:
Government agency mortgage-backed securities	1,246,443		(4,764)		71		—		1,246,514		(4,764)
Government agency collateralized mortgage obligation	1,738,718		(14,869)		728		(8)		1,739,446		(14,877)
Private-label collateralized mortgage obligation	—		—		445		(16)		445		(16)
Commercial mortgage-backed securities:
Government agency mortgage-backed securities	201,713		(1,613)		—		—		201,713		(1,613)
Government agency collateralized mortgage obligation	55,101		(614)		—		—		55,101		(614)
Private-label collateralized mortgage obligation	35,582		(227)		7,256		(117)		42,838		(344)
Municipal bonds:
Tax-exempt	915,726		(14,095)		—		—		915,726		(14,095)
Taxable	300,313		(2,546)		—		—		300,313		(2,546)
Asset backed securities:
Government sponsored student loan pools	110,746		(452)		41,725		(231)		152,471		(683)
	$	5,141,252	$	(43,952)	$	50,225	$	(372)	$	5,191,477	$	(44,324)



	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)
September 30, 2019
Residential mortgage-backed securities:
Government agency collateralized mortgage obligation	149,711		(852		)	11,210		(53		)	160,921		(905		)
Private-label collateralized mortgage obligation	60		—			15,976		(211		)	16,036		(211		)
Asset backed securities:
Government sponsored student loan pools	145,165		(2,388		)	109,092		(1,978		)	254,257		(4,366		)
	$	294,936	$	(3,240	)	$	136,278	$	(2,242	)	$	431,214	$	(5,482	)
December 31, 2018
Residential mortgage-backed securities:
Government agency collateralized mortgage obligation	$	9,952	$	(58	)	$	29,450	$	(567	)	$	39,402	$	(625	)
Private-label collateralized mortgage obligation	19,061		(80		)	1,703		(27		)	20,764		(107		)
Commercial mortgage-backed securities:
Government agency collateralized mortgage obligation	—		—			22,752		(1,065		)	22,752		(1,065		)
Asset backed securities:
Government sponsored student loan pools	219,169		(1,014		)	—		—			219,169		(1,014		)
	$	248,182	$	(1,152	)	$	53,905	$	(1,659	)	$	302,087	$	(2,811	)


	Available-for-sale securities
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

	(Dollars in thousands)
December 31, 2020


Residential mortgage-backed securities:
Government agency mortgage-backed securities	$	5,165	$	(55)	$	—	$	—	$	5,165	$	(55)
Government agency collateralized mortgage obligation	120,912		(172)		56,976		(126)		177,888		(298)
Private-label collateralized mortgage obligation	290		(7)		9,950		(249)		10,240		(256)







Asset backed securities:
Government sponsored student loan pools	—		—		240,825		(3,149)		240,825		(3,149)
	$	126,367	$	(234)	$	307,751	$	(3,524)	$	434,118	$	(3,758)



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.


	Available-for-sale securities
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

	(Dollars in thousands)
September 30, 2021

U.S. agency securities - excluding mortgage-backed securities	$	1,077,672	$	5,920	$	(4,772)	$	1,078,820
Residential mortgage-backed securities:
Government agency mortgage-backed securities	1,371,347		247		(4,764)		1,366,830
Government agency collateralized mortgage obligation	1,992,224		1,941		(14,877)		1,979,288
Private-label collateralized mortgage obligation	1,583		26		(16)		1,593
Commercial mortgage-backed securities:
Government agency mortgage-backed securities	396,500		995		(1,613)		395,882
Government agency collateralized mortgage obligation	218,078		232		(614)		217,696
Private-label collateralized mortgage obligation	253,293		12,373		(344)		265,322
Municipal bonds:
Tax-exempt	1,289,545		21,562		(14,095)		1,297,012
Taxable	395,246		1,885		(2,546)		394,585
Asset backed securities:
Government sponsored student loan pools	237,537		334		(683)		237,188
	$	7,233,025	$	45,515	$	(44,324)	$	7,234,216



	Held-to-maturity securities
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value

	(Dollars in thousands)
September 30, 2019
Collateralized mortgage obligations	$	—	$	—	$	—		$	—
December 31, 2018
Collateralized mortgage obligations	$	73	$	—	$	(1	)	$	72


~~(1)~~	Loans held-for-sale included $306.7 million, and $211.0 million of mortgage warehouse loans at September 30, 2019 and December 31, 2018, respectively. At December 31, 2018, loans held-for-sale also included $125.2 million of business loans that were sold in March 2019, discussed in “Note 1—Nature of Business and Summary of Significant Accounting Policies”.


	Three Months Ended September 30, 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, June 30, 2021	$	1,259	$	743	$	2,938	$	512	$	1,245	$	11	$	208	$	6,916
Charge-offs	—		—		—		—		—		—		—		—
Recoveries	—		—		—		—		—		—		—		—
Provision for loan losses	(131)		(103)		(440)		91		211		1		371		—
Balance, September 30, 2021	$	1,128	$	640	$	2,498	$	603	$	1,456	$	12	$	579	$	6,916


	Three Months Ended September 30, 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, June 30, 2020	$	1,514	$	822	$	1,947	$	1,018	$	763	$	40	$	659	$	6,763
Charge-offs	—		—		—		—		—		—		—		—
Recoveries	—		—		—		—		—		—		—		—
Provision for loan losses	(83)		23		(18)		309		14		1		(246)		—
Balance, September 30, 2020	$	1,431	$	845	$	1,929	$	1,327	$	777	$	41	$	413	$	6,763


	Nine Months Ended September 30, 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	(117)		(238)		688		13		(475)		(27)		156		—
Balance, September 30, 2021	$	1,128	$	640	$	2,498	$	603	$	1,456	$	12	$	579	$	6,916


	Nine Months Ended September 30, 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	(17)		—		—		—		—		—		—		(17)
Recoveries	—		—		—		—		—		—		—		—
Provision for loan losses	(603)		192		(862)		1,231		465		3		163		589
Balance, September 30, 2020	$	1,431	$	845	$	1,929	$	1,327	$	777	$	41	$	413	$	6,763



	Three Months Ended September 30, 2019
	One-to -Four Family		Multi- Family			Commercial Real Estate			Construction		Commercial and Industrial		Consumer and Other		Reverse Mortgage		Mortgage Warehouse			Total

	(Dollars in thousands)
Balance, June 30, 2019	$	1,769	$	879		$	3,761		$	79	$	237	$	1	$	36	$	287		$	7,049
Charge-offs	—		—			—			—		—		—		—		—			—
Recoveries	—		—			—			—		—		—		—		—			—
Provision for loan losses	282		(226		)	(970		)	17		75		—		1		(37		)	(858		)
Balance, September 30, 2019	$	2,051	$	653		$	2,791		$	96	$	312	$	1	$	37	$	250		$	6,191



	Three Months Ended September 30, 2018
	One-to -Four Family			Multi- Family		Commercial Real Estate		Construction		Commercial and Industrial		Consumer and Other		Reverse Mortgage		Mortgage Warehouse		Total

	(Dollars in thousands)
Balance, June 30, 2018	$	1,782		$	200	$	4,455	$	130	$	1,424	$	1	$	46	$	288	$	8,326
Charge-offs	(6		)	—		—		—		—		—		—		—		(6		)
Recoveries	—			—		—		—		68		—		—		—		68
Provision for loan losses	—			—		—		—		—		—		—		—		—
Balance, September 30, 2018	$	1,776		$	200	$	4,455	$	130	$	1,492	$	1	$	46	$	288	$	8,388



	Nine Months Ended September 30, 2019
	One-to -Four Family			Multi- Family		Commercial Real Estate			Construction			Commercial and Industrial		Consumer and Other		Reverse Mortgage			Mortgage Warehouse		Total

	(Dollars in thousands)
Balance, December 31, 2018	$	1,848		$	483	$	3,854		$	98		$	156	$	1	$	54		$	229	$	6,723
Charge-offs	(93		)	—		—			—			—		—		—			—		(93		)
Recoveries	—			—		—			—			—		—		—			—		—
Provision for loan losses	296			170		(1,063		)	(2		)	156		—		(17		)	21		(439		)
Balance, September 30, 2019	$	2,051		$	653	$	2,791		$	96		$	312	$	1	$	37		$	250	$	6,191



	Nine Months Ended September 30, 2018
	One-to -Four Family			Multi- Family			Commercial Real Estate			Construction			Commercial and Industrial		Consumer and Other			Reverse Mortgage		Mortgage Warehouse			Total

	(Dollars in thousands)
Balance, December 31, 2017	$	1,991		$	226		$	4,711		$	140		$	677	$	18		$	41	$	361		$	8,165
Charge-offs	(6		)	—			—			—			—		—			—		—			(6		)
Recoveries	—			—			—			—			80		—			1		—			81
Provision for loan losses	(209		)	(26		)	(256		)	(10		)	735		(17		)	4		(73		)	148
Balance, September 30, 2018	$	1,776		$	200		$	4,455		$	130		$	1,492	$	1		$	46	$	288		$	8,388



	Nine Months Ended September 30, 2019
	Number of Loans	Pre- Modifications Outstanding Recorded Investment		Post- Modifications Outstanding Recorded Investment

	(Dollars in thousands)
Troubled debt restructurings:
Real estate loans:
One-to-four family	2	$	1,018	$	1,114
Commercial and industrial	1	494		494
Total	3	$	1,512	$	1,608



	Nine Months Ended September 30, 2019			Year Ended December 31, 2018

	(Dollars in thousands)
Amount outstanding at period-end	$	20,000		—
Weighted average interest rate at period-end	2.08		%	—
Maximum month-end balance during the period	$	20,000		$	15,000
Average balance outstanding during the period	$	10,322		$	1,274
Weighted average interest rate during the period	2.23		%	1.49		%


	Nine Months Ended September 30, 2021			Year Ended December 31, 2020

	(Dollars in thousands)
Amount outstanding at period-end	$	—		$	—
Weighted average interest rate at period-end	—			—
Maximum month-end balance during the period	$	—		$	360,000
Average balance outstanding during the period	$	—		$	68,522
Weighted average interest rate during the period	0.19		%	0.50		%


	Carrying Amount of the Hedged Asset (Liability)				Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of Hedged Assets/(Liabilities)
	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020

	(Dollars in thousands)
Line Item in the Statement of Financial Condition of Hedged Item:
Securities available-for-sale	$	714,943	$	15,367	$	(1,028)	$	(278)



	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 September 30,						Three Months Ended September 30,
	2019			2018			2019			2018

	(Dollars in thousands)						(Dollars in thousands)
Derivatives designated as hedging instruments:
Cash flow hedge interest rate floor	$	(11,413	)	$	—	Interest income - Other interest earning assets	$	(154	)	$	—
Cash flow hedge interest rate floor	16,839			—		Interest income - Securities	(374		)	—
Cash flow hedge interest rate cap	(35		)	70		Interest expense - Subordinated debentures	(31		)	(28		)


	Location and Amount of Gain or (Loss) Recognized in Income on Fair Value Hedging Relationships
	Three Months Ended September 30,
	2021				2020
	Interest income - Taxable securities		Interest income - Tax-exempt securities		Interest income - Taxable securities		Interest income - Tax-exempt securities

	(Dollars in thousands)
Total interest income presented in the statement of operations in which the effects of fair value hedges are recorded	$	14,000	$	5,014	$	3,746	$	1,720
Effects of fair value hedging relationships
Interest rate contracts:
Hedged items	$	(105)	$	—	$	(86)	$	—
Derivatives designated as hedging instruments	74		—		72		—
Amount excluded from effectiveness testing recognized in earnings based on amortization approach	—		(625)		—		—



	September 30, 2019
~~Weighted-average remaining lease term~~	~~3.2 years~~
~~Weighted-average discount rate~~	~~4.21~~	%



	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019

	(Dollars in thousands)
Operating lease cost	$	398		$	1,156
Variable lease cost	13			32
Short-term lease cost⁽¹⁾	18			144
Sublease income	(32		)	(32		)
Total lease cost	$	397		$	1,300



Operating leases	September 30, 2019

Period / Year Ending December 31,	(Dollars in thousands)
2019	$	410
2020	1,676
2021	1,748
2022	1,548
2023	215
2024	26
Total lease payments	5,623
Less: imputed lease interest	(386		)
Total lease liabilities	$	5,237



	Nine Months Ended September 30, 2019

	(Dollars in thousands)
Cash paid for amounts included in the measurement of operating lease liabilities	$	1,113
Right-of-use assets obtained in exchange for new operating lease liabilities	6,599


	Number of Shares	Weighted-Average Grant Date Fair Value Per Share
Nonvested at January 1, 2021	58,690	$	15.61
Granted	31,788	$	121.61
Vested	(16,646)	$	14.46
Forfeited	(3,340)	$	39.59
Nonvested at September 30, 2021	70,492	$	62.54


	Actual				Minimum capital adequacy(1)				To be well capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(Dollars in thousands)
September 30, 2021
The Company
Tier 1 leverage ratio	$	1,082,862	8.71	%	$	497,134	4.00	%	N/A		N/A
Common equity tier 1 capital ratio	873,676		40.98	%	95,928		4.50	%	N/A		N/A
Tier 1 risk-based capital ratio	1,082,862		50.80	%	127,904		6.00	%	N/A		N/A
Total risk-based capital ratio	1,090,012		51.13	%	170,539		8.00	%	N/A		N/A
The Bank
Tier 1 leverage ratio	1,023,689		8.24	%	497,201		4.00	%	$	621,501	5.00	%
Common equity tier 1 capital ratio	1,023,689		48.04	%	95,892		4.50	%	138,511		6.50	%
Tier 1 risk-based capital ratio	1,023,689		48.04	%	127,857		6.00	%	170,475		8.00	%
Total risk-based capital ratio	1,030,839		48.37	%	170,475		8.00	%	213,094		10.00	%



	Actual				Minimum capital adequacy				To be well capitalized
	Amount		Ratio		Amount		Ratio		Amount	Ratio

	(Dollars in thousands)
December 31, 2018
The Company
Tier 1 leverage ratio	$	208,807	9.00	%	$	92,812	4.00	%	N/A	N/A
Common equity tier 1 capital ratio	193,307		23.10	%	37,650		4.50	%	N/A	N/A
Tier 1 risk-based capital ratio	208,807		24.96	%	50,200		6.00	%	N/A	N/A
Total risk-based capital ratio	215,638		25.77	%	66,933		8.00	%	N/A	N/A
The Bank
Tier 1 leverage ratio	197,175		8.51	%	92,637		4.00	%	115,796	5.00	%
Common equity tier 1 capital ratio	197,175		23.68	%	37,472		4.50	%	54,127	6.50	%
Tier 1 risk-based capital ratio	197,175		23.68	%	49,963		6.00	%	66,618	8.00	%
Total risk-based capital ratio	204,006		24.50	%	66,618		8.00	%	83,272	10.00	%


	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)
September 30, 2021
Assets

Securities available-for-sale	$	—	$	7,234,216	$	—	$	7,234,216
Derivative assets	—		37,210		—		37,210
	$	—	$	7,271,426	$	—	$	7,271,426


	Carrying Amount		Fair Value Measurements Using
			Level 1		Level 2		Level 3		Total

	(Dollars in thousands)
September 30, 2021
Financial assets:
Cash and due from banks	$	168,628	$	168,628	$	—	$	—	$	168,628
Interest earning deposits	3,615,860		3,615,860		—		—		3,615,860

Loans held-for-sale	818,447		—		818,447		—		818,447
Loans held-for-investment, net	809,745		—		—		811,295		811,295
Accrued interest receivable	32,154		190		7,104		24,860		32,154
Financial liabilities:
Deposits	$	11,662,520	$	—	$	11,716,200	$	—	$	11,716,200




Subordinated debentures, net	15,841		—		15,541		—		15,541
Accrued interest payable	107		—		107		—		107


	September 30, 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	$	119,817	52	%	14.7	%
Multi-family	54,636		48	%	6.7	%
Commercial industry sectors:
Retail	75,693		53	%	9.3	%
Hospitality	46,279		44	%	5.7	%
Office	47,780		65	%	5.9	%
Industrial	38,584		57	%	4.7	%
Other	41,959		45	%	5.1	%
Total commercial	250,295		53	%	30.7	%
Construction	6,046		58	%	0.7	%
Other	384,984		N/A		47.2	%
Total gross loans held-for-investment	$	815,778	N/A		100.0	%


•	~~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.


•	~~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.