UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ending September 30, 2019March 31, 2022
OR
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☐ | 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)
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| | | | | | | |
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)
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| | | | | | | |
Securities Registered Pursuant to Section 12(b) of the Act: |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock, par value $0.01 per share | SI | New York Stock Exchange |
Depositary Shares, Each Representing a 1/40th Interest in a Share of 5.375% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A | SI PRA | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange actAct of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☐☒ No☒☐
Indicate by check mark whether the registrant has submitted electronically 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.
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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,May 2, 2022, the registrant had 17,775,16031,633,815 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
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)
|
| | | | | | | | |
| | 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 |
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| | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
ASSETS | | | | |
Cash and due from banks | | $ | 207,304 | | | $ | 208,193 | |
Interest earning deposits in other banks | | 1,178,205 | | | 5,179,753 | |
Cash and cash equivalents | | 1,385,509 | | | 5,387,946 | |
| | | | |
Securities available-for-sale, at fair value | | 9,463,494 | | | 8,625,259 | |
Securities held-to-maturity, at amortized cost (fair value of $2,578,976 at March 31, 2022) | | 2,751,625 | | | — | |
Loans held-for-sale, at lower of cost or fair value | | 937,140 | | | 893,194 | |
Loans held-for-investment, net of allowance for loan losses of $4,442 and $6,916 at March 31, 2022 and December 31, 2021, respectively | | 739,014 | | | 887,304 | |
Federal home loan and federal reserve bank stock, at cost | | 61,719 | | | 34,010 | |
Accrued interest receivable | | 62,573 | | | 40,370 | |
Premises and equipment, net | | 1,678 | | | 3,008 | |
Intangible assets | | 189,977 | | | — | |
Derivative assets | | 46,415 | | | 34,056 | |
Other assets | | 158,869 | | | 100,348 | |
Total assets | | $ | 15,798,013 | | | $ | 16,005,495 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Deposits: | | | | |
Noninterest bearing demand accounts | | $ | 13,323,535 | | | $ | 14,213,472 | |
Interest bearing accounts | | 72,627 | | | 77,156 | |
| | | | |
Total deposits | | 13,396,162 | | | 14,290,628 | |
Federal home loan bank advances | | 800,000 | | | — | |
| | | | |
Subordinated debentures, net | | 15,848 | | | 15,845 | |
Accrued expenses and other liabilities | | 39,507 | | | 90,186 | |
Total liabilities | | 14,251,517 | | | 14,396,659 | |
Commitments and contingencies | | 0 | | 0 |
Preferred stock, $0.01 par value—authorized 10,000 shares; $1,000 per share liquidation preference, 200 shares issued and outstanding at March 31, 2022 and December 31, 2021 | | 2 | | | 2 | |
Class A common stock, $0.01 par value—authorized 125,000 shares; 31,630 and 30,403 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | | 316 | | | 304 | |
Class B non-voting common stock, $0.01 par value—authorized 25,000 shares; no shares issued and outstanding at March 31, 2022 and December 31, 2021 | | — | | | — | |
Additional paid-in capital | | 1,553,547 | | | 1,421,592 | |
Retained earnings | | 218,558 | | | 193,860 | |
Accumulated other comprehensive loss | | (225,927) | | | (6,922) | |
Total shareholders’ equity | | 1,546,496 | | | 1,608,836 | |
Total liabilities and shareholders’ equity | | $ | 15,798,013 | | | $ | 16,005,495 | |
See accompanying notes to unaudited consolidated financial statements
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended March 31, |
| | 2019 | | 2018 | | 2019 | | 2018 | | | | 2022 | | 2021 |
Interest income | | | | | | | | | Interest income | | | | | |
Loans, including fees | | $ | 13,574 |
| | $ | 12,726 |
| | $ | 38,369 |
| | $ | 35,357 |
| Loans, including fees | | | $ | 18,287 | | | $ | 16,597 | |
Securities | | 6,510 |
| | 1,941 |
| | 14,044 |
| | 5,016 |
| |
Taxable securities | | Taxable securities | | | 17,779 | | | 3,592 | |
Tax-exempt securities | | Tax-exempt securities | | | 13,184 | | | 1,695 | |
Other interest earning assets | | 1,183 |
| | 3,921 |
| | 8,038 |
| | 10,386 |
| Other interest earning assets | | | 1,385 | | | 1,279 | |
Dividends and other | | 121 |
| | 119 |
| | 472 |
| | 392 |
| Dividends and other | | | 203 | | | 143 | |
Total interest income | | 21,388 |
| | 18,707 |
| | 60,923 |
| | 51,151 |
| Total interest income | | | 50,838 | | | 23,306 | |
Interest expense | | | | | | | | | Interest expense | | | |
Deposits | | 2,385 |
| | 400 |
| | 3,920 |
| | 1,386 |
| Deposits | | | 21 | | | 46 | |
Federal home loan bank advances | | 172 |
| | — |
| | 172 |
| | 19 |
| Federal home loan bank advances | | | 70 | | | — | |
Notes payable and other | | 117 |
| | 98 |
| | 702 |
| | 315 |
| |
Subordinated debentures | | 271 |
| | 239 |
| | 802 |
| | 671 |
| |
Subordinated debentures and other | | Subordinated debentures and other | | | 252 | | | 245 | |
Total interest expense | | 2,945 |
| | 737 |
| | 5,596 |
| | 2,391 |
| Total interest expense | | | 343 | | | 291 | |
Net interest income before provision for loan losses | | 18,443 |
| | 17,970 |
| | 55,327 |
| | 48,760 |
| Net interest income before provision for loan losses | | | 50,495 | | | 23,015 | |
(Reversal of) provision for loan losses | | (858 | ) | | — |
| | (439 | ) | | 148 |
| |
Reversal of provision for loan losses | | Reversal of provision for loan losses | | | (2,474) | | | — | |
Net interest income after provision for loan losses | | 19,301 |
| | 17,970 |
| | 55,766 |
| | 48,612 |
| Net interest income after provision for loan losses | | | 52,969 | | | 23,015 | |
Noninterest income | | | | | | | | | Noninterest income | | | |
Deposit related fees | | Deposit related fees | | | 8,968 | | | 7,124 | |
Mortgage warehouse fee income | | 373 |
| | 393 |
| | 1,085 |
| | 1,152 |
| Mortgage warehouse fee income | | | 651 | | | 954 | |
Service fees related to off-balance sheet deposits | | 283 |
| | 573 |
| | 1,454 |
| | 1,683 |
| |
Deposit related fees | | 1,657 |
| | 688 |
| | 3,815 |
| | 1,655 |
| |
Gain on sale of loans | | 248 |
| | 416 |
| | 593 |
| | 699 |
| |
Gain on sale of branch, net | | — |
| | — |
| | 5,509 |
| | — |
| |
| Loss on sale of securities, net | | Loss on sale of securities, net | | | (605) | | | — | |
| Other income | | 38 |
| | 114 |
| | 168 |
| | 383 |
| Other income | | | 436 | | | 12 | |
Total noninterest income | | 2,599 |
| | 2,184 |
| | 12,624 |
| | 5,572 |
| Total noninterest income | | | 9,450 | | | 8,090 | |
Noninterest expense | | | | | | | | | Noninterest expense | | | |
Salaries and employee benefits | | 8,277 |
| | 7,259 |
| | 25,124 |
| | 21,335 |
| Salaries and employee benefits | | | 15,544 | | | 10,990 | |
Occupancy and equipment | | 892 |
| | 742 |
| | 2,777 |
| | 2,251 |
| Occupancy and equipment | | | 586 | | | 614 | |
| Communications and data processing | | 1,298 |
| | 703 |
| | 3,458 |
| | 2,149 |
| Communications and data processing | | | 2,762 | | | 1,621 | |
Professional services | | 889 |
| | 1,507 |
| | 3,407 |
| | 3,918 |
| Professional services | | | 2,954 | | | 1,717 | |
Federal deposit insurance | | 39 |
| | 214 |
| | 382 |
| | 1,078 |
| Federal deposit insurance | | | 1,762 | | | 2,296 | |
Correspondent bank charges | | 288 |
| | 240 |
| | 868 |
| | 914 |
| Correspondent bank charges | | | 828 | | | 497 | |
Other loan expense | | 47 |
| | 57 |
| | 290 |
| | 198 |
| Other loan expense | | | 384 | | | 174 | |
Other real estate owned expense (recovery) | | 75 |
| | (10 | ) | | 80 |
| | 42 |
| |
Other general and administrative | | 806 |
| | 705 |
| | 2,432 |
| | 2,461 |
| Other general and administrative | | | 3,198 | | | 1,697 | |
Total noninterest expense | | 12,611 |
| | 11,417 |
| | 38,818 |
| | 34,346 |
| Total noninterest expense | | | 28,018 | | | 19,606 | |
Income before income taxes | | 9,289 |
| | 8,737 |
| | 29,572 |
| | 19,838 |
| Income before income taxes | | | 34,401 | | | 11,499 | |
Income tax expense | | 2,633 |
| | 2,458 |
| | 8,324 |
| | 5,525 |
| |
Income tax expense (benefit) | | Income tax expense (benefit) | | | 7,015 | | | (1,211) | |
Net income | | $ | 6,656 |
| | $ | 6,279 |
| | $ | 21,248 |
| | $ | 14,313 |
| Net income | | | 27,386 | | | 12,710 | |
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 | | | 2,688 | | | — | |
Net income available to common shareholders | | Net income available to common shareholders | | | $ | 24,698 | | | $ | 12,710 | |
Basic earnings per common share | | Basic earnings per common share | | | $ | 0.79 | | | $ | 0.56 | |
Diluted earnings per common share | | Diluted earnings per common share | | | $ | 0.79 | | | $ | 0.55 | |
Weighted average common shares outstanding: | | Weighted average common shares outstanding: | | | | | |
Basic | | 17,840 |
| | 17,808 |
| | 17,830 |
| | 16,113 |
| Basic | | | 31,219 | | | 22,504 | |
Diluted | | 18,246 |
| | 18,254 |
| | 18,252 |
| | 16,607 |
| Diluted | | | 31,401 | | | 23,010 | |
See accompanying notes to unaudited consolidated financial statements
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMELOSS
(In Thousands)
(Unaudited)
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| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Net income | | $ | 6,656 |
| | $ | 6,279 |
| | $ | 21,248 |
| | $ | 14,313 |
|
Other comprehensive income (loss): | | | | | | | | |
Change in net unrealized gain (loss) on available-for-sale securities | | 6,983 |
| | 403 |
| | 15,152 |
| | (1,333 | ) |
Income tax effect | | (1,997 | ) | | (113 | ) | | (4,332 | ) | | 367 |
|
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 |
|
Income tax effect | | (1,701 | ) | | (27 | ) | | (2,957 | ) | | (147 | ) |
Unrealized gain on derivative instruments, net of tax | | 4,249 |
| | 71 |
| | 7,391 |
| | 335 |
|
Other comprehensive income (loss) | | 9,235 |
| | 361 |
| | 18,211 |
| | (631 | ) |
Total comprehensive income | | $ | 15,891 |
| | $ | 6,640 |
| | $ | 39,459 |
| | $ | 13,682 |
|
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
Net income | | | | | | $ | 27,386 | | | $ | 12,710 | |
Other comprehensive income (loss): | | | | | | | | |
Change in net unrealized loss on available-for-sale securities | | | | | | (324,226) | | | (13,434) | |
Less: Reclassification adjustment for net loss included in net income | | | | | | 605 | | | — | |
Less: Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity | | | | | | 774 | | | — | |
Income tax effect | | | | | | 94,220 | | | 3,690 | |
Unrealized loss on available-for-sale securities, net of tax | | | | | | (228,627) | | | (9,744) | |
Change in net unrealized gain (loss) on derivative assets | | | | | | 14,603 | | | (7,460) | |
Less: Reclassification adjustment for net gain included in net income | | | | | | (951) | | | (504) | |
Income tax effect | | | | | | (4,030) | | | 2,189 | |
Unrealized gain (loss) on derivative instruments, net of tax | | | | | | 9,622 | | | (5,775) | |
Other comprehensive loss | | | | | | (219,005) | | | (15,519) | |
Total comprehensive loss | | | | | | $ | (191,619) | | | $ | (2,809) | |
See accompanying notes to unaudited consolidated financial statements
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In Thousands, Except Share Data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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) | |
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| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Issuance of stock, net | | — | | | — | | | 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, net of shares withheld for employee taxes | | — | | | — | | | 124,848 | | | 1 | | | — | | | — | | | (1,700) | | | — | | | — | | | (1,699) | |
Issuance of share-based awards, net of shares withheld for employee taxes | | — | | | — | | | 294 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2021 | | — | | | $ | — | | | 24,819,968 | | | $ | 248 | | | — | | | $ | — | | | $ | 551,798 | | | $ | 131,058 | | | $ | 30,517 | | | $ | 713,621 | |
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| | 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | Class A Common Stock | | Class B Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders’ Equity |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
Balance at January 1, 2022 | | 200,000 | | | $ | 2 | | | 30,402,706 | | | $ | 304 | | | — | | | $ | — | | | $ | 1,421,592 | | | $ | 193,860 | | | $ | (6,922) | | | $ | 1,608,836 | |
Total comprehensive income (loss), net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 27,386 | | | (219,005) | | | (191,619) | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Dividends on preferred stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,688) | | | — | | | (2,688) | |
Issuance of stock, net | | — | | | — | | | 1,221,217 | | | 12 | | | — | | | — | | | 131,505 | | | — | | | — | | | 131,517 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | — | | | — | | | — | | | — | | | 729 | | | — | | | — | | | 729 | |
Exercise of stock options, net of shares withheld for employee taxes | | — | | | — | | | 1,840 | | | — | | | — | | | — | | | 30 | | | — | | | — | | | 30 | |
Issuance of share-based awards, net of shares withheld for employee taxes | | — | | | — | | | 4,552 | | | — | | | — | | | — | | | (309) | | | — | | | — | | | (309) | |
| | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2022 | | 200,000 | | | $ | 2 | | | 31,630,315 | | | $ | 316 | | | — | | | $ | — | | | $ | 1,553,547 | | | $ | 218,558 | | | $ | (225,927) | | | $ | 1,546,496 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
See accompanying notes to unaudited consolidated financial statements
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF 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 |
|
See accompanying notes to unaudited consolidated financial statements
SILVERGATE CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| | | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | 2019 | | 2018 | | | 2022 | | 2021 |
Cash flows from operating activities | | | | | Cash flows from operating activities | | | | |
Net income | | $ | 21,248 |
| | $ | 14,313 |
| Net income | | $ | 27,386 | | | $ | 12,710 | |
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 | | 815 | | | 644 | |
Amortization of securities premiums and discounts, net | | 1,261 |
| | 308 |
| Amortization of securities premiums and discounts, net | | 40,503 | | | 1,212 | |
Amortization of loan premiums and discounts and deferred loan origination fees and costs, net | | 666 |
| | 280 |
| Amortization of loan premiums and discounts and deferred loan origination fees and costs, net | | (253) | | | 250 | |
Stock-based compensation | | 66 |
| | 97 |
| Stock-based compensation | | 729 | | | 290 | |
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 | ) | |
Reversal of provision for loan losses | | Reversal of provision for loan losses | | (2,474) | | | — | |
Originations of loans held-for-sale | | Originations of loans held-for-sale | | (2,972,952) | | | (3,384,431) | |
Proceeds from sales of loans held-for-sale | | 2,235,558 |
| | 2,112,629 |
| Proceeds from sales of loans held-for-sale | | 2,951,944 | | | 3,353,164 | |
Gain on sale of branch, net | | (5,509 | ) | | — |
| |
| Other gains, net | | Other gains, net | | (430) | | | (1,141) | |
Other, net | | 2,108 |
| | (67 | ) | Other, net | | 675 | | | 891 | |
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 | | 15,480 | | | (4,119) | |
Accrued expenses and other liabilities | | (617 | ) | | 3,051 |
| Accrued expenses and other liabilities | | (47,782) | | | 469 | |
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 | | 13,641 | | | (20,061) | |
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 | | (3,303,782) | | | (817,734) | |
Proceeds from sale of securities available-for-sale | | 31,088 |
| | — |
| Proceeds from sale of securities available-for-sale | | 432,059 | | | — | |
Loan originations and payments, net | | (128,832 | ) | | (23,126 | ) | |
Proceeds from sale of loans held-for-sale previously classified as held-for-investment | | 41,963 |
| | 20,532 |
| |
Proceeds from paydowns and maturities of securities available-for-sale | | Proceeds from paydowns and maturities of securities available-for-sale | | 131,521 | | | 21,403 | |
Purchases of securities held-to-maturity | | Purchases of securities held-to-maturity | | (1,249,507) | | | — | |
Proceeds from paydowns and maturities of securities held-to-maturity | | Proceeds from paydowns and maturities of securities held-to-maturity | | 26,665 | | | — | |
Loan originations/purchases and payments, net | | Loan originations/purchases and payments, net | | (20,405) | | | 18,112 | |
Proceeds from sale of loans, net | | Proceeds from sale of loans, net | | 149,070 | | | — | |
Purchase of federal home loan and federal reserve bank stock, net | | (603 | ) | | (2,308 | ) | Purchase of federal home loan and federal reserve bank stock, net | | (27,708) | | | — | |
Proceeds from sale of other real estate owned | | 77 |
| | 2,370 |
| |
Purchase of premises and equipment | | (942 | ) | | (1,484 | ) | Purchase of premises and equipment | | (274) | | | (32) | |
Proceeds from sale of branch, net of cash | | 32,555 |
| | — |
| |
Purchases of derivative contracts, net of proceeds | | (20,663 | ) | | — |
| |
Other, net | | 10 |
| | 38 |
| |
Payments to acquire intangible assets | | Payments to acquire intangible assets | | (58,403) | | | — | |
| Proceeds from (payments for) derivative contracts, net | | Proceeds from (payments for) derivative contracts, net | | 2,176 | | | (8,439) | |
| Net cash used in investing activities | | (616,027 | ) | | (116,135 | ) | Net cash used in investing activities | | (3,918,588) | | | (786,690) | |
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 | | (889,937) | | | 1,755,702 | |
Net change in interest bearing deposits | | 284,277 |
| | (82,256 | ) | Net change in interest bearing deposits | | (4,529) | | | (1,357) | |
Net change in federal home loan bank advances | | 20,000 |
| | (15,000 | ) | Net change in federal home loan bank advances | | 800,000 | | | — | |
Payments made on notes payable | | (857 | ) | | (857 | ) | |
| Proceeds from common stock issuance, net | | — |
| | 107,884 |
| Proceeds from common stock issuance, net | | (57) | | | 423,540 | |
Payment of deferred offering costs | | (384 | ) | | (429 | ) | |
Repurchase of common stock | | — |
| | (11,371 | ) | |
| Payments of preferred stock dividends | | Payments of preferred stock dividends | | (2,688) | | | — | |
Proceeds from stock option exercise | | — |
| | 87 |
| Proceeds from stock option exercise | | 30 | | | 261 | |
Taxes paid related to net share settlement of equity awards | | (158 | ) | | (796 | ) | Taxes paid related to net share settlement of equity awards | | (309) | | | (1,960) | |
Other, net | | 226 |
| | — |
| |
Net cash provided by financing activities | | 158,367 |
| | 241,698 |
| |
| Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | | (97,490) | | | 2,176,186 | |
Net (decrease) increase in cash and cash equivalents | | (514,162 | ) | | 152,658 |
| Net (decrease) increase in cash and cash equivalents | | (4,002,437) | | | 1,369,435 | |
Cash and cash equivalents, beginning of year | | 674,420 |
| | 797,668 |
| |
Cash and cash equivalents, end of year | | $ | 160,258 |
| | $ | 950,326 |
| |
Cash and cash equivalents, beginning of period | | Cash and cash equivalents, beginning of period | | 5,387,946 | | | 2,962,087 | |
Cash and cash equivalents, end of period | | Cash and cash equivalents, end of period | | $ | 1,385,509 | | | $ | 4,331,522 | |
Supplemental cash flow information: | | Supplemental cash flow information: | | | | |
Cash paid for interest | | Cash paid for interest | | $ | 454 | | | $ | 444 | |
Income taxes paid (refunded), net | | Income taxes paid (refunded), net | | 146 | | | (6) | |
Supplemental noncash disclosures: | | Supplemental noncash disclosures: | |
Transfers of securities from available-for-sale to held-to-maturity | | Transfers of securities from available-for-sale to held-to-maturity | | $ | 1,534,713 | | | $ | — | |
Common stock issued in exchange for assets acquired | | Common stock issued in exchange for assets acquired | | 131,574 | | | — | |
Loans held-for-investment transferred to loans held-for-sale | | Loans held-for-investment transferred to loans held-for-sale | | 22,938 | | | — | |
|
See accompanying notes to unaudited consolidated financial statements
SILVERGATE CAPITAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1—1—Nature of Business and Summary of Significant Accounting Policies
Nature of Business
The accompanying consolidated financial statements include the accounts of Silvergate Capital Corporation, a Maryland corporation, and its wholly-owned subsidiary, Silvergate Bank (the “Bank”), collectively referred to as (the “Company” or “Silvergate”).
The Bank was incorporatedCompany’s assets consist primarily of its investment in 1987 and commenced business in 1988 under the California Financial Code as an industrial bank. In February 2009 the Bank convertedand its charter to a California commercial bank, which gave itprimary activities are conducted through the added authority to accept demand deposits. At the same time, theBank. The Company also becameis a registered bank holding company underthat is subject to supervision by the federal Bank Holding Company Act. The Bank became a memberBoard of Governors of the Federal Reserve System in December 2012.(“Federal Reserve”). The Bank is subject to regulation by the California Department of Business OversightFinancial 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”) up to applicable legal limits..
On November 15, 2018, the Company and the Bank entered into a purchase and assumption agreement to sell the Bank’s retail branch located in San Marcos, California and business loan portfolio to HomeStreet Bank. The Company completed the sale in March 2019, which included the reduction of $115.4 million in loans and $74.5 million in deposits and resulted in a pre-tax gain on sale of $5.5 million.
Financial Statement Preparation and Presentation
The accompanying interim consolidated financial statements have been prepared by the Company, without 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 presentationstatement 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, 2018,2021, included in the Company’s prospectusAnnual Report on Form 10-K dated November 6, 2019 and filed with the SEC on November 8, 2019, relating to its initial public offering (“IPO”).February 28, 2022. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.
The consolidated financial statements include the accounts of the Company and all other entities in which it has a controlling financial interest. All significant intercompany accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company include its wholly owned subsidiaries. The accounting and reporting policies of the Company are based uponconform with GAAP and conform to predominant practices within the financial services industry.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s financial statements and the accompanying notes. Actual results could materially differ from those estimates.
Deferred Offering Costs
The Company capitalizes certain legal, 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.
AdoptedRecently Issued Accounting Pronouncements Not Yet Effective
In FebruaryJune 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-CreditInstruments—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, as of the ASU 2019-10 effective date, such as the Company to apply the standards related to CECL, until fiscal years beginning after December 15, 2022. For debt securities with other than temporary impairment (OTTI), the guidance will be applied prospectivelyprospectively. The new methodology replaces the other-than-temporary impairment model and requires the recognition of an allowance for existingreductions in a security’s fair value attributable to declines in credit quality, instead of a direct write-down of the security when a valuation decline is determined to be other-than-temporary. Existing purchased credit impaired (PCI) assets will be grandfathered and classified as purchased credit deteriorated (PCD) assets at the date of adoption. The asset will be grossed up for the allowance for expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit discount in interest income based on the yield such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance. For all other assets with the scope of CECL, the cumulative effect adjustment will be recognized in retained earnings as of the
beginning of the first reporting period in which the guidance is effective. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-CreditInstruments—Credit Losses, which clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. The amendment eliminates the accounting guidance for troubled debt restructurings by creditors in Subtopic 310-40, while enhancing disclosure requirements for certain loan refinancings and restructuring by creditors when a borrow is experiencing financial difficulty. In addition, the update requires public business entities to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination. In relation to the loan portfolio, the Company formed a CECL implementation committee in 2018 which prepared a project plan to migrate towards the adoption date. As part of the project plan, the Company contracted a third-party vendor to assist in the application and analysis of ASU 2016-13 as well as a third party vendor to perform an independent model validation. As part of this process, the Company has determined preliminary loan pool segmentation under CECL, as well as evaluated the key economic loss drivers for each segment. The Company 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 theis running this preliminary CECL model alongside the existing incurred loss methodologymethodology. 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.
disclosures.
In August 2018,March 2020, the FASB issued ASU 2018-13, Fair Value Measurement2020-04, Reference Rate Reform (Topic 820)848): Disclosure Framework-ChangesFacilitation of the Effects of Reference Rate Reform on Financial Reporting (or “ASU 2020-04”), which provides temporary, optional guidance to ease the Disclosure Requirementspotential 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 improvesis 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 effectiveCompany 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 assessingevaluating the timingimpact that ASU 2020-04 will have on those financial assets where LIBOR is used as an index rate.
In March 2022, the SEC released Staff Accounting Bulletin No. 121 (“SAB 121”), which provided interpretive guidance regarding accounting for obligations to safeguard crypto-assets an entity holds for platform users. The interpretive guidance requires an entity to recognize a liability on its balance sheet to reflect the obligation to safeguard the crypto-assets held for its platform users, along with a corresponding asset, both of which are measured at fair value. SAB 121 also requires disclosure of the nature and amount of crypto assets being safeguarded, how the fair value is determined, an entity’s accounting policy for safeguarding liabilities and corresponding assets and may require other information about risks and uncertainties arising from the entity’s safeguarding activities. SAB 121 is effective no later than the first interim or annual period ending after June 15, 2022, with retrospective application as of the beginning of the fiscal year. The Company is evaluating the impact of adopting the updated provisions.that SAB 121 will have on its financial statements and disclosures.
With the exception ofExcept for the updated standards discussed above, there have been no new accounting pronouncements not yet effective that have significance, or potential significance, to the Company’s consolidated financial statements.
Note 2—Securities
The following tables summarize the amortized cost, fair value of available-for-sale securities and their relatedthe corresponding amounts of gross unrealized gains and losses at the dates indicated are as follows:
|
| | | | | | | | | | | | | | | | |
| | Available-for-sale securities |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | | | | | |
| | (Dollars in thousands) |
September 30, 2019 | | | | | | | | |
Residential mortgage-backed securities: | | | | | | | | |
Government agency mortgage-backed securities | | $ | 783 |
| | $ | 33 |
| | $ | — |
| | $ | 816 |
|
Government agency collateralized mortgage obligation | | 246,689 |
| | 539 |
| | (905 | ) | | 246,323 |
|
Private-label collateralized mortgage obligation | | 27,385 |
| | 567 |
| | (211 | ) | | 27,741 |
|
Commercial mortgage-backed securities: | | | | | | | | |
Private-label collateralized mortgage obligation | | 363,782 |
| | 16,998 |
| | — |
| | 380,780 |
|
Asset backed securities: | | | | | | | | |
Government sponsored student loan pools | | 258,623 |
| | — |
| | (4,366 | ) | | 254,257 |
|
| | $ | 897,262 |
| | $ | 18,137 |
| | $ | (5,482 | ) | | $ | 909,917 |
|
December 31, 2018 | | | | | | | | |
Residential mortgage-backed securities: | | | | | | | | |
Government agency mortgage-backed securities | | $ | 932 |
| | $ | 25 |
| | $ | — |
| | $ | 957 |
|
Government agency collateralized mortgage obligation | | 50,888 |
| | 37 |
| | (625 | ) | | 50,300 |
|
Private-label collateralized mortgage obligation | | 23,988 |
| | 64 |
| | (107 | ) | | 23,945 |
|
Commercial mortgage-backed securities: | |
|
| |
|
| |
|
| |
|
|
Government agency collateralized mortgage obligation | | 23,817 |
| | — |
| | (1,065 | ) | | 22,752 |
|
Asset backed securities: | |
|
| |
|
| |
|
| |
|
|
Government sponsored student loan pools | | 260,050 |
| | 188 |
| | (1,014 | ) | | 259,224 |
|
| | $ | 359,675 |
| | $ | 314 |
| | $ | (2,811 | ) | | $ | 357,178 |
|
The amortized cost, unrealizedrecognized in accumulated other comprehensive income and gross unrecognized gains and losses of available-for-sale and fair value of securities held-to-maturity at the dates indicated are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | | | | | |
| | (Dollars in thousands) |
Available-for-sale securities | | | | | | | | |
U.S. Treasuries | | $ | 34,889 | | | $ | — | | | $ | (165) | | | $ | 34,724 | |
U.S. agency securities - excluding mortgage-backed securities | | 1,548,367 | | | 7,627 | | | (7,333) | | | 1,548,661 | |
Residential mortgage-backed securities: | | | | | | | | |
Government agency mortgage-backed securities | | 1,781,961 | | | 62 | | | (30,103) | | | 1,751,920 | |
Government agency collateralized mortgage obligation | | 1,385,198 | | | 1 | | | (27,850) | | | 1,357,349 | |
Private-label collateralized mortgage obligation | | 1,342 | | | 12 | | | (14) | | | 1,340 | |
Commercial mortgage-backed securities: | | | | | | | | |
Government agency mortgage-backed securities | | 1,338,333 | | | 2,360 | | | (9,283) | | | 1,331,410 | |
Government agency collateralized mortgage obligation | | 70,839 | | | — | | | (60) | | | 70,779 | |
Private-label collateralized mortgage obligation | | 492,565 | | | — | | | (11,651) | | | 480,914 | |
Municipal bonds: | | | | | | | | |
Tax-exempt | | 2,900,600 | | | 65 | | | (236,505) | | | 2,664,160 | |
| | | | | | | | |
Asset backed securities: | | | | | | | | |
Government sponsored student loan pools | | 226,738 | | | — | | | (4,501) | | | 222,237 | |
Total available-for-sale | | $ | 9,780,832 | | | $ | 10,127 | | | $ | (327,465) | | | $ | 9,463,494 | |
| | | | | | | | |
| | Amortized Cost | | Gross Unrecognized Gains | | Gross Unrecognized Losses | | Fair Value |
| | (Dollars in thousands) |
Held-to-maturity securities | | | | | | | | |
U.S. Treasuries | | $ | 1,245,293 | | | $ | — | | | $ | (42,488) | | | $ | 1,202,805 | |
| | | | | | | | |
Residential mortgage-backed securities: | | | | | | | | |
Government agency mortgage-backed securities | | 547,423 | | | — | | | (34,896) | | | 512,527 | |
Government agency collateralized mortgage obligation | | 113,921 | | | — | | | (7,192) | | | 106,729 | |
| | | | | | | | |
Commercial mortgage-backed securities: | | | | | | | | |
| | | | | | | | |
Government agency collateralized mortgage obligation | | 53,408 | | | — | | | (5,179) | | | 48,229 | |
| | | | | | | | |
Municipal bonds: | | | | | | | | |
Tax-exempt | | 393,965 | | | — | | | (44,265) | | | 349,700 | |
Taxable | | 397,615 | | | — | | | (38,629) | | | 358,986 | |
| | | | | | | | |
| | | | | | | | |
Total held-to-maturity | | $ | 2,751,625 | | | $ | — | | | $ | (172,649) | | | $ | 2,578,976 | |
|
| | | | | | | | | | | | | | | | |
| | 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 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | | | | | |
| | (Dollars in thousands) |
Available-for-sale securities | | | | | | | | |
| | | | | | | | |
U.S. agency securities - excluding mortgage-backed securities | | $ | 1,177,452 | | | $ | 7,320 | | | $ | (6,005) | | | $ | 1,178,767 | |
Residential mortgage-backed securities: | | | | | | | | |
Government agency mortgage-backed securities | | 1,428,365 | | | 130 | | | (14,378) | | | 1,414,117 | |
Government agency collateralized mortgage obligation | | 1,659,125 | | | 1,617 | | | (15,739) | | | 1,645,003 | |
Private-label collateralized mortgage obligation | | 1,425 | | | 19 | | | (11) | | | 1,433 | |
Commercial mortgage-backed securities: | | | | | | | | |
Government agency mortgage-backed securities | | 1,106,680 | | | 1,886 | | | (4,962) | | | 1,103,604 | |
Government agency collateralized mortgage obligation | | 212,266 | | | 19 | | | (1,370) | | | 210,915 | |
Private-label collateralized mortgage obligation | | 144,204 | | | 227 | | | (797) | | | 143,634 | |
Municipal bonds: | | | | | | | | |
Tax-exempt | | 2,272,794 | | | 33,153 | | | (8,210) | | | 2,297,737 | |
Taxable | | 403,279 | | | 341 | | | (6,016) | | | 397,604 | |
Asset backed securities: | | | | | | | | |
Government sponsored student loan pools | | 233,374 | | | 97 | | | (1,026) | | | 232,445 | |
Total available-for-sale | | $ | 8,638,964 | | | $ | 44,809 | | | $ | (58,514) | | | $ | 8,625,259 | |
During the three months ended March 31, 2018,2022, the Company had 0 private-labeltransferred, at fair value, $1.5 billion of residential mortgage-backed securities, commercial mortgage-backed securities, and municipal bonds from available-for-sale to held-to-maturity collateralized mortgage obligations.securities. The decision to re-designate the securities was based on the Company’s ability and intent to hold these securities to maturity. Factors used in assessing the ability to hold these securities to maturity were future liquidity needs and sources of funding. The related net unrealized after-tax loss of $14.1 million remained in accumulated other comprehensive income and will be amortized as a yield adjustment through earnings over the remaining life of the securities, offsetting the related net amortization of premium on the transferred securities. No gain or loss was recognized at the time of the transfer.
At September 30, 2019, there were 0 investment securities pledged for borrowings. There were 0 investment securitiesSecurities pledged for borrowings or for other purposes as required or permitted by law had a fair value of $1.2 billion as of March 31, 2022. There were no securities pledged as of December 31, 2018.2021.
At September 30, 2019,March 31, 2022, the total fair value of securities issued by 61 individual issuers,issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity was $360.9$275.3 million.
Securities with unrealized and unrecognized losses as of the dates indicated, aggregated by investment category and length of time that individual securities have been in a continuous unrealized or unrecognized loss position, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 |
| | Less than 12 Months | | 12 Months or More | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
Available-for-sale securities | | | | | | | | | | | | |
U.S. Treasuries | | $ | 34,724 | | | $ | (165) | | | $ | — | | | $ | — | | | $ | 34,724 | | | $ | (165) | |
U.S. agency securities - excluding mortgage-backed securities | | 781,759 | | | (7,101) | | | 12,977 | | | (232) | | | 794,736 | | | (7,333) | |
Residential mortgage-backed securities: |
Government agency mortgage-backed securities | | 1,725,830 | | | (30,102) | | | 68 | | | (1) | | | 1,725,898 | | | (30,103) | |
Government agency collateralized mortgage obligation | | 1,155,505 | | | (24,377) | | | 199,890 | | | (3,473) | | | 1,355,395 | | | (27,850) | |
Private-label collateralized mortgage obligation | | 199 | | | (3) | | | 421 | | | (11) | | | 620 | | | (14) | |
Commercial mortgage-backed securities: |
Government agency mortgage-backed securities | | 871,284 | | | (9,283) | | | — | | | — | | | 871,284 | | | (9,283) | |
Government agency collateralized mortgage obligation | | 62,991 | | | (60) | | | — | | | — | | | 62,991 | | | (60) | |
Private-label collateralized mortgage obligation | | 474,175 | | | (11,513) | | | 6,739 | | | (138) | | | 480,914 | | | (11,651) | |
Municipal bonds: | | | | | | | | | | | | |
Tax-exempt | | 2,627,812 | | | (236,505) | | | — | | | — | | | 2,627,812 | | | (236,505) | |
| | | | | | | | | | | | |
Asset backed securities: | | | | | | | | | | | | |
Government sponsored student loan pools | | 186,833 | | | (4,054) | | | 35,405 | | | (447) | | | 222,238 | | | (4,501) | |
| | $ | 7,921,112 | | | $ | (323,163) | | | $ | 255,500 | | | $ | (4,302) | | | $ | 8,176,612 | | | $ | (327,465) | |
| | | | | | | | | | | | |
| | Less than 12 Months | | 12 Months or More | | Total |
| | Fair Value | | Unrecognized Losses | | Fair Value | | Unrecognized Losses | | Fair Value | | Unrecognized Losses |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
Held-to-maturity securities | | | | | | | | | | | | |
U.S. Treasuries | | $ | 1,202,805 | | | $ | (42,488) | | | $ | — | | | $ | — | | | $ | 1,202,805 | | | $ | (42,488) | |
| | | | | | | | | | | | |
Residential mortgage-backed securities: |
Government agency mortgage-backed securities | | 512,527 | | | (40,537) | | | — | | | — | | | 512,527 | | | (40,537) | |
Government agency collateralized mortgage obligation | | 106,646 | | | (10,393) | | | — | | | — | | | 106,646 | | | (10,393) | |
| | | | | | | | | | | | |
Commercial mortgage-backed securities: |
| | | | | | | | | | | | |
Government agency collateralized mortgage obligation | | 48,229 | | | (6,241) | | | — | | | — | | | 48,229 | | | (6,241) | |
| | | | | | | | | | | | |
Municipal bonds: | | | | | | | | | | | | |
Tax-exempt | | 349,700 | | | (48,038) | | | — | | | — | | | 349,700 | | | (48,038) | |
Taxable | | 358,986 | | | (44,164) | | | — | | | — | | | 358,986 | | | (44,164) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | $ | 2,578,893 | | | $ | (191,861) | | | $ | — | | | $ | — | | | $ | 2,578,893 | | | $ | (191,861) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Available-for-sale securities |
| | Less than 12 Months | | 12 Months or More | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Less than 12 Months | | 12 Months or More | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
Available-for-sale securities | | | | | | | | | | | | |
| | | | | | | | | | | | |
U.S. agency securities - excluding mortgage-backed securities | | $ | 761,711 | | | $ | (6,005) | | | $ | — | | | $ | — | | | $ | 761,711 | | | $ | (6,005) | |
Residential mortgage-backed securities: | | | | | | | | | | | | |
Government agency mortgage-backed securities | | 1,357,080 | | | (14,378) | | | 70 | | | — | | | 1,357,150 | | | (14,378) | |
Government agency collateralized mortgage obligation | | 1,513,388 | | | (15,732) | | | 650 | | | (7) | | | 1,514,038 | | | (15,739) | |
Private-label collateralized mortgage obligation | | — | | | — | | | 433 | | | (11) | | | 433 | | | (11) | |
Commercial mortgage-backed securities: | | | | | | | | | | | | |
Government agency mortgage-backed securities | | 435,055 | | | (4,962) | | | — | | | — | | | 435,055 | | | (4,962) | |
Government agency collateralized mortgage obligation | | 189,397 | | | (1,370) | | | — | | | — | | | 189,397 | | | (1,370) | |
Private-label collateralized mortgage obligation | | 98,173 | | | (656) | | | 6,791 | | | (141) | | | 104,964 | | | (797) | |
Municipal bonds: | | | | | | | | | | | | |
Tax-exempt | | 1,025,689 | | | (8,210) | | | — | | | — | | | 1,025,689 | | | (8,210) | |
Taxable | | 339,041 | | | (6,016) | | | — | | | — | | | 339,041 | | | (6,016) | |
Asset backed securities: | | | | | | | | | | | | |
Government sponsored student loan pools | | 168,204 | | | (803) | | | 32,783 | | | (223) | | | 200,987 | | | (1,026) | |
| | $ | 5,887,738 | | | $ | (58,132) | | | $ | 40,727 | | | $ | (382) | | | $ | 5,928,465 | | | $ | (58,514) | |
As indicated in the tables above, as of September 30, 2019,March 31, 2022, the Company’s investment securities had gross unrealized losses totaling approximately $5.5$519.3 million, compared to approximately $2.8$58.5 million at December 31, 2018.2021. The Company analyzedanalyzes 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 DecemberMarch 31, 2018.2022. Management continues to expect to recover the adjusted amortized cost basis of these bonds.securities.
As of September 30, 2019,March 31, 2022, the Company had 31622 securities whose estimated fair value declined 1.26%4.61% from the Company’s amortized cost; at December 31, 2018,2021, the Company had 32323 securities whose estimated fair value declined 0.92%0.98% from the Company’s amortized cost. TheThese unrealized losses relate principallyon securities are primarily due to the general changechanges in market interest rates or widening of credit spreads since thetheir purchase dates and such unrecognizeddates. 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 managementdates. 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, 2019March 31, 2022, the Company received $31.1$432.1 million in proceeds and recognized $16,000 in$3.8 million of gains and $4.4 million losses on sales of available for saleavailable-for-sale securities. There were no sales andor calls of securities during the for the three and nine months ended September 30, 2018.March 31, 2021.
There were 0no credit losses associated with our securities portfolio recognized in earnings for the three and nine months ended September 30, 2019March 31, 2022 and 2018.2021.
The amortized cost and estimated fair value of investment securities as of the periods presented by contractual maturity are shown below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay
obligations with or without call or prepayment penalties. For purposes of the following table, the entire outstanding balance of residential and commercial mortgage-backed securities is categorized based on the final maturity date. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | | | | | | | |
| | (Dollars in thousands) |
Available-for-sale securities | | | | | | | | |
Within one year | | $ | 34,889 | | | $ | 34,724 | | | $ | — | | | $ | — | |
After one year through five years | | 1,611 | | | 1,531 | | | 2,243 | | | 2,170 | |
After five years through ten years | | 1,503,068 | | | 1,502,618 | | | 1,406,395 | | | 1,401,733 | |
After ten years | | 8,241,264 | | | 7,924,621 | | | 7,230,326 | | | 7,221,356 | |
Total | | $ | 9,780,832 | | | $ | 9,463,494 | | | $ | 8,638,964 | | | $ | 8,625,259 | |
Held-to-maturity securities | | | | | | | | |
Within one year | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
After one year through five years | | 1,245,293 | | | 1,202,805 | | | — | | | — | |
After five years through ten years | | 275,375 | | | 249,523 | | | — | | | — | |
After ten years | | 1,230,957 | | | 1,126,648 | | | — | | | — | |
Total | | $ | 2,751,625 | | | $ | 2,578,976 | | | $ | — | | | $ | — | |
Note 3—Loans
The following disclosure reports the Company’s loan portfolio segments and classes. Segments are groupings of similar loans at a level in which the Company has adopted systematic methods of documentation for determining its allowance for loan and credit losses. Classes are a disaggregation of the portfolio segments. The Company’s loan portfolio segments are:
Real estate loans.estate. Real estate includesloans include loans for which the Company holds one-to-four family, multi-family, commercial and construction real property as collateral. One-to-four family real estate loans primarily consist of non-qualified single-family residential mortgage loans and purchases of loan pools. Multi-family real estate loans have been offered for the purchase or refinancing of apartment properties located primarily in the Southern California market area. Commercial real estate lending activity is typically restricted to owner-occupied properties or tohas historically been primarily focused on investor properties that are owned by customers with a current banking relationship. The primary risks of real estate mortgage loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral and significant increases in interest rates, which may make the real estate mortgage loan unprofitable. Real estate loans also may be adversely affected by conditions in the real estate markets or in the general economy.
Commercial and industrial. Commercial and industrial loans consist of U.S. dollar denominated loans to businesses that are collateralized almost exclusively by bitcoin or U.S. dollars, also known as our core lending product, SEN Leverage. Commercial and industrial loans may also consist of loans and lines of credit to 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 loansthat are generally collateralized by accounts receivable, inventory, equipment, loan and lease receivables and other commercial assets, and may be supported by other credit enhancements such as personal guarantees. RiskRisks 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. SinceBorrowers accessing SEN Leverage provide bitcoin or U.S. dollars as collateral in an amount greater than the March 2019 saleline of our business loan portfolio, commercialcredit eligible to be advanced. The Bank works with regulated digital currency exchanges and industrial loans consist primarily of asset based loans.
Consumer and other. Consumer loans consist of consumerother indirect lenders, as the case may be, to both act as its collateral custodian for such loans, and otherto liquidate the collateral in the event of a decline in collateral coverage below levels required in the borrower’s loan agreement. At no time does the Bank directly hold the pledged bitcoin digital currency. The Bank sets collateral coverage ratios at levels intended to yield collateral liquidation proceeds in excess of the borrower’s loan amount, but the borrower remains obligated for the payment of any deficiency notwithstanding any change in the condition of the exchange, financial or otherwise. The outstanding balance of gross SEN Leverage loans secured by personal property.was $435.0 million and $335.9 million at March 31, 2022 and December 31, 2021, respectively. Unfunded commitments on SEN Leverage loans were $635.1 million and $234.6 million at March 31, 2022 and December 31, 2021, respectively.
Reverse mortgage.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 purchasesoutstanding loan balance exceeds collateral value at the time the loan is required to be repaid. Other loans consist of reverse mortgageconsumer loans and began selling its remaining loans in the secondary market. At September 30, 2019, the Bank owned $1.6 millionsecured by personal property.
Mortgage warehouse. The Company’s mortgage warehouse lending division provides short-term interim funding primarily for single-family residential mortgage loans originated by mortgage bankers or other lenders pending the sale oflenders. The Company holds legal title to such loans infrom the secondary market. The Company’s risk is mitigated by comprehensive policies, procedures, and controls governing this activity, partial loan fundingdate they are funded by the originating lender, guaranties or additional monies pledged toCompany until the Company as security, and the short holding period of funded loans on the Company’s balance sheet. In addition, the loss rates of this portfolio have historically been minimal, and these loans are all subjectsold to written purchasesecondary market investors pursuant to pre-existing take out commitments, from takeout investors or are hedged.generally within a few weeks of origination, with loan sale proceeds applied to pay down Company funding. The Company’s mortgage warehouse loans may either be held-for-investment or held-for-sale depending on the underlying contract. The Company sold approximately $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, 2019March 31, 2022 and December 31, 2018,2021, gross mortgage warehouse loans were approximately $368.6 million$1.0 billion and $252.6 million,$1.1 billion, respectively.
A summary of loans as of the periods presented are as follows:
| | | | September 30, 2019 | | December 31, 2018 | | March 31, 2022 | | December 31, 2021 |
| | | | | | | | |
| | (Dollars in thousands) | | | (Dollars in thousands) |
Real estate loans: | | | | | Real estate loans: | |
One-to-four family | | $ | 212,440 |
| | $ | 190,885 |
| One-to-four family | | $ | 94,161 | | | $ | 105,098 | |
Multi-family | | 77,901 |
| | 40,584 |
| Multi-family | | 9,368 | | | 56,751 | |
Commercial | | 322,733 |
| | 309,655 |
| Commercial | | 80,279 | | | 210,136 | |
Construction | | 3,986 |
| | 3,847 |
| Construction | | — | | | 7,573 | |
Commercial and industrial | | 14,563 |
| | 8,586 |
| Commercial and industrial | | 434,960 | | | 335,862 | |
Consumer and other | | 76 |
| | 150 |
| |
Reverse mortgage | | 1,629 |
| | 1,742 |
| |
| Reverse mortgage and other | | Reverse mortgage and other | | 1,137 | | | 1,410 | |
Mortgage warehouse | | 61,856 |
| | 41,586 |
| Mortgage warehouse | | 125,435 | | | 177,115 | |
Total gross loans held-for-investment | | 695,184 |
| | 597,035 |
| Total gross loans held-for-investment | | 745,340 | | | 893,945 | |
Deferred fees, net | | 2,997 |
| | 2,469 |
| Deferred fees, net | | (1,884) | | | 275 | |
Total loans held-for-investment | | 698,181 |
| | 599,504 |
| Total loans held-for-investment | | 743,456 | | | 894,220 | |
Allowance for loan losses | | (6,191 | ) | | (6,723 | ) | Allowance for loan losses | | (4,442) | | | (6,916) | |
Total loans held-for-investment, net | | $ | 691,990 |
| | $ | 592,781 |
| Total loans held-for-investment, net | | $ | 739,014 | | | $ | 887,304 | |
Total loans held-for-sale(1) | | $ | 311,410 |
| | $ | 350,636 |
| Total loans held-for-sale(1) | | $ | 937,140 | | | $ | 893,194 | |
________________________ | |
(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”. |
At September 30, 2019(1)Loans held-for-sale includes $914.2 million and $893.2 million of mortgage warehouse loans as of March 31, 2022 and December 31, 2018,2021, respectively.
At March 31, 2022 and December 31, 2021, approximately $618.7$184.9 million and $546.7$381.0 million, respectively, of the Company’s loan portfoliogross loans held-for-investment were collateralized by various forms of real estate. A significant percentage of such loans are collateralized by propertiesestate, primarily located in California (66.6% and 69.7% as of September 30, 2019California. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. At March 31, 2022 and December 31, 2018, respectively), Arizona (8.4%2021, approximately $435.0 million and 7.3%$335.9 million, respectively, of the Company’s gross loans held-for-investment was collateralized primarily by bitcoin and U.S. dollars. The loan to value ratio of these loans fluctuates in relation to value of bitcoin held as collateral, which may be volatile and there is no assurance that customers will be able to timely provide additional collateral under these loans in a scenario where the value of 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%.the bitcoin drops precipitously. The Company attempts to addressmonitors and mitigatemanages concentrations of credit risk by making loans that are diversified by collateral type, placing limits on the amounts of various categories of loans relative to total Company capital, and conducting quarterly reviews of its portfolio by collateral type, geography, and other characteristics. While management believes that the collateral presently securing its portfolio and the recorded allowance for loan losses are adequate to absorb potential losses, there can be no assurances that significant deterioration in the California, 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, net due to immateriality. Accrued interest on loans held-for-investment totaled approximately $2.4$2.5 million and $2.1 million and deferred fees totaled approximately $3.0 million and $2.5$3.3 million at September 30, 2019March 31, 2022 and December 31, 2018,2021, respectively.
Allowance for Loan Losses
The following tables present the allocation of the allowance for loan losses, as well as the activity in the allowance by loan class, and recorded investment in loans held-for-investment as of and for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 |
| | One-to -Four Family | | Multi- Family | | Commercial Real Estate | | Construction | | Commercial and Industrial | | | | Reverse Mortgage and Other | | Mortgage Warehouse | | Total |
| | | | | | | | | | | | | | | | | | |
| | (Dollars in thousands) |
Balance, December 31, 2021 | | $ | 1,023 | | | $ | 682 | | | $ | 2,017 | | | $ | 776 | | | $ | 1,566 | | | | | $ | 12 | | | $ | 840 | | | $ | 6,916 | |
Charge-offs | | — | | | — | | | — | | | — | | | — | | | | | — | | | — | | | — | |
Recoveries | | — | | | — | | | — | | | — | | | — | | | | | — | | | — | | | — | |
Provision for loan losses | | (223) | | | (582) | | | (1,542) | | | (776) | | | 933 | | | | | (1) | | | (283) | | | (2,474) | |
Balance, March 31, 2022 | | $ | 800 | | | $ | 100 | | | $ | 475 | | | $ | — | | | $ | 2,499 | | | | | $ | 11 | | | $ | 557 | | | $ | 4,442 | |
| | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, 2021 |
| | Three Months Ended September 30, 2019 | | | One-to -Four Family | | Multi- Family | | Commercial Real Estate | | Construction | | Commercial and Industrial | | | Reverse Mortgage and Other | | Mortgage Warehouse | | Total |
| | One-to -Four Family | | Multi- Family | | Commercial Real Estate | | Construction | | Commercial and Industrial | | Consumer and Other | | Reverse Mortgage | | Mortgage Warehouse | | Total | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | (Dollars in thousands) |
| | (Dollars in thousands) | |
Balance, June 30, 2019 | | $ | 1,769 |
| | $ | 879 |
| | $ | 3,761 |
| | $ | 79 |
| | $ | 237 |
| | $ | 1 |
| | $ | 36 |
| | $ | 287 |
| | $ | 7,049 |
| |
Balance, December 31, 2020 | | Balance, December 31, 2020 | | $ | 1,245 | | | $ | 878 | | | $ | 1,810 | | | $ | 590 | | | $ | 1,931 | | | | $ | 39 | | | $ | 423 | | | $ | 6,916 | |
Charge-offs | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Charge-offs | | — | | | — | | | — | | | — | | | — | | | | — | | | — | | | — | |
Recoveries | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Recoveries | | — | | | — | | | — | | | — | | | — | | | | — | | | — | | | — | |
Provision for loan losses | | 282 |
| | (226 | ) | | (970 | ) | | 17 |
| | 75 |
| | — |
| | 1 |
| | (37 | ) | | (858 | ) | Provision for loan losses | | 389 | | | (50) | | | 1,441 | | | (97) | | | (1,571) | | | | (21) | | | (91) | | | — | |
Balance, September 30, 2019 | | $ | 2,051 |
| | $ | 653 |
| | $ | 2,791 |
| | $ | 96 |
| | $ | 312 |
| | $ | 1 |
| | $ | 37 |
| | $ | 250 |
| | $ | 6,191 |
| |
Balance, March 31, 2021 | | Balance, March 31, 2021 | | $ | 1,634 | | | $ | 828 | | | $ | 3,251 | | | $ | 493 | | | $ | 360 | | | | $ | 18 | | | $ | 332 | | | $ | 6,916 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 |
| | One-to -Four Family | | Multi- Family | | Commercial Real Estate | | Construction | | Commercial and Industrial | | | | Reverse Mortgage and Other | | Mortgage Warehouse | | Total |
| | | | | | | | | | | | | | | | | | |
| | (Dollars in thousands) |
Amount of allowance attributed to: | | | | | | | | | | | | | | | | | | |
Specifically evaluated impaired loans | | $ | 28 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | $ | — | | | $ | — | | | $ | 28 | |
General portfolio allocation | | 772 | | | 100 | | | 475 | | | — | | | 2,499 | | | | | 11 | | | 557 | | | 4,414 | |
Total allowance for loan losses | | $ | 800 | | | $ | 100 | | | $ | 475 | | | $ | — | | | $ | 2,499 | | | | | $ | 11 | | | $ | 557 | | | $ | 4,442 | |
Loans evaluated for impairment: | | | | | | | | | | | | | | | | | | |
Specifically evaluated | | $ | 4,126 | | | $ | — | | | $ | 1,236 | | | $ | — | | | $ | — | | | | | $ | 646 | | | $ | — | | | $ | 6,008 | |
Collectively evaluated | | 90,575 | | | 9,367 | | | 79,037 | | | — | | | 432,533 | | | | | 501 | | | 125,435 | | | 737,448 | |
Total loans held-for-investment | | $ | 94,701 | | | $ | 9,367 | | | $ | 80,273 | | | $ | — | | | $ | 432,533 | | | | | $ | 1,147 | | | $ | 125,435 | | | $ | 743,456 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | One-to -Four Family | | Multi- Family | | Commercial Real Estate | | Construction | | Commercial and Industrial | | | | Reverse Mortgage and Other | | Mortgage Warehouse | | Total |
| | | | | | | | | | | | | | | | | | |
| | (Dollars in thousands) |
Amount of allowance attributed to: | | | | | | | | | | | | | | | | | | |
Specifically evaluated impaired loans | | $ | 29 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | $ | — | | | $ | — | | | $ | 29 | |
General portfolio allocation | | 994 | | | 682 | | | 2,017 | | | 776 | | | 1,566 | | | | | 12 | | | 840 | | | 6,887 | |
Total allowance for loan losses | | $ | 1,023 | | | $ | 682 | | | $ | 2,017 | | | $ | 776 | | | $ | 1,566 | | | | | $ | 12 | | | $ | 840 | | | $ | 6,916 | |
Loans evaluated for impairment: | | | | | | | | | | | | | | | | | | |
Specifically evaluated | | $ | 4,229 | | | $ | — | | | $ | 1,956 | | | $ | — | | | $ | — | | | | | $ | 923 | | | $ | — | | | $ | 7,108 | |
Collectively evaluated | | 101,609 | | | 56,855 | | | 208,170 | | | 7,502 | | | 335,362 | | | | | 499 | | | 177,115 | | | 887,112 | |
Total loans held-for-investment | | $ | 105,838 | | | $ | 56,855 | | | $ | 210,126 | | | $ | 7,502 | | | $ | 335,362 | | | | | $ | 1,422 | | | $ | 177,115 | | | $ | 894,220 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
|
Table of Contents
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
|
Impaired Loans
The following tables provide a summary of the Company’s investment in impaired loans as of and for the periods presented:
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 |
| | Unpaid Principal Balance | | Recorded Investment | | Related Allowance |
| | | | | | |
| | (Dollars in thousands) |
With no related allowance recorded: | | | | | | |
Real estate loans: | | | | | | |
One-to-four family | | $ | 3,866 | | | $ | 3,827 | | | $ | — | |
| | | | | | |
Commercial | | 1,237 | | | 1,236 | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
Reverse mortgage and other | | 646 | | | 646 | | | — | |
| | | | | | |
| | 5,749 | | | 5,709 | | | — | |
With an allowance recorded: | | | | | | |
Real estate loans: | | | | | | |
One-to-four family | | 296 | | | 299 | | | 28 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | 296 | | | 299 | | | 28 | |
Total impaired loans | | $ | 6,045 | | | $ | 6,008 | | | $ | 28 | |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Unpaid Principal Balance | | Recorded Investment | | Related Allowance |
| | | | | | |
| | (Dollars in thousands) |
With no related allowance recorded: | | | | | | |
Real estate loans: | | | | | | |
One-to-four family | | $ | 4,616 | | | $ | 3,927 | | | $ | — | |
| | | | | | |
Commercial | | 1,955 | | | 1,956 | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
Reverse mortgage and other | | 914 | | | 923 | | | — | |
| | | | | | |
| | 7,485 | | | 6,806 | | | — | |
With an allowance recorded: | | | | | | |
Real estate loans: | | | | | | |
One-to-four family | | 323 | | | 302 | | | 29 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | 323 | | | 302 | | | 29 | |
Total impaired loans | | $ | 7,808 | | | $ | 7,108 | | | $ | 29 | |
|
| | | | | | | | | | | | |
| | September 30, 2019 |
| | Unpaid Principal Balance | | Recorded Investment | | Related Allowance |
| | | | | | |
| | (Dollars in thousands) |
With no related allowance recorded: | | | | | | |
Real estate loans: | | | | | | |
One-to-four family | | $ | 4,917 |
| | $ | 4,359 |
| | $ | — |
|
Commercial | | 7,664 |
| | 7,385 |
| | — |
|
Commercial and industrial | | 3,954 |
| | 3,763 |
| | — |
|
Reverse mortgage | | 736 |
| | 737 |
| | — |
|
| | 17,271 |
| | 16,244 |
| | — |
|
With an allowance recorded: | | | | | | |
Real estate loans: | | | | | | |
One-to-four family | | 66 |
| | 66 |
| | 10 |
|
Reverse mortgage | | 337 |
| | 337 |
| | 29 |
|
| | 403 |
| | 403 |
| | 39 |
|
Total impaired loans | | $ | 17,674 |
| | $ | 16,647 |
| | $ | 39 |
|
|
| | | | | | | | | | | | |
| | December 31, 2018 |
| | Unpaid Principal Balance | | Recorded Investment | | Related Allowance |
| | | | | | |
| | (Dollars in thousands) |
With no related allowance recorded: | | | | | | |
Real estate loans: | | | | | | |
One-to-four family | | $ | 3,739 |
| | $ | 3,318 |
| | $ | — |
|
Commercial | | 8,266 |
| | 7,946 |
| | — |
|
Commercial and industrial | | 3,754 |
| | 3,596 |
| | — |
|
Reverse mortgage | | 846 |
| | 797 |
| | — |
|
| | 16,605 |
| | 15,657 |
| | — |
|
With an allowance recorded: | | | | | | |
Real estate loans: | | | | | | |
One-to-four family | | 24 |
| | 24 |
| | — |
|
Reverse mortgage | | 454 |
| | 426 |
| | 47 |
|
| | 478 |
| | 450 |
| | 47 |
|
Total impaired loans | | $ | 17,083 |
| | $ | 16,107 |
| | $ | 47 |
|
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
| | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
| | | | | | | | |
| | (Dollars in thousands) |
With no related allowance recorded: | | | | | | | | |
Real estate loans: | | | | | | | | |
One-to-four family | | $ | 3,856 | | | $ | 17 | | | $ | 4,979 | | | $ | 77 | |
| | | | | | | | |
Commercial | | 2,526 | | | 20 | | | 9,795 | | | 128 | |
| | | | | | | | |
Commercial and industrial | | — | | | — | | | 249 | | | 5 | |
| | | | | | | | |
Reverse mortgage and other | | 829 | | | — | | | 616 | | | — | |
| | | | | | | | |
| | 7,211 | | | 37 | | | 15,639 | | | 210 | |
With an allowance recorded: | | | | | | | | |
Real estate loans: | | | | | | | | |
One-to-four family | | 300 | | | 1 | | | 64 | | | 1 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Reverse mortgage and other | | — | | | — | | | 258 | | | — | |
| | | | | | | | |
| | 300 | | | 1 | | | 322 | | | 1 | |
Total impaired loans | | $ | 7,511 | | | $ | 38 | | | $ | 15,961 | | | $ | 211 | |
For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs. Cash basis interest income is not materially different than interest income recognized.
Nonaccrual and Past Due Loans
Nonperforming loans include 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater than 89 Days Past Due | | Total Past Due | | Current | | Total | | Nonaccruing | | Loans Receivable > 89 Days and Accruing |
| | | | | | | | | | | | | | | | |
| | (Dollars in thousands) |
Real estate loans: | | | | | | | | | | | | | | | | |
One-to-four family | | $ | 210 | | | $ | 189 | | | $ | 2,776 | | | $ | 3,175 | | | $ | 91,526 | | | $ | 94,701 | | | $ | 2,986 | | | $ | — | |
Multi-family | | — | | | — | | | — | | | — | | | 9,367 | | | 9,367 | | | — | | | — | |
Commercial | | — | | | — | | | — | | | — | | | 80,273 | | | 80,273 | | | — | | | — | |
Construction | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial and industrial | | — | | | — | | | — | | | — | | | 432,533 | | | 432,533 | | | — | | | — | |
| | | | | | | | | | | | | | | | |
Reverse mortgage and other | | — | | | — | | | — | | | — | | | 1,147 | | | 1,147 | | | 646 | | | — | |
Mortgage warehouse | | — | | | — | | | — | | | — | | | 125,435 | | | 125,435 | | | — | | | — | |
Total loans held-for-investment | | $ | 210 | | | $ | 189 | | | $ | 2,776 | | | $ | 3,175 | | | $ | 740,281 | | | $ | 743,456 | | | $ | 3,632 | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 |
| | 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 | | $ | — |
| | $ | 76 |
| | $ | 2,694 |
| | $ | 2,770 |
| | $ | 209,670 |
| | $ | 212,440 |
| | $ | 4,161 |
| | $ | — |
|
Multi-family | | — |
| | — |
| | — |
| | — |
| | 77,901 |
| | 77,901 |
| | — |
| | — |
|
Commercial | | — |
| | — |
| | — |
| | — |
| | 322,733 |
| | 322,733 |
| | — |
| | — |
|
Construction | | — |
| | — |
| | — |
| | — |
| | 3,986 |
| | 3,986 |
| | — |
| | — |
|
Commercial and industrial | | — |
| | — |
| | — |
| | — |
| | 14,563 |
| | 14,563 |
| | 1,473 |
| | — |
|
Consumer and other | | — |
| | — |
| | — |
| | — |
| | 76 |
| | 76 |
| | — |
| | — |
|
Reverse mortgage | | — |
| | — |
| | — |
| | — |
| | 1,629 |
| | 1,629 |
| | 1,073 |
| | — |
|
Mortgage warehouse | | — |
| | — |
| | — |
| | — |
| | 61,856 |
| | 61,856 |
| | — |
| | — |
|
Total gross loans held-for-investment | | $ | — |
| | $ | 76 |
| | $ | 2,694 |
| | $ | 2,770 |
| | $ | 692,414 |
| | $ | 695,184 |
| | $ | 6,707 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2021 |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater than 89 Days Past Due | | Total Past Due | | Current | | Total | | Nonaccruing | | Loans Receivable > 89 Days and Accruing |
| | | | | | | | | | | | | | | | |
| | (Dollars in thousands) |
Real estate loans: | | | | | | | | | | | | | | | | |
One-to-four family | | $ | 1,176 | | | $ | — | | | $ | 2,985 | | | $ | 4,161 | | | $ | 101,677 | | | $ | 105,838 | | | $ | 3,080 | | | $ | — | |
Multi-family | | — | | | — | | | — | | | — | | | 56,855 | | | 56,855 | | | — | | | — | |
Commercial | | — | | | — | | | — | | | — | | | 210,126 | | | 210,126 | | | — | | | — | |
Construction | | — | | | — | | | — | | | — | | | 7,502 | | | 7,502 | | | — | | | — | |
Commercial and industrial | | — | | | — | | | — | | | — | | | 335,362 | | | 335,362 | | | — | | | — | |
| | | | | | | | | | | | | | | | |
Reverse mortgage and other | | — | | | — | | | — | | | — | | | 1,422 | | | 1,422 | | | 923 | | | — | |
Mortgage warehouse | | — | | | — | | | — | | | — | | | 177,115 | | | 177,115 | | | — | | | — | |
Total loans held-for-investment | | $ | 1,176 | | | $ | — | | | $ | 2,985 | | | $ | 4,161 | | | $ | 890,059 | | | $ | 894,220 | | | $ | 4,003 | | | $ | — | |
Troubled Debt Restructurings
A loan is identified as a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulties and, for economic or legal reasons related to these difficulties, the Company grants a concession to the borrower in the restructuring that it would not otherwise consider. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. The Company has granted a concession when, as a result of the restructuring, it does not expect to collect all amounts due or within the time periods originally due under the original contract, including one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a temporary forbearance with regard to the payment of principal or interest. All troubled debt restructurings are reviewed for potential impairment. Generally, a nonaccrual loan that is restructured remains on nonaccrual status for a minimum period of six months to demonstrate that the borrower can perform under the restructured terms. If the borrower’s performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan. Loans classified as TDRs are reported as impaired loans.
As of September 30, 2019March 31, 2022 and December 31, 2018,2021, the Company had a recorded investment in TDR’sTDRs of $1.8 million and $0.5 million, respectively.$1.7 million. The Company has not allocated any amount$28,000 of specific allowance for those loans at September 30, 2019March 31, 2022 and has allocated a negligible amount of specific allowance for those loans$29,000 at December 31, 2018.2021. The Company has not committed to lendadvance additional amounts toon these TDRs. NaNNo loans were modified as TDRs during the three months ended September 30, 2019March 31, 2022 or during the three and nine months ended September 30, 2018.2021.
Modifications of loans classified as TDRs during the periods presented, are as follows:
|
| | | | | | | | | | | |
| | 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 |
|
The TDR’s described above had no impact the allowance for loan losses and charge-offs during the nine months ended September 30, 2019.
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 ninethree months ended
September 30, 2019 March 31, 2022 or 2018.2021. There was no provision for loan loss or charge-offs for TDR’s that subsequently defaulted during the three or nine months ended September 30, 2019March 31, 2022 or 2018.2021.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. This analysis typically includes larger, nonhomogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:
|
| | | | | | | |
Pass: | | Loans in all classes that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass. |
| |
Special mention: | | Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. |
| |
Substandard: | | Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. |
| |
| | | | | | | | |
Doubtful: | | Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. |
| | |
Loss: | | Credits rated as loss are charged-off. Management has no expectation of the recovery of any payments in respect of credits rated as loss. |
The following tables present by portfolio class the Company’s internal risk grading system as well as certain other information concerning the credit quality of the Company’s recorded investment in loans held-for-investment as of the periods presented. No assets were classified as loss or doubtful during the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Credit Risk Grades |
| | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
| | | | | | | | | | |
| | (Dollars in thousands) |
March 31, 2022 | | | | | | | | | | |
Real estate loans: | | | | | | | | | | |
One-to-four family | | $ | 91,166 | | | $ | 549 | | | $ | 2,986 | | | $ | — | | | $ | 94,701 | |
Multi-family | | 9,367 | | | — | | | — | | | — | | | 9,367 | |
Commercial | | 65,305 | | | 13,732 | | | 1,236 | | | — | | | 80,273 | |
Construction | | — | | | — | | | — | | | — | | | — | |
Commercial and industrial | | 432,533 | | | — | | | — | | | — | | | 432,533 | |
| | | | | | | | | | |
Reverse mortgage and other | | 501 | | | — | | | 646 | | | — | | | 1,147 | |
Mortgage warehouse | | 125,435 | | | — | | | — | | | — | | | 125,435 | |
Total loans held-for-investment | | $ | 724,307 | | | $ | 14,281 | | | $ | 4,868 | | | $ | — | | | $ | 743,456 | |
| | | | | | | | | | | | | | | Credit Risk Grades |
| | Credit Risk Grades | | | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
| | Pass | | Special Mention | | Substandard | | Doubtful | | Total | | | | | | | | | | |
| | | | | | | | | | | | | (Dollars in thousands) |
| | (Dollars in thousands) | |
September 30, 2019 | | | | | | | | | | | |
December 31, 2021 | | December 31, 2021 | |
Real estate loans: | | | | | | | | | | | Real estate loans: | |
One-to-four family | | $ | 208,280 |
| | $ | — |
| | $ | 4,160 |
| | $ | — |
| | $ | 212,440 |
| One-to-four family | | $ | 102,307 | | | $ | 451 | | | $ | 3,080 | | | $ | — | | | $ | 105,838 | |
Multi-family | | 77,901 |
| | — |
| | — |
| | — |
| | 77,901 |
| Multi-family | | 56,855 | | | — | | | — | | | — | | | 56,855 | |
Commercial | | 322,733 |
| | — |
| | — |
| | — |
| | 322,733 |
| Commercial | | 199,598 | | | 10,528 | | | — | | | — | | | 210,126 | |
Construction | | 3,986 |
| | — |
| | — |
| | — |
| | 3,986 |
| Construction | | 7,502 | | | — | | | — | | | — | | | 7,502 | |
Commercial and industrial | | 10,657 |
| | 143 |
| | 3,763 |
| | — |
| | 14,563 |
| Commercial and industrial | | 335,362 | | | — | | | — | | | — | | | 335,362 | |
Consumer and other | | 76 |
| | — |
| | — |
| | — |
| | 76 |
| |
Reverse mortgage | | 376 |
| | 179 |
| | 1,074 |
| | — |
| | 1,629 |
| |
| Reverse mortgage and other | | Reverse mortgage and other | | 499 | | | — | | | 923 | | | — | | | 1,422 | |
Mortgage warehouse | | 61,856 |
| | — |
| | — |
| | — |
| | 61,856 |
| Mortgage warehouse | | 177,115 | | | — | | | — | | | — | | | 177,115 | |
Total gross loans held-for-investment | | $ | 685,865 |
| | $ | 322 |
| | $ | 8,997 |
| | $ | — |
| | $ | 695,184 |
| |
Total loans held-for-investment | | Total loans held-for-investment | | $ | 879,238 | | | $ | 10,979 | | | $ | 4,003 | | | $ | — | | | $ | 894,220 | |
Purchases and Sales
The following table presents loans held-for-investment purchased and/or sold during the year by portfolio segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
| | Purchases | | Sales(1) | | Purchases | | Sales |
| | | | | | | | |
| | (Dollars in thousands) |
Real estate loans: | | | | | | | | |
| | | | | | | | |
Multi-family | | $ | — | | | $ | 54,227 | | | $ | — | | | $ | — | |
Commercial | | — | | | 155,011 | | | — | | | — | |
Construction | | — | | | 6,823 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | $ | — | | | $ | 216,061 | | | $ | — | | | $ | — | |
________________________(1)In conjunction with the loan sale during the three months ended March 31, 2022, the Company purchased a participating interest of $67.6 million of the loans sold to the buyer.
|
| | | | | | | | | | | | | | | | | | | | |
| | Credit Risk Grades |
| | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
| | | | | | | | | | |
| | (Dollars in thousands) |
December 31, 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 |
|
19
Related Party Loans
The Company had no outstanding balance of related party loans with anat March 31, 2022 and $7.7 million outstanding balance of $4.6 million and $5.0 million as of September 30, 2019 and December 31, 2018, respectively.2021. 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, the balance of related party loans decreased by $0.3 million due to changes in composition of related parties andMarch 31, 2022, the Company received $58,000$7.7 million in proceeds from loan sales and 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:
|
| | | | | | | | |
| | 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 | % |
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 | | Year Ended December 31, 2021 |
| | | | |
| | (Dollars in thousands) |
Amount outstanding at period-end | | $ | 800,000 | | | $ | — | |
Weighted average interest rate at period-end | | 0.43 | % | | — | |
FHLB advances areor borrowing capacity can be secured with eligible collateral consisting of certainqualifying real estate loans.loans or certain securities. Advances from the FHLB are subject to the FHLB’s collateral and underwriting requirements and as of September 30, 2019March 31, 2022 and December 31, 2018,2021, were limited in the aggregate to 35% of the Company’sBank’s total assets. Loans with carrying valuesand securities of approximately $695.7 million$2.4 billion and $625.3 million$1.4 billion were pledged to the FHLB as of September 30, 2019March 31, 2022 and December 31, 2018,2021, respectively. Unused borrowing capacity based on the lesser of the percentage of total assets and pledged collateral was approximately $529.4 million$1.2 billion and $472.3 million$1.0 billion as of September 30, 2019March 31, 2022 and December 31, 2018,2021, respectively.
FRB Advances
The CompanyBank is also approved to borrow through the Discount Window of the Federal Reserve Bank of San Francisco on a collateralized basis without any fixed dollar limit. Loans with a carrying value of approximately $10.1$5.2 million and $19.0$6.0 million were pledged to the FRB at September 30, 2019March 31, 2022 and December 31, 2018,2021, respectively. The Company’sBank’s borrowing capacity under the Federal Reserve’s discount window program was $7.4approximately $2.9 million and $5.2 million as of September 30, 2019. At September 30, 2019March 31, 2022 and December 31, 2018,2021, respectively. At March 31, 2022 and December 31, 2021, there were 0 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.
no FRB advances outstanding.
Federal Funds Purchased
The CompanyBank 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’sBank’s credit profile. As of September 30, 2019,March 31, 2022 and December 31, 2021, the Company had 0no outstanding balance of federal funds purchased.
Note 5—Notes PayableIntangible Assets
On January 29, 2016,31, 2022 the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) under which it acquired from the Libra Association, Diem Networks US HoldCo, Inc., Diem Networks US, Inc., Diem Networks II LLC, Diem LLC, and Diem Networks LLC, (collectively, the “Sellers”) certain intellectual property and other technology assets related to running a term loan withblockchain-based payment network. The assets acquired by the Company included development, deployment and operations infrastructure and tools for running a commercial bankblockchain-based payment network designed to facilitate payments for commerce and cross-border remittances as well as proprietary software elements that are critical to running a single principal advanceregulatory-compliant stablecoin network. The technology is currently in a pre-launch phase, and no related amortization expense has been recorded for the acquired asset. The amortization period will begin when the developed technology is available for intended use.
Under the terms of $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 greaterPurchase Agreement, the aggregate purchase price for the acquired assets consisted 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(i) $50.0 million in 2019, $1.1cash consideration and (ii) 1,221,217 shares of the Company’s Class A common stock. The value of the total transaction consideration was $181.6 million. The Company accounted for the purchase as an asset acquisition and capitalized direct transaction costs related to the purchase of $8.4 million, in 2020 and $2.6bringing the total intangible asset to $190.0 million in 2021.at March 31, 2022.
Note 6—Subordinated Debentures, Net
A trust formed by the Company issued $12.5 million of floating rate trust preferred securities in July 2001 as part of a pooled offering of such securities. The Company issued subordinated debentures to the trust in exchange for its proceeds from the offering. The debentures and related accrued interest represent substantially all of the assets of the trust. The subordinated debentures bear interest at six-month LIBOR plus 375 basis points, which adjusts every six months in January and July of each
year. Interest is payable semiannually. At September 30, 2019,March 31, 2022, the interest rate for the Company’s next scheduled payment was 5.94%4.19%, based on six-month LIBOR of 2.19%0.44%. On any January 25 or July 25 the Company may redeem the 2001 subordinated debentures at 100% of principal amount plus accrued interest. The 2001 subordinated debentures mature on July 25, 2031.
A second trust formed by the Company issued $3.0 million of trust preferred securities in January 2005 as part of a pooled offering of such securities. The Company issued subordinated debentures to the trust in exchange for its proceeds from the offering. The debentures and related accrued interest represent substantially all of the assets of the trust. The subordinated debentures bear interest at three-month LIBOR plus 185 basis points, which adjusts every three months. Interest is payable quarterly. At September 30, 2019,March 31, 2022, the interest rate for the Company’s next scheduled payment was 3.97%2.68%, based on three-month LIBOR of 2.12%0.83%. On the 15th day of any March, June, September, or December, the Company may redeem the 2005 subordinated debentures at 100% of principal amount plus accrued interest. The 2005 subordinated debentures mature on March 15, 2035.
The Company also retained a 3% minority interest in each of these trusts which is included in subordinated debentures. The balance of the equity in the trusts is comprised of mandatorily redeemable preferred securities. The subordinated debentures may be included in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations. The Company has the right to defer interest payments on the subordinated debentures from time to time for a period not to exceed five years.
The outstanding balance of the subordinated debentures was $15.8 million, net of $0.1 million unamortized debt issuance costs as of March 31, 2022 and December 31, 2021. Note 7—Derivative and Hedging Activities
The Company is exposed to certain risks relating to its ongoing business operations. The Company utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the derivative does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual derivative agreements. In accordance with accounting guidance, changes in the fair value of derivatives designated and that qualify as cash flow hedges are initially recorded in accumulated other comprehensive income (“OCI”AOCI”), reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. TheFor 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 conditionearnings 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 change in fair value of the hedged item is recorded as a basis adjustment to the hedged assets or liabilities. The amount included as a basis adjustment would be reclassified to current earnings on a straight-line basis over the original life of the hedged item should the hedges no longer be considered effective.
Interest rate swaps. In 2020, the Company entered into 2 pay-fixed/receive floating rate interest rate swaps (the “Swap Agreements”) for a notional amount of $14.3 million that were designated as fair value hedges of certain available-for-sale securities. The Swap Agreements were determined to be fully effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. In October 2021, the Company sold the swaps and related securities, which resulted in a gain of $0.9 million related to the swaps to be recognized immediately. The gain was recorded in other noninterest income on the statement of operations. The Swap Agreements were based on three-month LIBOR and had original expiration dates in 2030 and 2031.
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 JuneJuly 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 fedfederal 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. During the three months ended March 31, 2022, the Company sold certain tax-exempt municipal bonds and $16.5 million notional amount of the related interest rate caps for $1.1 million in proceeds for the interest rate caps and recognized a gain of $0.4 million which was recognized immediately in other noninterest income on the statement of operations.
In 2012, the Company entered into a $12.5 million and a $3.0 million notional forward interest rate cap agreement (the “Cap“LIBOR Cap Agreements”) to hedge its variable rate subordinated debentures. The $3.0 million LIBOR Cap Agreements expireAgreement matured during the three months ended March 31, 2022. The remaining $12.5 million LIBOR Cap Agreement expires July 25, 2022 and March 15, 2022, respectively.2022. The Company utilizes interest rate capsutilized these LIBOR Cap Agreements as hedges against adverse changes in cash flows on the designated preferred trusts attributable to fluctuations in three-month LIBOR beyond 0.50% for the $3.0 million subordinated debenturedebentures and six-month LIBOR beyond 0.75% for the $12.5 million subordinated debenture.debentures. The capsCap 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| | 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 | | $ | 13,671 | | | Derivative assets | | $ | 18,992 | |
Cash flow hedge interest rate cap | | Derivative assets | | — | | | Derivative assets | | — | |
| | | | | | | | |
| | | | | | | | |
Fair value hedge interest rate cap | | Derivative assets | | 32,744 | | | Derivative assets | | 15,064 | |
The following table presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of those items as of the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying Amount of the Hedged Asset (Liability) | | Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of Hedged Assets/(Liabilities) |
| | March 31, 2022 | | December 31, 2021 | | March 31, 2022 | | December 31, 2021 |
| | | | | | | | |
| | (Dollars in thousands) |
Line Item in the Statement of Financial Condition of Hedged Item: | | | | | | | | |
Securities available-for-sale | | $ | 742,461 | | | $ | 697,437 | | | $ | (3,347) | | | $ | — | |
|
| | | | | | | | | | | | |
| | 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 |
|
22
The following table summarizes the effects of derivatives in cash flow and fair value hedging relationships designated as hedging instruments on the Company’s AOCI 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, |
| | 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 | | 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, | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | | | | | | | | | |
| | (Dollars in thousands) | | (Dollars in thousands) | | (Dollars in thousands) |
Derivatives designated as hedging instruments: | | | | | 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 | | $ | (857) | | | $ | (1,450) | | | Interest income - Other interest earning assets | | $ | 131 | | | $ | 136 | |
Cash flow hedge interest rate floor | | 18,710 |
| | — |
| | Interest income - Securities | | (491 | ) | | — |
| Cash flow hedge interest rate floor | | (3,426) | | | (5,800) | | | Interest income - Taxable securities | | 1,032 | | | 1,052 | |
Cash flow hedge interest rate cap | | (428 | ) | | 401 |
| | Interest expense - Subordinated debentures | | (127 | ) | | (111 | ) | Cash flow hedge interest rate cap | | — | | | — | | | Interest expense - Subordinated debentures | | (96) | | | (99) | |
Cash flow hedge interest rate swap | | — |
| | 24 |
| | Interest expense - FHLB advances | | — |
| | 54 |
| |
Fair value hedge interest rate cap(1) | | Fair value hedge interest rate cap(1) | | 19,448 | | | 375 | | |
________________________
(1)Represents amounts excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in other comprehensive income.
The Company estimates that approximately $0.2$1.6 million of net derivative gain for cash flow hedges included in OCIAOCI will be reclassified into earnings within the next 12 months. No gain or loss was reclassified from OCIAOCI into earnings as a result of forecasted transactions that failed to occur during the periods presented.
The following table presents the effect of fair value hedge accounting on the Company’s consolidated statements of operations for the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Location and Amount of Gain or (Loss) Recognized in Income on Fair Value Hedging Relationships |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
| | 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 | | $ | 17,779 | | | $ | 13,184 | | | $ | 3,592 | | | $ | 1,695 | |
Effects of fair value hedging relationships | | | | | | | | |
Interest rate contracts: | | | | | | | | |
Hedged items | | $ | — | | | $ | (3,701) | | | $ | (1,072) | | | $ | (743) | |
Derivatives designated as hedging instruments | | — | | | 3,701 | | | 1,053 | | | 743 | |
Amount excluded from effectiveness testing recognized in earnings based on amortization approach | | — | | | (610) | | | — | | | (25) | |
Note 8—Income Taxes
Comparison of the federal statutory income tax rates to the Company’s effective income tax rates for the periods presented are as follows:
|
| | | | | | | | | | | | | | |
| | Three Months Ended 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 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
| | Amount | | Rate | | Amount | | Rate |
| | | | | | | | |
| | (Dollars in thousands) |
Statutory federal tax | | $ | 7,222 | | | 21.0 | % | | $ | 2,415 | | | 21.0 | % |
State tax, net of federal benefit | | 2,840 | | | 8.3 | % | | (451) | | | (3.9) | % |
| | | | | | | | |
Tax credits | | (38) | | | (0.1) | % | | (41) | | | (0.4) | % |
Tax-exempt income, net | | (2,994) | | | (8.7) | % | | (347) | | | (3.0) | % |
Excess tax benefit from stock-based compensation | | (29) | | | (0.1) | % | | (3,003) | | | (26.1) | % |
Other items, net | | 14 | | | 0.0 | % | | 216 | | | 1.9 | % |
Actual tax expense (benefit) | | $ | 7,015 | | | 20.4 | % | | $ | (1,211) | | | (10.5) | % |
Income tax expense was $2.6$7.0 million for the three months ended September 30, 2019March 31, 2022 compared to $2.5a benefit of $1.2 million for the three months ended September 30, 2018. The increase was primarily related to increased pre-tax income.March 31, 2021. The effective tax rates for the three months ended September 30, 2019March 31, 2022 and September 30, 20182021 were 28.3%20.4% and 28.1%, respectively.
Income tax expense was $8.3 million for the nine months ended September 30, 2019 compared to $5.5 million for the nine months ended September 30, 2018. The increase was primarily related to increased pre-tax income. The effective tax rates for the nine months ended September 30, 2019 and September 30, 2018 were 28.1% and 27.9%(10.5)%, respectively. The increase in the Company’stax expense and effective tax rate was primarily related to anfor the three months ended March 31, 2022 were reduced by a significant increase in state blendedtax-exempt income earned on certain municipal bonds compared to the three months ended March 31, 2021. The lower effective tax rate and non-deductiblefor the three months ended March 31, 2021 was due to higher excess tax treatmentbenefits recognized on the exercise of certain noninterest expenses.stock options.
The deferred tax asset balance as of September 30, 2019March 31, 2022 was a liability of $3.8$97.1 million compared to an asset of $3.3$6.5 million as of December 31, 2018.2021. The primary changeincrease in balance was duethe deferred tax asset is attributable to the increase in unrealized gainslosses on the available-for-sale securities and derivative assets.portfolio.
Note 9 —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 $0.1$1.6 million as of September 30, 2019and $0.6 million at March 31, 2022 and December 31, 2018.
2021, respectively.
The Company’s commitments associated with outstanding letters of credit and commitments to extend credit expiring by period as of the date indicated are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
|
| | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | | | |
| | (Dollars in thousands) |
Unfunded lines of credit | | $ | 45,215 |
| | $ | 71,398 |
|
Letters of credit | | 257 |
| | 10 |
|
Total credit extension commitments | | $ | 45,472 |
| | $ | 71,408 |
|
| | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| | | | |
| | (Dollars in thousands) |
Unfunded lines of credit | | $ | 643,609 | | | $ | 248,092 | |
Letters of credit | | 821 | | | 484 | |
Total credit extension commitments | | $ | 644,430 | | | $ | 248,576 | |
Unfunded lines of credit represent unused credit facilities to the Company’s current borrowers that represent no change in credit risk that exist in the Company’s portfolio. Lines of credit generally have variable interest rates. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Company would be entitled to seek recovery from the client from the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, bitcoin, cash and/or marketable securities. The Company’s policies generally require that letter
of credit arrangements contain security and debt covenants like those contained in loan agreements and our credit risk associated with issuing letters of credit is essentially the same as the risk involved in extending loan facilities to customers.
The Company minimizes its exposure to loss under letters of credit and credit commitments by subjecting them to the same credit approval and monitoring procedures used for on-balance sheet instruments. The effect on the Company’s revenue, expenses, cash flows and liquidity of the unused portions of these letters of credit commitments cannot be precisely predicted because there is no guarantee that the lines of credit will be used.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract, for a specific purpose. Commitments generally have variable interest rates, fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management’s credit evaluation of the customer.
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:
|
| | | |
| | September 30, 2019 |
Weighted-average remaining lease term | | 3.2 years |
|
Weighted-average discount rate | | 4.21 | % |
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 |
|
Litigation
The Company is involved in various matters of litigation which have arisen in the ordinary course of its business. In the opinion of management, the disposition of such pending litigation will not have a material adverse effect on the Company’s financial statements.
Note 10—Stock-based Compensation
In June 2018, the Company adopted the 2018 Equity Compensation Plan, or 2018 Plan, that permits the Compensation Committee, in its sole discretion, to grant various forms of incentive awards. Under the 2018 Plan, the Compensation Committee has the power to grant stock options, stock appreciation rights, or SARs, restricted stock and restricted stock units. The number of shares that may be issued pursuant to awards under the 2018 Plan is 1,596,753.
In 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 incomeexpense was $17,000$0.7 million and $17,000$0.3 million for the three months ended September 30, 2019March 31, 2022 and 2018,2021, respectively. Total compensation cost charged against income was $66,000 and $97,000 for the nine months ended September 30, 2019 and 2018, respectively.
Stock Options
A summary of stock option activity as of September 30, 2019March 31, 2022 and changes during the ninethree months ended September 30, 2019March 31, 2022 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, 2022 | | 191,191 | | | $ | 24.97 | | | | | |
Granted | | 29,117 | | | 110.84 | | | | | |
Exercised | | (1,840) | | | 16.09 | | | | | |
Forfeited or expired | | (1,511) | | | 16.09 | | | | | |
Outstanding at March 31, 2022 | | 216,957 | | | $ | 36.63 | | | 7.3 years | | $ | 24,720 | |
Exercisable at March 31, 2022 | | 99,654 | | | $ | 19.28 | | | 6.0 years | | $ | 13,083 | |
Vested or Expected to Vest at March 31, 2022 | | 209,715 | | | $ | 36.34 | | | 7.2 years | | $ | 23,956 | |
As of September 30, 2019,March 31, 2022, there was $0.1$2.2 million of total unrecognized compensation cost related to non-vestednonvested stock options which is expected to be recognized over a weighted-average period of 1.72.4 years.
Restricted Stock Units
A summary of the status of the Company’s nonvested restricted stock unit awards as of March 31, 2022, and changes during the three months ended March 31, 2022, is presented below:
| | | | | | | | | | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value Per Share |
Nonvested at January 1, 2022 | | 56,871 | | | $ | 72.53 | |
Granted | | 43,165 | | | $ | 110.84 | |
Vested | | (7,128) | | | $ | 122.91 | |
Forfeited | | (1,029) | | | $ | 71.99 | |
Nonvested at March 31, 2022 | | 91,879 | | | $ | 86.63 | |
At March 31, 2022, there was approximately $6.1 million of total unrecognized compensation expense related to nonvested restricted stock unit awards, which is expected to be recognized over a weighted-average period of 2.6 years.
Note 11—Regulatory Capital
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. 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 Company and the Bank’s regulatory capital reflects the one-time AOCI opt-out election made in the first reporting period after it was subject to capital requirements and therefore the net unrealized gain or loss on available for sale securities and derivatives are not included in computing regulatory capital. Management believes, as of September 30, 2019,March 31, 2022, the Company and the Bank meetmet all capital adequacy requirements to which they arewere 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, 2019March 31, 2022 and December 31, 2018,2021, are presented in the following tables:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum capital adequacy(1) | | To be well capitalized |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
March 31, 2022 | | | | | | | | | | | | |
The Company | | | | | | | | | | | | |
Tier 1 leverage ratio | | $ | 1,597,946 | | | 9.68 | % | | $ | 660,633 | | | 4.00 | % | | N/A | | N/A |
Common equity tier 1 capital ratio | | 1,388,825 | | | 38.97 | % | | 160,360 | | | 4.50 | % | | N/A | | N/A |
Tier 1 risk-based capital ratio | | 1,597,946 | | | 44.84 | % | | 213,813 | | | 6.00 | % | | N/A | | N/A |
Total risk-based capital ratio | | 1,603,983 | | | 45.01 | % | | 285,084 | | | 8.00 | % | | N/A | | N/A |
The Bank | | | | | | | | | | | | |
Tier 1 leverage ratio | | 1,577,199 | | | 9.51 | % | | 663,196 | | | 4.00 | % | | $ | 828,995 | | | 5.00 | % |
Common equity tier 1 capital ratio | | 1,577,199 | | | 44.28 | % | | 160,273 | | | 4.50 | % | | 231,505 | | | 6.50 | % |
Tier 1 risk-based capital ratio | | 1,577,199 | | | 44.28 | % | | 213,697 | | | 6.00 | % | | 284,929 | | | 8.00 | % |
Total risk-based capital ratio | | 1,583,236 | | | 44.45 | % | | 284,929 | | | 8.00 | % | | 356,161 | | | 10.00 | % |
| | | | | | | | | | | | | | | | | Actual | | Minimum capital adequacy(1) | | To be well capitalized |
| | Actual | | Minimum capital adequacy | | To be well capitalized | | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | | | | | | | | | | | |
| | | | | | | | | | | | | | | (Dollars in thousands) |
| | (Dollars in thousands) | |
September 30, 2019 | | | | | | | | | | | | | |
December 31, 2021 | | December 31, 2021 | |
The Company | | | | | | | | | | | | | The Company | |
Tier 1 leverage ratio | | $ | 229,963 |
| | 10.43 | % | | $ | 88,208 |
| | 4.00 | % | | N/A |
| | N/A |
| Tier 1 leverage ratio | | $ | 1,631,257 | | | 11.07 | % | | $ | 589,614 | | | 4.00 | % | | N/A | | N/A |
Common equity tier 1 capital ratio | | 214,463 |
| | 23.57 | % | | 40,939 |
| | 4.50 | % | | N/A |
| | N/A |
| Common equity tier 1 capital ratio | | 1,422,136 | | | 49.53 | % | | 129,198 | | | 4.50 | % | | N/A | | N/A |
Tier 1 risk-based capital ratio | | 229,963 |
| | 25.28 | % | | 54,585 |
| | 6.00 | % | | N/A |
| | N/A |
| Tier 1 risk-based capital ratio | | 1,631,257 | | | 56.82 | % | | 172,264 | | | 6.00 | % | | N/A | | N/A |
Total risk-based capital ratio | | 236,268 |
| | 25.97 | % | | 72,780 |
| | 8.00 | % | | N/A |
| | N/A |
| Total risk-based capital ratio | | 1,638,794 | | | 57.08 | % | | 229,686 | | | 8.00 | % | | N/A | | N/A |
The Bank | | | | | | | | | | | | | The Bank | |
Tier 1 leverage ratio | | 220,308 |
| | 10.01 | % | | 88,062 |
| | 4.00 | % | | 110,077 |
| | 5.00 | % | Tier 1 leverage ratio | | 1,546,693 | | | 10.49 | % | | 589,595 | | | 4.00 | % | | $ | 736,994 | | | 5.00 | % |
Common equity tier 1 capital ratio | | 220,308 |
| | 24.30 | % | | 40,790 |
| | 4.50 | % | | 58,919 |
| | 6.50 | % | Common equity tier 1 capital ratio | | 1,546,693 | | | 53.89 | % | | 129,162 | | | 4.50 | % | | 186,567 | | | 6.50 | % |
Tier 1 risk-based capital ratio | | 220,308 |
| | 24.30 | % | | 54,386 |
| | 6.00 | % | | 72,515 |
| | 8.00 | % | Tier 1 risk-based capital ratio | | 1,546,693 | | | 53.89 | % | | 172,216 | | | 6.00 | % | | 229,622 | | | 8.00 | % |
Total risk-based capital ratio | | 226,613 |
| | 25.00 | % | | 72,515 |
| | 8.00 | % | | 90,644 |
| | 10.00 | % | Total risk-based capital ratio | | 1,554,230 | | | 54.15 | % | | 229,622 | | | 8.00 | % | | 287,027 | | | 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 | % |
(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 shareholdersshareholder 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—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—-QuotedQuoted 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—-SignificantSignificant 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—-SignificantSignificant 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:
InvestmentsSecurities. The fair values of securities available-for-sale and trading securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or. For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing which is a mathematical technique commonly used widely in the industry to valueprice debt securities that are not actively traded, which values debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2)2 inputs).
Derivatives. The Company’s derivative assets and liabilities are carried at fair value as required by GAAP. The estimated fair values of the derivative assets and liabilities are based on current market prices for similar instruments. Given the meaningful level of secondary market activity for derivative contracts, active pricing is available for similar assets and accordingly, the Company classifies its derivative assets and liabilities as Level 2.
Impaired loans (collateral-dependent). The Company does not record impaired loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect (1) partial write-downs, through charge-offs or specific allowances, that are based on the current appraised or market-quoted value of the underlying collateral or (2) the full charge-off of the loan carrying value. In some cases, the properties for which market quotes or appraised values
have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for collateral-dependent impaired loans are obtained from real estate brokers or other third-party consultants. These appraisals may utilize a single valuation approach or a combination of approaches, which generally include various Level 3 inputs. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available and such adjustments are typically significant (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) measurement. To the extent a negotiated sales price or reduced listing price represents a significant discount to an observable market price, such valuation input would result in a fair value measurement that is also considered a (Level 3) measurement.
The following tables provide the hierarchy and fair value for each class of assets and liabilities measured at fair value at September 30, 2019 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.
As of September 30, 2019March 31, 2022 and December 31, 2018,2021, 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) |
March 31, 2022 | | | | | | | | |
Assets | | | | | | | | |
| | | | | | | | |
Securities available-for-sale | | $ | 176,343 | | | $ | 9,287,151 | | | $ | — | | | $ | 9,463,494 | |
Derivative assets | | — | | | 46,415 | | | — | | | 46,415 | |
| | $ | 176,343 | | | $ | 9,333,566 | | | $ | — | | | $ | 9,509,909 | |
| | | | | | | | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
As of September 30, 2019 and December 31, 2018, | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2021 | | | | | | | | |
Assets | | | | | | | | |
| | | | | | | | |
Securities available-for-sale | | $ | — | | | $ | 8,625,259 | | | $ | — | | | $ | 8,625,259 | |
Derivative assets | | — | | | 34,056 | | | — | | | 34,056 | |
| | $ | — | | | $ | 8,659,315 | | | $ | — | | | $ | 8,659,315 | |
| | | | | | | | |
| | | | | | | | |
There were no assets measured at fair value on a non-recurringnonrecurring 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 |
|
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
of March 31, 2022 and December 31, 2021.Financial Instruments Not Required To Be Carried At Fair Value
FASB ASC Topic 825, Financial Instruments, requires the disclosure of the estimated fair value of financial instruments. The Company’s estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts the Company could have realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The following tables present information about the Company’s assets and liabilities that are not measured at fair value in the consolidated statements of financial condition as of the dates presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying Amount | | Fair Value Measurements Using |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | | | |
| | (Dollars in thousands) |
March 31, 2022 | | | | | | | | | | |
Financial assets: | | | | | | | | | | |
Cash and due from banks | | $ | 207,304 | | | $ | 207,304 | | | $ | — | | | $ | — | | | $ | 207,304 | |
Interest earning deposits | | 1,178,205 | | | 1,178,205 | | | — | | | — | | | 1,178,205 | |
Securities held-to-maturity | | 2,751,625 | | | 1,202,805 | | | 1,376,171 | | | — | | | 2,578,976 | |
Loans held-for-sale | | 937,140 | | | — | | | 937,140 | | | — | | | 937,140 | |
Loans held-for-investment, net | | 739,014 | | | — | | | — | | | 742,784 | | | 742,784 | |
Accrued interest receivable | | 62,573 | | | 158 | | | 17,070 | | | 45,345 | | | 62,573 | |
Financial liabilities: | | | | | | | | | | |
Deposits | | $ | 13,396,162 | | | $ | — | | | $ | 12,839,700 | | | $ | — | | | $ | 12,839,700 | |
| | | | | | | | | | |
FHLB advances | | 800,000 | | | — | | | 800,000 | | | — | | | 800,000 | |
| | | | | | | | | | |
| | | | | | | | | | |
Subordinated debentures, net | | 15,848 | | | — | | | 15,745 | | | — | | | 15,745 | |
Accrued interest payable | | 111 | | | — | | | 111 | | | — | | | 111 | |
| | | | | | | | | | | | | | | Carrying Amount | | Fair Value Measurements Using |
| | Carrying Amount | | Fair Value Measurements Using | | | Level 1 | | Level 2 | | Level 3 | | Total |
| | Level 1 | | Level 2 | | Level 3 | | Total | | | | | | | | | | |
| | | | | | | | | | | | | (Dollars in thousands) |
| | (Dollars in thousands) | |
September 30, 2019 | | | | | | | | | | | |
December 31, 2021 | | December 31, 2021 | |
Financial assets: | | | | | | | | | | | Financial assets: | |
Cash and due from banks | | $ | 4,098 |
| | $ | 4,098 |
| | $ | — |
| | $ | — |
| | $ | 4,098 |
| Cash and due from banks | | $ | 208,193 | | | $ | 208,193�� | | | $ | — | | | $ | — | | | $ | 208,193 | |
Interest earning deposits | | 156,160 |
| | 156,160 |
| | — |
| | — |
| | 156,160 |
| Interest earning deposits | | 5,179,753 | | | 5,179,753 | | | — | | | — | | | 5,179,753 | |
| Loans held-for-sale | | Loans held-for-sale | | 893,194 | | | — | | | 893,194 | | | — | | | 893,194 | |
Loans held-for-investment, net | | 691,990 |
| | — |
| | — |
| | 693,764 |
| | 693,764 |
| Loans held-for-investment, net | | 887,304 | | | — | | | — | | | 891,166 | | | 891,166 | |
Loans held-for-sale | | 311,410 |
| | — |
| | 311,508 |
| | — |
| | 311,508 |
| |
FHLB and FRB stock | | 10,264 |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| |
Accrued interest receivable | | 5,875 |
| | 45 |
| | 2,247 |
| | 3,583 |
| | 5,875 |
| Accrued interest receivable | | 40,370 | | | 41 | | | 8,980 | | | 31,349 | | | 40,370 | |
Financial liabilities: | | | | | | | | | | | Financial liabilities: | |
Deposits | | $ | 1,848,095 |
| | $ | — |
| | $ | 1,859,500 |
| | $ | — |
| | $ | 1,859,500 |
| Deposits | | $ | 14,290,628 | | | $ | — | | | $ | 14,167,200 | | | $ | — | | | $ | 14,167,200 | |
FHLB advances | | 20,000 |
| | — |
| | 20,000 |
| | — |
| | 20,000 |
| |
Notes payable | | 4,000 |
| | — |
| | 4,000 |
| | — |
| | 4,000 |
| |
Subordinated debentures | | 15,813 |
| | — |
| | 15,124 |
| | — |
| | 15,124 |
| |
| Subordinated debentures, net | | Subordinated debentures, net | | 15,845 | | | — | | | 15,646 | | | — | | | 15,646 | |
Accrued interest payable | | 446 |
| | — |
| | 446 |
| | — |
| | 446 |
| Accrued interest payable | | 223 | | | — | | | 223 | | | — | | | 223 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | 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—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 |
|
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
| | | | | | | | |
| | | | | | (In thousands, except per share data) |
Basic | | | | | | | | |
Net income | | | | | | $ | 27,386 | | | $ | 12,710 | |
Less: Dividends paid to preferred shareholders | | | | | | 2,688 | | | — | |
Net income available to common shareholders | | | | | | $ | 24,698 | | | $ | 12,710 | |
Weighted average common shares outstanding | | | | | | 31,219 | | | 22,504 | |
Basic earnings per common share | | | | | | $ | 0.79 | | | $ | 0.56 | |
Diluted | | | | | | | | |
Net income available to common shareholders | | | | | | $ | 24,698 | | | $ | 12,710 | |
Weighted average common shares outstanding for basic earnings per common share | | | | | | 31,219 | | | 22,504 | |
Add: Dilutive effects of stock-based awards | | | | | | 182 | | | 506 | |
Average shares and dilutive potential common shares | | | | | | 31,401 | | | 23,010 | |
Dilutive earnings per common share | | | | | | $ | 0.79 | | | $ | 0.55 | |
Stock optionsStock-based awards for 110,00048,000 and 114,00044,000 shares of common stock for the three months ended September 30, 2019March 31, 2022 and 2018, respectively, and 110,000 and 76,000 shares of common stock for the nine months ended September 30, 2019 and 2018,2021, 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.
Preferred Stock
The Company, upon authorization of the board of directors, may issue shares of one or more series of preferred stock from time to time. The board of directors may, without any action by holders of Class A and Class B Common Stock or, except as may be otherwise provided in the terms of any series of preferred stock of which there are shares outstanding, holders of preferred stock adopt resolutions to designate and establish a new series of preferred stock. Upon establishing such a series of
preferred stock, the board will determine the number of shares of preferred stock of that series that may be issued and the rights and preferences of that series of preferred stock. The 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.
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 $193.6 million after deducting underwriting discounts and offering expenses. When, as and if declared by the board of directors of the Company, or a duly authorized board committee, dividends will be payable from the date of issuance, quarterly in arrears, beginning on November 15, 2021. The Company may redeem the Series A Preferred Stock at its option, subject to regulatory approval, on or after August 15, 2026.
Preferred Stock Dividend
On October 14, 2021, the Company’s Board of Directors declared the first quarterly dividend payment of $15.08 per share, equivalent to $0.377 per depositary share, on its Series A Preferred Stock, for the period covering August 4, 2021 through November 14, 2021 for a total dividend of $3.0 million. The depositary shares representing the Series A Preferred Stock are traded on the New York Stock Exchange under the symbol “SI PRA.” The dividend was paid on November 15, 2021 to shareholders of record of the preferred stock as of October 29, 2021.
On January 14, 2022, the Company’s Board of Directors declared a quarterly dividend payment of $13.44 per share, equivalent to $0.336 per depositary share, on its Series A Preferred Stock, for the period covering November 15, 2021 through February 14, 2022 for a total dividend of $2.7 million. The depositary shares representing the Series A Preferred Stock are traded on the New York Stock Exchange under the symbol “SI PRA.” The dividend was paid on February 15, 2022 to shareholders of record of the preferred stock as of January 31, 2022.
Common Stock
Class A Voting Common Stock. Each holder of Class A Common Stock is entitled to one vote for each share on all matters submitted to a vote of shareholders, except as otherwise required by law and subject to the rights and preferences of the holders of any outstanding shares of our preferred stock. The members of the Company’s board of directors are elected by a plurality of the votes cast. The Company’s Articles expressly prohibit cumulative voting.
Class B Non-Voting Common Stock. Class B Non-Voting Common Stock is non-voting while held by the initial holder with certain limited exceptions. Each share of Class B Non-Voting Common Stock will automatically convert into a share of Class A Common Stock upon certain sales or transfers by the initial holder of such shares including to an unaffiliated third-party and in a widely dispersed public offering. If Class B Non-Voting Common Stock is sold or transferred to an affiliate of the initial holder, the Class B Non-Voting Common Stock would not convert into Class A Common Stock.
On February 23, 2018,January 26, 2021, the Company completed its underwritten public offering of 4,563,493 shares of Class A common stock at a private placementprice of 9.5$63.00 per share, including 595,238 shares of Class A common stock upon the exercise in full by the underwriters of their option to purchase additional shares. The aggregate gross proceeds of the offering were $287.5 million and net proceeds to the Company were $272.4 million after deducting underwriting discounts and offering expenses.
On March 9, 2021, the Company entered into an equity distribution agreement pursuant to which the Company could issue and sell, from time to time, up to an aggregate gross sales price of $300.0 million of the Company’s shares of Class A common stock through an “at-the-market” equity offering program, or ATM Offering. As of June 30, 2021, the Company had completed the ATM Offering with a total of 2,793,826 shares of Class A common stock sold at an average price of $107.38. The transactions resulted in net proceeds to the Company of $295.1 million after deducting commissions and expenses.
On December 9, 2021, the Company completed its underwritten public offering of 3,806,895 shares of Class A common stock at a price of $145.00 per share, including 496,551 shares of Class A common stock upon the exercise in full by the underwriters of their option to purchase additional shares. The aggregate gross proceeds of the offering were $552.0 million and net proceeds to the Company were $530.3 million after deducting underwriting discounts and offering expenses.
On January 31, 2022 the Company issued 1,221,217 shares of the Company’s Class A common stock generating gross proceedsto the Sellers for the purchase of $114.0certain technology assets, at a price of $107.74 per share for a total value of $131.6 million. Costs incurred with
Note 15—Subsequent Event
Preferred Stock Dividend
On April 11, 2022, the private placement were $6.1Company’s Board of Directors declared a quarterly dividend payment of $13.44 per share, equivalent to $0.336 per depositary share, on its Series A Preferred Stock, for the period covering February 15, 2022 through May 14, 2022, for a total dividend of $2.7 million. The private placement raised net proceeds of $107.9 million of common equity, $60.0 million of which was contributed as equity capital todepositary shares representing the Bank during the first quarter of 2018. Proceeds from this placement also funded a stock repurchase of 997,506 shares of ClassSeries 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
IPO
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 isPreferred Stock are traded on the New York Stock Exchange under the ticker symbol “SI.“SI PRA.” The IPO generated aggregate gross proceedsdividend will be payable on May 16, 2022 to the Companyshareholders 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. On November 15, 2019, the underwriters purchased an additional 499,999 sharesrecord of the Company’s ClassSeries A common 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 yearsPreferred Stock as of September 30, 2019. These certificatesApril 29, 2022.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the related notes and the Company’s Registration StatementAnnual Report on Form S-1,10-K, which contains audited financial statements of the Company as of and for the year ended December 31, 2018,2021, previously filed with the Securities and Exchange Commission (“SEC”). Results for the three and nine month periodsmonths ended September 30, 2019March 31, 2022 are not necessarily indicative of results for the year ending December 31, 20192022 or any future period.
Cautionary Note Regarding Forward LookingForward-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. While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: changes in general economic, political, or industry conditions; geopolitical concerns, including the ongoing war in Ukraine; the magnitude and duration of the COVID-19 pandemic and related variants and mutations and their impact on the global economy and financial market conditions and our business, results of operations, and financial condition; uncertainty in U.S. fiscal and monetary policy, including the interest rate policies of the Board of Governors of the Federal Reserve System; inflation/deflation, interest rate, market, and monetary fluctuations; volatility and disruptions in global capital and credit markets; the transition away from USD London Interbank Offered Rate (or “LIBOR”) and uncertainty regarding potential alternative reference rates, including SOFR; competitive pressures on product pricing and services; success, impact, and timing of our business strategies, including market acceptance of any new products or services; the impact of changes in financial services policies, laws, and regulations, including those concerning taxes, banking, securities, digital currencies and insurance, and the application thereof by regulatory bodies; cybersecurity threats and the cost of defending against them, including the costs of compliance with potential legislation to combat cybersecurity at a state, national, or global level; and other factors that may affect our future results.
If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports and registration statements filed by us with the SEC. For information on the factors that could cause actual results to differ from the expectations stated in the forward- looking statements, see “Risk Factors” under Part I, Item 1A of our 2021 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. InstrumentalKey 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 growinggrow our noninterest bearing deposit product for digital currency industry participants, which has provided the majority of our funding over the last two fouryears. This unique source of funding is a distinctivedistinct advantage over most traditional financial institutions and allows us to generate revenue from a conservative portfolio of investments in cash, short term securities and certain types of loans that we believe
generate attractive risk-adjusted returns. In addition, use of the SEN has resulted in an increase in noninterest income that we believe will become a valuable source of additional revenue as we develop and deploy fee-based solutions in connection with our digital currency initiative. We are also evaluating additional products or product enhancements specifically targeted at providing further financial infrastructure solutions to our customers and strengthening SEN network effects.
The Company is a Maryland corporation that is the parent company of Silvergate Bank. The Company’swhose 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 conversion to a commercial bankIn 2013, we began introducing an expanded array of relationship-oriented business products and services, which inexploring the past five years has been augmented by our digital currency initiative. Whileindustry and have significantly expanded and reoriented our commercial real estate lending activities are concentrated in California, we have a broader, nationwide
focus onproduct and service menus since that time to support our growing digital currency initiative, including the implementation of deposit and cash management services for digital currency-relatedcurrency related businesses, as well asdomestically and internationally. Because of our focus on the digital currency industry in recent years and the unique value-add solutions and services we provide, we have experienced a significant increase in our noninterest bearing deposits which has allowed us to generate attractive returns on lower risk assets through increased investments in interest earning deposits in other banks and securities. Correspondingly, we have significantly de-emphasized our real estate lending and, currently, our lending activities are focused on digital currency collateralized loans or SEN Leverage, and mortgage warehouse and correspondent residential lending. Our goalloans. In fact, our SEN Leverage lending product, which was piloted during 2020, is to establish profitable long-term banking relationships.
In March 2019, the Company and the Bank completed the salenow one of the Bank’s retail branch located in San Marcos, California and business loan portfolio to HomeStreet Bank. This transaction generated a pre-tax gain 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.Company’s core lending products.
Digital Currency Initiative
We leverage the SEN and our management team’s expertise in the digital currency industry to develop, implement and maintain critical financial infrastructure solutions and services for many of the largest U.S. digital currency exchanges and global investors, as well as other digital currency infrastructure providers that utilize the Company as a foundational layer for their products. The SEN is a central element of the operations of our digital currency related customers, which enables us to grow with our existing customers and to attract new customers who can benefit from our innovative solutions and services. We believe that our 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 sixeight 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,March 31, 2022, we had 250over 300 prospective digital currency customerscustomer 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 chartlist sets forth summary information regarding the types of market participants who 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 (“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:Companies developing new protocols, platforms and applications; mining operations; and providers of other services. |
Our customers include some of the largest U.S. exchanges and global investors in the digital currency industry. These market participants generally hold either or both of two distinct types of funds: (i) those funds that market participants use for digital currency investment activities, which we refer to as investor funds, and (ii) those funds that market participants use for business operations, which we refer to as operating funds.
Our customer ecosystem also includes software developers, digital currency miners, custodians and general industry participants that need our solutions and services.
Silvergate Exchange Network
The following table presentsFor the numberthree months ended March 31, 2022, there were $142.3 billion of transactions and the U.S. dollar volume of transactionstransfers that occurred on the SEN, forcompared to $166.5 billion during the periods presented:
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
three months ended March 31, 2021.
Financial Results
In November 2020, the SEC adopted amendments to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K, which became effective on February 10, 2021. One update to Item 303 of Regulation S-K allows registrants to compare the results of the most recently completed quarter to the results of either the immediately preceding quarter or the corresponding quarter of the preceding year. We have elected to adopt this rule change, as management believes that comparing current quarter results to those of the immediately preceding quarter is more useful in identifying current business trends and provides a more meaningful comparison. Accordingly, we have compared the results for the three months ended March 31, 2022 and December 31, 2021, where applicable, throughout this Management's Discussion and Analysis. As required, we continue to compare our year-to-date results to the corresponding year-to-date results of the preceding year.
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 | |
| 2019 | | 2018 | | 2019 | | 2018 | | March 31, 2022 | | December 31, 2021 | | March 31, 2021 | |
| | | | | | | | | | | | | | |
| (In thousands, except per share data) | | (In thousands, except per share data) |
Statement of Operations Data: | | | | | | | | Statement of Operations Data: | | |
Interest income | $ | 21,388 |
| | $ | 18,707 |
| | $ | 60,923 |
| | $ | 51,151 |
| Interest income | | $ | 50,838 | | | $ | 38,482 | | | $ | 23,306 | | |
Interest expense | 2,945 |
| | 737 |
| | 5,596 |
| | 2,391 |
| Interest expense | | 343 | | | 276 | | | 291 | | |
Net interest income | 18,443 |
| | 17,970 |
| | 55,327 |
| | 48,760 |
| Net interest income | | 50,495 | | | 38,206 | | | 23,015 | | |
(Reversal of) provision for loan losses | (858 | ) | | — |
| | (439 | ) | | 148 |
| |
Reversal of provision for loan losses | | Reversal of provision for loan losses | | (2,474) | | | — | | | — | | |
Net interest income after provision | 19,301 |
| | 17,970 |
| | 55,766 |
| | 48,612 |
| Net interest income after provision | | 52,969 | | | 38,206 | | | 23,015 | | |
Noninterest income | 2,599 |
| | 2,184 |
| | 12,624 |
| | 5,572 |
| Noninterest income | | 9,450 | | | 11,055 | | | 8,090 | | |
Noninterest expense | 12,611 |
| | 11,417 |
| | 38,818 |
| | 34,346 |
| Noninterest expense | | 28,018 | | | 25,656 | | | 19,606 | | |
Income before income taxes | 9,289 |
| | 8,737 |
| | 29,572 |
| | 19,838 |
| Income before income taxes | | 34,401 | | | 23,605 | | | 11,499 | | |
Income tax expense | 2,633 |
| | 2,458 |
| | 8,324 |
| | 5,525 |
| |
Income tax expense (benefit) | | Income tax expense (benefit) | | 7,015 | | | 2,214 | | | (1,211) | | |
Net income | $ | 6,656 |
| | $ | 6,279 |
| | $ | 21,248 |
| | $ | 14,313 |
| Net income | | 27,386 | | | 21,391 | | | 12,710 | | |
Dividends on preferred stock | | Dividends on preferred stock | | 2,688 | | | 3,016 | | | — | | |
Net income available to common shareholders | | Net income available to common shareholders | | $ | 24,698 | | | $ | 18,375 | | | $ | 12,710 | | |
Financial Ratios(1): | | | | | | | | Financial Ratios(1): | | | | | | | |
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) | | 0.60 | % | | 0.50 | % | | 0.71 | % | |
Return on average equity (ROAE) | | Return on average equity (ROAE) | | 6.06 | % | | 6.08 | % | | 9.76 | % | |
Return on average common equity (ROACE) | | Return on average common equity (ROACE) | | 6.87 | % | | 7.25 | % | | 9.76 | % | |
Net interest margin(2) | | Net interest margin(2) | | 1.36 | % | | 1.11 | % | | 1.33 | % | |
Noninterest income to average assets | | Noninterest income to average assets | | 0.23 | % | | 0.30 | % | | 0.45 | % | |
Noninterest expense to average assets | 2.27 | % | | 2.32 | % | | 2.52 | % | | 2.41 | % | Noninterest expense to average assets | | 0.68 | % | | 0.69 | % | | 1.10 | % | |
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) | | 46.74 | % | | 52.08 | % | | 63.03 | % | |
Loan yield(4) | | Loan yield(4) | | 4.51 | % | | 4.32 | % | | 4.31 | % | |
Cost of deposits | 0.50 | % | | 0.09 | % | | 0.29 | % | | 0.11 | % | Cost of deposits | | 0.00 | % | | 0.00 | % | | 0.00 | % | |
Cost of funds | 0.59 | % | | 0.17 | % | | 0.41 | % | | 0.18 | % | Cost of funds | | 0.01 | % | | 0.01 | % | | 0.02 | % | |
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 | | $ | 0.79 | | | $ | 0.67 | | | $ | 0.56 | | |
Diluted earnings per common share | | Diluted earnings per common share | | $ | 0.79 | | | $ | 0.66 | | | $ | 0.55 | | |
Basic weighted average shares outstanding | 17,840 |
| | 17,808 |
| | 17,830 |
| | 16,113 |
| Basic weighted average shares outstanding | | 31,219 | | | 27,527 | | | 22,504 | | |
Diluted weighted average shares outstanding | 18,246 |
| | 18,254 |
| | 18,252 |
| | 16,607 |
| Diluted weighted average shares outstanding | | 31,401 | | | 27,744 | | | 23,010 | | |
________________________ | |
(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.
The following table presents the components of financial condition and ratios at the dates indicated:
| | | | September 30, 2019 | | December 31, 2018 | | March 31, 2022 | | December 31, 2021 |
| | | | | | | | |
| | (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 | | $ | 1,385,509 | | | $ | 5,387,946 | |
Securities | | 909,917 |
| | 357,251 |
| Securities | | 12,215,119 | | | 8,625,259 | |
Loans held-for-sale | | Loans held-for-sale | | 937,140 | | | 893,194 | |
Loans held-for-investment, net | | 691,990 |
| | 592,781 |
| Loans held-for-investment, net | | 739,014 | | | 887,304 | |
Loans held-for-sale | | 311,410 |
| | 350,636 |
| |
Other assets | | 63,269 |
| | 29,230 |
| |
Other | | Other | | 521,231 | | | 211,792 | |
Total assets | | $ | 2,136,844 |
| | $ | 2,004,318 |
| Total assets | | $ | 15,798,013 | | | $ | 16,005,495 | |
Deposits | �� | $ | 1,848,095 |
| | $ | 1,783,005 |
| Deposits | | $ | 13,396,162 | | | $ | 14,290,628 | |
Borrowings | | 39,813 |
| | 20,659 |
| Borrowings | | 815,848 | | | 15,845 | |
Other liabilities | | 18,322 |
| | 9,408 |
| Other liabilities | | 39,507 | | | 90,186 | |
Total liabilities | | 1,906,230 |
| | 1,813,072 |
| Total liabilities | | 14,251,517 | | | 14,396,659 | |
Total shareholders’ equity | | 230,614 |
| | 191,246 |
| Total shareholders’ equity | | 1,546,496 | | | 1,608,836 | |
Total liabilities and shareholders' equity | | $ | 2,136,844 |
| | $ | 2,004,318 |
| Total liabilities and shareholders' equity | | $ | 15,798,013 | | | $ | 16,005,495 | |
Nonperforming Assets: | | | | | Nonperforming Assets: | | | | |
Nonperforming loans | | $ | 6,707 |
| | $ | 8,303 |
| |
Nonaccrual loans | | Nonaccrual loans | | $ | 3,632 | | | $ | 4,003 | |
Troubled debt restructurings | | $ | 1,840 |
| | $ | 514 |
| Troubled debt restructurings | | $ | 1,703 | | | $ | 1,713 | |
Other real estate owned, net | | $ | 81 |
| | $ | 31 |
| Other real estate owned, net | | — | | | — | |
Nonperforming assets | | $ | 6,788 |
| | $ | 8,334 |
| Nonperforming assets | | $ | 3,632 | | | $ | 4,003 | |
Asset Quality Ratios: | | | | | Asset Quality Ratios: | |
Nonperforming assets to total assets | | 0.32 | % | | 0.42 | % | Nonperforming assets to total assets | | 0.02 | % | | 0.03 | % |
Nonperforming loans to gross loans(1) | | 0.96 | % | | 1.39 | % | |
Nonperforming assets to gross loans and other real estate owned(1) | | 0.98 | % | | 1.40 | % | |
Net charge-offs (recoveries) to average total loans(1) | | 0.01 | % | | (0.01 | )% | |
Allowance for loan losses to gross loans(1) | | 0.89 | % | | 1.13 | % | |
Allowance for loan losses to nonperforming loans | | 92.31 | % | | 80.97 | % | |
Nonperforming loans to total loans(1) | | Nonperforming loans to total loans(1) | | 0.49 | % | | 0.45 | % |
Net charge-offs to average total loans(1) | | Net charge-offs to average total loans(1) | | 0.00 | % | | 0.00 | % |
Allowance for loan losses to total loans(1) | | Allowance for loan losses to total loans(1) | | 0.60 | % | | 0.77 | % |
Allowance for loan losses to nonaccrual loans | | Allowance for loan losses to nonaccrual loans | | 122.30 | % | | 172.77 | % |
Company Capital Ratios: | | | | | Company Capital Ratios: | |
Tier 1 leverage ratio | | 10.43 | % | | 9.00 | % | Tier 1 leverage ratio | | 9.68 | % | | 11.07 | % |
Common equity tier 1 capital ratio | | 23.57 | % | | 23.10 | % | Common equity tier 1 capital ratio | | 38.97 | % | | 49.53 | % |
Tier 1 risk-based capital ratio | | 25.28 | % | | 24.96 | % | Tier 1 risk-based capital ratio | | 44.84 | % | | 56.82 | % |
Total risk-based capital ratio | | 25.97 | % | | 25.77 | % | Total risk-based capital ratio | | 45.01 | % | | 57.08 | % |
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 | | 8.56 | % | | 8.84 | % |
Book value per common share | | Book value per common share | | $ | 42.77 | | | $ | 46.55 | |
Bank Capital Ratios: | | | | | Bank Capital Ratios: | |
Tier 1 leverage ratio | | 10.01 | % | | 8.51 | % | Tier 1 leverage ratio | | 9.51 | % | | 10.49 | % |
Common equity tier 1 capital ratio | | 24.30 | % | | 23.68 | % | Common equity tier 1 capital ratio | | 44.28 | % | | 53.89 | % |
Tier 1 risk-based capital ratio | | 24.30 | % | | 23.68 | % | Tier 1 risk-based capital ratio | | 44.28 | % | | 53.89 | % |
Total risk-based capital ratio | | 25.00 | % | | 24.50 | % | Total risk-based capital ratio | | 44.45 | % | | 54.15 | % |
Other: | | | | | Other: | |
Total headcount | | 209 |
| | 209 |
| Total headcount | | 308 | | | 279 | |
________________________ | |
(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.
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 have been no significant changes during the ninethree months ended September 30, 2019March 31, 2022 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 andAnnual Report on Form 10-K filed with the SEC on November 8, 2019, relating to its initial public offering (“IPO”).February 28, 2022.
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 SECAnnual 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 thethose 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 | | Three Months Ended |
| | 2019 | | 2018 | | % Increase/ (Decrease) | | 2019 | | 2018 | | % Increase/ (Decrease) | | March 31, 2022 | | December 31, 2021 | | % Increase/ (Decrease) | | March 31, 2022 | | March 31, 2021 | | % Increase/ (Decrease) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | (Dollars in thousands) | | (Dollars in thousands) |
Interest income | | $ | 21,388 |
| | $ | 18,707 |
| | 14.3 | % | | $ | 60,923 |
| | $ | 51,151 |
| | 19.1 | % | Interest income | | $ | 50,838 | | | $ | 38,482 | | | 32.1 | % | | $ | 50,838 | | | $ | 23,306 | | | 118.1 | % |
Interest expense | | 2,945 |
| | 737 |
| | 299.6 | % | | 5,596 |
| | 2,391 |
| | 134.0 | % | Interest expense | | 343 | | | 276 | | | 24.3 | % | | 343 | | | 291 | | | 17.9 | % |
Net interest income | | 18,443 |
| | 17,970 |
| | 2.6 | % | | 55,327 |
| | 48,760 |
| | 13.5 | % | Net interest income | | 50,495 | | | 38,206 | | | 32.2 | % | | 50,495 | | | 23,015 | | | 119.4 | % |
(Reversal of) provision for loan losses | | (858 | ) | | — |
| | N/M |
| | (439 | ) | | 148 |
| | (396.6 | )% | |
Reversal of provision for loan losses | | Reversal of provision for loan losses | | (2,474) | | | — | | | N/M | | (2,474) | | | — | | | N/M |
Net interest income after provision | | 19,301 |
| | 17,970 |
| | 7.4 | % | | 55,766 |
| | 48,612 |
| | 14.7 | % | Net interest income after provision | | 52,969 | | | 38,206 | | | 38.6 | % | | 52,969 | | | 23,015 | | | 130.1 | % |
Noninterest income | | 2,599 |
| | 2,184 |
| | 19.0 | % | | 12,624 |
| | 5,572 |
| | 126.6 | % | Noninterest income | | 9,450 | | | 11,055 | | | (14.5) | % | | 9,450 | | | 8,090 | | | 16.8 | % |
Noninterest expense | | 12,611 |
| | 11,417 |
| | 10.5 | % | | 38,818 |
| | 34,346 |
| | 13.0 | % | Noninterest expense | | 28,018 | | | 25,656 | | | 9.2 | % | | 28,018 | | | 19,606 | | | 42.9 | % |
Net income before income taxes | | 9,289 |
| | 8,737 |
| | 6.3 | % | | 29,572 |
| | 19,838 |
| | 49.1 | % | |
Income tax expense | | 2,633 |
| | 2,458 |
| | 7.1 | % | | 8,324 |
| | 5,525 |
| | 50.7 | % | |
Income before income taxes | | Income before income taxes | | 34,401 | | | 23,605 | | | 45.7 | % | | 34,401 | | | 11,499 | | | 199.2 | % |
Income tax expense (benefit) | | Income tax expense (benefit) | | 7,015 | | | 2,214 | | | 216.8 | % | | 7,015 | | | (1,211) | | | (679.3) | % |
Net income | | $ | 6,656 |
| | $ | 6,279 |
| | 6.0 | % | | $ | 21,248 |
| | $ | 14,313 |
| | 48.5 | % | Net income | | $ | 27,386 | | | $ | 21,391 | | | 28.0 | % | | $ | 27,386 | | | $ | 12,710 | | | 115.5 | % |
________________________N/M—Not meaningful
Net income for the three months ended September 30, 2019March 31, 2022 was $6.7$27.4 million, an increase of $0.4$6.0 million or 6.0%28.0% from net income of $6.3$21.4 million for the three months ended September 30, 2018.December 31, 2021. The increase was primarily due to an increase of $2.7 million or 14.3% in interest income, a $0.9 million loan loss reversal and a $0.4$12.3 million increase in noninterestnet interest income partiallyand a $2.5 million reversal of provision for loan losses offset by a $2.2$1.6 million increase or 299.6% in interest expense, a $1.2 million or 10.5% increasedecrease in noninterest expense andincome, a $0.2$4.8 million increase in income tax expense and a $2.4 million increase in noninterest expense, all as described below.
Net income for the ninethree months ended September 30, 2019March 31, 2022 was $21.2$27.4 million, an increase of $6.9$14.7 million or 48.5%115.5% from net income of $14.3$12.7 million for the ninethree months ended September 30, 2018.March 31, 2021. The increase was primarily due to ana $27.5 million increase of $9.8 million or 19.1% in net interest income, a $2.5 million reversal of provision for loan losses and a $7.1$1.4 million increase in noninterest income partially 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$8.2 million increase in income tax expense and a $8.4 million increase in noninterest expense, all as described below.
Net Interest Income and Net Interest Margin Analysis (Taxable Equivalent Basis)
We analyze our ability to maximize income generated from interest earning assets and control the interest expenses of our liabilities, measured as net interest income, through our net interest margin and net interest spread. Net interest income is the difference between the interest and fees earned on interest earning assets, such as loans, interest earning deposits in other banks and securities, and the interest expense incurred on interest bearing liabilities, such as deposits and borrowings, which are used to fund those assets. 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 costcosts are calculated by dividing income or expense by the average daily balances of the associated assets or liabilities for the same period.
Tax-exempt income from securities is calculated on a taxable equivalent basis. Net interest income, net interest spread and net interest margin are presented on a taxable equivalent basis to consistently reflect income from taxable securities and tax-exempt securities based on the federal statutory tax rate of 21.0%.
AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2022 | | December 31, 2021 |
| | Average Outstanding Balance | | Interest Income/ Expense | | Average Yield/ Rate | | Average Outstanding Balance | | Interest Income/ Expense | | Average Yield/ Rate |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
Assets | | | | | | | | | | | | |
Interest earning assets: | | | | | | | | | | | | |
Interest earning deposits in other banks | | $ | 3,067,054 | | | $ | 1,385 | | | 0.18 | % | | $ | 5,282,661 | | | $ | 2,166 | | | 0.16 | % |
Taxable securities | | 8,492,768 | | | 17,779 | | | 0.85 | % | | 5,735,932 | | | 10,178 | | | 0.70 | % |
Tax-exempt securities(1) | | 2,887,072 | | | 16,689 | | | 2.34 | % | | 1,728,862 | | | 9,454 | | | 2.17 | % |
Loans(2)(3) | | 1,644,604 | | | 18,287 | | | 4.51 | % | | 1,641,345 | | | 17,892 | | | 4.32 | % |
Other | | 41,751 | | | 203 | | | 1.97 | % | | 34,490 | | | 777 | | | 8.94 | % |
Total interest earning assets | | 16,133,249 | | | 54,343 | | | 1.37 | % | | 14,423,290 | | | 40,467 | | | 1.11 | % |
Noninterest earning assets | | 500,299 | | | | | | | 295,841 | | | | | |
Total assets | | $ | 16,633,548 | | | | | | | $ | 14,719,131 | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | | | | | |
Interest bearing liabilities: | | | | | | | | | | | | |
Interest bearing deposits | | $ | 76,663 | | | $ | 21 | | | 0.11 | % | | $ | 77,564 | | | $ | 27 | | | 0.14 | % |
FHLB advances and other borrowings | | 71,111 | | | 70 | | | 0.40 | % | | 12 | | | — | | | 0.00 | % |
Subordinated debentures | | 15,846 | | | 252 | | | 6.45 | % | | 15,843 | | | 249 | | | 6.24 | % |
Total interest bearing liabilities | | 163,620 | | | 343 | | | 0.85 | % | | 93,419 | | | 276 | | | 1.17 | % |
Noninterest bearing liabilities: | | | | | | | | | | | | |
Noninterest bearing deposits | | 14,781,601 | | | | | | | 13,377,552 | | | | | |
Other liabilities | | 36,770 | | | | | | | 49,023 | | | | | |
Shareholders’ equity | | 1,651,557 | | | | | | | 1,199,137 | | | | | |
Total liabilities and shareholders’ equity | | $ | 16,633,548 | | | | | | | $ | 14,719,131 | | | | | |
Net interest spread(4) | | | | | | 0.52 | % | | | | | | (0.06) | % |
Net interest income, taxable equivalent basis | | | | $ | 54,000 | | | | | | | $ | 40,191 | | | |
Net interest margin(5) | | | | | | 1.36 | % | | | | | | 1.11 | % |
Reconciliation to reported net interest income: | | | | | | | | | | | | |
Adjustments for taxable equivalent basis | | | | (3,505) | | | | | | | (1,985) | | | |
Net interest income, as reported | | | | $ | 50,495 | | | | | | | $ | 38,206 | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | 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 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2022 | | March 31, 2021 |
| | Average Outstanding Balance | | Interest Income/ Expense | | Average Yield/ Rate | | Average Outstanding Balance | | Interest Income/ Expense | | Average Yield/ Rate |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
Assets | | | | | | | | | | | | |
Interest earning assets: | | | | | | | | | | | | |
Interest earning deposits in other banks | | $ | 3,067,054 | | | $ | 1,385 | | | 0.18 | % | | $ | 4,450,110 | | | $ | 1,279 | | | 0.12 | % |
Taxable securities | | 8,492,768 | | | 17,779 | | | 0.85 | % | | 850,558 | | | 3,592 | | | 1.71 | % |
Tax-exempt securities(1) | | 2,887,072 | | | 16,689 | | | 2.34 | % | | 270,711 | | | 2,146 | | | 3.21 | % |
Loans(2)(3) | | 1,644,604 | | | 18,287 | | | 4.51 | % | | 1,559,989 | | | 16,597 | | | 4.31 | % |
Other | | 41,751 | | | 203 | | | 1.97 | % | | 15,331 | | | 143 | | | 3.78 | % |
Total interest earning assets | | 16,133,249 | | | 54,343 | | | 1.37 | % | | 7,146,699 | | | 23,757 | | | 1.35 | % |
Noninterest earning assets | | 500,299 | | | | | | | 72,155 | | | | | |
Total assets | | $ | 16,633,548 | | | | | | | $ | 7,218,854 | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | | | | | |
Interest bearing liabilities: | | | | | | | | | | | | |
Interest bearing deposits | | $ | 76,663 | | | $ | 21 | | | 0.11 | % | | $ | 117,228 | | | $ | 46 | | | 0.16 | % |
FHLB advances and other borrowings | | 71,111 | | | 70 | | | 0.40 | % | | — | | | — | | | — | |
Subordinated debentures and other | | 15,846 | | | 252 | | | 6.45 | % | | 15,832 | | | 245 | | | 6.28 | % |
Total interest bearing liabilities | | 163,620 | | | 343 | | | 0.85 | % | | 133,060 | | | 291 | | | 0.89 | % |
Noninterest bearing liabilities: | | | | | | | | | | | | |
Noninterest bearing deposits | | 14,781,601 | | | | | | | 6,526,555 | | | | | |
Other liabilities | | 36,770 | | | | | | | 30,911 | | | | | |
Shareholders’ equity | | 1,651,557 | | | | | | | 528,328 | | | | | |
Total liabilities and shareholders’ equity | | $ | 16,633,548 | | | | | | | $ | 7,218,854 | | | | | |
Net interest spread(4) | | | | | | 0.52 | % | | | | | | 0.46 | % |
Net interest income, taxable equivalent basis | | | | $ | 54,000 | | | | | | | $ | 23,466 | | | |
Net interest margin(5) | | | | | | 1.36 | % | | | | | | 1.33 | % |
Reconciliation to reported net interest income: | | | | | | | | | | | | |
Adjustments for taxable equivalent basis | | | | (3,505) | | | | | | | (451) | | | |
Net interest income, as reported | | | | $ | 50,495 | | | | | | | $ | 23,015 | | | |
________________________(1)Interest income on tax-exempt securities is presented on a taxable equivalent basis using the federal statutory tax rate of 21.0% for all periods presented.
(2)Loans include nonaccrual loans and loans held-for-sale, net of deferred fees and before allowance for loan losses.
(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 incometaxable equivalent basis, divided by average interest earning assets for the same period.
Information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest bearing liabilities and distinguishes between the changes
attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been proportionately allocated to both volume and rate.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, 2022 Compared to December 31, 2021 | | For the Three Months Ended March 31, 2022 Compared to March 31, 2021 |
| | Change Due To | | Interest Variance | | Change Due To | | Interest Variance |
| | Volume | | Rate | | | Volume | | Rate | |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
Interest Income: | | | | | | | | | | | | |
Interest earning deposits in other banks | | $ | (936) | | | $ | 155 | | | $ | (781) | | | $ | (398) | | | $ | 504 | | | $ | 106 | |
Taxable securities | | 4,564 | | | 3,037 | | | 7,601 | | | 32,274 | | | (18,087) | | | 14,187 | |
Tax-exempt securities(1) | | 5,990 | | | 1,245 | | | 7,235 | | | 20,731 | | | (6,188) | | | 14,543 | |
Loans | | (354) | | | 749 | | | 395 | | | 1,933 | | | (243) | | | 1,690 | |
Other | | 143 | | | (717) | | | (574) | | | 246 | | | (186) | | | 60 | |
Total interest income | | 9,407 | | | 4,469 | | | 13,876 | | | 54,786 | | | (24,200) | | | 30,586 | |
Interest Expense: | | | | | | | | | | | | |
Interest bearing deposits | | — | | | (6) | | | (6) | | | (14) | | | (11) | | | (25) | |
FHLB advances and other borrowings | | 32 | | | 38 | | | 70 | | | 26 | | | 44 | | | 70 | |
Subordinated debentures and other | | (5) | | | 8 | | | 3 | | | — | | | 7 | | | 7 | |
Total interest expense | | 27 | | | 40 | | | 67 | | | 12 | | | 40 | | | 52 | |
Net interest income, taxable equivalent basis | | $ | 9,380 | | | $ | 4,429 | | | $ | 13,809 | | | $ | 54,774 | | | $ | (24,240) | | | $ | 30,534 | |
________________________ |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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$13.8 million to $18.4$54.0 million for the three months ended September 30, 2019March 31, 2022, compared to $18.0$40.2 million for the three months ended September 30, 2018,December 31, 2021, due to an increase of $2.7$13.9 million in interest income partially offset by an increase of $2.2$0.1 million in interest expense.
Average total interest earning assets increased $217.1 million$1.7 billion or 11.2%, from $1.9 billion11.9% for the three months ended September 30, 2018March 31, 2022, compared to $2.2 billion for the three months ended September 30, 2019. The increase wasDecember 31, 2021, primarily due to an increase in average balance ofincreased securities loans, partly offset by a decrease indecreased interest earning deposits in other banks. The increase in securities was driven 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 in mortgage warehouse loans, partly offset by a decrease in commercial loans related to the sale of the San Marcos branch 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.” The average annualized yield on total interest earning assets increased from 3.82%1.11% for the three months ended September 30, 2018December 31, 2021, to 3.93%1.37% for the three months ended September 30, 2019.March 31, 2022, primarily due to a higher proportion of securities and a lower proportion of interest earning deposits in other banks as a percentage of interest earning assets, as well as higher yields on recently purchased securities.
Average interest bearing liabilities increased $241.3$70.2 million or 94.1%75.1% for the three months ended September 30, 2019 asMarch 31, 2022, compared to the same period in 2018 primarilythree months ended December 31, 2021, due to the implementation 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.increased FHLB advances. The average annualized rate on total interest bearing liabilities increased to 2.35%decreased from 1.17% for the three months ended September 30, 2019 comparedDecember 31, 2021 to 1.14%0.85% for the same period in 2018three months ended March 31, 2022, primarily due to a higher proportion of low cost FHLB borrowings as a percentage of total interest on callable brokered certificates deposits associated with our hedging strategy.bearing liabilities.
For the three months ended September 30, 2019,March 31, 2022, the net interest spread was 1.58%0.52% and the net interest margin was 3.39%1.36%, compared to 2.68%(0.06)% and 3.67%1.11%, respectively, for the comparable period in 2018.three months ended December 31, 2021. The decreaseincrease in the net interest spread and net interest margin infrom the three months ended September 30, 2019December 31, 2021 was primarily due to the callable brokered certificatesdriven by a higher proportion of securities and a lower proportion of interest earning deposits associated with our hedging strategy.in other banks as a percentage of total interest earning assets, as well as higher yields on recently purchased securities.
Net interest income on a taxable equivalent basis increased $6.6$30.5 million to $55.3$54.0 million for the ninethree months ended September 30, 2019March 31, 2022, compared to $48.8$23.5 million for the ninethree months ended September 30, 2018,March 31, 2021, due to an increase of $9.8$30.6 million in interest income partially offset by an increase of $3.2$0.1 million in interest expense.
Average total interest earning assets increased $139.7 million$9.0 billion or 7.4%, from $1.9 billion125.7% for the ninethree months ended September 30, 2018 to $2.0 billion for the nine months ended September 30, 2019. This increase was dueMarch 31, 2022, compared to the inflow of noninterest bearing deposits related to our digital currency initiative which were investedsame period 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 was2021, primarily due to the implementation of the Bank’s hedging strategy during the first nine months of 2019.increased securities balances funded by growth in digital currency related deposits. The average annualized yield on total interest earning assets increased from 3.61%1.35% for the ninethree months ended September 30, 2018March 31, 2021, to 4.01%1.37% for the ninethree months ended September 30, 2019March 31, 2022, primarily due to a higher proportion of securities and a lower proportion of interest earning deposits in other banks as a percentage of interest earning assets, partially offset by lower
yields on callable brokered certificates deposits associated with our hedging strategy.the securities portfolio due to the majority of the securities in the portfolio being acquired in the last 12 months within a lower rate environment.
Average interest bearing liabilities increased $66.6$30.6 million or 22.7%23.0% for the ninethree months ended September 30, 2019 asMarch 31, 2022, compared to the same period in 2018 primarily2021, due to an increase inincreased FHLB advances offset by lower balances of interest bearing deposits between periods, and an increase in FHLB and other borrowings.deposits. The average annualized rate on total interest bearing liabilities increaseddecreased to 2.08%0.85% for the ninethree months ended September 30, 2019March 31, 2022, compared to 1.09%0.89% for the same period in 2018.2021, primarily due to a higher proportion of low cost FHLB borrowings as a percentage of interest bearing liabilities.
For the ninethree months ended September 30, 2019,March 31, 2022, the net interest spread was 1.93%0.52% and the net interest margin was 3.64%1.36%, compared to 2.52%0.46% and 3.45%1.33%, respectively, for the comparable period in 2018.2021. The decreaseincrease in the net interest spread inand net interest margin for the ninethree months ended September 30, 2019March 31, 2021 was primarily due to a higher proportion of securities and a lower proportion of interest earning deposits in other banks as a percentage of interest earning assets, partially offset by lower yields on the callable brokered certificates of deposits associated with our hedging strategy.securities portfolio.
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 $2.5 million reversal of $0.9 million and no provision for loan losses for the three months ended September 30, 2019 and 2018, respectively. We recorded a reversal of $0.4 million and aMarch 31, 2022 compared to no provision for loan losses $0.1 million for the ninethree months ended September 30, 2019December 31, 2021 and 2018, respectively.March 31, 2021. The allowance for loan losses to total gross loans held-for-investment was 0.89%0.60% at September 30, 2019March 31, 2022, compared to 1.21%0.77% and 0.94% at September 30, 2018.December 31, 2021 and March 31, 2021, respectively. The reversal during the three months ended March 31, 2022 was due to improvementsthe changes in qualitative factors related toloan product and segment mix in the loan portfolio, andincluding the continued low charge-off rates.net decrease of approximately $148.5 million of gross real estate loans sold during the period, partially offset by an increase in SEN Leverage loans.
Noninterest Income
The following table presents, for the periods indicated, the major categories of noninterest income:
NONINTEREST INCOME
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended | | Three Months Ended |
| | 2019 | | 2018 | | % Increase/ (Decrease) | | 2019 | | 2018 | | % Increase/ (Decrease) | | | March 31, 2022 | | December 31, 2021 | | % Increase/ (Decrease) | | March 31, 2022 | | March 31, 2021 | | % Increase/ (Decrease) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | (Dollars in thousands) | | | (Dollars in thousands) |
Noninterest income: | | | | | | | | | | | | | Noninterest income: | |
Deposit related fees | | Deposit related fees | | $ | 8,968 | | | $ | 9,378 | | | (4.4) | % | | $ | 8,968 | | | $ | 7,124 | | | 25.9 | % |
Mortgage warehouse fee income | | $ | 373 |
| | $ | 393 |
| | (5.1 | )% | | $ | 1,085 |
| | $ | 1,152 |
| | (5.8 | )% | Mortgage warehouse fee income | | 651 | | | 684 | | | (4.8) | % | | 651 | | | 954 | | | (31.8) | % |
Service fees related to off-balance sheet deposits | | 283 |
| | 573 |
| | (50.6 | )% | | 1,454 |
| | 1,683 |
| | (13.6 | )% | |
Deposit related fees | | 1,657 |
| | 688 |
| | 140.8 | % | | 3,815 |
| | 1,655 |
| | 130.5 | % | |
Gain on sale of loans | | 248 |
| | 416 |
| | (40.4 | )% | | 593 |
| | 699 |
| | (15.2 | )% | |
Gain on sale of branch, net | | — |
| | — |
| | — |
| | 5,509 |
| | — |
| | N/M |
| |
| (Loss) gain on sale of securities, net | | (Loss) gain on sale of securities, net | | (605) | | | 56 | | | N/M | | (605) | | | — | | | N/M |
| Other income | | 38 |
| | 114 |
| | (66.7 | )% | | 168 |
| | 383 |
| | (56.1 | )% | Other income | | 436 | | | 937 | | | (53.5) | % | | 436 | | | 12 | | | N/M |
Total noninterest income | | $ | 2,599 |
| | $ | 2,184 |
| | 19.0 | % | | $ | 12,624 |
| | $ | 5,572 |
| | 126.6 | % | Total noninterest income | | $ | 9,450 | | | $ | 11,055 | | | (14.5) | % | | $ | 9,450 | | | $ | 8,090 | | | 16.8 | % |
________________________N/M—Not meaningful
Noninterest income decreased $1.6 million or 14.5% for the three months ended September 30, 2019March 31, 2022, compared to the three months ended December 31, 2021. This decrease was $2.6primarily due to a $0.6 million an increaseloss on sale of securities and a decrease of $0.4 million or 19.0% comparedin deposit related fees as a result of lower foreign exchange fees attributed in part to noninterestthe geopolitical environment, which negatively impacted trading volume. Additionally, there was a $0.5 million decrease in other income due to a gain on sale of $2.2other assets of $0.4 million for the three months ended September 30, 2018. TheMarch 31, 2022 compared to a gain on sale of other assets of $0.9 million recognized in the three months ended December 31, 2021.
Noninterest income increased $1.4 million or 16.8% for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. This increase was primarily due to an increase of $1.0$1.8 million or 140.8%, in deposit related fees. Thefees and an increase was partially offset by decreasesof $0.4 million in service fees relatedother income due to off-balance sheet deposits,a gain on sale of loans and other income. Deposit related fees increased primarily due to increases in transactional volume for cash management, SEN related feesand foreign exchange fee income associated with our digital currency initiative.
Noninterest income for the nine months ended September 30, 2019 was $12.6assets, partially offset by a $0.6 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 million gainloss on sale of branchsecurities and a $2.2$0.3 million decrease in mortgage warehouse fee income. The increase in deposit related fees partially offset by a $0.2 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. 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 the fourth quarter
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, | | | Three Months Ended | | Three Months Ended |
| | 2019 | | 2018 | | % Increase/ (Decrease) | | 2019 | | 2018 | | % Increase/ (Decrease) | | | March 31, 2022 | | December 31, 2021 | | % Increase/ (Decrease) | | March 31, 2022 | | March 31, 2021 | | % Increase/ (Decrease) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | (Dollars in thousands) | | | (Dollars in thousands) |
Noninterest expense: | | | | | | | | | | | | | Noninterest expense: | |
Salaries and employee benefits | | $ | 8,277 |
| | $ | 7,259 |
| | 14.0 | % | | $ | 25,124 |
| | $ | 21,335 |
| | 17.8 | % | Salaries and employee benefits | | $ | 15,544 | | | $ | 13,815 | | | 12.5 | % | | $ | 15,544 | | | $ | 10,990 | | | 41.4 | % |
Occupancy and equipment | | 892 |
| | 742 |
| | 20.2 | % | | 2,777 |
| | 2,251 |
| | 23.4 | % | Occupancy and equipment | | 586 | | | 728 | | | (19.5) | % | | 586 | | | 614 | | | (4.6) | % |
| Communications and data processing | | 1,298 |
| | 703 |
| | 84.6 | % | | 3,458 |
| | 2,149 |
| | 60.9 | % | Communications and data processing | | 2,762 | | | 1,862 | | | 48.3 | % | | 2,762 | | | 1,621 | | | 70.4 | % |
Professional services | | 889 |
| | 1,507 |
| | (41.0 | )% | | 3,407 |
| | 3,918 |
| | (13.0 | )% | Professional services | | 2,954 | | | 2,994 | | | (1.3) | % | | 2,954 | | | 1,717 | | | 72.0 | % |
Federal deposit insurance | | 39 |
| | 214 |
| | (81.8 | )% | | 382 |
| | 1,078 |
| | (64.6 | )% | Federal deposit insurance | | 1,762 | | | 3,100 | | | (43.2) | % | | 1,762 | | | 2,296 | | | (23.3) | % |
Correspondent bank charges | | 288 |
| | 240 |
| | 20.0 | % | | 868 |
| | 914 |
| | (5.0 | )% | Correspondent bank charges | | 828 | | | 634 | | | 30.6 | % | | 828 | | | 497 | | | 66.6 | % |
Other loan expense | | 47 |
| | 57 |
| | (17.5 | )% | | 290 |
| | 198 |
| | 46.5 | % | Other loan expense | | 384 | | | 364 | | | 5.5 | % | | 384 | | | 174 | | | 120.7 | % |
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 | )% | Other general and administrative | | 3,198 | | | 2,159 | | | 48.1 | % | | 3,198 | | | 1,697 | | | 88.5 | % |
Total noninterest expense | | $ | 12,611 |
| | $ | 11,417 |
| | 10.5 | % | | $ | 38,818 |
| | $ | 34,346 |
| | 13.0 | % | Total noninterest expense | | $ | 28,018 | | | $ | 25,656 | | | 9.2 | % | | $ | 28,018 | | | $ | 19,606 | | | 42.9 | % |
Noninterest expense increased $1.2$2.4 million or 10.5%9.2% for the three months ended September 30, 2019March 31, 2022, compared to the three months ended September 30, 2018December 31, 2021, primarily due to increases in salaries and employee benefits, occupancy and equipment and communications and data processing, and other general and administrative expense, offset by decreasesa decrease 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 management 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 legal 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$1.7 million or 17.8%12.5% in salaries and employee benefits was primarily due to an increase in headcount. The Company’s average full-time equivalent employees with significant increases inincreased by 10.9% from 265 for the Bank’s average full-time equivalent employees in project managementthree months ended December 31, 2021 to 294 for the three months ended March 31, 2022. Communications and operations, partially offset by a reduction in personnel as a result of the sale of the Bank’s San Marcos branch and business loan operations. Occupancy and equipmentdata processing increased $0.5$0.9 million or 23.4%48.3% primarily due to blockchain infrastructure hosting costs related to the stablecoin initiative as well as continued investment in enterprise cloud storage solutions and scalable cloud-based software solutions. Federal deposit insurance expense decreased $1.3 million due to a slower growth rate in deposit levels. Other general and administrative expense increased $1.0 million or 48.1% primarily due to an increase in leased spacethe provision for off-balance sheet commitments driven by growth in SEN Leverage and an increase for expanded coverage of insurance.
Noninterest expense increased $8.4 million or 42.9% for the corporate headquarters partially offsetthree months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to increases in salaries and employee benefits, communications and data processing, professional services, and other general and administrative expense. The increase of $4.6 million or 41.4% in salaries and employee benefits was primarily due to an increase in headcount and in cost per full-time equivalent employee. The Company’s average full-time equivalent employees increased by 34.2% from 219 for the sale ofthree months ended March 31, 2021 to 294 for the San Marcos branch.three months ended March 31, 2022. Communications and data processing increased $1.3$1.1 million or 60.9%70.4% primarily due to updating our ITblockchain infrastructure hosting costs related to the Stablecoin initiative as well as continued investment in enterprise cloud storage solutions and expansion projectsscalable cloud-based software solutions. Professional services increased $1.2 million or 72.0% due primarily to support our digital currency initiative. We continue to invest in scalable technology,consulting costs around corporate governance, legal fees associated with the stablecoin initiative 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 haveincreased talent acquisition costs. Federal deposit insurance expense decreased by $0.5 million or 13.0% due to decreased consulting expense. The decrease of $0.7a slower growth rate in deposit levels. Other general and administrative expense increased $1.5 million or
64.6% in federal deposit insurance payments was 88.5% primarily due to an FDIC assessment credit as well as a reductionincrease in the multiplier based on significant assetprovision for off-balance sheet commitments driven by growth in SEN Leverage and an 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. (Benefit)
Income tax expense was $2.6$7.0 million for the three months ended September 30, 2019March 31, 2022, compared to $2.5$2.2 million for the three nine months ended September 30, 2018.December 31, 2021. Our effective tax rates for the three months ended September 30, 2019March 31, 2022 and 2018December 31, 2021 were 28.3%20.4% and 28.1%9.4%, respectively. The increase in income tax expense was primarily due to an increase in pre-tax income and a decrease in tax benefits recognized on exercise of stock options. The increase in the effective tax rates was due to lower excess tax benefits recognized on the exercise of stock options when compared to the three months ended December 31, 2021.
Income tax expense was $8.3$7.0 million for the ninethree months ended September 30, 2019March 31, 2022, compared to $5.5a benefit of $1.2 million for the ninethree months ended September 30, 2018. The increase was primarily related to increased pre-tax income.March 31, 2021. Our effective tax rates for the ninethree months ended September 30, 2019March 31, 2022 and 20182021 were 28.1%20.4% and 27.9%(10.5)%, respectively. The increase in our effectiveincome tax rateexpense was primarily relateddue to an increase in our state blendedpre-tax income and a
decrease in tax rate and non-deductiblebenefits recognized on exercise of stock options. The increase in the effective tax treatmentrates was due to less excess tax benefits recognized on the exercise of certain noninterest expenses.stock options when compared to the three months ended March 31, 2021.
Financial Condition
As of September 30, 2019,March 31, 2022, our total assets increaseddecreased to $2.1$15.8 billion compared to $2.0$16.0 billion as of December 31, 2018.2021. Shareholders’ equity increased $39.4 million,decreased $0.1 billion, or 20.6%3.9%, to $230.6 million$1.5 billion at September 30, 2019March 31, 2022, compared to $191.2 million$1.6 billion at December 31, 2018.2021. A summary of the individual components driving the changes in total assets, total liabilities and shareholders' equity is discussedset forth below.
Interest Earning Deposits in Other Banks
Interest earning deposits in other banks decreased from $670.2 million$5.2 billion at December 31, 20182021 to $156.2 million$1.2 billion at September 30, 2019.March 31, 2022. The majority of the Company’s interest earning deposits in other banks is cash held at the Federal Reserve Bank. The decrease in interest earning deposits was due to lower balances withdriven by the FRB and purchasespurchase of securities particularly during the first half of 2019 as the Bank implemented its hedging strategy, discussed in more detail below.
Securities
We use our securities portfolio to primarily provide a source of liquidity, provide an appropriatea return on funds invested and manage interest rate risk, meet collateral and regulatory capital requirements and as part of our recently implemented hedging strategy.risk.
Management classifies investment securities primarily as either held-to-maturity or available-for-sale based on our intentions and the Company’s ability to hold such securities until maturity. In determining such classifications, securities that management has the positive intent and the Company has the ability to hold until maturity are classified as held to maturity and carried at amortized cost. All other securities are designated as available-for-sale and carried at estimated fair value with unrealized gains and losses included in shareholders’ equity on an after-tax basis. For the years presented, substantially all
Total securities were classified as available-for-sale.
Our securities available-for-sale increased $552.7 million,$3.6 billion, or 154.8%41.6%, from $357.2 million$8.6 billion at December 31, 20182021 to $909.9 million$12.2 billion at September 30, 2019.March 31, 2022. To supplement interest income earned on our loan portfolio, we invest in high quality mortgage-backed securities, collateralized mortgage obligations, andother asset backed securities. Our securities portfolio has grown substantially due toand municipal bonds. During the implementationthree months ended March 31, 2022, we purchased $4.6 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 purchasessecurities, including $1.3 billion of interest rate floors and commercialU.S. Treasuries, $1.1 billion of tax-exempt municipal bonds, $1.1 billion of agency residential mortgage-backed securities, primarily funded by callable brokered certificates$432.6 million of deposit. We entered into repurchase agreements to temporarily fund the purchaseU.S. agency securities excluding mortgage-backed securities, $348.3 million of securities while waiting for executed callable brokered certificates 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 $400.0 million in notional amount of interest rate floors, $350.4 million in fixed-rateprivate label commercial mortgage-backed securities and issued $325.0$256.4 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 sixagency commercial mortgage-backed securities. During the three 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,ended March 31, 2022, we held a total of $196.0 million in callable certificates of deposit and $1.3sold $432.1 million of related unamortized premium, which was subsequently called afterlonger duration securities and recognized a net loss of $0.6 million. The securities sold were part of a restructuring that is projected to have a positive impact on future earnings when compared to securities purchased in the endfirst quarter of the third quarter.2022. In addition, we purchased $214.8sold the related interest rate cap contracts that hedged a portion of the securities that were sold and a realized gain on sale of $0.4 million was recognized in adjustable rateother noninterest income.
During the three months ended March 31, 2022, we transferred, at fair value, $1.5 billion of residential mortgage-backed securities, duringcommercial mortgage-backed securities, and municipal bonds from available-for-sale to held-to-maturity securities. Our decision to re-designate the nine months ended September 30, 2019securities was based on our ability and sold $30.0intent to hold these securities to maturity. Factors used in assessing the ability to hold these securities to maturity were future liquidity needs and sources of funding. The related net unrealized after-tax loss of $14.1 million remained in accumulated other comprehensive income and will be amortized as a yield adjustment through earnings over the remaining life of residential and commercial government agency collateralized mortgage obligations.
the securities, offsetting the related net amortization of premium on the transferred securities. No gain or loss was recognized at the time of the transfer.
The following tables summarize the contractual maturities and weighted-average yields of investment securities at September 30, 2019March 31, 2022 and the amortized cost and carryingfair value of those securities as of the indicated dates. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Residential and commercial mortgage-backed securities are classified below based on the final maturity date, however these are amortizing securities with expected average lives primarily less than ten years. The weighted average yield is a prospective yield computed using the amortized cost of fixed income investment securities. Actual yields earned may differ significantly based upon actual prepayments.
SECURITIES
| | | | | | | | | | | | | | | | | | | | | | | | | | | One Year or Less | | More Than One Year Through Five Years | | More Than Five Years Through 10 Years | | More Than 10 Years | | Total |
| One Year or Less | | More Than One Year Through Five Years | | More Than Five Years Through 10 Years | | More Than 10 Years | | Total | | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Fair Value | | Weighted Average Yield |
| Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Weighted Average Yield | | Amortized Cost | | Fair Value | | Weighted Average Yield | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | (Dollars in thousands) |
| (Dollars in thousands) | |
September 30, 2019 | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2022 | | March 31, 2022 | | |
Securities Available-for-Sale: | | | | | | | | | | | | | | | | | | | | | | Securities Available-for-Sale: |
U.S. Treasuries | | U.S. Treasuries | | $ | 34,889 | | | 0.48 | % | | $ | — | | | — | | | $ | — | | | — | | | $ | — | | | — | | | $ | 34,889 | | | $ | 34,724 | | | 0.48 | % |
U.S. agency securities - excluding mortgage-backed securities | | U.S. agency securities - excluding mortgage-backed securities | | — | | | — | | | 1,611 | | | (0.22) | % | | 1,432,229 | | | 0.46 | % | | 114,527 | | | 0.57 | % | | 1,548,367 | | | 1,548,661 | | | 0.47 | % |
Residential mortgage-backed securities: | Residential mortgage-backed securities: | Residential mortgage-backed securities: |
Government agency mortgage-backed securities | $ | 5 |
| | 2.25 | % | | $ | — |
| | — |
| | $ | — |
| | — |
| | $ | 778 |
| | 4.28 | % | | $ | 783 |
| | $ | 816 |
| | 2.95 | % | Government agency mortgage-backed securities | | — | | | — | | | — | | | — | | | — | | | — | | | 1,781,961 | | | 1.36 | % | | 1,781,961 | | | 1,751,920 | | | 1.36 | % |
Government agency collateralized mortgage obligation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 246,689 |
| | 2.67 | % | | 246,689 |
| | 246,323 |
| | 2.67 | % | Government agency collateralized mortgage obligation | | — | | | — | | | — | | | — | | | — | | | — | | | 1,385,198 | | | 0.23 | % | | 1,385,198 | | | 1,357,349 | | | 0.23 | % |
Private-label collateralized mortgage obligation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 27,385 |
| | 3.86 | % | | 27,385 |
| | 27,741 |
| | 3.86 | % | Private-label collateralized mortgage obligation | | — | | | — | | | — | | | — | | | — | | | — | | | 1,342 | | | 2.67 | % | | 1,342 | | | 1,340 | | | 2.67 | % |
Commercial mortgage-backed securities: | Commercial mortgage-backed securities: | Commercial mortgage-backed securities: |
Government agency mortgage-backed securities | | Government agency mortgage-backed securities | | — | | | — | | | — | | | — | | | — | | | — | | | 1,338,333 | | | 0.65 | % | | 1,338,333 | | | 1,331,410 | | | 0.65 | % |
Government agency collateralized mortgage obligation | | Government agency collateralized mortgage obligation | | — | | | — | | | — | | | — | | | 70,839 | | | 0.27 | % | | — | | | — | | | 70,839 | | | 70,779 | | | 0.27 | % |
Private-label collateralized mortgage obligation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 363,782 |
| | 3.14 | % | | 363,782 |
| | 380,780 |
| | 3.14 | % | Private-label collateralized mortgage obligation | | — | | | — | | | — | | | — | | | — | | | — | | | 492,565 | | | 1.42 | % | | 492,565 | | | 480,914 | | | 1.42 | % |
Municipal bonds: | | Municipal bonds: | | |
Tax-exempt | | Tax-exempt | | — | | | — | | | — | | | — | | | — | | | — | | | 2,900,600 | | | 1.89 | % | | 2,900,600 | | | 2,664,160 | | | 1.89 | % |
| Asset backed securities: | | | | | | | | | | | | | | | | | | | | | | Asset backed securities: | | |
Government sponsored student loan pools | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 258,623 |
| | 2.86 | % | | 258,623 |
| | 254,257 |
| | 2.86 | % | Government sponsored student loan pools | | — | | | — | | | — | | | — | | | — | | | — | | | 226,738 | | | 0.83 | % | | 226,738 | | | 222,237 | | | 0.83 | % |
Total securities available-for-sale | | Total securities available-for-sale | | $ | 34,889 | | | 0.48 | % | | $ | 1,611 | | | (0.22) | % | | $ | 1,503,068 | | | 0.45 | % | | $ | 8,241,264 | | | 1.22 | % | | $ | 9,780,832 | | | $ | 9,463,494 | | | 1.10 | % |
| Securities Held-to-Maturity: | | Securities Held-to-Maturity: |
U.S. Treasuries | | U.S. Treasuries | | $ | — | | | — | | | $ | 1,245,293 | | | 1.33 | % | | $ | — | | | — | | | $ | — | | | — | | | $ | 1,245,293 | | | $ | 1,202,805 | | | 1.33 | % |
| Residential mortgage-backed securities: | | Residential mortgage-backed securities: |
Government agency mortgage-backed securities | | Government agency mortgage-backed securities | | — | | | — | | | — | | | — | | | — | | | — | | | 547,423 | | | 1.34 | % | | 547,423 | | | 512,527 | | | 1.34 | % |
Government agency collateralized mortgage obligation | | Government agency collateralized mortgage obligation | | — | | | — | | | — | | | — | | | 50 | | | 1.93 | % | | 113,871 | | | 0.90 | % | | 113,921 | | | 106,729 | | | 0.90 | % |
| Commercial mortgage-backed securities: | | Commercial mortgage-backed securities: |
| Government agency collateralized mortgage obligation | | Government agency collateralized mortgage obligation | | — | | | — | | | — | | | — | | | 53,408 | | | 1.53 | % | | — | | | — | | | 53,408 | | | 48,229 | | | 1.53 | % |
| Municipal bonds: | | Municipal bonds: | | |
Tax-exempt | | Tax-exempt | | — | | | — | | | — | | | — | | | — | | | — | | | 393,965 | | | 1.81 | % | | 393,965 | | | 349,700 | | | 1.81 | % |
Taxable | | Taxable | | — | | | — | | | — | | | — | | | 221,917 | | | 1.87 | % | | 175,698 | | | 2.34 | % | | 397,615 | | | 358,986 | | | 2.08 | % |
| Total securities held-to-maturity | | Total securities held-to-maturity | | $ | — | | | — | | | $ | 1,245,293 | | | 1.33 | % | | $ | 275,375 | | | 1.80 | % | | $ | 1,230,957 | | | 1.59 | % | | $ | 2,751,625 | | | $ | 2,578,976 | | | 1.50 | % |
Total securities | $ | 5 |
| | 2.25 | % | | $ | — |
| | — |
| | $ | — |
| | — |
| | $ | 897,257 |
| | 2.95 | % | | $ | 897,262 |
| | $ | 909,917 |
| | 2.95 | % | Total securities | | $ | 34,889 | | | 0.48 | % | | $ | 1,246,904 | | | 1.33 | % | | $ | 1,778,443 | | | 0.66 | % | | $ | 9,472,221 | | | 1.27 | % | | $ | 12,532,457 | | | $ | 12,042,470 | | | 1.19 | % |
|
| | | | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | Total | | Total |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | | | | | | | |
| | (Dollars in thousands) |
Securities Available-for-Sale: | | | | | | | | |
Residential mortgage-backed securities: | | | | | | | | |
Government agency mortgage-backed securities | | $ | 783 |
| | $ | 816 |
| | $ | 932 |
| | $ | 957 |
|
Government agency collateralized mortgage obligation | | 246,689 |
| | 246,323 |
| | 50,888 |
| | 50,300 |
|
Private-label collateralized mortgage obligation | | 27,385 |
| | 27,741 |
| | 23,988 |
| | 23,945 |
|
Commercial mortgage-backed securities: |
Government agency collateralized mortgage obligation | | — |
| | — |
| | 23,817 |
| | 22,752 |
|
Private-label collateralized mortgage obligation | | 363,782 |
| | 380,780 |
| | — |
| | — |
|
Asset backed securities: | | | | | | | | |
Government sponsored student loan pools | | 258,623 |
| | 254,257 |
| | 260,050 |
| | 259,224 |
|
Securities Held-to-Maturity: | | | | | | | | |
Collateralized mortgage obligations | | — |
| | — |
| | 73 |
| | 72 |
|
Total securities | | $ | 897,262 |
| | $ | 909,917 |
| | $ | 359,748 |
| | $ | 357,250 |
|
Loan Portfolio
Our primary source of income is derived from interest earned on loans. Our loan portfolio consists primarily of mortgage warehouse loans, loans secured by bitcoin which are included in the commercial and industrial loan segment and loans secured by real estate and mortgage warehouse loans, as well as commercial and industrial loans. Our loan customers primarily consist of small- to medium-sized businesses, professionals, real estate investors, small residential builders and individuals. Our owner-occupied and investment commercial real estate loans, multi-family loans and commercial and industrial loans provide us with higher risk-adjusted returns, relatively shorter maturities and more sensitivity to interest rate fluctuations, 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 lending activities are principally directed to our market area of Southern California. Our one-to-four family residential loans and warehouse loans are sourced throughout the United States.
estate. The following table summarizes our loan portfolio by loan segment as of the dates indicated:
COMPOSITION OF LOAN PORTFOLIO
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| | Amount | | Percent | | Amount | | Percent |
| | | | | | | | |
| | (Dollars in thousands) |
Real estate: | | | | | | | | |
One-to-four family | | $ | 94,161 | | | 12.6 | % | | $ | 105,098 | | | 11.8 | % |
Multi-family | | 9,368 | | | 1.3 | % | | 56,751 | | | 6.3 | % |
Commercial | | 80,279 | | | 10.8 | % | | 210,136 | | | 23.5 | % |
Construction | | — | | | — | | | 7,573 | | | 0.8 | % |
Commercial and industrial(1) | | 434,960 | | | 58.3 | % | | 335,862 | | | 37.6 | % |
| | | | | | | | |
Reverse mortgage and other | | 1,137 | | | 0.2 | % | | 1,410 | | | 0.2 | % |
Mortgage warehouse | | 125,435 | | | 16.8 | % | | 177,115 | | | 19.8 | % |
Total gross loans held-for-investment | | 745,340 | | | 100.0 | % | | 893,945 | | | 100.0 | % |
Deferred fees, net | | (1,884) | | | | | 275 | | | |
Total loans held-for-investment | | 743,456 | | | | | 894,220 | | | |
Allowance for loan losses | | (4,442) | | | | | (6,916) | | | |
Total net loans held-for-investment | | $ | 739,014 | | | | | $ | 887,304 | | | |
Loans held-for-sale(2) | | $ | 937,140 | | | | | $ | 893,194 | | | |
________________________(1)Commercial and industrial loans includes $435.0 million and $335.9 million of SEN Leverage loans as of March 31, 2022 and December 31, 2021, respectively.
(2)Loans held-for-sale includes $914.2 million and $893.2 million of mortgage warehouse loans as of March 31, 2022 and December 31, 2021, respectively.
In March 2022, the Company sold $216.1 million of commercial real estate, multi-family real estate and construction loans gross loans, and purchased a participating interest of $67.6 million of those loans, which decreased overall gross loans by approximately $148.5 million compared to December 31, 2021. In addition, there were $22.9 million of commercial real estate and construction loans transferred to held-for-sale as of March 31, 2022.
|
| | | | | | | | | | | | | | |
| | 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 |
| | |
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 portfolioloans held-for-investment at September 30, 2019:March 31, 2022:
LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES
| | | | September 30, 2019 | | | March 31, 2022 |
| | Due in One Year or Less | | Due in One to Five Years | | Due After Five Years | | Total | | | Due in One Year or Less | | Due in One to Five Years | | Due After Five Years to 15 Years | | Due After 15 Years | | Total |
| | | | | | | | | | | | | | | | | | |
| | (Dollars in thousands) | | | (Dollars in thousands) |
Real estate: | | | | | | | | | Real estate: | |
One-to-four family | | $ | 7 |
| | $ | 835 |
| | $ | 211,598 |
| | $ | 212,440 |
| One-to-four family | | $ | 16 | | | $ | 642 | | | $ | 6,472 | | | $ | 87,571 | | | $ | 94,701 | |
Multi-family | | 1,255 |
| | 31,097 |
| | 45,549 |
| | 77,901 |
| Multi-family | | — | | | 8,827 | | | 540 | | | — | | | 9,367 | |
Commercial | | 38,265 |
| | 128,332 |
| | 156,136 |
| | 322,733 |
| Commercial | | 11,877 | | | 51,565 | | | 16,831 | | | — | | | 80,273 | |
Construction | | 3,870 |
| | 116 |
| | — |
| | 3,986 |
| |
| Commercial and industrial | | 12,515 |
| | 2,048 |
| | — |
| | 14,563 |
| Commercial and industrial | | 185,796 | | | 246,733 | | | 4 | | | — | | | 432,533 | |
Consumer and other | | 76 |
| | — |
| | — |
| | 76 |
| |
Reverse mortgage | | — |
| | — |
| | 1,629 |
| | 1,629 |
| |
| Reverse mortgage and other | | Reverse mortgage and other | | — | | | — | | | — | | | 1,147 | | | 1,147 | |
Mortgage warehouse | | 61,856 |
| | — |
| | — |
| | 61,856 |
| Mortgage warehouse | | 125,435 | | | — | | | — | | | — | | | 125,435 | |
Total gross loans held-for-investment | | $ | 117,844 |
| | $ | 162,428 |
| | $ | 414,912 |
| | $ | 695,184 |
| |
Total loans held-for-investment | | Total loans held-for-investment | | $ | 323,124 | | | $ | 307,767 | | | $ | 23,847 | | | $ | 88,718 | | | $ | 743,456 | |
Amounts with fixed rates | | $ | 87,638 |
| | $ | 129,680 |
| | $ | 83,893 |
| | $ | 301,211 |
| Amounts with fixed rates | | $ | 7,518 | | | $ | 60,433 | | | $ | 4,408 | | | $ | 2,959 | | | $ | 75,318 | |
Amounts with floating rates | | $ | 30,206 |
| | $ | 32,748 |
| | $ | 331,019 |
| | $ | 393,973 |
| Amounts with floating rates | | $ | 315,606 | | | $ | 247,334 | | | $ | 19,439 | | | $ | 85,759 | | | $ | 668,138 | |
Nonperforming Assets
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether such loans are actually past due. In general, we place loans on nonaccrual status when they become 90 days past due. We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When interest accrual is discontinued, all unpaid accrued interest is reversed from income.
Interest income is subsequently recognized only to the extent cash payments received exceed principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are, in management’s opinion, reasonably assured. Any loan which the Bank deems to be uncollectible, in whole or in part, is charged off to the extent of the anticipated loss. Loans that are past due for 180 days or more are charged off unless the loan is well secured and in the process of collection.
We believe our disciplined lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have several procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our bankers,loan officers, and we also monitor our delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
NonperformingNonaccrual loans decreased to $6.7$3.6 million, or 0.96%0.49% of total loans, at September 30, 2019March 31, 2022, compared to $8.3$4.0 million, or 1.39%0.45% of total loans, at December 31, 2018.2021. The decrease in nonperformingnonaccrual loans during the ninethree months ended September 30, 2019March 31, 2022 was due primarily to principal repayments on nonperforming commercial and industrial loans, offset partially by an increasea decrease in one-to-four family nonaccrual reverse mortgage loans.
Other real estate owned increased to $81,000 as of September 30, 2019 compared to $31,000 at December 31, 2018.
Total nonperforming assets were $6.8$3.6 million and $8.3$4.0 million at September 30, 2019March 31, 2022 and December 31, 2018,2021, respectively, or 0.32%0.02% and 0.42%0.03%, respectively, of total assets.
The following table presents information regarding nonperforming assets at the dates indicated:
NONPERFORMING ASSETS
| | | | September 30, 2019 | | December 31, 2018 | | | March 31, 2022 | | December 31, 2021 |
| | | | | | | | |
| | (Dollars in thousands) | | | (Dollars in thousands) |
Nonaccrual loans | | | | | Nonaccrual loans | |
Real estate: | | | | | Real estate: | |
One-to-four family | | $ | 4,161 |
| | $ | 3,062 |
| One-to-four family | | $ | 2,986 | | | $ | 3,080 | |
Commercial | | — |
| | 422 |
| |
Commercial and industrial | | 1,473 |
| | 3,596 |
| |
Reverse mortgage | | 1,073 |
| | 1,223 |
| |
| Reverse mortgage and other | | Reverse mortgage and other | | 646 | | | 923 | |
| Total nonaccrual loans | | Total nonaccrual loans | | 3,632 | | | 4,003 | |
Accruing loans 90 or more days past due | | — |
| | — |
| Accruing loans 90 or more days past due | | — | | | — | |
Total gross nonperforming loans | | 6,707 |
| | 8,303 |
| |
Total nonperforming loans | | Total nonperforming loans | | 3,632 | | | 4,003 | |
Other real estate owned, net | | 81 |
| | 31 |
| Other real estate owned, net | | — | | | — | |
Total nonperforming assets | | $ | 6,788 |
| | $ | 8,334 |
| Total nonperforming assets | | $ | 3,632 | | | $ | 4,003 | |
Ratio of nonperforming loans to total loans(1) | | 0.96 | % | | 1.39 | % | |
Ratio of nonaccrual loans to total loans(1) | | Ratio of nonaccrual loans to total loans(1) | | 0.49 | % | | 0.45 | % |
Ratio of allowance for loan losses to nonaccrual loans | | Ratio of allowance for loan losses to nonaccrual loans | | 122.30 | % | | 172.77 | % |
Ratio of nonperforming assets to total assets | | 0.32 | % | | 0.42 | % | Ratio of nonperforming assets to total assets | | 0.02 | % | | 0.03 | % |
| | | | | |
Troubled debt restructurings | | | | | Troubled debt restructurings | |
Restructured loans-nonaccrual | | $ | 1,209 |
| | $ | 301 |
| Restructured loans-nonaccrual | | $ | 563 | | | $ | 564 | |
Restructured loans-accruing | | 631 |
| | 213 |
| Restructured loans-accruing | | 1,140 | | | 1,149 | |
Total troubled debt restructurings | | $ | 1,840 |
| | $ | 514 |
| Total troubled debt restructurings | | $ | 1,703 | | | $ | 1,713 | |
________________________(1)Total loans exclude loans held-for-sale at each of the dates presented.
Loans Grading
From a credit risk standpoint, we grade watchlist and problem loans into one of five categories: pass, special mention, substandard, doubtful or loss. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. We review the ratings on credits regularly. Ratings are adjusted regularly to reflect the degree of risk and loss that our management believes to be appropriate for each credit. Our methodology is structured so that specific reserve allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss). The Bank uses the following definitions for watch list risk ratings:
| |
• | Pass. Loans in all classes that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.
|
| |
• | Special Mention. A special mention loan has potential weaknesses deserving of management’s close attention. If uncorrected, such weaknesses may result in deterioration of the repayment prospects for the asset or in our credit position at some future date.
|
| |
• | Substandard. A substandard loan is inadequately protected by the current financial condition and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if deficiencies are not corrected.
|
| |
• | Doubtful. A doubtful loan has all weaknesses inherent in one classified as substandard, with the added characteristic that weaknesses make collection or liquidation in full, on the basis of existing facts, conditions, and values, highly questionable and improbable.
|
| |
• | Loss. Credits rated as loss are charged-off. We have no expectation of the recovery of any payments in respect of credits rated as loss.
|
The following table presents the loan balances by segment as well as risk rating. No assets were classified as loss during the periods presented.
LOAN CLASSIFICATION
|
| | | | | | | | | | | | | | | | | | | | |
| | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
| | | | | | | | | | |
| | (Dollars in thousands) |
September 30, 2019 | | | | | | | | | | |
Real estate loans: | | | | | | | | | | |
One-to-four family | | $ | 208,280 |
| | $ | — |
| | $ | 4,160 |
| | $ | — |
| | $ | 212,440 |
|
Multi-family | | 77,901 |
| | — |
| | — |
| | — |
| | 77,901 |
|
Commercial | | 322,733 |
| | — |
| | — |
| | — |
| | 322,733 |
|
Construction | | 3,986 |
| | — |
| | — |
| | — |
| | 3,986 |
|
Commercial and industrial | | 10,657 |
| | 143 |
| | 3,763 |
| | — |
| | 14,563 |
|
Consumer and other | | 76 |
| | — |
| | — |
| | — |
| | 76 |
|
Reverse mortgage | | 376 |
| | 179 |
| | 1,074 |
| | — |
| | 1,629 |
|
Mortgage warehouse | | 61,856 |
| | — |
| | — |
| | — |
| | 61,856 |
|
Total gross loans held-for-investment | | $ | 685,865 |
| | $ | 322 |
| | $ | 8,997 |
| | $ | — |
| | $ | 695,184 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | 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 |
|
Loan Reviews and Problem Loan Management.
Our credit administration staff conducts meetings at least eight times a year to review asset quality and loan delinquencies. The Bank’s Lending and Collection Policy requires that we perform annual reviews of every loan of $250,000 or more not rated special mention or adversely classified. Individual loan reviews encompass a loan’s payment status and history,
current and projected paying capacity of the borrower and/or guarantor(s), current condition and estimated value of any collateral, sufficiency of credit and collateral documentation, and compliance with Bank and regulatory lending standards. Loan reviewers assign an overall loan risk rating from one of the Bank’s loan rating categories and prepare a written report summarizing the review, with any work papers related to the review retained.
Once a loan is identified as a problem loan or a loan requiring a workout, the Bank makes an evaluation and develops a plan for handling the loan. In developing such a plan, management reviews all relevant information from the loan file and any loan review reports. We have a conversation with the borrower and update current and projected financial information (including borrower global cash flows when possible) and collateral valuation estimates. Following analysis of all available relevant information, management adopts an action plan from the following alternatives: (a) continuation of loan collection efforts on their existing terms, (b) a restructure of the loan’s terms, (c) a sale of the loan, (d) a charge off or partial charge off, (e) foreclosure on pledged collateral, or (f) acceptance of a deed in lieu of foreclosure.
Impaired Loans and TDRs.
Impaired loans also include certain loans that have been modified as troubled debt restructurings, or TDRs. As of September 30, 2019,March 31, 2022 and December 31, 2021, the Company held nineeight loans amounting to $1.8totaling $1.7 million whichthat were TDRs compared to seven loans amounting to $0.5 million at December 31, 2018.TDRs.
A loan is identified as a TDR when a borrower is experiencing financial difficulties and, for economic or legal reasons related to these difficulties, the Company grants a concession to the borrower in the restructuring that it would not otherwise consider. The Company has granted a concession when, as a result of the restructuring, it does not expect to collect all amounts due or within the time periods originally due under the original contract, including one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a temporary forbearance with regard to the payment of principal or interest. All TDRs are reviewed for potential impairment. Generally, a nonaccrual loan that is restructured remains on nonaccrual status for a minimum period of six months to demonstrate that the borrower can perform under the restructured terms. If the borrower’s performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan. Loans classified as TDRs are reported as impaired loans.
Loans Grading
From a credit risk standpoint, we grade watchlist and problem loans into one of five categories: pass, special mention, substandard, doubtful or loss. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. We review the ratings on credits regularly. Ratings are adjusted regularly to reflect the degree of risk and loss that our management believes to be appropriate for each credit. Our methodology is structured so that specific reserve allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).
The following table presents the loan balances by segment as well as risk rating. No assets were classified as loss during the periods presented.
LOAN CLASSIFICATION
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| | Credit Risk Grades |
| | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
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| | (Dollars in thousands) |
March 31, 2022 | | | | | | | | | | |
Real estate loans: | | | | | | | | | | |
One-to-four family | | $ | 91,166 | | | $ | 549 | | | $ | 2,986 | | | $ | — | | | $ | 94,701 | |
Multi-family | | 9,367 | | | — | | | — | | | — | | | 9,367 | |
Commercial | | 65,305 | | | 13,732 | | | 1,236 | | | — | | | 80,273 | |
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Commercial and industrial | | 432,533 | | | — | | | — | | | — | | | 432,533 | |
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Reverse mortgage and other | | 501 | | | — | | | 646 | | | — | | | 1,147 | |
Mortgage warehouse | | 125,435 | | | — | | | — | | | — | | | 125,435 | |
Total loans held-for-investment | | $ | 724,307 | | | $ | 14,281 | | | $ | 4,868 | | | $ | — | | | $ | 743,456 | |
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| | Credit Risk Grades |
| | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
| | | | | | | | | | |
| | (Dollars in thousands) |
December 31, 2021 | | | | | | | | | | |
Real estate loans: | | | | | | | | | | |
One-to-four family | | $ | 102,307 | | | $ | 451 | | | $ | 3,080 | | | $ | — | | | $ | 105,838 | |
Multi-family | | 56,855 | | | — | | | — | | | — | | | 56,855 | |
Commercial | | 199,598 | | | 10,528 | | | — | | | — | | | 210,126 | |
Construction | | 7,502 | | | — | | | — | | | — | | | 7,502 | |
Commercial and industrial | | 335,362 | | | — | | | — | | | — | | | 335,362 | |
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Reverse mortgage and other | | 499 | | | — | | | 923 | | | — | | | 1,422 | |
Mortgage warehouse | | 177,115 | | | — | | | — | | | — | | | 177,115 | |
Total loans held-for-investment | | $ | 879,238 | | | $ | 10,979 | | | $ | 4,003 | | | $ | — | | | $ | 894,220 | |
Allowance for Loan Losses
We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks inherent in our loan portfolio. The amount of the allowance for loan losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts, or at all. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.
In reviewing our loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality
For residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt-to-income ratio and employment and income stability, the loan-to-value ratio, and the age, condition and marketability of the collateral;
For commercial and multi-family mortgage loans, the debt service coverage ratio, operating results of the owner in the case of owner-occupied properties, the loan-to-value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type;
For construction loans, the perceived feasibility of the project including the ability to sell improvements constructed for resale, the quality and nature of contracts for presale, if any, experience and ability of the builder, loan-to-cost ratio and loan-to-value ratio;
For commercial and industrial loans, the debt service coverage ratio (income from the business exceeding operating expenses compared to loan repayment requirements), the operating results of the commercial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral; and
For mortgage warehouse loans held-for-investment, despite our negligible loss history, we provide a loss allowance factor subject to quarterly adjustment. Mortgage warehouse loans held-for-sale are not subject to any loan loss allowance.
The following table presents a summary of changes in the allowance for loan losses for the periods and dates indicated:
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
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| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | 2018 |
| | | | |
| | (Dollars in thousands) |
Allowance for loan losses at beginning of period | | $ | 6,723 |
| | $ | 8,165 |
|
Charge-offs: | | | | |
Real estate: | | | | |
One-to-four family | | 93 |
| | 6 |
|
Total charge-offs | | 93 |
| | 6 |
|
Recoveries: | | | | |
Commercial and industrial | | — |
| | (80 | ) |
Reverse mortgage | | — |
| | (1 | ) |
Total recoveries | | — |
| | (81 | ) |
Net charge-offs (recoveries) | | 93 |
| | (75 | ) |
(Reversal of) provision for loan losses | | (439 | ) | | 148 |
|
Allowance for loan losses at period end | | $ | 6,191 |
| | $ | 8,388 |
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Total gross loans outstanding (end of period) | | $ | 695,184 |
| | $ | 694,585 |
|
Average loans outstanding | | $ | 655,790 |
| | $ | 694,272 |
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Allowance for loan losses to period end loans | | 0.89 | % | | 1.21 | % |
Net charge-offs (recoveries) to average loans | | 0.01 | % | | (0.01 | )% |
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| | Three Months Ended |
| | March 31, 2022 | | December 31, 2021 | | | | March 31, 2021 |
| | | | | | | | |
| | (Dollars in thousands) |
Allowance for loan losses at beginning of period | | $ | 6,916 | | | $ | 6,916 | | | | | $ | 6,916 | |
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Net charge-offs | | — | | | — | | | | | — | |
Reversal of provision for loan losses | | (2,474) | | | — | | | | | — | |
Allowance for loan losses at period end | | $ | 4,442 | | | $ | 6,916 | | | | | $ | 6,916 | |
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Total loans outstanding (end of period) | | $ | 743,456 | | | $ | 894,220 | | | | | $ | 735,306 | |
Average loans outstanding | | $ | 792,071 | | | $ | 779,244 | | | | | $ | 744,557 | |
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Allowance for loan losses to period end loans | | 0.60 | % | | 0.77 | % | | | | 0.94 | % |
Net charge-offs to average loans | | 0.00 | % | | 0.00 | % | | | | 0.00 | % |
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Our allowance for loan losses at September 30, 2019March 31, 2022, December 31, 2021 and September 30, 2018March 31, 2021 was $6.2$4.4 million, $6.9 million and $8.4$6.9 million, respectively, or 0.89%0.60%, 0.77% and 1.21%0.94% of loans held-for-investment for each respective period-end. The decrease in the ratio of the allowance for loan losses to loans held-for-investment from March 31, 2021 was primarily due to the lower risk profile of the loan portfolio as a result of the loan sale discussed above.
We had $93,000 inno charge-offs and no recoveries for the nine months ended September 30, 2019 compared to charge-offs of $6,000 and $81,000 of recoveries for the nine months ended September 30, 2018.all periods presented.
Although we believe that we have established our allowance for loan losses in accordance with GAAP and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for loan losses will be subject to ongoing evaluations of the risks in our loan portfolio.
The following table shows the allocation of the allowance for loan losses among loan categories and certain other informationpercent of loans in each category to total loans as of the dates indicated. The total allowance is available to absorb losses from any loan category.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
| | | | September 30, 2019 | | December 31, 2018 | | | March 31, 2022 | | December 31, 2021 |
| | Amount | | Percent(1) | | Amount | | Percent(1) | | | Amount | | Percent(1) | | Amount | | Percent(1) |
| | | | | | | | | | | | | | | | |
| | (Dollars in thousands) | | | (Dollars in thousands) |
Real estate: | | | | | | | | | Real estate: | |
One-to-four family | | $ | 2,051 |
| | 0.30 | % | | $ | 1,848 |
| | 0.31 | % | One-to-four family | | $ | 800 | | | 12.6 | % | | $ | 1,023 | | | 11.8 | % |
Multi-family | | 653 |
| | 0.09 | % | | 483 |
| | 0.08 | % | Multi-family | | 100 | | | 1.3 | % | | 682 | | | 6.3 | % |
Commercial | | 2,791 |
| | 0.40 | % | | 3,854 |
| | 0.65 | % | Commercial | | 475 | | | 10.8 | % | | 2,017 | | | 23.5 | % |
Construction | | 96 |
| | 0.01 | % | | 98 |
| | 0.02 | % | Construction | | — | | | 0.0 | % | | 776 | | | 0.8 | % |
Commercial and industrial | | 312 |
| | 0.04 | % | | 156 |
| | 0.03 | % | Commercial and industrial | | 2,499 | | | 58.3 | % | | 1,566 | | | 37.6 | % |
Consumer and other | | 1 |
| | 0.00 | % | | 1 |
| | 0.00 | % | |
Reverse mortgage | | 37 |
| | 0.01 | % | | 54 |
| | 0.01 | % | |
| Reverse mortgage and other | | Reverse mortgage and other | | 11 | | | 0.2 | % | | 12 | | | 0.2 | % |
Mortgage warehouse | | 250 |
| | 0.04 | % | | 229 |
| | 0.04 | % | Mortgage warehouse | | 557 | | | 16.8 | % | | 840 | | | 19.8 | % |
Total allowance for loan losses | | $ | 6,191 |
| | 0.89 | % | | $ | 6,723 |
| | 1.13 | % | |
Total | | Total | | $ | 4,442 | | | 100.0 | % | | $ | 6,916 | | | 100.0 | % |
________________________(1)Loan categoryamount as a percentage of total gross loans.
Deposits
Deposits are the major source of funding for the Company. We offer a variety of deposit products including interest and noninterest bearing demand accounts, money market and savings accounts and certificates of deposit,Company, substantially all of which we market at competitive pricing. We generate depositsare derived from our customers on a relationship basis and through the efforts of our commercial lending officers and our business banking officers.digital currency customer base. Deposits remained flat at $1.8decreased $0.9 billion or 6.3% to $13.4 billion at September 30, 2019March 31, 2022, compared to $14.3 billion at December 31, 2018.2021. Noninterest bearing deposits totaled $1.4$13.3 billion, (representingrepresenting approximately 75.5%99.5% of total deposits)deposits at September 30, 2019,March 31, 2022, compared to $1.6$14.2 billion, (representingrepresenting approximately 88.7%99.5% of total deposits)deposits at December 31, 2018. Total2021.
At March 31, 2022, deposits increased slightlyby foreign depositors amounted to $4.3 billion or 31.8% of total deposits, compared to $4.0 billion, or 28.0% of total deposits, at December 31, 2021. The Bank’s 10 largest depositors accounted for $6.5 billion in deposits, or approximately 48.2% of total deposits at March 31, 2022 compared to $6.5 billion in deposits, or approximately 45.3% of total deposits at December 31, 2021.
Deposits that meet or exceed the FDIC insurance limit of $250,000 and over totaled $13.2 billion at March 31, 2022. The amounts stated for uninsured deposits as of the reported period are estimates due to the issuanceimpracticability of $325.0 million in callable brokeredprecisely measuring amounts of uninsured deposits for accounts held through fiduciary relationships, some portion of which may qualify for “pass-through” insurance coverage under FDIC regulations. Accordingly, a portion of our reported uninsured deposits may be eligible for pass-through deposit insurance coverage. There were no uninsured certificates of deposit associated withat March 31, 2022.
Our growth has been accompanied by significant fluctuations in the implementationlevel of a hedging strategy, offsetour deposits, in particular our deposits from customers in the digital currency industry. The Bank’s average total digital currency deposits during the three months ended March 31, 2022 amounted to $14.7 billion, the high and low daily total digital currency deposit levels during such time were $16.2 billion and $13.2 billion, respectively, compared to an average of $10.2 billion during the three months ended December 31, 2021, and the high and low daily deposit levels were $16.0 billion and $4.6 billion, respectively.
Demand for new deposit accounts is generated by the sale ofCompany’s banking platform for innovators that includes the San Marcos branch,SEN, which reduced total deposits by $74.5 million. The decrease in noninterest bearing deposits reflect changes in deposit levels of our digital currency customers. While deposits may fluctuate in the ordinary course ofis enabled through Silvergate’s proprietary API, and other cash management solutions. These tools enable Silvergate’s clients to grow their business we continue to add new digital currency customers each quarter.
and scale operations. The following table presents a breakdown of our digital currency customer base and the deposits held by such customers at the dates noted below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| | Number of Customers | | Total Deposits(1) | | Number of Customers | | Total Deposits(1) |
| | | | | | | | |
| | (Dollars in millions) |
Digital currency exchanges | | 96 | | | $ | 7,960 | | | 94 | | | $ | 8,288 | |
Institutional investors | | 966 | | | 3,109 | | | 894 | | | 4,220 | |
Other customers | | 441 | | | 2,126 | | | 393 | | | 1,603 | |
Total | | 1,503 | | | $ | 13,195 | | | 1,381 | | | $ | 14,111 | |
________________________ |
| | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | Number of Customers | | Total Deposits | | Number of Customers | | Total Deposits |
| | | | | | | | |
| | (Dollars in millions) |
Digital currency exchanges | | 69 |
| | $ | 546 |
| | 37 |
| | $ | 618 |
|
Institutional investors | | 468 |
| | 504 |
| | 363 |
| | 577 |
|
Other customers | | 219 |
| | 247 |
| | 142 |
| | 274 |
|
Total | | 756 |
| | $ | 1,297 |
| | 542 |
| | $ | 1,470 |
|
(1)Total deposits may not foot due to rounding.The funding related to the success of the digital currency initiative has substantially reduced our cost of funds and allowed us to focus on retaining lower cost deposits. Our cost of total deposits and our cost of funds was 0.29%0.00% and 0.41%0.01%, respectively, for the ninethree months ended September 30, 2019 asMarch 31, 2022, compared to 0.11%0.00% and 0.18%0.02%, respectively, for the ninethree months ended September 30, 2018. The increase in the weighted average cost of deposits compared to the prior period was driven by the addition of new callable brokered certificates of deposit associated with a hedging strategy, as discussed in “Financial Condition—Securities” above. For the nine months ended September 30, 2019, the hedging strategy increased the cost of deposits by 22 basis points due to the funding of the strategy with callable brokered certificates of deposit.
March 31, 2021.
The following table presents the average balances and average rates paid on deposits for the periods indicated:
COMPOSITION OF DEPOSITS
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| | Three Months Ended March 31, 2022 | | Year Ended December 31, 2021 |
| | Average Balance | | Average Rate | | Average Balance | | Average Rate |
| | | | | | | | |
| | (Dollars in thousands) |
Noninterest bearing demand accounts(1) | | $ | 14,781,601 | | | — | | | $ | 10,319,141 | | | — | |
Interest bearing accounts: | | | | | | | | |
Interest bearing demand accounts | | 5,531 | | | 0.07 | % | | 21,310 | | | 0.12 | % |
Money market and savings accounts(2) | | 70,632 | | | 0.11 | % | | 70,215 | | | 0.15 | % |
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Certificates of deposit | | 500 | | | 0.81 | % | | 612 | | | 0.65 | % |
Total interest bearing deposits | | 76,663 | | | 0.11 | % | | 92,137 | | | 0.15 | % |
Total deposits | | $ | 14,858,264 | | | 0.00 | % | | $ | 10,411,278 | | | 0.00 | % |
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| | Nine Months Ended September 30, 2019 | | Year Ended December 31, 2018 |
| | Average Balance | | Average Rate | | Average Balance | | Average Rate |
| | | | | | | | |
| | (Dollars in thousands) |
Noninterest bearing demand accounts | | $ | 1,482,317 |
| | — |
| | $ | 1,554,852 |
| | — |
|
Interest bearing accounts: | | | | | | | | |
Interest bearing demand accounts | | 48,701 |
| | 0.14 | % | | 53,627 |
| | 0.14 | % |
Money market and savings accounts | | 93,028 |
| | 0.83 | % | | 146,055 |
| | 0.59 | % |
Certificates of deposit: | |
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| |
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Brokered certificates of deposit | | 145,405 |
| | 2.85 | % | | — |
| | — |
|
Other | | 16,596 |
| | 1.50 | % | | 58,901 |
| | 1.45 | % |
Total interest bearing deposits | | 303,730 |
| | 1.73 | % | | 258,583 |
| | 0.69 | % |
Total deposits | | $ | 1,786,047 |
| | 0.29 | % | | $ | 1,813,435 |
| | 0.10 | % |
________________________The following table presents(1)Noninterest bearing demand accounts includes an average balance of $4.8 billion and $3.1 billion of foreign deposits for the maturitiesthree months ended March 31, 2022 and the year ended December 31, 2021, respectively
(2)Money market and savings accounts includes an average balance of our certificates$0.6 million and $0.5 million of deposit asforeign deposits with an average rate paid of September 30, 2019:
MATURITIES OF CERTIFICATES OF DEPOSIT0.01% and 0.05% for the three months ended March 31, 2022 and the year ended December 31, 2021, respectively.
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| | Three Months or Less | | Over Three Through Six Months | | Over Six Through Twelve Months | | Over Twelve Months | | Total |
| | | | | | | | | | |
| | (Dollars in thousands) |
$100,000 or more | | $ | 353 |
| | $ | 310 |
| | $ | 360 |
| | $ | 752 |
| | $ | 1,775 |
|
Less than $100,000 | | 116 |
| | 259 |
| | 147 |
| | 322,964 |
| | 323,486 |
|
Total | | $ | 469 |
| | $ | 569 |
| | $ | 507 |
| | $ | 323,716 |
| | $ | 325,261 |
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Borrowings
We primarily utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below.
FHLB Advances. The FHLB allows us to borrow up to 35% of the Bank’s assets on a blanket floating lien status collateralized by certain securities and loans. As of September 30, 2019,March 31, 2022, approximately $695.7 million$2.4 billion in real estate loans and securities were pledged as collateral for our FHLB borrowings. We utilizemay use these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio as needed.portfolio. As of September 30, 2019,March 31, 2022, we had $529.4$800.0 million of outstanding FHLB advances and had an additional $1.2 billion in available borrowing capacity from the FHLB. Our use of FHLB advances has been significantly reduced due to the inflow of noninterest bearing deposits. At September 30, 2019, we had $20.0 million in outstanding FHLB advances.
The following table sets forth certain information on our FHLB borrowings during the periods presented:
FHLB ADVANCES
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| | 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 |
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Average balance outstanding during the period | | $ | 10,322 |
| | $ | 1,274 |
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Weighted average interest rate during the period | | 2.23 | % | | 1.49 | % |
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| | Three Months Ended March 31, 2022 | | Year Ended December 31, 2021 |
| | | | |
| | (Dollars in thousands) |
Amount outstanding at period-end | | $ | 800,000 | | | $ | — | |
Weighted average interest rate at period-end | | 0.43 | % | | — | |
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Federal Reserve Bank of San Francisco. The FRB has an available borrower in custody arrangement that allows us to borrow on a collateralized basis. The Company’sBank’s borrowing capacity under the Federal Reserve’s discount window program was $7.4$2.9 million as of September 30, 2019.March 31, 2022. Certain commercial loans are pledged under this arrangement. We maintain this borrowing arrangement to meet liquidity needs pursuant to our contingency funding plan. No advances were outstanding under this facility as of September 30, 2019.March 31, 2022.
The Company has also issued subordinated debentures obtained a term loan, entered into repurchase agreements and purchasedhas access to borrow federal funds.funds or lines of credit with correspondent banks. At September 30, 2019,March 31, 2022, these outstanding borrowings amounted to $19.8$15.8 million.
Notes Payable. On January 29, 2016, the Company obtained a term loan from a commercial bank with 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 zero percent and the one-month LIBOR rate. As of September 30, 2019, the one-month LIBOR rate was 2.02%. The proceeds were used to redeem preferred stock and can be prepaid at any time. The outstanding principal at September 30, 2019 was $4.0 million. Annual principal payments on outstanding borrowings are $1.1 million in 2019, $1.1 million in 2020 and $2.6 million in 2021.
Subordinated Debentures. A trust formed by the Company issued $12.5 million of floating rate trust preferred securities in July 2001 as part of a pooled offering of such securities. The Company issued subordinated debentures to the trust in exchange for its proceeds from the offering. The debentures and related accrued interest represent substantially all the assets of the trust. The subordinated debentures bear interest at six-month LIBOR plus 375 basis points, which adjusts every six months in January and July of each year. Interest is payable semiannually. At September 30, 2019,March 31, 2022, the interest rate for the Company’s next scheduled payment was 5.94%4.19%, based on six-month LIBOR of 2.19%0.44%. On any January 25 or July 25 the Company may redeem the 2001 subordinated debentures at 100% of principal amount plus accrued interest. The 2001 subordinated debentures mature on July 25, 2031.
A second trust formed by the Company issued $3.0 million of trust preferred securities in January 2005 as part of a pooled offering of such securities. The Company issued subordinated debentures to the trust in exchange for its proceeds from the offering. The debentures and related accrued interest represent substantially all the assets of the trust. The subordinated debentures bear interest at three-month LIBOR plus 185 basis points, which adjusts every three months. Interest is payable quarterly. At September 30, 2019,March 31, 2022, the interest rate for the Company’s next scheduled payment was 3.97%2.68%, based on three-month LIBOR of 2.12%0.83%. On the 15th day of any March, June, September, or December, the Company may redeem the 2005 subordinated debentures at 100% of principal amount plus accrued interest. The 2005 subordinated debentures mature on March 15, 2035.
The Company also retained a 3% minority interest in each of these trusts which is included in subordinated debentures. The balance of the equity in the trusts is comprised of mandatorily redeemable preferred securities. The subordinated debentures may be included in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations. The Company has the right to defer interest payments on the subordinated debentures from time to time for a period not to exceed five years.
Other Borrowings. At September 30, 2019,March 31, 2022, the Company had no outstanding balance of repurchase agreements or federal funds purchased and had available lines of credit of $32.0$108.0 million with other correspondent banks.
Liquidity and Capital Resources
Liquidity
Liquidity is defined as the Bank’s capacity to meet its cash and collateral obligations at a reasonable cost. Maintaining an adequate level of liquidity depends on the Bank’s ability to meet both expected and unexpected cash flows and collateral needs efficiently without adversely affecting either daily operations or the financial condition of the Bank. Liquidity risk is the risk that we will be unable to meet our obligations as they become due because of an inability to liquidate assets or obtain adequate
funding. The Bank’s obligations, and the funding sources used to meet them, depend significantly on our business mix, balance sheet structure and the cash flow profiles of our on- and off-balance sheet obligations. In managing our cash flows, management regularly confronts situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints on the ability to convert assets into cash or in accessing sources of funds (i.e., market liquidity) and contingent liquidity events. Changes in economic conditions or exposure to credit, market, operation, legal and reputational risks also could affect the Bank’s liquidity risk profile and are considered in the assessment of liquidity and asset/liability management.
We maintain high levels of liquidity for our customers who operate in the digital currency industry, as these deposits are subject to potentially dramatic fluctuations due to certain factors that may be outside of our control. As a result, our investment portfolio iswe have a significant amount of liquid assets such as interest earning deposits in other banks and available-for-sale securities which are comprised primarily of mortgage-backed securities backed by government-sponsored entities, collateralized mortgage obligations, municipal bonds and asset-backed securities.
Management has established a comprehensive management process for identifying, measuring, monitoring and controlling liquidity risk. Because of its critical importance to the viability of the Bank, liquidity risk management is fully integrated into our risk management processes. Critical elements of our liquidity risk management include: effective corporate governance consisting of oversight by the board of directors and active involvement by management; appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are commensurate with the complexity and business activities of the Bank; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of cash and cash equivalents and highly liquid marketable securities free of legal, regulatory or operational impediments, that can be used to meet liquidity needs in stressful situations; comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the institution’s liquidity risk management process.
The movement of funds on our balance sheet among different SEN deposit customers does not reduce the Bank’s deposits and thus does not presentresult in liquidity issues or require any borrowing by the Company or the Bank. In addition, to the extent that SEN participants fully withdraw funds from the Bank, no material liquidity issues or borrowing needs would be presentedarise since the majority of SEN deposit fundsparticipants deposits are held in liquid assets, such as available-for-sale securities and cash, or other short duration liquid assets.used to fund short-term mortgage warehouse loans.
We expect funds to be available from basic banking activity sources, including the core deposit base, the repayment and maturity of loans and investment security cash flows. Other potential funding sources include borrowings from the FHLB, the FRB, other lines of credit and if necessary, brokered certificates of deposit. At September 30, 2019,As of March 31, 2022, we had $20.0 million in outstanding FHLB advances. We did not have any borrowings outstanding with the FRB at September 30, 2019 and our borrowing capacity is limited only by eligible collateral. As of September 30, 2019, we had $529.4 million$1.2 billion of available borrowing capacity from the FHLB, $7.4$2.9 million of available borrowing capacity from the FRB and available lines of credit of $32.0$108.0 million with other correspondent banks. Cash and cash equivalents at September 30, 2019March 31, 2022 were $160.3 million.$1.4 billion. Accordingly, our liquidity resources were at sufficient levels to fund loans and meet other cash needs as necessary.
Capital Resources
Shareholders’ equity increased $39.4 million to $230.6 million at September 30, 2019 compared to $191.2 million at December 31, 2018. The increase in shareholders’ equity was primarily due to net income for the nine months ended September 30, 2019, which amounted to $21.2 million and an increase in accumulated other comprehensive income of $18.2 million. The increase in accumulated other comprehensive income was primarily due to unrealized gains in the securities purchased in connection with the Bank’s hedging strategy.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios of common equity Tier 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1,250%. The Company and the Bank are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.
In July 2013, federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with certain standards that were developed by Basel III and certain provisions of the Dodd-Frank Act. The final rule currently applies to all depository institutions and bank holding companies and savings and loan holding companies with total consolidated assets of more than $3 billion. While the Company was exempt from the consolidated capital requirements at September 30, 2019, it is not eligible for the Small Bank Holding Company Policy Statement due to the issuance of common stock in its recent initial public offering.
As of September 30, 2019, the Company and the Bank were in compliance with all applicable regulatory capital requirements to which they were subject, and the Bank was classified as “well capitalized” for purposes of the prompt corrective action regulations. As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we intend to monitor and control our growth to remain in compliance with all regulatory capital standards applicable to us.
The following table presents the regulatory capital ratios for the Company and the Bank as of the dates indicated:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum capital adequacy | | To be well capitalized |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
September 30, 2019 | | | | | | | | | | | | |
The Company | | | | | | | | | | | | |
Tier 1 leverage ratio | | $ | 229,963 |
| | 10.43 | % | | $ | 88,208 |
| | 4.00 | % | | N/A |
| | N/A |
|
Common equity tier 1 capital ratio | | 214,463 |
| | 23.57 | % | | 40,939 |
| | 4.50 | % | | N/A |
| | N/A |
|
Tier 1 risk-based capital ratio | | 229,963 |
| | 25.28 | % | | 54,585 |
| | 6.00 | % | | N/A |
| | N/A |
|
Total risk-based capital ratio | | 236,268 |
| | 25.97 | % | | 72,780 |
| | 8.00 | % | | N/A |
| | N/A |
|
The Bank | | | | | | | | | | | | |
Tier 1 leverage ratio | | 220,308 |
| | 10.01 | % | | 88,062 |
| | 4.00 | % | | $ | 110,077 |
| | 5.00 | % |
Common equity tier 1 capital ratio | | 220,308 |
| | 24.30 | % | | 40,790 |
| | 4.50 | % | | 58,919 |
| | 6.50 | % |
Tier 1 risk-based capital ratio | | 220,308 |
| | 24.30 | % | | 54,386 |
| | 6.00 | % | | 72,515 |
| | 8.00 | % |
Total risk-based capital ratio | | 226,613 |
| | 25.00 | % | | 72,515 |
| | 8.00 | % | | 90,644 |
| | 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 | % |
Off-Balance Sheet Items
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated statements of financial condition. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and issue letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk exceeding the amounts recognized in our consolidated statements of financial condition. Our exposure to credit loss is represented by the contractual amounts of these commitments. The same credit policies and procedures are used in making these commitments as for on-balance sheet instruments. We are not awareAt March 31, 2022, we had $644.4 million of any accounting loss to be incurred by funding these commitments; however, we maintain an allowance for off-balance sheet credit risk which is recorded in other liabilities on the consolidated statements of financial condition.extension commitments. For details of our commitments to extend credit, and commercial and standby letters of credit, please refer to “Note 9—Commitments and Contingencies—Off-Balance Sheet Items” of the “Notes to Unaudited Consolidated Financial Statements” under Part I, Item 1 of this Quarterly Report on Form 10-Q.
Non-GAAP Financial MeasuresShareholders’ equity decreased $62.3 million to $1.5 billion at March 31, 2022, compared to $1.6 billion at December 31, 2021. The decrease in shareholders’ equity was primarily due to a decrease in accumulated other comprehensive income of $219.0 million due to the decrease in unrealized gains on available-for-sale securities portfolio and derivative assets, partially offset by a $132.0 million increase in additional paid-in capital driven by common stock issuance in exchange for assets acquired and net income for the three months ended March 31, 2022 of $27.4 million.
Our accounting and reporting policies conform to GAAPThe Company and the prevailing practices inBank are subject to various regulatory capital requirements administered by the federal banking industry. However, weagencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also evaluate our performancesubject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of common equity Tier 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1,250%. The Bank is also required to maintain capital at a minimum level based on certain additional financial measures discussed in this Quarterly Report on Form 10-Q as being “non-GAAP financial measures.” We identify certain financial measures as non-GAAP financial measures if that financial measure excludes or includes amounts, that are not included or excluded,quarterly average assets, which is known as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP in our statementsleverage ratio.
As of operations, financial condition or
cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios that are calculated using exclusively financial measures presented in accordance with GAAP.
This Quarterly Report on Form 10-Q includes certain non-GAAP financial measures for the nine months ended September 30, 2019 in order to present our results of operations for that period on a basis consistent with our historical operations. On November 15, 2018,March 31, 2022, the Company and the Bank entered into a purchasewere in compliance with all applicable regulatory capital requirements to which they were subject, and assumption agreementthe Bank was classified as “well capitalized” for purposes of the prompt corrective action regulations. As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we intend to monitor and control our growth to remain in compliance with HomeStreet Bankall regulatory capital standards applicable to sellus.
The following table presents the Bank’s retail branch located in San Marcos, California and business loan portfolio to HomeStreet Bank. This transaction, which was completed in March 2019, generated a pre-tax gain on sale of $5.5 million. There was no impact to the three months September 30, 2019.
We believe that these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP. However, non-GAAP financial measures have a number of limitations, are not necessarily comparable to GAAP measures and should not be considered in isolation or viewed as a substituteregulatory capital ratios for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover,Company and the manner in which we calculate non-GAAP financial measures may differ from thatBank as of other companies reporting non-GAAP measures with similar names. You should understand how such other companies calculate their financial measures that may be similar or have names that are similar to the non-GAAP financial measures discussed herein when comparing such non-GAAP financial measures. Our management uses the non-GAAP financial measures set forth below in its analysis of our performance.dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum capital adequacy(1) | | To be well capitalized |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
March 31, 2022 | | | | | | | | | | | | |
The Company | | | | | | | | | | | | |
Tier 1 leverage ratio | | $ | 1,597,946 | | | 9.68 | % | | $ | 660,633 | | | 4.00 | % | | N/A | | N/A |
Common equity tier 1 capital ratio | | 1,388,825 | | | 38.97 | % | | 160,360 | | | 4.50 | % | | N/A | | N/A |
Tier 1 risk-based capital ratio | | 1,597,946 | | | 44.84 | % | | 213,813 | | | 6.00 | % | | N/A | | N/A |
Total risk-based capital ratio | | 1,603,983 | | | 45.01 | % | | 285,084 | | | 8.00 | % | | N/A | | N/A |
The Bank | | | | | | | | | | | | |
Tier 1 leverage ratio | | 1,577,199 | | | 9.51 | % | | 663,196 | | | 4.00 | % | | $ | 828,995 | | | 5.00 | % |
Common equity tier 1 capital ratio | | 1,577,199 | | | 44.28 | % | | 160,273 | | | 4.50 | % | | 231,505 | | | 6.50 | % |
Tier 1 risk-based capital ratio | | 1,577,199 | | | 44.28 | % | | 213,697 | | | 6.00 | % | | 284,929 | | | 8.00 | % |
Total risk-based capital ratio | | 1,583,236 | | | 44.45 | % | | 284,929 | | | 8.00 | % | | 356,161 | | | 10.00 | % |
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | 2018 |
| | | | |
| | (Dollars in thousands) |
Net income | | | | |
Net income, as reported | | $ | 21,248 |
| | $ | 14,313 |
|
Adjustments: | | | | |
Gain on sale of branch, net | | (5,509 | ) | | — |
|
Tax effect(1) | | 1,574 |
| | — |
|
Adjusted net income | | $ | 17,313 |
| | $ | 14,313 |
|
| | | | |
Return on average assets (ROAA)(2) | | | | |
Adjusted net income | | $ | 17,313 |
| | $ | 14,313 |
|
Average assets | | 2,063,298 |
| | 1,904,684 |
|
Return on average assets (ROAA), as reported | | 1.38 | % | | 1.00 | % |
Adjusted return on average assets | | 1.12 | % | | 1.00 | % |
| | | | |
Return on average equity (ROAE)(2) | | | | |
Adjusted net income | | $ | 17,313 |
| | $ | 14,313 |
|
Average equity | | 208,775 |
| | 158,248 |
|
Return on average equity (ROAE), as reported | | 13.61 | % | | 12.09 | % |
Adjusted return on average equity | | 11.09 | % | | 12.09 | % |
| | | | |
Noninterest income / average assets(2) | | | | |
Noninterest income | | $ | 12,624 |
| | $ | 5,572 |
|
Adjustments: | | | | |
Gain on sale of branch, net | | (5,509 | ) | | — |
|
Adjusted noninterest income | | 7,115 |
| | 5,572 |
|
Average assets | | 2,063,298 |
| | 1,904,684 |
|
Noninterest income / average assets, as reported | | 0.82 | % | | 0.39 | % |
Adjusted noninterest income / average assets | | 0.46 | % | | 0.39 | % |
| | | | |
Efficiency ratio | | | | |
Noninterest expense | | $ | 38,818 |
| | $ | 34,346 |
|
| | | | |
Net interest income | | 55,327 |
| | 48,760 |
|
Noninterest income | | 12,624 |
| | 5,572 |
|
Total net interest income and noninterest income | | 67,951 |
| | 54,332 |
|
Adjustments: | | | | |
Gain on sale of branch, net | | (5,509 | ) | | — |
|
Adjusted total net interest income and noninterest income | | 62,442 |
| | 54,332 |
|
Efficiency ratio, as reported | | 57.13 | % | | 63.22 | % |
Adjusted efficiency ratio | | 62.17 | % | | 63.22 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum capital adequacy(1) | | To be well capitalized |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
December 31, 2021 | | | | | | | | | | | | |
The Company | | | | | | | | | | | | |
Tier 1 leverage ratio | | $ | 1,631,257 | | | 11.07 | % | | $ | 589,614 | | | 4.00 | % | | N/A | | N/A |
Common equity tier 1 capital ratio | | 1,422,136 | | | 49.53 | % | | 129,198 | | | 4.50 | % | | N/A | | N/A |
Tier 1 risk-based capital ratio | | 1,631,257 | | | 56.82 | % | | 172,264 | | | 6.00 | % | | N/A | | N/A |
Total risk-based capital ratio | | 1,638,794 | | | 57.08 | % | | 229,686 | | | 8.00 | % | | N/A | | N/A |
The Bank | | | | | | | | | | | | |
Tier 1 leverage ratio | | 1,546,693 | | | 10.49 | % | | 589,595 | | | 4.00 | % | | $ | 736,994 | | | 5.00 | % |
Common equity tier 1 capital ratio | | 1,546,693 | | | 53.89 | % | | 129,162 | | | 4.50 | % | | 186,567 | | | 6.50 | % |
Tier 1 risk-based capital ratio | | 1,546,693 | | | 53.89 | % | | 172,216 | | | 6.00 | % | | 229,622 | | | 8.00 | % |
Total risk-based capital ratio | | 1,554,230 | | | 54.15 | % | | 229,622 | | | 8.00 | % | | 287,027 | | | 10.00 | % |
________________________ | |
(1) | Amount represents the total income tax effect of the adjustment, which is calculated based on the applicable marginal tax rate of 28.58%. |
| |
(2) | Data has been annualized. |
(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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our Asset Liability Management Policy sets forth guidelines for effective funds management and establishes an approach for measuring and monitoring our net interest rate sensitivity.
Interest rate risk is the probability of an increase or decline in the value of an asset or liability due to fluctuations in interest rates. These fluctuations have an impact on both the level of interest income and interest expense as well as the market value of all interest earning assets and interest bearing liabilities (excluding those with short-term maturities).liabilities. The objective is to measure
the impact that different interest rate scenarios have on net interest income and ensure that the results are within policy limits while maximizing income. The results can be reflected as a lossan increase or decrease of future net interest income or a lossan increase or decrease of current fair market value.
Exposure to interest rates is managed by structuring the balance sheet in a ‘business as usual’ or ‘base case’ scenario. We do not enter into instruments such as leveraged derivatives, financial options or financial future contracts for the purpose of reducing interest rate risk. We hedge interest rate risk by utilizing interest rate floors and interest rate caps. The interest rate floors hedge our cash and securities and the interest rate caps hedge our securities and subordinated debentures. Based on the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
Exposure to interest rate risk is managed by the Bank’s Asset Liability Management Committee or ALCO, in accordance with policies approved by the board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital under the current interest rate outlook, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans, and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits, and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk that include an analysis of relationships between interest earning assets and interest-bearing liabilities as well as utilizing an interest rate simulation model where the rates are shocked.various rate scenarios can be analyzed.
The following table indicates that, for periods less than one year, rate-sensitive assets exceed rate-sensitive liabilities, resulting in an asset-sensitive position. For a bank with an asset-sensitive position, or positive gap, rising interest rates would generally be expected to have a positive effect on net interest income, and falling interest rates would generally be expected to have the opposite effect. Due to our significantWhile the Company is asset sensitive, position, we have hedgedvarious instruments that help reduce our interest rate risk exposure in a decreasingdeclining rate environment, by implementing our hedging strategy. For a discussionsuch as interest rate floors and fixed-rate securities.
INTEREST SENSITIVITY GAP
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Within One Month | | After One Month Through Three Months | | After Three Through Twelve Months | | Within One Year | | Greater Than One Year or Non -Sensitive | | Total |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
September 30, 2019 | | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
Interest earning assets | | | | | | | | | | | | |
Loans(1) | | $ | 428,830 |
| | $ | 56,200 |
| | $ | 55,260 |
| | $ | 540,290 |
| | $ | 469,301 |
| | $ | 1,009,591 |
|
Securities(2) | | 486,249 |
| | 10,493 |
| | 2,602 |
| | 499,344 |
| | 420,837 |
| | 920,181 |
|
Interest earning deposits in other banks | | 154,982 |
| | — |
| | 1,178 |
| | 156,160 |
| | — |
| | 156,160 |
|
Total earning assets | | $ | 1,070,061 |
| | $ | 66,693 |
| | $ | 59,040 |
| | $ | 1,195,794 |
| | $ | 890,138 |
| | $ | 2,085,932 |
|
Liabilities | | | | | | | | | | | | |
Interest bearing liabilities | | | | | | | | | | | | |
Interest bearing deposits | | $ | 128,401 |
| | $ | — |
| | $ | — |
| | $ | 128,401 |
| | $ | — |
| | $ | 128,401 |
|
Certificates of deposit | | 1 |
| | 467 |
| | 569 |
| | 1,037 |
| | 324,224 |
| | 325,261 |
|
Total interest bearing deposits | | 128,402 |
| | 467 |
| | 569 |
| | 129,438 |
| | 324,224 |
| | 453,662 |
|
FHLB advances | | 20,000 |
| | — |
| | — |
| | 20,000 |
| | — |
| | 20,000 |
|
Total interest bearing liabilities | | $ | 148,402 |
| | $ | 467 |
| | $ | 569 |
| | $ | 149,438 |
| | $ | 324,224 |
| | $ | 473,662 |
|
Period gap | | $ | 921,659 |
| | $ | 66,226 |
| | $ | 58,471 |
| | $ | 1,046,356 |
| | $ | 565,914 |
| | $ | 1,612,270 |
|
Cumulative gap | | $ | 921,659 |
| | $ | 987,885 |
| | $ | 1,046,356 |
| | $ | 1,046,356 |
| | $ | 1,612,270 |
| | |
Ratio of cumulative gap to total earning assets | | 0.86 | % | | 0.87 | % | | 0.88 | % | | 0.88 | % | | 0.77 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Within One Month | | After One Month Through Three Months | | After Three Through Twelve Months | | Within One Year | | Greater Than One Year or Non -Sensitive | | Total |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
March 31, 2022 | | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
Interest earning assets | | | | | | | | | | | | |
Loans(1) | | $ | 1,487,345 | | | $ | 11,778 | | | $ | 62,976 | | | $ | 1,562,099 | | | $ | 118,497 | | | $ | 1,680,596 | |
Securities(2) | | 6,112,349 | | | 14,010 | | | 200,703 | | | 6,327,062 | | | 5,949,776 | | | 12,276,838 | |
Interest earning deposits in other banks | | 1,173,924 | | | 135 | | | 1,130 | | | 1,175,189 | | | 3,016 | | | 1,178,205 | |
Total earning assets | | $ | 8,773,618 | | | $ | 25,923 | | | $ | 264,809 | | | $ | 9,064,350 | | | $ | 6,071,289 | | | $ | 15,135,639 | |
Liabilities | | | | | | | | | | | | |
Interest bearing liabilities | | | | | | | | | | | | |
Interest bearing deposits | | $ | 71,871 | | | $ | — | | | $ | — | | | $ | 71,871 | | | $ | 316 | | | $ | 72,187 | |
Certificates of deposit | | 41 | | | — | | | 307 | | | 348 | | | 92 | | | 440 | |
Total interest bearing deposits | | 71,912 | | | — | | | 307 | | | 72,219 | | | 408 | | | 72,627 | |
FHLB advances | | 800,000 | | | — | | | — | | | 800,000 | | | — | | | 800,000 | |
Total interest bearing liabilities | | $ | 871,912 | | | $ | — | | | $ | 307 | | | $ | 872,219 | | | $ | 408 | | | $ | 872,627 | |
Period gap | | $ | 7,901,706 | | | $ | 25,923 | | | $ | 264,502 | | | $ | 8,192,131 | | | $ | 6,070,881 | | | $ | 14,263,012 | |
Cumulative gap | | $ | 7,901,706 | | | $ | 7,927,629 | | | $ | 8,192,131 | | | $ | 8,192,131 | | | $ | 14,263,012 | | | |
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Ratio of cumulative gap to total earning assets | | 52.21 | % | | 52.38 | % | | 54.12 | % | | 54.12 | % | | 94.23 | % | | |
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(1) | Includes loans held-for-sale. |
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(2) | Includes FHLB and FRB stock. |
(1)Includes loans held-for-sale.
(2)Includes FHLB and FRB stock.
We use quarterly Interest Rate Risk, or IRR, simulations to assess the impact of changing interest rates on our net interest income and net income under a variety of scenarios and time horizons. These simulations utilize both instantaneous and parallel changes in the level of interest rates, as well as non-parallel changes such as changing slopes and twists of the yield curve. Static simulation models are based on current exposures and assume a constant balance sheet with no new growth. Dynamic simulation models are also utilized that rely on detailed assumptions regarding changes in existing lines of business, new business, and changes in management and client behavior.
We also use economic value-based methodologies to measure the degree to which the economic values of the Bank’s positions change under different interest rate scenarios. The economic-value approach focuses on a longer-term time horizon and captures all future cash flows expected from existing assets and liabilities. The economic value model utilizes a static approach in that the analysis does not incorporate new business; rather, the analysis shows a snapshot in time of the risk inherent in the balance sheet.
Many assumptions are used to calculate the impact of interest rate fluctuations on our net interest income, such as asset prepayments, non-maturity deposit price sensitivity and decay rates, and key rate drivers. Because of the inherent use of these estimates and assumptions in the model, our actual results may, and most likely will, differ from our static IRR results. In addition, static IRR results do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates or client behavior. For example, as part of our asset/liability management strategy, management can increase asset duration and decrease liability duration to reduce asset sensitivity, or to decrease asset duration and increase liability duration in order to increase asset sensitivity.
The following table summarizes the results of our IRR analysis in simulating the change in net interest income and fair value of equity over a 12-month horizon as of September 30, 2019:March 31, 2022:
IMPACT ON NET INTEREST INCOME UNDER A STATIC BALANCE SHEET, PARALLEL INTEREST RATE SHOCK
| | Earnings at Risk as of: | | -100 bps | | Flat | | +100 bps | | +200 bps | | +300 bps | Earnings at Risk as of: | | -100 bps | | Flat | | +100 bps | | +200 bps | | +300 bps |
September 30, 2019 | | (7.76 | )% | | 0.00 | % | | 10.08 | % | | 22.35 | % | | 33.85 | % | |
March 31, 2022 | | March 31, 2022 | | (24.87) | % | | 0.00 | % | | 31.47 | % | | 62.62 | % | | 91.34 | % |
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Utilizing an economic value of equity, or EVE, approach, we analyze the risk to capital from the effects of various interest rate scenarios through a long-term discounted cash flow model. This measures the difference between the economic value of our assets and the economic value of our liabilities, which is a proxy for our liquidation value. While this provides some value as a risk measurement tool, management believes IRR is more appropriate in accordance with the going concern principle.
The following table illustrates the results of our EVE analysis as of September 30, 2019.March 31, 2022.
ECONOMIC VALUE OF EQUITY ANALYSIS UNDER A STATIC BALANCE SHEET, PARALLEL INTEREST RATE SHOCK
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As of: | | -100 bps | | Flat | | +100 bps | | +200 bps | | +300 bps |
March 31, 2022 | | 3.50 | % | | 0.00 | % | | (8.82) | % | | (16.11) | % | | (24.43) | % |
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As of: | | -100 bps | | Flat | | +100 bps | | +200 bps | | +300 bps |
September 30, 2019 | | (1.80 | )% | | 0.00 | % | | 1.24 | % | | 4.97 | % | | 7.60 | % |
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (asas defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2019.March 31, 2022.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2019March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
None.We are not currently subject to any material legal proceedings. We are from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as well as claims or litigation relating to intellectual property, securities, breach of contract and tort. We intend to defend ourselves vigorously against any pending or future claims and litigation.
In the current opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on our results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor. Item 1A. Risk Factors
In additionThere have been no material changes to the other information set forth in this report, you should carefully consider the otherrisk factors discusseddisclosed in the “Risk Factors” section of our registration statementCompany’s Annual Report on Form S-110-K for the year ended December 31, 2021, as filed with the SEC on OctoberFebruary 28, 2019 (333-228446) and declared effective by the SEC on November 6, 2019 (the “Registration Statement”), which could materially affect our business, financial condition and/or operating results. There were no material changes from risk factors previously disclosed in our Registration Statement. The risk factors identified are in addition to those contained in any other cautionary statements, written or oral, which may be or otherwise addressed in connection with a forward‑looking statement or contained in any of our subsequent filings with the SEC.2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended September 30, 2019,On January 31, 2022, the Company had one employee exercise options forissued 1,221,217 shares of the Company’s Class A common stock. Both exercises were done by a cashless exercise at a fair market value of $12.00 as determined by the Company’s board of directors. All of the stock options were issued pursuant to the Company’s 2010 Equity Compensation Plan. The table below reflects the date, number of options exercised, number of shares issued and the exercise price for each option exercise in the three months ending September 30, 2019.
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OPTIONS EXERCISED IN THE THREE MONTHS ENDING SEPTEMBER 30, 2018 |
Date of Sale/Exercise | | Number of Options | | Number of Shares Issued | | Exercise Price |
August 15, 2019 | | 13,457 | | 4,000 | | $6.55 |
August 15, 2019 | | 10,000 | | 2,803 | | $6.86 |
The issuance of the shares of common stock was exempt from registration under the Securities Act,(the “Shares”) in reliance upon Rule 701 promulgated underthe exemption from registration pursuant to Section 3(b)4(a)(2) of the Securities Act of 1933, as a transaction by an issuer pursuant to benefit plansamended (the “Securities Act”) and contracts relating to compensationRule 506 of Regulation D promulgated thereunder. The Shares were issued as provided under Rule 701.
On November 12, 2019,part of the Company completed its initial public offeringconsideration in the Company’s acquisition of 3,333,333 shares of its Class A common stock at a price to the public of $12.00 per share, 824,605 shares of which were sold by the Companycertain intellectual property and 2,508,728 shares of which were sold by the selling shareholders. The net proceeds to the Companyother technology assets from the IPO were $6.8 million after deductingLibra Association. For additional information, see the underwriting discount and offering expenses, which have not yet been finalized. The Company did not receive any proceeds from the sales of shares by the selling shareholders. All of the shares were sold pursuant to our Registration Statement, which was declared effective by the SECCompany’s Current Report on November 6, 2019.
There has been no material change in the planned use of proceeds from our initial public offering as described in our prospectusForm 8-K filed with the SEC on November 8, 2019 pursuant to Rule 424(b)(4) under the Securities Act.February 4, 2022.
The Company did not repurchase any of its shares during the quarter and does not have any authorized share repurchase programs.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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Number | | Description |
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3.12.1 | | Asset Purchase Agreement, dated January 31, 2022, by and among Silvergate Capital Corporation, Libra Association, Diem Networks US HoldCo, Inc., Diem Networks US, Inc., Diem Networks II LLC, Diem Networks LLC, and Diem LLC(incorporated by reference to Exhibit 2.1 to Silvergate Capital Corporation’s Current Report on Form 8-K filed on February 4, 2022) |
3.1 | | |
3.2 | | |
31.13.3 | | |
10.1 | | |
31.1 | | |
31.2 | | |
32.1 | | |
101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | XBRL Taxonomy Extension Definitions Linkbase Document |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | SILVERGATE CAPITAL CORPORATION |
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Date: | December 4, 2019May 9, 2022 | By: | | /s/ Alan J. Lane |
| | | | Alan J. Lane |
| | | | President and Chief Executive Officer (Principal Executive Officer) |
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Date: | December 4, 2019May 9, 2022 | By: | | /s/ Antonio Martino |
| | | | Antonio Martino |
| | | | Chief Financial Officer (Principal Financial and Accounting Officer) |