~~Table of Contents~~

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ending September 30, ~~2019~~2022



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

For the transition period from __________________ to __________________

Commission file number 001-39123

SILVERGATE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)



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

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

(Address of principal executive offices, including zip code)

(~~858~~) (858) 362-6300

(Registrant’s telephone number, including area code)



Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, par value $0.01 per share	SI	New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of 5.375% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A	SI PRA	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange ~~act~~Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☐☒ No☒☐

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

Yes ☒ No ☐

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

Large accelerated filer

☐☒

Accelerated filer

☐

Emerging growth company

☒☐

Non-accelerated Filer

☒☐

Smaller reporting company

☒☐

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

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

As of ~~November 27, 2019,~~October 31, 2022, the registrant had ~~17,775,160~~31,658,603 shares of Class A voting common stock ~~and 892,836 shares of Class B non-voting common stock~~ outstanding.

SILVERGATE CAPITAL CORPORATION

FORM 10-Q

TABLE OF CONTENTS


			Page

PART I—FINANCIAL INFORMATION

		~~Page~~

~~PART I—FINANCIAL INFORMATION~~	3

Item 1. Financial Statements (Unaudited)		32
Consolidated Statements of Financial Condition			32
Consolidated Statements of Operations			43
Consolidated Statements of Comprehensive Income			54
Consolidated Statements of Shareholders’ Equity			65
~~Condensed~~ Consolidated Statements of Cash Flows			87
Notes to Unaudited Consolidated Financial Statements			98
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			3337
Item 3. Quantitative and Qualitative Disclosures About Market Risk			5860
Item 4. Controls and Procedures			6062

PART II—OTHER INFORMATION			61

Item 1. Legal Proceedings			6163
Item 1A. Risk Factors			6163
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			6163
Item 3. Defaults Upon Senior Securities			6163
Item 4. Mine Safety Disclosures			6163
Item 5. Other Information			6163
Item 6. Exhibits			6264

SIGNATURES			6365

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

SILVERGATE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In Thousands, Except Par Value and Per Share Amounts)

(Unaudited)

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

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


	September 30, 2022		December 31, 2021
ASSETS
Cash and due from banks	$	465,853	$	208,193
Interest earning deposits in other banks	1,420,970		5,179,753
Cash and cash equivalents	1,886,823		5,387,946

Securities available-for-sale, at fair value	8,317,247		8,625,259
Securities held-to-maturity, at amortized cost (fair value of $2,677,834 at September 30, 2022)	3,104,557		—
Loans held-for-sale, at lower of cost or fair value	924,644		893,194
Loans held-for-investment, net of allowance for loan losses of $3,176 and $6,916 at September 30, 2022 and December 31, 2021, respectively	467,786		887,304
Other investments	60,428		34,010
Accrued interest receivable	78,799		40,370
Premises and equipment, net	3,518		3,008
Intangible assets	194,045		—
Derivative assets	153,990		34,056

Other assets	275,503		100,348
Total assets	$	15,467,340	$	16,005,495
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing demand accounts	$	12,005,719	$	14,213,472
Interest bearing accounts	1,232,707		77,156

Total deposits	13,238,426		14,290,628
Federal home loan bank advances	700,000		—

Subordinated debentures, net	15,855		15,845

Accrued expenses and other liabilities	181,714		90,186
Total liabilities	14,135,995		14,396,659
Commitments and contingencies
Preferred stock, $0.01 par value—authorized 10,000 shares; $1,000 per share liquidation preference, 200 shares issued and outstanding at September 30, 2022 and December 31, 2021	2		2
Class A common stock, $0.01 par value—150,000 shares authorized and 31,659 shares issued and outstanding at September 30, 2022; 125,000 shares authorized and 30,403 shares issued and outstanding at December 31, 2021	317		304
Class B non-voting common stock, $0.01 par value—no shares authorized and no shares issued and outstanding at September 30, 2022; 25,000 shares authorized and no shares issued and outstanding at December 31, 2021	—		—
Additional paid-in capital	1,555,996		1,421,592
Retained earnings	295,115		193,860
Accumulated other comprehensive loss	(520,085)		(6,922)
Total shareholders’ equity	1,331,345		1,608,836
Total liabilities and shareholders’ equity	$	15,467,340	$	16,005,495

See accompanying notes to unaudited consolidated financial statements

Table of Contents

SILVERGATE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,				Nine Months Ended September 30,
	2019			2018			2019			2018			2022		2021		2022		2021
Interest income												Interest income
Loans, including fees	$	13,574		$	12,726		$	38,369		$	35,357	Loans, including fees	$	20,663	$	16,972	$	61,004	$	50,727
Securities	6,510			1,941			14,044			5,016
Taxable securities												Taxable securities	47,401		14,000		96,166		25,916
Tax-exempt securities												Tax-exempt securities	14,412		5,014		42,416		9,832
Other interest earning assets	1,183			3,921			8,038			10,386		Other interest earning assets	8,001		1,755		12,394		4,633
Dividends and other	121			119			472			392		Dividends and other	289		195		1,211		804
Total interest income	21,388			18,707			60,923			51,151		Total interest income	90,766		37,936		213,191		91,912
Interest expense												Interest expense
Deposits	2,385			400			3,920			1,386		Deposits	5,221		26		5,244		107
Federal home loan bank advances	172			—			172			19
Notes payable and other	117			98			702			315
Federal home loan bank advances and other												Federal home loan bank advances and other	4,399		—		5,265		—
Subordinated debentures	271			239			802			671		Subordinated debentures	258		247		753		744
Total interest expense	2,945			737			5,596			2,391		Total interest expense	9,878		273		11,262		851
Net interest income before provision for loan losses	18,443			17,970			55,327			48,760		Net interest income before provision for loan losses	80,888		37,663		201,929		91,061
(Reversal of) provision for loan losses	(858		)	—			(439		)	148
Reversal of provision for loan losses												Reversal of provision for loan losses	(601)		—		(3,075)		—
Net interest income after provision for loan losses	19,301			17,970			55,766			48,612		Net interest income after provision for loan losses	81,489		37,663		205,004		91,061
Noninterest income												Noninterest income
Deposit related fees												Deposit related fees	7,953		8,171		25,729		26,603
Mortgage warehouse fee income	373			393			1,085			1,152		Mortgage warehouse fee income	482		665		1,688		2,372
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			—

Gain (loss) on sale of securities, net												Gain (loss) on sale of securities, net	—		5,182		(804)		5,182
Loss on sale of loans, net												Loss on sale of loans, net	(329)		—		(329)		—

Other income	38			114			168			383		Other income	348		24		834		44
Total noninterest income	2,599			2,184			12,624			5,572		Total noninterest income	8,454		14,042		27,118		34,201
Noninterest expense												Noninterest expense
Salaries and employee benefits	8,277			7,259			25,124			21,335		Salaries and employee benefits	19,632		10,729		51,532		31,979
Occupancy and equipment	892			742			2,777			2,251		Occupancy and equipment	822		523		2,471		1,736

Communications and data processing	1,298			703			3,458			2,149		Communications and data processing	3,210		1,793		8,939		5,210
Professional services	889			1,507			3,407			3,918		Professional services	4,314		2,471		13,548		6,782
Federal deposit insurance	39			214			382			1,078		Federal deposit insurance	1,217		4,297		4,474		10,437
Correspondent bank charges	288			240			868			914		Correspondent bank charges	902		572		2,531		1,881
Other loan expense	47			57			290			198		Other loan expense	529		299		1,595		753
Other real estate owned expense (recovery)	75			(10		)	80			42
Other general and administrative	806			705			2,432			2,461		Other general and administrative	2,527		1,655		6,633		4,686
Total noninterest expense	12,611			11,417			38,818			34,346		Total noninterest expense	33,153		22,339		91,723		63,464
Income before income taxes	9,289			8,737			29,572			19,838		Income before income taxes	56,790		29,366		140,399		61,798
Income tax expense	2,633			2,458			8,324			5,525		Income tax expense	13,462		5,874		31,080		4,661
Net income	$	6,656		$	6,279		$	21,248		$	14,313	Net income	43,328		23,492		109,319		57,137
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		—		8,064		—
Net income available to common shareholders												Net income available to common shareholders	$	40,640	$	23,492	$	101,255	$	57,137
Basic earnings per common share												Basic earnings per common share	$	1.28	$	0.89	$	3.21	$	2.29
Diluted earnings per common share												Diluted earnings per common share	$	1.28	$	0.88	$	3.20	$	2.26
Weighted average common shares outstanding:												Weighted average common shares outstanding:
Basic	17,840			17,808			17,830			16,113		Basic	31,655		26,525		31,505		24,927
Diluted	18,246			18,254			18,252			16,607		Diluted	31,803		26,766		31,669		25,308

See accompanying notes to unaudited consolidated financial statements

Table of Contents

SILVERGATE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In Thousands)

(Unaudited)

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 September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income	$	43,328	$	23,492	$	109,319	$	57,137
Other comprehensive income (loss):
Change in net unrealized loss on available-for-sale securities	(113,762)		(16,019)		(635,385)		(33,891)
Less: Reclassification adjustment for net (gain) loss included in net income	—		(5,182)		804		(5,182)
Less: Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity	1,611		—		4,042		—
Income tax effect	33,383		6,019		184,244		10,960
Unrealized loss on available-for-sale securities, net of tax	(78,768)		(15,182)		(446,295)		(28,113)
Change in net unrealized loss on derivative assets	(76,494)		(1,234)		(92,562)		(16,768)
Less: Reclassification adjustment for net gain included in net income	(516)		(516)		(1,977)		(1,530)
Income tax effect	21,894		471		27,671		5,093
Unrealized loss on derivative instruments, net of tax	(55,116)		(1,279)		(66,868)		(13,205)
Other comprehensive loss	(133,884)		(16,461)		(513,163)		(41,318)
Total comprehensive (loss) income	$	(90,556)	$	7,031	$	(403,844)	$	15,819

See accompanying notes to unaudited consolidated financial statements

Table of Contents

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)



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
Total comprehensive income (loss), net of tax	—	—		—	—		—	—		—		20,935		(9,338)		11,597



Issuance of stock, net	—	—		1,496,461	15		—	—		143,990		—		—		144,005


Stock-based compensation	—	—		—	—		—	—		496		—		—		496
Exercise of stock options	—	—		176,834	2		—	—		786		—		—		788
Issuance of share-based awards, net of shares withheld for employee taxes	—	—		14,392	—		—	—		—		—		—		—

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



Issuance of stock, net	200,000	2		—	—		—	—		193,627		—		—		193,629


Stock-based compensation	—	—		—	—		—	—		587		—		—		587
Exercise of stock options	—	—		25,996	—		—	—		327		—		—		327
Issuance of share-based awards, net of shares withheld for employee taxes	—	—		1,960	—		—	—		—		—		—		—

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

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

Table of Contents

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

SILVERGATE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Continued)

(In Thousands, Except Share Data)

(Unaudited)

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


	Preferred Stock			Class A Common Stock			Class B Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
	Shares	Amount		Shares	Amount		Shares	Amount
Balance at January 1, 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	—	—		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
Total comprehensive income (loss), net of tax	—	—		—	—		—	—		—		38,605		(160,274)		(121,669)


Dividends on preferred stock	—	—		—	—		—	—		—		(2,688)		—		(2,688)



Stock-based compensation	—	—		—	—		—	—		1,019		—		—		1,019
Exercise of stock options	—	—		5,260	—		—	—		61		—		—		61
Issuance of share-based awards, net of shares withheld for employee taxes	—	—		5,392	—		—	—		—		—		—		—

Balance at June 30, 2022	200,000	2		31,640,967	316		—	—		1,554,627		254,475		(386,201)		1,423,219
Total comprehensive income (loss), net of tax	—	—		—	—		—	—		—		43,328		(133,884)		(90,556)


Dividends on preferred stock	—	—		—	—		—	—		—		(2,688)		—		(2,688)



Stock-based compensation	—	—		—	—		—	—		1,083		—		—		1,083
Exercise of stock options	—	—		17,636	1		—	—		286		—		—		287


Balance at September 30, 2022	200,000	$	2	31,658,603	$	317	—	$	—	$	1,555,996	$	295,115	$	(520,085)	$	1,331,345

See accompanying notes to unaudited consolidated financial statements

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SILVERGATE CAPITAL CORPORATION

~~CONDENSED~~ CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)


	Nine Months Ended September 30,							Nine Months Ended September 30,
	2019			2018				2022		2021
Cash flows from operating activities							Cash flows from operating activities
Net income	$	21,248		$	14,313		Net income	$	109,319	$	57,137
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:							Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	771			848			Depreciation and amortization	2,531		1,900
Amortization of securities premiums and discounts, net	1,261			308			Amortization of securities premiums and discounts, net	126,247		28,069
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	(1,854)		422
Stock-based compensation	66			97			Stock-based compensation	2,831		1,373
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	(3,075)		—
Originations of loans held-for-sale							Originations of loans held-for-sale	(7,776,631)		(9,440,843)
Proceeds from sales of loans held-for-sale	2,235,558			2,112,629			Proceeds from sales of loans held-for-sale	7,776,994		9,488,357
Gain on sale of branch, net	(5,509		)	—

Other gains, net							Other gains, net	(2,321)		(7,650)
Other, net	2,108			(67		)	Other, net	(1,844)		(655)
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	5,268		(24,216)
Accrued expenses and other liabilities	(617		)	3,051			Accrued expenses and other liabilities	31,680		15,238
Net cash (used in) provided by operating activities	(56,502		)	27,095
Net cash provided by operating activities							Net cash provided by operating activities	269,145		119,132
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	(3,481,713)		(6,921,562)
Proceeds from sale of securities available-for-sale	31,088			—			Proceeds from sale of securities available-for-sale	507,186		338,851
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	478,086		215,278
Purchases of securities held-to-maturity							Purchases of securities held-to-maturity	(1,250,420)		—
Proceeds from paydowns and maturities of securities held-to-maturity							Proceeds from paydowns and maturities of securities held-to-maturity	80,521		—
Loan payments and (originations), net							Loan payments and (originations), net	227,182		(63,415)
Proceeds from sale of loans, net							Proceeds from sale of loans, net	165,665		—
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	(24,758)		(19,160)
Proceeds from sale of other real estate owned	77			2,370
Purchase of premises and equipment	(942		)	(1,484		)	Purchase of premises and equipment	(1,394)		(267)
Proceeds from sale of branch, net of cash	32,555			—
Purchases of derivative contracts, net of proceeds	(20,663		)	—
Payments to acquire intangible assets							Payments to acquire intangible assets	(62,471)		—

Payments for derivative contracts, net							Payments for derivative contracts, net	(46,183)		(21,540)
Other, net	10			38			Other, net	(1,715)		—
Net cash used in investing activities	(616,027		)	(116,135		)	Net cash used in investing activities	(3,410,014)		(6,471,815)
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	(2,207,753)		6,452,739
Net change in interest bearing deposits	284,277			(82,256		)	Net change in interest bearing deposits	1,155,551		(38,245)
Net change in federal home loan bank advances	20,000			(15,000		)	Net change in federal home loan bank advances	700,000		—
Payments made on notes payable	(857		)	(857		)

Proceeds from common stock issuance, net	—			107,884			Proceeds from common stock issuance, net	(57)		567,521
Payment of deferred offering costs	(384		)	(429		)
Repurchase of common stock	—			(11,371		)

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

Payments of preferred stock dividends							Payments of preferred stock dividends	(8,064)		—
Proceeds from stock option exercise	—			87			Proceeds from stock option exercise	378		1,559
Taxes paid related to net share settlement of equity awards	(158		)	(796		)	Taxes paid related to net share settlement of equity awards	(309)		(2,143)
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	(360,254)		7,175,084
Net (decrease) increase in cash and cash equivalents	(514,162		)	152,658			Net (decrease) increase in cash and cash equivalents	(3,501,123)		822,401
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	$	1,886,823	$	3,784,488
Supplemental cash flow information:							Supplemental cash flow information:
Cash paid for interest							Cash paid for interest	$	8,110	$	1,004
Income taxes paid, net							Income taxes paid, net	12,789		3,702
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	$	1,945,473	$	—
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	56,884		—
Loans held-for-sale transferred to loans held-for-investment							Loans held-for-sale transferred to loans held-for-investment	11,780		—

See accompanying notes to unaudited consolidated financial statements

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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 incorporated~~Company’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 ~~converted~~and its ~~charter to a California commercial bank, which gave it~~primary activities are conducted through the ~~added authority to accept demand deposits. At the same time, the~~Bank. The Company ~~also became~~is a registered bank holding company ~~under~~that is subject to supervision by the ~~federal Bank Holding Company Act. The Bank became a member~~Board of Governors of the Federal Reserve ~~System in December 2012.~~(“Federal Reserve”). The Bank is subject to regulation by the California Department of ~~Business Oversight~~Financial Protection and Innovation, Division of Financial Institutions (“~~DBO”~~DFPI”), and, as a Federal Reserve member bank since 2012, the Federal Reserve Bank of San Francisco (“FRB”)~~, and its~~. The Bank’s deposits are insured up to legal limits by the Federal Deposit Insurance Corporation (“FDIC”) ~~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 ~~presentation~~statement of the Company’s consolidated financial statements. These consolidated statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, ~~2018,~~2021, included in the Company’s ~~prospectus~~Annual 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 upon~~conform 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.

~~Adopted~~Recently Issued Accounting Pronouncements Not Yet Effective

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

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

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

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

~~In June 2016, the FASB issued ASU~~ 2016-13, Financial Instruments-Credit Losses (Topic 326) to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (or “CECL”) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held to maturity debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. These amendments were initially effective for fiscal years beginning after December 15, 2019 for SEC registrants and after December 15, 2020, for Public Business Entities, or PBEs. In November 2019, the FASB issued ASU 2019-10, Financial ~~Instruments-Credit~~Instruments—Credit Losses ~~(Topic326)~~(Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which finalized the delay of the effective date for smaller reporting companies, 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 ~~prospectively~~prospectively. The new methodology replaces the other-than-temporary impairment model and requires the recognition of an allowance for ~~existing~~reductions 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

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beginning of the first reporting period in which the guidance is effective. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial ~~Instruments-Credit~~Instruments—Credit Losses, which clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. The ~~Company formed~~amendment eliminates the accounting guidance for troubled debt restructurings by creditors in Subtopic 310-40, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a ~~CECL implementation committee~~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 ~~2018 which prepared a project plan to migrate towards~~leases by year of origination. In preparation for the adoption ~~date. As part~~ of ~~the project plan,~~CECL, 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~~In relation to the loan portfolio, significant progress has been made in the implementation efforts, which include model development, documentation, and validation, identification of ~~this process, the~~data sources, processes and internal controls, and establishment of formal governing policies and standards. The Company has determined ~~preliminary~~ loan pool segmentation under CECL, as well as ~~evaluated~~selected the key economic loss drivers for each segment. A CECL model has also been implemented for the securities portfolio. Currently, the Company is conducting parallel runs as well as continuing to review and refine its models and methodologies. The Company ~~continues to work through the implementation plan~~has not yet completed an internal and third-party model validation and has ~~made significant progress by performing data gap assessments, completed remediation efforts~~not yet finalized selection of internal controls and ~~established preliminary decisions regarding economic scenarios.~~tests of those controls, and therefore the Company cannot reasonably estimate the impact that the adoption of CECL will have on the Company’s financial statements. The ~~Company operationalized an initial CECL model during the second quarter~~impact upon adoption will depend on a variety of ~~2019, and plans to run the CECL model alongside the existing incurred loss methodology until~~factors as of the date of ~~adoption. The Company expects~~adoption, including the size and composition of the Company’s portfolios, macroeconomic conditions and forecasts, finalized models, methodologies and other management adjustments. At adoption, the one-time cumulative-effect adjustment for the change in the allowance for credit losses, net of tax, will impact the opening balance of retained earnings as of January 1, 2023. An increase in the allowance will result in a decrease to ~~continually address any gaps in interpretations, methodology, data~~regulatory capital amounts and ~~operational processes based upon reviews and tests. The Company continues~~ratios. Federal banking regulatory agencies have provided relief for an initial decrease at adoption by allowing the impact to ~~evaluate the effects of ASU 2016-13~~be phased-in over three years on ~~its financial statements and disclosures and whether or not to early adopt the guidance in 2021 or 2022.~~

a straight-line basis.

In ~~August 2018,~~March 2020, the FASB issued ASU ~~2018-13, Fair Value Measurement~~2020-04, Reference Rate Reform (Topic ~~820)~~848): ~~Disclosure Framework-Changes~~Facilitation of the Effects of Reference Rate Reform on Financial Reporting (or “ASU 2020-04”), which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the London Interbank Offered Rate (or “LIBOR”) or other interbank offered rate (reference rates) on financial reporting. 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 guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. The expedients and exceptions in this update are available to all entities starting March 12, 2020 through December 31, 2022. In January 2020, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which clarifies the scope of Topic 848 to include derivative instruments impacted by discounting transition. The Company has created a LIBOR transition team that reports to the ~~Disclosure Requirements~~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 Fair Value Measurement. The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance if effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures.these changes. The Company is ~~currently assessing~~continuing to evaluate the ~~timing and~~ impact ~~of adopting the updated provisions.~~that ASU 2020-04 will have on those financial assets where LIBOR is used as an index rate.

~~With the exception of~~Except for the updated standards discussed above, there have been no new accounting pronouncements not yet effective that have significance, or potential significance, to the Company’s consolidated financial statements.

Adopted Accounting Pronouncements

~~Note 2—Securities~~

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 safeguarding 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 safeguarding assets and may require disclosure of other information about risks and uncertainties arising from the entity’s safeguarding activities. SAB 121 was 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 adopted this guidance as of June 30, 2022 with retrospective application as of January 1, 2022, and concluded that as of June 30, 2022, $52.8 million of safeguarding liabilities and corresponding safeguarding assets were subject to the guidance in SAB 121 and were recorded on the Company’s statement of financial position. The safeguarding liabilities and corresponding safeguarding assets represent the fair value of ~~available-for-sale~~certain bitcoin collateral for the SEN Leverage loan product held by exchanges or other custodians at the end of the reporting period. The Bank works with regulated digital asset exchanges and custodians as

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well as other indirect lenders, to act as its collateral custodians for such loans and to liquidate the collateral in the event of a decline in collateral coverage below levels required in the borrower’s loan agreement. The collateral custodians hold the cryptographic key information, maintain the recordkeeping of the assets and are obligated to secure the assets and protect them from loss or theft. The bitcoin collateral for the SEN Leverage loans may be subject to SAB 121 depending on, among other factors, the underlying contracts with the custodians, including direct or indirect relationships with the custodian and the titling of the custodial accounts in the name of the Bank for the benefit of the borrowers. These specific collateral arrangements resulted in a risk profile consistent with the intent of SAB 121, and therefore were recorded on the statement of financial condition. At September 30, 2022, the balance of safeguarding liabilities and corresponding safeguarding assets was zero.

Note 2—Debt Securities

The following tables summarize the amortized cost, fair value of securities and ~~their related~~the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income and gross unrecognized gains and losses of available-for-sale and held-to-maturity debt securities at the dates indicated are as follows:


	September 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

	(Dollars in thousands)
Available-for-sale securities
U.S. Treasuries	$	34,972	$	—	$	(138)	$	34,834
U.S. agency securities - excluding mortgage-backed securities	1,401,703		7,339		(7,919)		1,401,123
Residential mortgage-backed securities:
Government agency mortgage-backed securities	1,765,029		—		(83,910)		1,681,119
Government agency collateralized mortgage obligation	1,226,242		—		(64,705)		1,161,537
Private-label collateralized mortgage obligation	130,754		—		(3,793)		126,961
Commercial mortgage-backed securities:
Government agency mortgage-backed securities	1,313,169		2,919		(9,062)		1,307,026
Government agency collateralized mortgage obligation	10,204		—		(240)		9,964
Private-label collateralized mortgage obligation	487,732		—		(24,588)		463,144
Municipal bonds:
Tax-exempt	2,329,021		—		(401,010)		1,928,011

Asset backed securities:
Government sponsored student loan pools	209,288		—		(5,760)		203,528
Total available-for-sale	$	8,908,114	$	10,258	$	(601,125)	$	8,317,247

	September 30, 2022
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(Dollars in thousands)
Held-to-maturity securities
U.S. Treasuries	$	1,246,108	$	—	$	(80,221)	$	1,165,887

Residential mortgage-backed securities:
Government agency mortgage-backed securities	505,600		—		(71,791)		433,809
Government agency collateralized mortgage obligation	101,336		—		(11,456)		89,880

Commercial mortgage-backed securities:

Government agency collateralized mortgage obligation	53,383		—		(10,216)		43,167

Municipal bonds:
Tax-exempt	800,492		—		(169,793)		630,699
Taxable	397,638		—		(83,246)		314,392


Total held-to-maturity	$	3,104,557	$	—	$	(426,723)	$	2,677,834

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											December 31, 2021
	Available-for-sale securities										Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
											(Dollars in thousands)
Available-for-sale securities										Available-for-sale securities
	(Dollars in thousands)
September 30, 2019
U.S. agency securities - excluding mortgage-backed securities										U.S. agency securities - excluding mortgage-backed securities	$	1,177,452	$	7,320	$	(6,005)	$	1,178,767
Residential mortgage-backed securities:										Residential mortgage-backed securities:
Government agency mortgage-backed securities	$	783	$	33	$	—		$	816	Government agency mortgage-backed securities	1,428,365		130		(14,378)		1,414,117
Government agency collateralized mortgage obligation	246,689		539		(905		)	246,323		Government agency collateralized mortgage obligation	1,659,125		1,617		(15,739)		1,645,003
Private-label collateralized mortgage obligation	27,385		567		(211		)	27,741		Private-label collateralized mortgage obligation	1,425		19		(11)		1,433
Commercial mortgage-backed securities:										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 mortgage-backed securities	1,106,680		1,886		(4,962)		1,103,604
Government agency collateralized mortgage obligation	50,888		37		(625		)	50,300		Government agency collateralized mortgage obligation	212,266		19		(1,370)		210,915
Private-label collateralized mortgage obligation	23,988		64		(107		)	23,945		Private-label collateralized mortgage obligation	144,204		227		(797)		143,634
Commercial mortgage-backed securities:
Government agency collateralized mortgage obligation	23,817		—		(1,065		)	22,752
Municipal bonds:										Municipal bonds:
Tax-exempt										Tax-exempt	2,272,794		33,153		(8,210)		2,297,737
Taxable										Taxable	403,279		341		(6,016)		397,604
Asset backed securities:										Asset backed securities:
Government sponsored student loan pools	260,050		188		(1,014		)	259,224		Government sponsored student loan pools	233,374		97		(1,026)		232,445
	$	359,675	$	314	$	(2,811	)	$	357,178
Total available-for-sale										Total available-for-sale	$	8,638,964	$	44,809	$	(58,514)	$	8,625,259

~~The amortized cost, unrealized gains and losses, and~~During the nine months ended September 30, 2022, the Company transferred, at fair value, $1.9 billion of residential mortgage-backed securities, commercial mortgage-backed securities, and municipal bonds from available-for-sale to held-to-maturity securities. The decision to re-designate the securities was based on the Company’s ability and intent to hold these securities to maturity. Factors used in assessing the ability to hold these securities to maturity were future liquidity needs and sources of funding. The related net unrealized after-tax loss of $40.6 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 ~~dates indicated are as follows:~~time of the transfer.

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

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

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

~~At September 30, 2019, there were 0 investment securities pledged for borrowings. There were 0 investment~~Held-to-maturity securities pledged for borrowings or for other purposes as required or permitted by law had a fair value of $1.7 billion as of September 30, 2022. There were no securities pledged as of December 31, ~~2018.~~2021.

At September 30, ~~2019,~~2022, the total fair value of securities issued by 6one individual ~~issuers,~~issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity was ~~$360.9~~$261.0 million.

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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:


	September 30, 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	$	34,834	$	(138)	$	—	$	—	$	34,834	$	(138)
U.S. agency securities - excluding mortgage-backed securities	199,505		(1,661)		400,765		(6,258)		600,270		(7,919)
Residential mortgage-backed securities:
Government agency mortgage-backed securities	1,547,470		(75,738)		133,649		(8,172)		1,681,119		(83,910)
Government agency collateralized mortgage obligation	33,617		(1,180)		1,127,920		(63,525)		1,161,537		(64,705)
Private-label collateralized mortgage obligation	126,372		(3,776)		377		(17)		126,749		(3,793)
Commercial mortgage-backed securities:
Government agency mortgage-backed securities	587,420		(7,639)		119,201		(1,423)		706,621		(9,062)
Government agency collateralized mortgage obligation	9,964		(240)		—		—		9,964		(240)
Private-label collateralized mortgage obligation	394,780		(14,900)		68,364		(9,688)		463,144		(24,588)
Municipal bonds:
Tax-exempt	1,644,444		(324,689)		283,567		(76,321)		1,928,011		(401,010)

Asset backed securities:
Government sponsored student loan pools	111,687		(2,902)		91,841		(2,858)		203,528		(5,760)
	$	4,690,093	$	(432,863)	$	2,225,684	$	(168,262)	$	6,915,777	$	(601,125)

	September 30, 2022
	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	$	1,165,887	$	(80,221)	$	—	$	—	$	1,165,887	$	(80,221)

Residential mortgage-backed securities:
Government agency mortgage-backed securities	433,809		(76,806)		—		—		433,809		(76,806)
Government agency collateralized mortgage obligation	95		(2,524)		89,785		(11,755)		89,880		(14,279)

Commercial mortgage-backed securities:

Government agency collateralized mortgage obligation	43,167		(11,227)		—		—		43,167		(11,227)

Municipal bonds:
Tax-exempt	621,808		(206,751)		8,891		(2,315)		630,699		(209,066)
Taxable	297,112		(85,838)		17,280		(2,659)		314,392		(88,497)


	$	2,561,878	$	(463,367)	$	115,956	$	(16,729)	$	2,677,834	$	(480,096)

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 )

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	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,~~2022, the Company’s investment securities had gross unrealized losses totaling approximately ~~$5.5 million,~~$1.1 billion, compared to approximately ~~$2.8~~$58.5 million at December 31, ~~2018.~~2021. The Company ~~analyzed~~analyzes all of its securities with an unrealized loss position. For each security, the Company analyzed the credit quality and performed a projected cash flow analysis. In analyzing the credit quality, management may consider whether the securities are issued by the federal government, its agencies or its sponsored entities, or non-governmental entities, whether downgrades by bond rating agencies have occurred, and if credit quality has deteriorated. In analyzing the issuer’s financial condition, management may consider whether the securities are issued by the federal government, its agencies or its sponsored entities, or non-governmental entities, whether downgrades by bond rating agencies have occurred, and the results of review of the issuer’s financial condition. When performing a cash flow analysis, the Company uses models that project prepayments, default rates, and loss severities on the collateral supporting the security, based on underlying loan level borrower and loan characteristics and interest rate assumptions. ~~In addition, the Company has contracted with third party companies to perform independent cash flow analyses of its securities portfolio as needed.~~ Based on these analyses and reviews conducted by the Company, and

assisted by independent third parties, the Company determined that none of its securities required an other-than-temporary impairment charge at September 30, ~~2019 or December 31, 2018.~~2022. Management continues to expect to recover the adjusted amortized cost basis of these ~~bonds.~~securities.

As of September 30, ~~2019,~~2022, the Company had 31633 securities whose estimated fair value declined ~~1.26%~~10.13% from the Company’s amortized ~~cost;~~cost and 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. ~~The~~These unrealized losses ~~relate principally~~on securities are primarily due to ~~the general change~~changes in market interest rates or widening of credit spreads since ~~the~~their purchase ~~dates and such unrecognized~~dates. Current unrealized losses ~~will continue to vary with general market interest rate fluctuations in the future. Fair values~~ are expected to ~~recover~~be recovered as the securities approach their respective maturity ~~dates and management~~dates. Management believes it iswill more than likely not ~~more likely than not it will~~ be required to sell any of the debt securities in an unrealized loss position before recovery of the amortized cost basis.

There were no sales or calls of available-for-sale securities for the three months ended September 30, 2022. For ~~both~~the nine months ended September 30, 2022, the Company received $507.2 million in proceeds and recognized $4.8 million of gains and $5.6 million losses on sales of available-for-sale securities. For the three and nine months ended September 30, ~~2019~~2021, the Company received ~~$31.1~~$338.9 million in proceeds and recognized ~~$16,000 in~~$5.2 million of gains and no losses on sales of ~~available for sale~~available-for-sale securities. ~~There were no sales~~

The amortized cost and ~~calls~~estimated fair value of investment securities ~~during~~as of the ~~for~~periods presented by contractual maturity are shown below. Expected maturities may differ from contractual maturities if borrowers have the ~~three~~right to call or prepay obligations with or without call or prepayment penalties. For purposes of the following table, the entire outstanding balance of

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residential and ~~nine months ended September 30, 2018.~~commercial mortgage-backed securities is categorized based on the final maturity date.


	September 30, 2022				December 31, 2021
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

	(Dollars in thousands)
Available-for-sale securities
Within one year	$	34,972	$	34,834	$	—	$	—
After one year through five years	138,340		134,166		2,243		2,170
After five years through ten years	1,438,115		1,435,430		1,406,395		1,401,733
After ten years	7,296,687		6,712,817		7,230,326		7,221,356
Total	$	8,908,114	$	8,317,247	$	8,638,964	$	8,625,259
Held-to-maturity securities
Within one year	$	—	$	—	$	—	$	—
After one year through five years	1,246,108		1,165,887		—		—
After five years through ten years	288,276		234,981		—		—
After ten years	1,570,173		1,276,966		—		—
Total	$	3,104,557	$	2,677,834	$	—	$	—

~~There were 0 credit losses recognized in earnings for the three and nine months ended September 30, 2019 and 2018.~~

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 ~~includes~~loans 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 to~~has 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 loans~~that are generally collateralized by accounts receivable, inventory, equipment, loan and lease receivables and other commercial assets, and may be supported by other credit enhancements such as personal guarantees. ~~Risk~~Risks may arise from differences between expected and actual cash flows and/or liquidity levels of the borrowers, as well as the type of collateral securing these loans and the reliability of the conversion thereof to cash. ~~Since~~Borrowers accessing SEN Leverage provide bitcoin or U.S. dollars as collateral in an amount greater than the ~~March 2019 sale~~line of ~~our business loan portfolio, commercial~~credit eligible to be advanced. The Bank works with regulated digital asset exchanges and ~~industrial loans consist primarily of asset based loans.~~

~~Consumer and other.~~ ~~Consumer loans consist of consumer~~other indirect lenders, as the case may be, to both act as its collateral custodian for such loans, and ~~other~~to liquidate the collateral in the event of a decline in collateral coverage below levels required in the borrower’s loan agreement. At no time does the Bank directly hold the pledged bitcoin. 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 $302.2 million and $335.9 million at September 30, 2022 and December 31, 2021, respectively. Unfunded commitments on SEN Leverage loans were $1.2 billion and $234.6 million at September 30, 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 purchases~~outstanding loan balance exceeds collateral value at the time the loan is required to be repaid. Other loans consist of ~~reverse mortgage~~consumer loans and ~~began selling its remaining~~ loans ~~in the secondary market. At September 30, 2019, the Bank owned $1.6 million~~secured by personal property.

Table of ~~reverse mortgage loans.~~Contents

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 of~~lenders. The Company holds legal title to such loans infrom the ~~secondary market. The Company’s risk is mitigated by comprehensive policies, procedures, and controls governing this activity, partial loan funding~~date they are funded by the ~~originating lender, guaranties or additional monies pledged to~~Company until the ~~Company as security, and the short holding period of funded loans on the Company’s balance sheet. In addition, the loss rates of this portfolio have historically been minimal, and these~~ loans are ~~all subject~~sold to ~~written purchase~~secondary market investors pursuant to pre-existing take out commitments, ~~from takeout investors or are hedged.~~generally within a few weeks of origination, with loan sale proceeds applied to pay down Company funding. The Company’s mortgage warehouse loans may either be held-for-investment or held-for-sale depending on the underlying contract. The Company sold approximately $23.7 million and $19.9 million of loans to participants during the three months ended September 30, 2019 and 2018, respectively. The Company sold approximately $124.3 million and $130.0 million of loans to participants during the nine months ended September 30, 2019 and 2018, respectively. At September 30, ~~2019~~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				September 30, 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	$	37,636	$	105,098
Multi-family	77,901			40,584			Multi-family	9,028		56,751
Commercial	322,733			309,655			Commercial	63,979		210,136
Construction	3,986			3,847			Construction	—		7,573
Commercial and industrial	14,563			8,586			Commercial and industrial	302,160		335,862
Consumer and other	76			150
Reverse mortgage	1,629			1,742

Reverse mortgage and other							Reverse mortgage and other	1,270		1,410
Mortgage warehouse	61,856			41,586			Mortgage warehouse	58,760		177,115
Total gross loans held-for-investment	695,184			597,035			Total gross loans held-for-investment	472,833		893,945
Deferred fees, net	2,997			2,469			Deferred fees, net	(1,871)		275
Total loans held-for-investment	698,181			599,504			Total loans held-for-investment	470,962		894,220
Allowance for loan losses	(6,191		)	(6,723		)	Allowance for loan losses	(3,176)		(6,916)
Total loans held-for-investment, net	$	691,990		$	592,781		Total loans held-for-investment, net	$	467,786	$	887,304
Total loans held-for-sale⁽¹⁾	$	311,410		$	350,636		Total loans held-for-sale(1)	$	924,644	$	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”.

(1)Loans held-for-sale include $891.5 million and $893.2 million of mortgage warehouse loans as of September 30, 2022 and December 31, 2021, respectively.

At September 30, ~~2019~~2022 and December 31, ~~2018,~~2021, approximately ~~$618.7~~$111.8 million and ~~$546.7~~$381.0 million, respectively, of the Company’s ~~loan portfolio~~gross loans held-for-investment were collateralized by various forms of real ~~estate. A significant percentage of such loans are collateralized by properties~~estate, primarily located in ~~California (66.6% and 69.7% as of~~California. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. At September 30, ~~2019~~2022 and December 31, ~~2018, respectively), Arizona (8.4%~~2021, approximately $302.2 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 address~~monitors and ~~mitigate~~manages concentrations of credit risk by making loans that are diversified by collateral type, placing limits on the amounts of various categories of loans relative to total Company capital, and conducting quarterly reviews of its portfolio by collateral type, geography, and other characteristics. While management believes that the collateral presently securing its portfolio and the recorded allowance for loan losses are adequate to absorb potential losses, there can be no assurances that significant deterioration in the California, Florida and Arizona real estate markets would not expose the Company to significantly greater credit risk.

Recorded investment in loans excludes accrued interest receivable ~~loan origination fees, net and unamortized premium or discount, 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, ~~2019~~2022 and December 31, ~~2018,~~2021, respectively.

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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 September 30, 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, June 30, 2022	$	644	$	108	$	464	$	—	$	2,538	$	13	$	675	$	4,442
Charge-offs(1)	(665)		—		—		—		—		—		—		(665)
Recoveries	—		—		—		—		—		—		—		—
Provision for loan losses	287		(11)		(94)		—		(365)		(1)		(417)		(601)
Balance, September 30, 2022	$	266	$	97	$	370	$	—	$	2,173	$	12	$	258	$	3,176


	Three Months Ended September 30, 2021
	One-to -Four Family		Multi- Family		Commercial Real Estate		Construction		Commercial and Industrial		Reverse Mortgage and Other		Mortgage Warehouse		Total

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


	Nine Months Ended September 30, 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(1)	(665)		—		—		—		—		—		—		(665)
Recoveries	—		—		—		—		—		—		—		—
Provision for loan losses	(92)		(585)		(1,647)		(776)		607		—		(582)		(3,075)
Balance, September 30, 2022	$	266	$	97	$	370	$	—	$	2,173	$	12	$	258	$	3,176


	Nine Months Ended September 30, 2021
	One-to -Four Family		Multi- Family		Commercial Real Estate		Construction		Commercial and Industrial		Reverse Mortgage and Other		Mortgage Warehouse		Total

	(Dollars in thousands)
Balance, December 31, 2020	$	1,245	$	878	$	1,810	$	590	$	1,931	$	39	$	423	$	6,916
Charge-offs	—		—		—		—		—		—		—		—
Recoveries	—		—		—		—		—		—		—		—
Provision for loan losses	(117)		(238)		688		13		(475)		(27)		156		—
Balance, September 30, 2021	$	1,128	$	640	$	2,498	$	603	$	1,456	$	12	$	579	$	6,916

________________________

(1)Includes write-downs arising from transfers of loans to held-for-sale.

Table of Contents

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

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


	September 30, 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	$	25	$	—	$	—	$	—	$	—	$	—	$	—	$	25
General portfolio allocation	241		97		370		—		2,173		12		258		3,151
Total allowance for loan losses	$	266	$	97	$	370	$	—	$	2,173	$	12	$	258	$	3,176
Loans evaluated for impairment:
Specifically evaluated	$	4,045	$	—	$	1,175	$	—	$	—	$	619	$	—	$	5,839
Collectively evaluated	33,895		9,028		62,795		—		299,985		660		58,760		465,123
Total loans held-for-investment	$	37,940	$	9,028	$	63,970	$	—	$	299,985	$	1,279	$	58,760	$	470,962

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

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

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


	December 31, 2021
	One-to -Four Family		Multi- Family		Commercial Real Estate		Construction		Commercial and Industrial		Reverse Mortgage and Other		Mortgage Warehouse		Total

	(Dollars in thousands)
Amount of allowance attributed to:
Specifically evaluated impaired loans	$	29	$	—	$	—	$	—	$	—	$	—	$	—	$	29
General portfolio allocation	994		682		2,017		776		1,566		12		840		6,887
Total allowance for loan losses	$	1,023	$	682	$	2,017	$	776	$	1,566	$	12	$	840	$	6,916
Loans evaluated for impairment:
Specifically evaluated	$	4,229	$	—	$	1,956	$	—	$	—	$	923	$	—	$	7,108
Collectively evaluated	101,609		56,855		208,170		7,502		335,362		499		177,115		887,112
Total loans held-for-investment	$	105,838	$	56,855	$	210,126	$	7,502	$	335,362	$	1,422	$	177,115	$	894,220

Impaired Loans

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


	September 30, 2022
	Unpaid Principal Balance		Recorded Investment		Specific Allowance

	(Dollars in thousands)
With no specific allowance recorded:
Real estate loans:
One-to-four family	$	3,789	$	3,750	$	—

Commercial	1,175		1,175		—



Reverse mortgage and other	613		619		—

	5,577		5,544		—
With a specific allowance recorded:
Real estate loans:
One-to-four family	291		295		25







	291		295		25
Total impaired loans	$	5,868	$	5,839	$	25

Table of Contents


								December 31, 2021
								Unpaid Principal Balance		Recorded Investment		Specific Allowance

								(Dollars in thousands)
With no specific allowance recorded:							With no specific allowance recorded:
Real estate loans:							Real estate loans:
One-to-four family							One-to-four family	$	4,616	$	3,927	$	—

Commercial							Commercial	1,955		1,956		—

Reverse mortgage and other							Reverse mortgage and other	914		923		—

								7,485		6,806		—
With a specific allowance recorded:							With a specific allowance recorded:
Real estate loans:							Real estate loans:
One-to-four family							One-to-four family	323		302		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			323		302		29
Total impaired loans	$	17,674	$	16,647	$	39	Total impaired loans	$	7,808	$	7,108	$	29


	Three Months Ended September 30,
	2022				2021
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

	(Dollars in thousands)
With no specific allowance recorded:
Real estate loans:
One-to-four family	$	4,941	$	21	$	6,873	$	50

Commercial	1,175		18		9,970		135

Commercial and industrial	—		—		174		3

Reverse mortgage and other	614		—		893		—

	6,730		39		17,910		188
With a specific allowance recorded:
Real estate loans:
One-to-four family	294		2		301		6







	294		2		301		6
Total impaired loans	$	7,024	$	41	$	18,211	$	194

Table of Contents

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


	Nine Months Ended September 30,
	2022				2021
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

	(Dollars in thousands)
With no specific allowance recorded:
Real estate loans:
One-to-four family	$	4,187	$	86	$	6,261	$	190

Commercial	1,625		66		9,890		396

Commercial and industrial	—		—		212		12

Reverse mortgage and other	692		—		796		—

	6,504		152		17,159		598
With a specific allowance recorded:
Real estate loans:
One-to-four family	297		8		243		9





Reverse mortgage and other	—		—		86		—

	297		8		329		9
Total impaired loans	$	6,801	$	160	$	17,488	$	607

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:


	September 30, 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	$	648	$	662	$	2,705	$	4,015	$	33,925	$	37,940	$	3,079	$	—
Multi-family	—		—		—		—		9,028		9,028		—		—
Commercial	—		—		—		—		63,970		63,970		—		—

Commercial and industrial	—		—		—		—		299,985		299,985		—		—

Reverse mortgage and other	—		—		—		—		1,279		1,279		619		—
Mortgage warehouse	—		—		—		—		58,760		58,760		—		—
Total loans held-for-investment	$	648	$	662	$	2,705	$	4,015	$	466,947	$	470,962	$	3,698	$	—

Table of Contents

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, ~~2019~~2022 and December 31, ~~2018,~~2021, the Company had a recorded investment in ~~TDR’s~~TDRs of ~~$1.8~~$1.6 million and ~~$0.5~~$1.7 million, respectively. The Company has ~~not~~ allocated ~~any amount~~$25,000 of specific allowance for those loans at September 30, ~~2019~~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 ~~lend~~advance additional amounts toon these TDRs. ~~NaN~~No loans were modified as TDRs during the three months ended September 30, ~~2019 or during the three and nine months ended September 30, 2018.~~2022.

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

Nine Months Ended September 30, 2022

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

136


	Nine Months Ended September 30, 2019						Three and Nine Months Ended September 30, 2021
	Number of Loans	Pre- Modifications Outstanding Recorded Investment		Post- Modifications Outstanding Recorded Investment			Number of Loans	Pre- Modifications Outstanding Recorded Investment		Post- Modifications Outstanding Recorded Investment

	(Dollars in thousands)						(Dollars in thousands)
Troubled debt restructurings:						Troubled debt restructurings:
Real estate loans:						Real estate loans:
One-to-four family	2	$	1,018	$	1,114	One-to-four family	2	$	547	$	590
Commercial and industrial	1	494		494
Total	3	$	1,512	$	1,608

Table of Contents

The ~~TDR’s~~TDRs described above had no impact on the allowance for loan losses and no impact to charge-offs during the three and nine months ended September 30, ~~2019.~~2022. The TDRs described above had an immaterial impact on the allowance for loan losses and no impact to charge-offs during the three and nine months ended September 30, 2021.

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

September 30, ~~2019~~2022 or ~~2018.~~2021. There was no provision for loan loss or charge-offs for ~~TDR’s~~TDRs that subsequently defaulted during the three orand nine months ended September 30, ~~2019~~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)
September 30, 2022
Real estate loans:
One-to-four family	$	33,838	$	1,023	$	3,079	$	—	$	37,940
Multi-family	9,028		—		—		—		9,028
Commercial	59,548		3,247		1,175		—		63,970

Commercial and industrial	299,985		—		—		—		299,985

Reverse mortgage and other	660		—		619		—		1,279
Mortgage warehouse	58,760		—		—		—		58,760
Total loans held-for-investment	$	461,819	$	4,270	$	4,873	$	—	$	470,962

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												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:

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


	Nine Months Ended September 30,
	2022				2021
	Purchases		Sales(1)		Purchases		Sales

	(Dollars in thousands)
Real estate loans:
One-to-four family	$	—	$	3,579	$	—	$	—
Multi-family	—		54,227		1,040		—
Commercial	—		155,011		—		—
Construction	—		6,823		—		—




	$	—	$	219,640	$	1,040	$	—

________________________

(1)In conjunction with the loan sales during the nine months ended September 30, 2022, the Company purchased a participating interest of $67.6 million of the loans sold to the buyer.

Related Party Loans

The Company had ~~related party loans with an~~no outstanding ~~balance of $4.6 million and $5.0 million as of September 30, 2019 and December 31, 2018, respectively. During the three months ended September 30, 2019, the~~ balance of related party loans ~~decreased by $19,000 due to principal payments.~~at September 30, 2022 and $7.7 million outstanding as of December 31, 2021. 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 and~~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~~overnight FHLB advances ~~during~~as of the ~~period presented:~~dates indicated:

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 %


	September 30, 2022			December 31, 2021

	(Dollars in thousands)
Amount outstanding	$	700,000		$	—
Weighted average interest rate	3.18		%	—

FHLB advances ~~are~~or borrowing capacity can be secured with eligible collateral consisting of ~~certain~~qualifying 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, ~~2019~~2022 and December 31, ~~2018,~~2021, were limited in the aggregate to 35% of the ~~Company’s~~Bank’s total assets. Loans ~~with carrying values~~and securities of approximately ~~$695.7 million~~$2.7 billion and ~~$625.3 million~~$1.4 billion were pledged to the FHLB as of September 30, ~~2019~~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~~$1.6 billion and ~~$472.3 million~~$1.0 billion as of September 30, ~~2019~~2022 and December 31, ~~2018,~~2021, respectively.

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FRB Advances

The ~~Company~~Bank is also approved to borrow through the Discount Window of the Federal Reserve Bank of San Francisco on a collateralized basis without any fixed dollar limit. Loans with a carrying value of approximately ~~$10.1~~$67.9 million and ~~$19.0~~$6.0 million were pledged to the FRB at September 30, ~~2019~~2022 and December 31, ~~2018,~~2021, respectively. The ~~Company’s~~Bank’s borrowing capacity under the Federal Reserve’s discount window program was ~~$7.4~~approximately $35.2 million and $5.2 million as of September 30, ~~2019.~~2022 and December 31, 2021, respectively. At September 30, ~~2019~~2022 and December 31, ~~2018,~~2021, there were ~~0 borrowings outstanding under any of these lines.~~no FRB advances outstanding.

Repurchase Agreements

~~During the nine months ended September 30, 2019, the~~The Bank ~~had~~occasionally borrows under repurchase agreements with brokers, accounted for as secured ~~borrowings, with an average outstanding balance of $24.9 million. The~~borrowings. At September 30, 2022 and December 31, 2021, there were no repurchase agreements ~~matured in July 2019 and as of September 30, 2019 there was 0 outstanding balance.~~

outstanding.

Federal Funds Purchased

The ~~Company~~Bank may borrow up to an aggregate ~~$32.0~~$138.0 million, overnight on an unsecured basis, from 3three of its correspondent banks. Access to these funds is subject to liquidity availability, market conditions and any negative material change in the ~~Company’s~~Bank’s credit profile. ~~As of~~At September 30, ~~2019,~~2022 and December 31, 2021, the Company had 0no outstanding balance of federal funds purchased.

Note 5—~~Notes Payable~~Intangible 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 with~~blockchain-based payment network. The assets acquired by the Company included development, deployment and operations infrastructure and tools for running a ~~commercial bank~~blockchain-based payment network designed to facilitate payments for commerce and cross-border remittances as well as proprietary software elements that are critical to running a ~~single principal advance~~regulatory-compliant stablecoin network. The technology is currently in a pre-launch phase, and no related amortization expense has been recorded for the acquired asset. The amortization period will begin when the developed technology is available for intended use.

Under the terms of ~~$8.0~~the Purchase Agreement, the aggregate purchase price for the acquired assets consisted of (i) $50.0 million ~~due~~in cash consideration and (ii) 1,221,217 shares of the Company’s Class A common stock. The value of the total transaction consideration was $181.6 million. The Company accounted for the purchase as an asset acquisition and has capitalized direct transaction costs related to ~~mature on January 29, 2021. Loan interest and principal is payable quarterly commencing April 2016 and accrues interest at an annual rate equal~~the purchase as well as development costs of $12.5 million, bringing the total intangible asset to ~~2.60% plus the greater of 0 percent and the one-month LIBOR rate. The proceeds were used to redeem preferred stock and can be prepaid at any time. The outstanding principal balance~~$194.0 million at September 30, 2019 and December 31, 2018 was $4.0 million and $4.9 million, respectively. Annual principal payments on outstanding borrowings are $1.1 million in 2019, $1.1 million in 2020 and $2.6 million in 2021.2022.

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,~~2022, the interest rate for the Company’s next scheduled payment was ~~5.94%~~7.13%, based on six-month LIBOR of ~~2.19%~~3.38%. 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,~~2022, the interest rate for the Company’s next scheduled payment was ~~3.97%~~5.14%, based on three-month LIBOR of ~~2.12%~~3.29%. 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.

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The outstanding balance of the subordinated debentures was $15.9 million, net of $0.1 million unamortized debt issuance costs as of September 30, 2022 and $15.8 million, net of $0.1 million unamortized debt issuance costs as of 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. ~~The~~For cash flow and fair value hedges, the initial fair value of hedge components excluded from the assessment of effectiveness is recognized in ~~the statement of financial condition~~earnings under a systematic and rational method over the life of the hedging instrument and is presented in the same income statement line item as the earnings effect of the hedged item. Any difference between the change in the fair value of the hedge components excluded from the assessment of effectiveness and the amounts recognized in earnings is recorded as a component of other comprehensive income. For a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. The 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 2022, the Company entered into a receive fixed/pay floating rate interest rate swap for a notional amount of $2.5 billion designated as a cash flow hedge of certain available-for-sale securities and a two-year forward starting pay fixed/receive floating rate interest rate swap for a notional amount of $1.5 billion that was designated as fair value hedge of certain available-for-sale securities (collectively the “2022 Swap Agreements”). The 2022 Swap Agreements were determined to be effective during the periods presented. The 2022 Swap Agreements were based on the Secured Overnight Financing Rate (“SOFR”) index and have original expiration dates in 2024 and 2029, respectively.

Interest rate ~~floor.~~floors. In 2022, the Company entered into an interest rate floor agreement (the “2022 Floor Agreement”) for a total notional amount of $1.0 billion to hedge cash flow receipts on securities, cash or loans, if needed. The 2022 Floor Agreement expires in May 2029. The Company utilized this 2022 Floor Agreement as a hedge against adverse changes in cash flows on the designated securities, cash, or loans attributable to fluctuations in the SOFR-30 Day Average index below 2.577%, as applicable. The 2022 Floor Agreement was 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 this 2022 Floor Agreement was approximately $57.6 million.

In 2019, the Company entered into 20 interest rate floor agreements (the ~~"Floor Agreements"~~“Floor Agreements”) for a total notional amount of $400.0 million to hedge cash flow receipts on cash and securities or loans, if needed. The original Floor Agreements expire on various dates in April 2024 and ~~June~~July 2029. The Company utilizes one-month LIBOR and three-month LIBOR interest rate floors as hedges against adverse changes in cash flows on the designated cash, securities or loans attributable to fluctuations in the ~~fed~~federal funds rate or three-month LIBOR below 2.50% or 2.25%, as applicable. The Floor

Agreements were determined to be fully effective during all periods presented and, as such, no amount of ineffectiveness has been included in net income. The upfront fee paid to the counterparty in entering into these Floor Agreements was approximately $20.8 million. During the three months ended March 31, 2020, the Company sold $200.0 million of its total $400.0 million notional amount of interest rate floors for $13.0 million, which resulted in a net gain of $8.4 million, to be recognized over the weighted average remaining term of 4.1 years. The remaining agreements are one-month LIBOR floors with a strike price of 2.25% and expire in July 2029.

Interest rate ~~cap.~~caps. In 2021, the Company entered into 26 interest rate cap agreements with a total notional amount of $552.8 million (“Federal Funds Rate Cap Agreements”). The Federal Funds Rate Cap Agreements are designated as fair value hedges against changes in the fair value of certain fixed rate tax-exempt municipal bonds. The Company utilizes the interest rate caps as hedges against adverse changes in interest rates on the designated securities attributable to fluctuations in the federal funds rate above 2.00%, as applicable. An increase in the benchmark interest rate hedged reduces the fair value of these assets. The Federal Funds Rate Cap Agreements expire on various dates from 2027 to 2032. The upfront fee paid to the counterparties was approximately $24.7 million. The Company expects the Federal Funds Rate Cap Agreements to remain effective during the remaining term of the respective agreements. 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

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income on the statement of operations. The Company may receive collateral or may be required to post collateral based upon market valuation. As of September 30, 2022, the Company held $83.5 million in cash collateral posted by the counterparty.

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 Cap Agreements expire July 25, 2022 and March 15, 2022, respectively. The Company utilizes interest rate caps as hedges against adverse changes in cash flows on the designated preferred trusts attributable to fluctuations in three-month LIBOR beyond 0.50% for the $3.0 million ~~subordinated debenture~~LIBOR Cap Agreement and ~~six-month LIBOR beyond 0.75% for the~~ $12.5 million ~~subordinated debenture. The caps were determined to be fully effective~~LIBOR Cap Agreement matured 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 Cap Agreements was approximately $2.5 million. The Company held approximately $0.4 million and $1.2 million of restricted cash at~~nine months ended 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.2022.

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.

September 30,
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 swap

Other liabilities

64,220

Other liabilities

—

Cash flow hedge interest rate floor

Derivative assets

35,367

Derivative assets

18,992

Fair value hedge interest rate swap

Derivative assets

55,925

Derivative assets

—

Fair value hedge interest rate cap

Derivative assets

62,698

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 Assets (Liabilities)				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Hedged Assets/(Liabilities)
	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021

	(Dollars in thousands)
Line Item in the Statement of Financial Condition of Hedged Item:
Securities available-for-sale	$	2,462,195	$	697,437	$	(102,236)	$	—

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

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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							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,							Three Months Ended September 30,					Three Months Ended September 30,
	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 swap													Cash flow hedge interest rate swap	$	(45,232)	$	—	Interest income—Taxable securities	$	2,824	$	—
Cash flow hedge interest rate floor	$	(11,413	)	$	—	Interest income - Other interest earning assets	$	(154	)	$	—		Cash flow hedge interest rate floor	(478)		(216)		Interest income—Other interest earning assets	(54)		142
Cash flow hedge interest rate floor	16,839			—		Interest income - Securities	(374		)	—			Cash flow hedge interest rate floor	(22,563)		(863)		Interest income—Taxable securities	(2,557)		1,089
Cash flow hedge interest rate cap	(35		)	70		Interest expense - Subordinated debentures	(31		)	(28		)	Cash flow hedge interest rate cap	—		—		Interest expense—Subordinated debentures	(22)		(101)
Fair value hedge interest rate cap(1)													Fair value hedge interest rate cap(1)	(8,844)		459


	Amount of Gain (Loss) Recognized in OCI					Location of Gain (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income							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,							Nine Months Ended September 30,					Nine Months Ended September 30,
	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 swap													Cash flow hedge interest rate swap	$	(57,474)	$	—	Interest income—Taxable securities	$	6,746	$	—
Cash flow hedge interest rate floor	$	(8,897	)	$	—	Interest income - Other interest earning assets	$	(345	)	$	—		Cash flow hedge interest rate floor	(2,283)		(1,361)		Interest income—Other interest earning assets	149		418
Cash flow hedge interest rate floor	18,710			—		Interest income - Securities	(491		)	—			Cash flow hedge interest rate floor	(34,239)		(5,442)		Interest income—Taxable securities	(1,549)		3,214
Cash flow hedge interest rate cap	(428		)	401		Interest expense - Subordinated debentures	(127		)	(111		)	Cash flow hedge interest rate cap	—		—		Interest expense—Subordinated debentures	(199)		(301)
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)	2,557		(8,164)

________________________

(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~~$46.3 million of net derivative ~~gain~~loss for cash flow hedges included in ~~OCI~~AOCI will be reclassified into earnings within the next 12 months. No gain or loss was reclassified from ~~OCI~~AOCI into earnings as a result of forecasted transactions that failed to occur during the periods presented.

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The following tables present 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 September 30,
	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	$	47,401	$	14,412	$	14,000	$	5,014
Effects of fair value hedging relationships
Interest rate contracts:
Hedged items	$	—	$	(83,584)	$	(105)	$	—
Derivatives designated as hedging instruments	—		82,814		74		—
Amount excluded from effectiveness testing recognized in earnings based on amortization approach	—		(606)		—		(625)


	Location and Amount of Gain or (Loss) Recognized in Income on Fair Value Hedging Relationships
	Nine Months Ended September 30,
	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	$	96,166	$	42,416	$	25,916	$	9,832
Effects of fair value hedging relationships
Interest rate contracts:
Hedged items	$	—	$	(102,590)	$	(690)	$	—
Derivatives designated as hedging instruments	—		101,777		631		—
Amount excluded from effectiveness testing recognized in earnings based on amortization approach	—		(1,815)		—		(1,104)

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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,
	2022				2021
	Amount		Rate		Amount		Rate

	(Dollars in thousands)
Statutory federal tax	$	11,926	21.0	%	$	6,167	21.0	%
State tax, net of federal benefit	4,617		8.1	%	2,049		7.0	%

Tax credits	(45)		(0.1)	%	(61)		(0.2)	%
Tax-exempt income, net	(3,380)		(6.0)	%	(1,731)		(5.9)	%
Excess tax benefit from stock-based compensation	(269)		(0.5)	%	(523)		(1.8)	%
Other items, net	613		1.2	%	(27)		(0.1)	%
Actual tax expense	$	13,462	23.7	%	$	5,874	20.0	%

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

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

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

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


	Nine Months Ended September 30,
	2022				2021
	Amount		Rate		Amount		Rate

	(Dollars in thousands)
Statutory federal tax	$	29,484	21.0	%	$	12,978	21.0	%
State tax, net of federal benefit	11,498		8.2	%	1,939		3.1	%

Tax credits	(128)		(0.1)	%	(118)		(0.2)	%
Tax-exempt income, net	(10,011)		(7.1)	%	(2,483)		(4.0)	%
Excess tax benefit from stock-based compensation	(393)		(0.3)	%	(7,572)		(12.3)	%
Other items, net	630		0.4	%	(83)		(0.1)	%
Actual tax expense	$	31,080	22.1	%	$	4,661	7.5	%

Income tax expense was ~~$2.6~~$13.5 million for the three months ended September 30, ~~2019~~2022 compared to ~~$2.5~~$5.9 million for the three months ended September 30, ~~2018. The increase was primarily related to increased pre-tax income.~~2021. The effective tax rates for the three months ended September 30, ~~2019~~2022 and ~~September 30, 2018~~2021 were ~~28.3%~~23.7% and ~~28.1%~~20.0%, respectively.

Income tax expense was ~~$8.3~~$31.1 million for the nine months ended September 30, ~~2019~~2022 compared to ~~$5.5~~$4.7 million for the nine months ended September 30, ~~2018. The increase was primarily related to increased pre-tax income.~~2021. The effective tax rates for the nine months ended September 30, ~~2019~~2022 and ~~September 30, 2018~~2021 were ~~28.1%~~22.1% and ~~27.9%~~7.5%, respectively. The higher effective tax rates for the three and nine months ended September 30, 2022 when compared to the three and nine months ended September 30, 2021 were primarily due to lower excess tax benefits recognized during 2022 on the exercise of stock options. The increase in ~~the Company’s~~tax expense and effective tax ~~rate was primarily related to~~rates for the three and nine months ended September 30, 2022 were partially offset by an increase in ~~state blended tax rate~~tax-exempt income earned on certain municipal bonds compared to the three and ~~non-deductible tax treatment of certain noninterest expenses.~~nine months ended September 30, 2021.

The deferred tax asset balance as of September 30, ~~2019~~2022 was ~~a liability of $3.8~~$219.9 million compared to ~~an asset of $3.3~~$6.5 million as of December 31, ~~2018.~~2021. The ~~primary change~~increase in ~~balance was due~~the deferred tax asset is attributable to the ~~increase in~~ unrealized ~~gains~~losses on the available-for-sale securities portfolio and ~~derivative assets.~~derivatives.

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~~$18,000 and $0.6 million ~~as of~~at September 30, ~~2019~~2022 and December 31, ~~2018.~~2021, respectively.

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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


	September 30, 2022		December 31, 2021

	(Dollars in thousands)
Unfunded lines of credit	$	1,191,043	$	248,092
Letters of credit	470		484
Total credit extension commitments	$	1,191,513	$	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.~~purpose and required collateral coverage ratios have been met ahead of any funding advance, if applicable. 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 income~~expense was ~~$17,000~~$1.1 million and ~~$17,000~~$0.6 million for the three months ended September 30, ~~2019~~2022 and ~~2018,~~2021, respectively. Total stock-based compensation ~~cost charged against income~~expense was ~~$66,000~~$2.8 million and ~~$97,000~~$1.4 million for the nine months ended September 30, ~~2019~~2022 and ~~2018,~~2021, respectively.

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Stock Options

A summary of stock option activity as of September 30, ~~2019~~2022 and changes during the nine months ended September 30, ~~2019~~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	(24,736)	14.72
Forfeited or expired	(1,831)	16.09
Outstanding at September 30, 2022	193,741	$	39.27	6.8 years	$	8,995
Exercisable at September 30, 2022	76,758	$	20.68	5.2 years	$	4,520
Vested or Expected to Vest at September 30, 2022	189,325	$	39.02	6.8 years	$	8,823

As of September 30, ~~2019,~~2022, there was ~~$0.1~~$1.8 million of total unrecognized compensation cost related to ~~non-vested~~nonvested stock options which is expected to be recognized over a weighted-average period of ~~1.7~~2.0 years.

Restricted Stock Units

A summary of the status of the Company’s nonvested restricted stock unit awards as of September 30, 2022, and changes during the nine months ended September 30, 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	55,461	$	102.25
Vested	(12,520)	$	111.48
Forfeited	(1,774)	$	87.01
Nonvested at September 30, 2022	98,038	$	84.11

At September 30, 2022, there was approximately $5.5 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 2.1 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,~~2022, the Company and the Bank ~~meet~~met all capital adequacy requirements to which they ~~are~~were subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. For the periods presented, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

Table of Contents

Actual capital amounts and ratios for the Company and the Bank as of September 30, ~~2019~~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)
September 30, 2022
The Company
Tier 1 leverage ratio	$	1,672,886	10.71	%	$	624,666	4.00	%	N/A		N/A
Common equity tier 1 capital ratio	1,463,765		40.72	%	161,753		4.50	%	N/A		N/A
Tier 1 risk-based capital ratio	1,672,886		46.54	%	215,671		6.00	%	N/A		N/A
Total risk-based capital ratio	1,676,080		46.63	%	287,561		8.00	%	N/A		N/A
The Bank
Tier 1 leverage ratio	1,631,662		10.45	%	624,574		4.00	%	$	780,717	5.00	%
Common equity tier 1 capital ratio	1,631,662		45.45	%	161,568		4.50	%	233,376		6.50	%
Tier 1 risk-based capital ratio	1,631,662		45.45	%	215,424		6.00	%	287,232		8.00	%
Total risk-based capital ratio	1,634,856		45.53	%	287,232		8.00	%	359,040		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 ~~shareholders~~shareholder during the same period must be approved by the California ~~DBO.~~DFPI. Also, the Bank may not pay dividends that would result in capital levels being reduced below the minimum requirements shown above. In addition, under the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (BASEL III rules), a new “capital conservation buffer” is being phased in through 2019 with different and generally higher limits than the well capitalized limits noted above. This may further restrict dividend and executive bonus distributions, should the Company’s capital ratios fall below the minimums required.

Note 12—Fair Value

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This standard’s fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 11—~~-Quoted~~Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

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Level 22—~~-Significant~~Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 33—~~-Significant~~Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Financial Instruments Required To Be Carried At Fair Value

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

~~Investments~~Securities. The fair values of securities available-for-sale and trading securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or. 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 ~~value~~price 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.

Safeguarding assets and liabilities. Safeguarding liabilities and corresponding safeguarding assets represent the Company’s obligation to safeguard bitcoin collateral held by certain regulated digital asset exchanges and other custodians for certain SEN Leverage loans subject to accounting guidance issued by SAB 121. The Company uses third party market pricing of bitcoin to record the safeguarding liabilities and corresponding safeguarding assets at fair value. The fair value of the safeguarding liabilities and corresponding safeguarding assets related to these digital assets are classified as Level 2 under the fair value hierarchy.

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, ~~2019~~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)
September 30, 2022
Assets

Securities available-for-sale	$	69,110	$	8,248,137	$	—	$	8,317,247
Derivative assets	—		153,990		—		153,990

	$	69,110	$	8,402,127	$	—	$	8,471,237
Liabilities
Derivative liabilities	$	—	$	64,220	$	—	$	64,220

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

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~~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-recurring~~nonrecurring 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 September 30, 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)
September 30, 2022
Financial assets:
Cash and due from banks	$	465,853	$	465,853	$	—	$	—	$	465,853
Interest earning deposits	1,420,970		1,420,970		—		—		1,420,970
Securities held-to-maturity	3,104,557		1,165,887		1,511,947		—		2,677,834
Loans held-for-sale	924,644		—		924,644		—		924,644
Loans held-for-investment, net	467,786		—		—		465,996		465,996
Accrued interest receivable	78,799		1,021		25,978		51,800		78,799
Financial liabilities:
Deposits	$	13,238,426	$	—	$	12,357,500	$	—	$	12,357,500

FHLB advances	700,000		—		700,000		—		700,000


Subordinated debentures, net	15,855		—		15,855		—		15,855
Accrued interest payable	3,375		—		3,375		—		3,375

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												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 September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(In thousands, except per share data)
Basic
Net income	$	43,328	$	23,492	$	109,319	$	57,137
Less: Dividends paid to preferred shareholders	2,688		—		8,064		—
Net income available to common shareholders	$	40,640	$	23,492	$	101,255	$	57,137
Weighted average common shares outstanding	31,655		26,525		31,505		24,927
Basic earnings per common share	$	1.28	$	0.89	$	3.21	$	2.29
Diluted
Net income available to common shareholders	$	40,640	$	23,492	$	101,255	$	57,137
Weighted average common shares outstanding for basic earnings per common share	31,655		26,525		31,505		24,927
Add: Dilutive effects of stock-based awards	148		241		164		381
Average shares and dilutive potential common shares	31,803		26,766		31,669		25,308
Dilutive earnings per common share	$	1.28	$	0.88	$	3.20	$	2.26

~~Stock options~~Stock-based awards for ~~110,000~~104,000 and ~~114,000~~44,000 shares of common stock for the three months ended September 30, ~~2019~~2022 and ~~2018,~~2021, respectively, and ~~110,000~~85,000 and ~~76,000~~44,000 shares of common stock for the nine months ended September 30, ~~2019~~2022 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,~~(“Articles”) authorize the Company to issue up to (i) ~~125,000,000~~150,000,000 shares of Class A Common Stock, par value $0.01 per share (“Class A Common Stock”), and (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.

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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. The depositary shares representing the Series A Preferred Stock are traded on the New York Stock Exchange under the symbol “SI PRA.”

Preferred Stock Dividends

The following table presents the details of historical preferred stock dividend payments on the Company’s depositary shares representing a 1/40th interest in a share of the Series A Preferred Stock.

Dividend Declared Date

Amount Per Share

Amount Per Depository Share

Total Dividend

(In Thousands)

Period Covered

Record Date

Dividend Paid Date

October 14, 2021

15.08

0.377

3,016

August 4, 2021 through November 14, 2021

October 29, 2021

November 15, 2021

January 14, 2022

13.44

0.336

2,688

November 15, 2021 through February 14, 2022

January 31, 2022

February 15, 2022

April 11, 2022

13.44

0.336

2,688

February 15, 2022 through May 14, 2022

April 29, 2022

May 16, 2022

July 11, 2022

13.44

0.336

2,688

May 15, 2022 through August 14, 2022

July 29, 2022

August 15, 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 iswas non-voting while held by the initial holder with certain limited exceptions. Each share of Class B Non-Voting Common Stock ~~will~~would 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 iswere 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,~~June 10, 2022, at the Annual Meeting of Stockholders of the Company, ~~completed a private placement of 9.5 million~~the Company’s stockholders approved an amendment to the Company’s Articles to cancel the Company's Class B Non-Voting common stock and re-allocate such shares to the Company's Class A Common Stock. On June 14, 2022, the authorized but unissued 25,000,000 shares of ~~the Company’s~~Class B Non-Voting common stock, $0.01 par value, were cancelled and reallocated as Class A common stock, ~~generating gross proceeds~~$0.01 par value. The reallocation of ~~$114.0 million. Costs incurred with~~ the ~~private placement were $6.1 million. The private placement raised net proceeds~~shares of ~~$107.9 million of~~authorized Class B Non-Voting common ~~equity, $60.0 million of which was contributed as equity capital to~~stock increased the ~~Bank during the first quarter of 2018. Proceeds from this placement also funded a stock repurchase of 997,506~~total authorized shares of Class A ~~and Class B common stock for $11.4 million, resulting in a net increase in shareholders’ equity~~Common Stock by 25,000,000 shares.

On January 26, 2021, the Company completed its underwritten public offering of ~~$96.5 million.~~

~~In March 2018, 1,165,000~~4,563,493 shares of Class ~~B common stock were sold by the Company’s shareholders and reissued as~~A Common Stock at a price of $63.00 per share, including 595,238 shares of 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 is traded on the New York~~Common Stock Exchange under the ticker symbol “SI.” The IPO generated aggregate gross proceeds to the Company of $9.9 million before deducting underwriting discounts and estimated offering expenses, and estimated aggregate net proceeds to the Company of approximately $6.8 million after deducting underwriting discounts and estimated offering expenses, which expenses are not yet finalized. Of the offered shares, 824,605 shares were offered by Silvergate and 2,508,728 shares were offered by selling shareholders. On November 15, 2019, the underwriters purchased an additional 499,999 shares of the Company’s Class A common stock from the Company’s selling shareholders in connection withupon the exercise in full by the underwriters of their option to purchase additional shares. The ~~Company did not receive any~~aggregate gross proceeds ~~from~~of the ~~sale of shares by the selling shareholders. The Company intends to use the~~offering were $287.5 million and net proceeds to ~~support continued growth, including organic growth~~the Company were $272.4 million after deducting underwriting discounts and ~~for general corporate purposes,~~offering expenses.

On March 9, 2021, the Company entered into an equity distribution agreement pursuant to which the Company could ~~include repayment~~issue and sell, from time to time, up to an aggregate gross sales price of ~~long-term debt, future acquisitions and other growth initiatives.~~

~~Callable Brokered Certificates~~$300.0 million of ~~Deposit~~

the Company’s shares of Class A Common Stock through an “at-the-market” equity offering program, or ATM Offering. As of ~~September~~June 30, ~~2019,~~2021, the Company had ~~issued $325.0 million of callable brokered certificates of deposit related to~~completed the hedging strategy. The callable brokered certificates of deposit had an unamortized premium of $2.3 million and have an average life of 4.2 years as of September 30, 2019. These certificates of deposit are initially callable six months after issuance and monthly thereafter. The initial call dates for all callable brokered certificates of deposit are from October 2019 through January 2020. At September 30, 2019, the Company heldATM Offering with a total of ~~$196.0~~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 ~~callable certificates~~full by the underwriters of ~~deposit~~their option to purchase additional shares. The aggregate gross proceeds of the offering were $552.0 million and ~~$1.3~~net proceeds to the Company were $530.3 million after deducting underwriting discounts and offering expenses.

On January 31, 2022 the ~~end~~Company issued 1,221,217 shares of ~~third quarter.~~the Company’s Class A Common Stock to the Sellers for the purchase of certain technology assets, at a price of $107.74 per share for a total value of $131.6 million.

Note 15—Subsequent Event

Preferred Stock Dividend

On October 11, 2022, the Company’s board of directors declared a quarterly dividend payment of $13.44 per share, equivalent to $0.336 per depositary share, on its Series A Preferred Stock, for the period covering August 15, 2022 through November 14, 2022, for a total dividend of $2.7 million. The dividend will be payable on November 15, 2022 to shareholders of record of the Series A Preferred Stock as of October 28, 2022.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the related notes and the Company’s ~~Registration Statement~~Annual Report on Form ~~S-1,~~10-K, which contains audited financial statements of the Company as of and for the year ended December 31, ~~2018,~~2021, previously filed with the Securities and Exchange Commission (“SEC”). Results for the three and nine ~~month periods~~months ended September 30, ~~2019~~2022 are not necessarily indicative of results for the year ending December 31, ~~2019~~2022 or any future period.

Cautionary Note Regarding ~~Forward Looking~~Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “projection,” “forecast,” “goal,” “target,” “would,” “aim” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry and management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. The inclusion of these forward-looking statements should not be regarded as a representation by us or any other person that such expectations, estimates and projections will be achieved. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. Any forward-looking statement speaks only as of the date of this shareholder letter, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether because of new information, future developments or otherwise, except as required by law. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence. In addition, we cannot assess the impact of each risk and uncertainty on our business or the extent to which any risk or uncertainty, or combination of risks and uncertainties, may cause actual results to differ materially from those contained in any forward-looking statements. 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 (“LIBOR”) and uncertainty regarding potential alternative reference rates, including the Secured Overnight Financing Rate (“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~~asset industry. ~~Instrumental~~Key to our leadership position and growth strategy is the Silvergate Exchange Network ~~or SEN,~~(“SEN”), our proprietary, virtually instantaneous payment network for participants in the digital ~~currency~~asset industry which serves as a platform for the development of additional products and services. The SEN has a powerful network effect that makes it more valuable as participants and utilization increase. The SEN has enabled us to ~~focus on~~ significantly ~~growing~~grow our noninterest bearing deposit product for digital ~~currency~~asset industry participants, which has provided the majority of our funding over the last ~~two~~ fouryears. This unique source of funding is a ~~distinctive~~distinct 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

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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~~asset initiative. We are also evaluating additional products or product enhancements specifically targeted at providing further financial infrastructure solutions to our customers and strengthening SEN network effects.

The Company is a Maryland corporation ~~that is the parent company of Silvergate Bank. The Company’s~~whose assets consist primarily of its investment in the Bank and its primary activities are conducted through the Bank. The Company is a registered bank holding company that is subject to supervision by the Board of Governors of the Federal ~~Reserve.~~Reserve (“Federal Reserve”). The Bank is subject to supervision by the California Department of ~~Business Oversight,~~Financial Protection and Innovation, Division of Financial Institutions ~~or DBO~~(“DFPI”), and, as a Federal Reserve member bank since 2012, the Federal Reserve Bank of San Francisco ~~or FRB.~~(“FRB”). The Bank’s deposits are insured up to legal limits by the Federal Deposit Insurance Corporation ~~or FDIC.~~(“FDIC”).

The Bank provides financial services that include commercial banking, commercial and residential real estate lending, mortgage warehouse lending and commercial business lending. Our client base is diverse and consists of business and individual clients in California and other states and includes digital currency-related customers in the United States and internationally. Following the Bank’s conversion to a commercial bankIn 2013, we began ~~introducing an~~exploring the digital asset industry and have significantly expanded ~~array~~and reoriented our product and service menus since that time to support our growing digital asset initiative, including the implementation of relationship-oriented business products and services, which in the past five years has been augmented by our digital currency initiative. While our commercial real estate lending activities are concentrated in California, we have a broader, nationwide

~~focus on~~ deposit and cash management services for digital ~~currency-related~~asset related businesses, ~~as well as~~domestically and internationally. Because of our focus on the digital asset 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 bitcoin collateralized loans, or SEN Leverage, and mortgage warehouse ~~and correspondent residential lending. Our goal~~loans. 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 sale~~now 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~~Asset Initiative

We leverage the SEN and our management team’s expertise in the digital ~~currency~~asset industry to develop, implement and maintain critical financial infrastructure solutions and services for many of the largest U.S. digital ~~currency~~asset exchanges and global investors, as well as other digital ~~currency~~asset 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~~asset 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~~asset industry in 2013 based on market dynamics which we believed were highly attractive:


•	~~Significant and Growing Industry:~~ ~~Digital currency presented a revolutionary model for executing financial transactions with substantial potential for growth.~~


•	~~Infrastructure Needs:~~ In order to become widely adopted, digital currency would need to rely on many traditional elements of financial services, including those services that support funds transfers, customer account controls and other security measures.

•

~~Regulatory Complexity as a Barrier to Entry:~~ Providing infrastructure solutions and services to the digital currency industry would require specialized compliance capabilities and a management team with a deep understanding of both the digital currency

•Significant and Growing Industry: Digital assets presented a revolutionary model for executing financial transactions with substantial potential for growth.

•Infrastructure Needs: In order to become widely adopted, digital assets 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 asset industry would require specialized compliance capabilities and a management team with a deep understanding of both the digital asset 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,~~assets, the need for infrastructure solutions and services and the regulatory complexity have all expanded significantly since 2013. Our ability to address these market dynamics over the past ~~six~~eight years has provided us with a first-mover advantage within the digital ~~currency~~asset industry that is the cornerstone of our leadership position today.

Digital ~~Currency~~Asset 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~~asset industry, which includes our unique technology solutions. As of September 30, ~~2019,~~2022, we had ~~250~~over 300 prospective digital ~~currency customers~~asset customer leads in various stages of our customer onboarding process and pipeline, which includes extensive regulatory compliance diligence and integrating of the customer’s technology stack for those new digital ~~currency~~asset customers interested in using our ~~API.~~proprietary, cloud-based application programming interface (“API”).

The following ~~chart~~list sets forth summary information regarding the types of market participants who 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 Asset Exchanges: Exchanges through which digital assets are bought and sold; includes over-the-counter (“OTC”) trading desks.

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•Institutional Investors: Hedge funds, venture capital funds, private equity funds, family offices and traditional asset managers, which are investing in the relatively nascent digital 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~~asset 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~~asset 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~~asset miners, custodians and general industry participants that need our solutions and services.

Silvergate Exchange Network

~~The following table presents~~For the ~~number~~three and nine months ended September 30, 2022, there were $112.6 billion and $446.2 billion, respectively, of ~~transactions and the~~ U.S. dollar ~~volume of transactions~~transfers that occurred on the SEN, ~~for~~compared to $162.0 billion and $568.1 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 and nine months ended September 30, 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 September 30, 2022 and June 30, 2022, 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.

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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						Nine Months Ended
	2019			2018			2019			2018				September 30, 2022			June 30, 2022			September 30, 2022			September 30, 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	$	90,766		$	71,587		$	213,191		$	91,912
Interest expense	2,945			737			5,596			2,391			Interest expense	9,878			1,041			11,262			851
Net interest income	18,443			17,970			55,327			48,760			Net interest income	80,888			70,546			201,929			91,061
(Reversal of) provision for loan losses	(858		)	—			(439		)	148
Reversal of provision for loan losses													Reversal of provision for loan losses	(601)			—			(3,075)			—
Net interest income after provision	19,301			17,970			55,766			48,612			Net interest income after provision	81,489			70,546			205,004			91,061
Noninterest income	2,599			2,184			12,624			5,572			Noninterest income	8,454			9,214			27,118			34,201
Noninterest expense	12,611			11,417			38,818			34,346			Noninterest expense	33,153			30,552			91,723			63,464
Income before income taxes	9,289			8,737			29,572			19,838			Income before income taxes	56,790			49,208			140,399			61,798
Income tax expense	2,633			2,458			8,324			5,525			Income tax expense	13,462			10,603			31,080			4,661
Net income	$	6,656		$	6,279		$	21,248		$	14,313		Net income	43,328			38,605			109,319			57,137
Dividends on preferred stock													Dividends on preferred stock	2,688			2,688			8,064			—
Net income available to common shareholders													Net income available to common shareholders	$	40,640		$	35,917		$	101,255		$	57,137
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)	1.04		%	0.89		%	0.84		%	0.75		%
Return on average equity (ROAE)													Return on average equity (ROAE)	11.24		%	9.58		%	8.85		%	9.73		%
Return on average common equity (ROACE)													Return on average common equity (ROACE)	12.99		%	10.99		%	10.13		%	10.27		%
Net interest margin(2)													Net interest margin(2)	2.31		%	1.96		%	1.86		%	1.24		%
Noninterest income to average assets													Noninterest income to average assets	0.22		%	0.23		%	0.22		%	0.45		%
Noninterest expense to average assets	2.27		%	2.32		%	2.52		%	2.41		%	Noninterest expense to average assets	0.85		%	0.75		%	0.76		%	0.83		%
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)	37.11		%	38.30		%	40.05		%	50.67		%
Loan yield(4)													Loan yield(4)	5.83		%	5.23		%	5.16		%	4.43		%
Cost of deposits	0.50		%	0.09		%	0.29		%	0.11		%	Cost of deposits	0.16		%	0.00		%	0.05		%	0.00		%
Cost of funds	0.59		%	0.17		%	0.41		%	0.18		%	Cost of funds	0.28		%	0.03		%	0.10		%	0.01		%
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	$	1.28		$	1.14		$	3.21		$	2.29
Diluted earnings per common share													Diluted earnings per common share	$	1.28		$	1.13		$	3.20		$	2.26
Basic weighted average shares outstanding	17,840			17,808			17,830			16,113			Basic weighted average shares outstanding	31,655			31,635			31,505			24,927
Diluted weighted average shares outstanding	18,246			18,254			18,252			16,607			Diluted weighted average shares outstanding	31,803			31,799			31,669			25,308

________________________


~~(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.

Table of Contents

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


		September 30, 2019			December 31, 2018				September 30, 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	$	1,886,823		$	5,387,946
Securities		909,917			357,251			Securities	11,421,804			8,625,259
Loans held-for-sale								Loans held-for-sale	924,644			893,194
Loans held-for-investment, net		691,990			592,781			Loans held-for-investment, net	467,786			887,304
Loans held-for-sale		311,410			350,636
Other assets		63,269			29,230
Other								Other	766,283			211,792
Total assets		$	2,136,844		$	2,004,318		Total assets	$	15,467,340		$	16,005,495
Deposits	��	$	1,848,095		$	1,783,005		Deposits	$	13,238,426		$	14,290,628
Borrowings		39,813			20,659			Borrowings	715,855			15,845
Other liabilities		18,322			9,408			Other liabilities	181,714			90,186
Total liabilities		1,906,230			1,813,072			Total liabilities	14,135,995			14,396,659
Total shareholders’ equity		230,614			191,246			Total shareholders’ equity	1,331,345			1,608,836
Total liabilities and shareholders' equity		$	2,136,844		$	2,004,318		Total liabilities and shareholders' equity	$	15,467,340		$	16,005,495
Nonperforming Assets:								Nonperforming Assets:
Nonperforming loans		$	6,707		$	8,303
Nonaccrual loans								Nonaccrual loans	$	3,698		$	4,003
Troubled debt restructurings		$	1,840		$	514		Troubled debt restructurings	$	1,623		$	1,713
Other real estate owned, net		$	81		$	31		Other real estate owned, net	$	45		$	—
Nonperforming assets		$	6,788		$	8,334		Nonperforming assets	$	3,743		$	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)	0.79		%	0.45		%
Net charge-offs to average total loans(1)(2)								Net charge-offs to average total loans(1)(2)	0.09		%	0.00		%
Allowance for loan losses to total loans(1)								Allowance for loan losses to total loans(1)	0.67		%	0.77		%
Allowance for loan losses to nonaccrual loans								Allowance for loan losses to nonaccrual loans	85.88		%	172.77		%
Company Capital Ratios:								Company Capital Ratios:
Tier 1 leverage ratio		10.43		%	9.00		%	Tier 1 leverage ratio	10.71		%	11.07		%
Common equity tier 1 capital ratio		23.57		%	23.10		%	Common equity tier 1 capital ratio	40.72		%	49.53		%
Tier 1 risk-based capital ratio		25.28		%	24.96		%	Tier 1 risk-based capital ratio	46.54		%	56.82		%
Total risk-based capital ratio		25.97		%	25.77		%	Total risk-based capital ratio	46.63		%	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	7.36		%	8.84		%
Book value per common share								Book value per common share	$	35.94		$	46.55
Bank Capital Ratios:								Bank Capital Ratios:
Tier 1 leverage ratio		10.01		%	8.51		%	Tier 1 leverage ratio	10.45		%	10.49		%
Common equity tier 1 capital ratio		24.30		%	23.68		%	Common equity tier 1 capital ratio	45.45		%	53.89		%
Tier 1 risk-based capital ratio		24.30		%	23.68		%	Tier 1 risk-based capital ratio	45.45		%	53.89		%
Total risk-based capital ratio		25.00		%	24.50		%	Total risk-based capital ratio	45.53		%	54.15		%
Other:								Other:
Total headcount		209			209			Total headcount	439			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.

(2)Includes write-downs arising from transfers of loans to held-for-sale.

Table of Contents

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 nine months ended September 30, ~~2019~~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 and~~Annual 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 SEC~~Annual Report on ~~November 8, 2019,~~Form 10-K, are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that ~~the~~those critical accounting policies and estimates ~~discussed below~~ require us to make difficult, subjective or complex judgments about matters that are inherently uncertain. Changes in these estimates, which are likely to occur from period to period, or use of different estimates that we could have reasonably used in the current period, would have a material impact on our financial position, results of operations or liquidity.

Results of Operations

Net Income

The following table sets forth the principal components of net income for the periods indicated.


	Three Months Ended September 30,							Nine Months Ended September 30,								Three Months Ended						Nine Months Ended
	2019			2018		% Increase/ (Decrease)		2019			2018		% Increase/ (Decrease)			September 30, 2022		June 30, 2022		% Increase/ (Decrease)		September 30, 2022		September 30, 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	$	90,766	$	71,587	26.8	%	$	213,191	$	91,912	132.0	%
Interest expense	2,945			737		299.6	%	5,596			2,391		134.0	%	Interest expense	9,878		1,041		848.9	%	11,262		851		N/M
Net interest income	18,443			17,970		2.6	%	55,327			48,760		13.5	%	Net interest income	80,888		70,546		14.7	%	201,929		91,061		121.8	%
(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	(601)		—		N/M		(3,075)		—		N/M
Net interest income after provision	19,301			17,970		7.4	%	55,766			48,612		14.7	%	Net interest income after provision	81,489		70,546		15.5	%	205,004		91,061		125.1	%
Noninterest income	2,599			2,184		19.0	%	12,624			5,572		126.6	%	Noninterest income	8,454		9,214		(8.2)	%	27,118		34,201		(20.7)	%
Noninterest expense	12,611			11,417		10.5	%	38,818			34,346		13.0	%	Noninterest expense	33,153		30,552		8.5	%	91,723		63,464		44.5	%
Net income before income taxes	9,289			8,737		6.3	%	29,572			19,838		49.1	%
Income before income taxes															Income before income taxes	56,790		49,208		15.4	%	140,399		61,798		127.2	%
Income tax expense	2,633			2,458		7.1	%	8,324			5,525		50.7	%	Income tax expense	13,462		10,603		27.0	%	31,080		4,661		566.8	%
Net income	$	6,656		$	6,279	6.0	%	$	21,248		$	14,313	48.5	%	Net income	$	43,328	$	38,605	12.2	%	$	109,319	$	57,137	91.3	%

________________________

N/M—Not meaningful

Net income for the three months ended September 30, ~~2019~~2022 was ~~$6.7~~$43.3 million, an increase of ~~$0.4~~$4.7 million or ~~6.0%~~12.2% from net income of ~~$6.3~~$38.6 million for the three months ended ~~September~~June 30, ~~2018.~~2022. 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~~$10.3 million increase in ~~noninterest~~net interest income ~~partially~~and a $0.6 million reversal of provision for loan losses, offset by a ~~$2.2~~$0.8 million ~~increase or 299.6% in interest expense, a $1.2 million or 10.5% increase~~decrease in noninterest ~~expense and~~income, a ~~$0.2~~$2.9 million increase in income tax expense and a $2.6 million increase in noninterest expense, all as described below.

Net income for the nine months ended September 30, ~~2019~~2022 was ~~$21.2~~$109.3 million, an increase of ~~$6.9~~$52.2 million or ~~48.5%~~91.3% from net income of ~~$14.3~~$57.1 million for the nine months ended September 30, ~~2018.~~2021. The increase was primarily due to ana $110.9 million increase ~~of $9.8 million or 19.1%~~ in net interest income and a $3.1 million reversal of provision for loan losses, offset by a $7.1 million ~~increase~~decrease 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~~$26.4 million increase in income tax expense and a $28.3 million increase in noninterest expense, all as described below.

Table of Contents

Net Interest Income and Net Interest Margin Analysis (Taxable Equivalent Basis)

We analyze our ability to maximize income generated from interest earning assets and control the interest expenses of our liabilities, measured as net interest income, through our net interest margin and net interest spread. Net interest income is the difference between the interest and fees earned on interest earning assets, such as loans, interest earning deposits in other banks and securities, and the interest expense incurred on interest bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest margin is a ratio calculated as net interest income divided by average interest earning assets for the same period. Net interest spread is the difference between average interest rates earned on interest earning assets and average interest rates paid on interest bearing liabilities.

Changes in market interest rates and the interest rates we earn on interest earning assets or pay on interest bearing liabilities, as well as in the volume and types of interest earning assets, interest bearing and noninterest bearing liabilities and shareholders’ equity, are usually the largest drivers of periodic changes in net interest income, net interest margin and net interest spread. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in the Southern California region, developments affecting the real estate, technology, hospitality, tourism and financial services sectors within our target markets and throughout the Southern California region, the volume and availability of residential loan pools and non-qualified residential loans and mortgage banker relationships. Our ability to respond to changes in these factors by using effective asset-liability management techniques is critical to maintaining the stability of our net interest income and net interest margin as our primary sources of earnings.

The following tables show the average outstanding balance of each principal category of our assets, liabilities and shareholders’ equity, together with the average yields on our assets and the average costs of our liabilities for the periods indicated. Such yields and ~~cost~~costs are calculated by dividing income or expense by the average daily balances of the associated assets or liabilities for the same period.

Tax-exempt income from securities is calculated on a taxable equivalent basis. Net interest income, net interest spread and net interest margin are presented on a taxable equivalent basis to consistently reflect income from taxable securities and tax-exempt securities based on the federal statutory tax rate of 21.0%.

Table of Contents

AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS


	Three Months Ended
	September 30, 2022						June 30, 2022
	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	$	1,324,361	$	8,001	2.40	%	$	1,458,173	$	3,008	0.83	%
Taxable securities	8,868,639		47,401		2.12	%	9,058,960		30,986		1.37	%
Tax-exempt securities(1)	2,889,391		18,243		2.50	%	2,992,038		18,759		2.51	%
Loans(2)(3)	1,407,290		20,663		5.83	%	1,689,852		22,054		5.23	%
Other	62,835		289		1.82	%	58,852		719		4.90	%
Total interest earning assets	14,552,516		94,597		2.58	%	15,257,875		75,526		1.99	%
Noninterest earning assets	942,110						1,010,486
Total assets	$	15,494,626					$	16,268,361
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits	$	1,000,615	$	5,221	2.07	%	$	68,128	$	2	0.01	%
FHLB advances and other borrowings	769,565		4,399		2.27	%	397,810		796		0.80	%
Subordinated debentures	15,854		258		6.46	%	15,850		243		6.15	%
Total interest bearing liabilities	1,786,034		9,878		2.19	%	481,788		1,041		0.87	%
Noninterest bearing liabilities:
Noninterest bearing deposits	12,139,522						13,951,397
Other liabilities	134,164						330,658
Shareholders’ equity	1,434,906						1,504,518
Total liabilities and shareholders’ equity	$	15,494,626					$	16,268,361
Net interest spread(4)					0.39	%					1.12	%
Net interest income, taxable equivalent basis			$	84,719					$	74,485
Net interest margin(5)					2.31	%					1.96	%
Reconciliation to reported net interest income:
Adjustments for taxable equivalent basis			(3,831)						(3,939)
Net interest income, as reported			$	80,888					$	70,546

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 %

Table of Contents


	Nine Months Ended
	September 30, 2022						September 30, 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	$	1,943,479	$	12,394	0.85	%	$	4,718,163	$	4,633	0.13	%
Taxable securities	8,808,166		96,166		1.46	%	3,095,984		25,916		1.12	%
Tax-exempt securities(1)	2,922,842		53,691		2.46	%	722,129		12,446		2.30	%
Loans(2)(3)	1,579,713		61,004		5.16	%	1,531,408		50,727		4.43	%
Other	54,556		1,211		2.97	%	25,308		804		4.25	%
Total interest earning assets	15,308,756		224,466		1.96	%	10,092,992		94,526		1.25	%
Noninterest earning assets	882,854						130,766
Total assets	$	16,191,610					$	10,223,758
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits	$	385,186	$	5,244	1.82	%	$	97,048	$	107	0.15	%
FHLB advances and other borrowings	415,388		5,265		1.69	%	15		—		0.00	%
Subordinated debentures	15,850		753		6.35	%	15,836		744		6.28	%
Total interest bearing liabilities	816,424		11,262		1.84	%	112,899		851		1.01	%
Noninterest bearing liabilities:
Noninterest bearing deposits	13,614,495						9,288,468
Other liabilities	231,158						37,124
Shareholders’ equity	1,529,533						785,267
Total liabilities and shareholders’ equity	$	16,191,610					$	10,223,758
Net interest spread(4)					0.12	%					0.24	%
Net interest income, taxable equivalent basis			$	213,204					$	93,675
Net interest margin(5)					1.86	%					1.24	%
Reconciliation to reported net interest income:
Adjustments for taxable equivalent basis			(11,275)						(2,614)
Net interest income, as reported			$	201,929					$	91,061

________________________

(1)Interest income on tax-exempt securities is presented on a taxable equivalent basis using the federal statutory tax rate of 21.0% for all periods presented.

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

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

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

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

Nine Months Ended September 30,
2019 2018
Average
Outstanding
Balance Interest
Income/
Expense Average
Yield/
Rate Average
Outstanding
Balance Interest
Income/
Expense Average
Yield/
Rate

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

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

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

Other liabilities 12,170
5,593

Shareholders’ equity 208,775
158,248

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

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

Net interest margin⁽⁴⁾
3.64 % 3.45 %

~~________________________~~

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

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

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

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

Information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest bearing liabilities and distinguishes between the changes

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attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been proportionately allocated to both volume and rate.

ANALYSIS OF CHANGES IN NET INTEREST INCOME


	For the Three Months Ended September 30, 2022 Compared to June 30, 2022						For the Nine Months Ended September 30, 2022 Compared to September 30, 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	$	(246)	$	5,239	$	4,993	$	(2,725)	$	10,486	$	7,761
Taxable securities	(318)		16,733		16,415		47,816		22,434		70,250
Tax-exempt securities(1)	(444)		(72)		(516)		37,930		3,315		41,245
Loans	(4,536)		3,145		(1,391)		4,847		5,430		10,277
Other	57		(487)		(430)		929		(522)		407
Total interest income	(5,487)		24,558		19,071		88,797		41,143		129,940
Interest Expense:
Interest bearing deposits	4,011		1,208		5,219		88		5,049		5,137
FHLB advances and other borrowings	762		2,841		3,603		477		4,788		5,265
Subordinated debentures	3		12		15		1		8		9
Total interest expense	4,776		4,061		8,837		566		9,845		10,411
Net interest income, taxable equivalent basis	$	(10,263)	$	20,497	$	10,234	$	88,231	$	31,298	$	119,529

________________________

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~~$10.2 million to ~~$18.4~~$84.7 million for the three months ended September 30, ~~2019~~2022, compared to ~~$18.0~~$74.5 million for the three months ended ~~September~~June 30, ~~2018,~~2022, due to an increase of ~~$2.7~~$19.1 million in interest income partially offset by an increase of ~~$2.2~~$8.8 million in interest expense.

Average total interest earning assets ~~increased $217.1 million~~decreased $0.7 billion or ~~11.2%, from $1.9 billion~~4.6% for the three months ended September 30, ~~2018~~2022, compared to ~~$2.2 billion for~~ the three months ended ~~September~~June 30, ~~2019. The increase was~~2022, primarily due to an increase in average balance of securities loans, partly offset by a decrease in interest earning deposits in other banks. The increase in securities was driven by the purchase of fixed-rate commercial mortgage-backeddecreased 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.”loan balances. The average annualized yield on total interest earning assets increased from ~~3.82%~~1.99% for the three months ended June 30, 2022, to 2.58% for the three months ended September 30, ~~2018~~2022, primarily due to ~~3.93%~~higher yields on securities and interest earning deposits in other banks. The yield on securities increased from 1.66% for the three months ended June 30, 2022, to 2.21% for the three months ended September 30, ~~2019.~~2022, due to an increase in market interest rates.

Average interest bearing liabilities increased ~~$241.3 million~~$1.3 billion or ~~94.1%~~270.7% for the three months ended September 30, ~~2019~~2022, compared to the three months ended June 30, 2022, due to the utilization of short-term brokered certificates of deposit and higher average balances of FHLB advances. The average annualized rate on total interest bearing liabilities increased from 0.87% for the three months ended June 30, 2022, to 2.19% for the three months ended September 30, 2022, primarily due to interest expense associated with recently issued brokered certificates of deposit and an increase in interest rates on FHLB advances.

For the three months ended September 30, 2022, the net interest spread was 0.39% and the net interest margin was 2.31%, compared to 1.12% and 1.96%, respectively, for the three months ended June 30, 2022. The decrease in net interest spread from the three months ended June 30, 2022 was primarily driven by the utilization of brokered certificates of deposit and increased average FHLB advances. The increase in net interest margin from the three months ended June 30, 2022 was primarily due to higher yields on adjustable rate securities and interest earning deposits in other banks reflecting the increasing rate environment, partially offset by higher borrowing costs associated with brokered certificates of deposit and FHLB advances as well as net expense from derivatives.

Net interest income on a taxable equivalent basis increased $119.5 million to $213.2 million for the nine months ended September 30, 2022, compared to $93.7 million for the nine months ended September 30, 2021, due to an increase of $129.9 million in interest income partially offset by an increase of $10.4 million in interest expense.

Average total interest earning assets increased $5.2 billion or 51.7% for the nine months ended September 30, 2022, compared to the same period in ~~2018~~2021, primarily due to increased securities balances funded by growth in digital asset related deposits. The average annualized yield on total interest earning assets increased from 1.25% for the ~~implementation~~nine months ended

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September 30, 2021, to 1.96% for the ~~Bank’s hedging strategy. The increase in interest bearing deposits was~~nine months ended September 30, 2022, primarily due to higher yields on the ~~issuance~~securities portfolio due to an increase in market interest rates and a higher proportion of ~~callable~~relatively higher yielding securities and a lower proportion of relatively lower yielding interest earning deposits in other banks as a percentage of interest earning assets.

Average interest bearing liabilities increased $703.5 million or 623.1% for the nine months ended September 30, 2022, compared to the same period in 2021, due to the utilization of brokered certificates of ~~deposits, which were used to fund the fixed-rate commercial mortgage-backed securities, both associated with our hedging strategy.~~deposit and higher average balances of FHLB advances. The average annualized rate on total interest bearing liabilities increased to ~~2.35%~~1.84% for the ~~three~~nine months ended September 30, ~~2019~~2022, compared to ~~1.14%~~1.01% for the same period in ~~2018~~2021, primarily due to interest ~~on callable~~expense associated with recently issued brokered certificates ~~deposits associated with our hedging strategy.~~of deposit and an increase in interest rates on FHLB advances.

For the ~~three~~nine months ended September 30, ~~2019,~~2022, the net interest spread was ~~1.58%~~0.12% and the net interest margin was ~~3.39%~~1.86%, compared to ~~2.68%~~0.24% and ~~3.67%~~1.24%, respectively, for the comparable period in ~~2018.~~2021. The decrease in ~~the~~ net interest spread was primarily driven by the utilization of brokered certificates of deposit and increased FHLB advances, partially offset by a lower proportion of higher cost subordinated debentures as a percentage of interest bearing liabilities and a higher proportion of securities as a percentage of interest earning assets. The increase in net interest margin ~~in the three months ended September 30, 2019 was primarily due to the callable brokered certificates of deposits associated with our hedging strategy.~~

~~Net interest income increased $6.6 million to $55.3 million~~ for the nine months ended September 30, ~~2019 compared to $48.8 million for the nine months ended September 30, 2018,~~2022 was primarily due to ~~an increase~~a higher proportion of ~~$9.8 million in interest income partially offset by an increase of $3.2 million in interest expense.~~

Average total interest earning assets increased $139.7 million or 7.4%, from $1.9 billion for the nine months ended September 30, 2018 to $2.0 billion for the nine months ended September 30, 2019. This increase was due to the inflow of noninterest bearing deposits related to our digital currency initiative which were invested inrelatively higher yielding securities and a lower proportion of relatively lower yielding interest earning ~~deposits. The average balance of securities increased from $248.6 million for the nine months ended September 30, 2018 to~~

~~$633.7 million for the nine months ended September 30, 2019 while the average balance of interest bearing~~ deposits in other banks ~~decreased from $770.4 million to $465.2 million over the same time period. The movement in these asset classes was primarily due to the implementation~~as a percentage of ~~the Bank’s hedging strategy during the first nine months of 2019. The average annualized yield on total~~ interest earning assets as well as increased ~~from 3.61% for the nine months ended September 30, 2018 to 4.01% for the nine months ended September 30, 2019 primarily due to~~market interest rates on ~~callable brokered certificates deposits associated with our hedging strategy.~~

~~Average~~ interest bearing liabilities increased $66.6 million or 22.7% for the nine months ended September 30, 2019 as compared to the same period in 2018 primarily due to an increase in interest bearing deposits between periods, and an increase in FHLB and other borrowings. The average annualized rate on total interest bearing liabilities increased to 2.08% for the nine months ended September 30, 2019 compared to 1.09% for the same period in 2018.earning assets.

For the nine months ended September 30, 2019, the net interest spread was 1.93% and the net interest margin was 3.64% compared to 2.52% and 3.45%, respectively, for the comparable period in 2018. The decrease in the net interest spread in the nine months ended September 30, 2019~~was primarily due to the callable brokered certificates of deposits associated with our hedging strategy~~.

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 $0.6 million reversal of ~~$0.9 million and no~~ provision for loan losses for the three months ended September 30, ~~2019~~2022 and ~~2018, respectively.~~no provision for the three months ended June 30, 2022. We recorded a $3.1 million reversal of ~~$0.4 million and a~~ provision for loan losses ~~$0.1 million~~ for the nine months ended September 30, ~~2019 and 2018, respectively.~~2022 compared to no provision for the nine months ended September 30, 2021. The allowance for loan losses to total gross loans held-for-investment was ~~0.89%~~0.67% at September 30, ~~2019~~2022, compared to ~~1.21%~~0.74% and 0.85% at June 30, 2022 and September 30, ~~2018.~~2021, respectively. During the three months ended September 30, 2022, $33.9 million of loans were transferred to held-for-sale and a $0.6 million fair value reduction was recorded as a write-down to the loans and a charge-off to the allowance. This was more than offset by the reduction to the allowance due to lower loan balances resulting from the transfer of loans and by a $3.6 million loan sale discussed below. The reversal during the nine months ended September 30, 2022 was due to ~~improvements~~changes in ~~qualitative factors related~~loan product and segment mix in the portfolio, including the net impact of the sales and transfer to ~~the loan portfolio and the continued low charge-off rates.~~held-for-sale of real estate 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						Nine Months Ended
	2019		2018		% Increase/ (Decrease)		2019		2018		% Increase/ (Decrease)			September 30, 2022		June 30, 2022		% Increase/ (Decrease)		September 30, 2022		September 30, 2021		% Increase/ (Decrease)

	(Dollars in thousands)													(Dollars in thousands)
Noninterest income:													Noninterest income:
Deposit related fees													Deposit related fees	$	7,953	$	8,808	(9.7)	%	$	25,729	$	26,603	(3.3)	%
Mortgage warehouse fee income	$	373	$	393	(5.1	)%	$	1,085	$	1,152	(5.8	)%	Mortgage warehouse fee income	482		555		(13.2)	%	1,688		2,372		(28.8)	%
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	—		(199)		N/M		(804)		5,182		(115.5)	%
Loss on sale of loans, net													Loss on sale of loans, net	(329)		—		N/M		(329)		—		N/M

Other income	38		114		(66.7	)%	168		383		(56.1	)%	Other income	348		50		596.0	%	834		44		N/M
Total noninterest income	$	2,599	$	2,184	19.0	%	$	12,624	$	5,572	126.6	%	Total noninterest income	$	8,454	$	9,214	(8.2)	%	$	27,118	$	34,201	(20.7)	%

________________________

N/M—Not meaningful

Noninterest income decreased $0.8 million or 8.2% for the three months ended September 30, ~~2019 was $2.6 million, an increase of $0.4 million or 19.0%~~2022, compared to ~~noninterest income~~the three months ended June 30, 2022. This decrease was primarily due to a decrease of ~~$2.2~~$0.9 million ~~for~~in deposit related fees and a $0.3 million loss on sale of loans, offset by a $0.3 million increase in other income. The decrease in deposit related fees was attributable to lower trading volumes. During the three months ended September 30, ~~2018. The increase was primarily due to an increase~~2022, the Company sold approximately $3.6 million of ~~$1.0 million, or 140.8%, in deposit related fees. The increase was partially offset by decreases in service fees related to off-balance sheet deposits, gain~~one-to-four family real estate loans and recognized a loss on sale of ~~loans and other income. Deposit related fees increased primarily due to increases in transactional volume for cash management, SEN related fees~~$0.3 million.

Table of Contents~~and foreign exchange fee income associated with our digital currency initiative.~~

Noninterest income decreased $7.1 million or 20.7% for the nine months ended September 30, ~~2019 was $12.6 million, an increase of $7.1 million or 126.6%~~2022, compared to ~~noninterest income of $5.6 million for~~ the nine months ended September 30, ~~2018.~~2021. This ~~increase~~decrease was

primarily due to a ~~$5.5~~$6.0 million decrease in gain (loss) on sale of ~~branch and~~securities, a ~~$2.2~~$0.9 million ~~increase~~decrease in deposit related fees ~~partially offset by~~and a ~~$0.2~~$0.7 million decrease in ~~service fees related to off-balance sheet deposits. To further our digital currency initiative as the core~~mortgage warehouse fee income. This was offset by an increase of ~~our strategy, the Bank completed the sale of its San Marcos branch and business loan portfolio to another bank~~$0.8 million 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 of 2018 we began working with correspondent banking partners, including a leading global investment bank, to provide competitive foreign exchange alternatives to our clients.other income.

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						Nine Months Ended
	2019		2018			% Increase/ (Decrease)		2019		2018		% Increase/ (Decrease)			September 30, 2022		June 30, 2022		% Increase/ (Decrease)		September 30, 2022		September 30, 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	$	19,632	$	16,356	20.0	%	$	51,532	$	31,979	61.1	%
Occupancy and equipment	892		742			20.2	%	2,777		2,251		23.4	%	Occupancy and equipment	822		1,063		(22.7)	%	2,471		1,736		42.3	%

Communications and data processing	1,298		703			84.6	%	3,458		2,149		60.9	%	Communications and data processing	3,210		2,967		8.2	%	8,939		5,210		71.6	%
Professional services	889		1,507			(41.0	)%	3,407		3,918		(13.0	)%	Professional services	4,314		6,280		(31.3)	%	13,548		6,782		99.8	%
Federal deposit insurance	39		214			(81.8	)%	382		1,078		(64.6	)%	Federal deposit insurance	1,217		1,495		(18.6)	%	4,474		10,437		(57.1)	%
Correspondent bank charges	288		240			20.0	%	868		914		(5.0	)%	Correspondent bank charges	902		801		12.6	%	2,531		1,881		34.6	%
Other loan expense	47		57			(17.5	)%	290		198		46.5	%	Other loan expense	529		682		(22.4)	%	1,595		753		111.8	%
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	2,527		908		178.3	%	6,633		4,686		41.5	%
Total noninterest expense	$	12,611	$	11,417		10.5	%	$	38,818	$	34,346	13.0	%	Total noninterest expense	$	33,153	$	30,552	8.5	%	$	91,723	$	63,464	44.5	%

Noninterest expense increased ~~$1.2~~$2.6 million or ~~10.5%~~8.5% for the three months ended September 30, ~~2019~~2022, compared to the three months ended ~~September~~June 30, ~~2018~~2022, primarily due to increases in salaries and employee benefits ~~occupancy~~ and ~~equipment~~other general and ~~communications and data processing~~administrative expense, offset by ~~decreases~~a 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.services. The increase of ~~$3.8~~$3.3 million or ~~17.8%~~20.0% in salaries and employee benefits was primarily due to an increase in headcount. The Company’s average full-time equivalent employees ~~with significant~~increased by 20.2% from 336 for the three months ended June 30, 2022 to 404 for the three months ended September 30, 2022. Professional services decreased $2.0 million or 31.3% primarily due to decreased consulting costs related to our strategic initiatives and decreased third-party agency fees. Other general and administrative expense increased $1.6 million or 178.3% primarily due to a $1.6 million reversal of the provision for off-balance sheet commitments recorded in the three months ended June 30, 2022 due to a change in estimate related to bitcoin collateralized SEN Leverage commitments.

Noninterest expense increased $28.3 million or 44.5% for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to increases in ~~the Bank’s average full-time equivalent employees in project management~~salaries and ~~operations,~~employee benefits, communications and data processing, professional services, and other general and administrative expense, partially offset by a ~~reduction~~decrease in ~~personnel as a result~~federal deposit insurance expense. The increase of ~~the sale of the Bank’s San Marcos branch and business loan operations. Occupancy and equipment increased $0.5~~$19.6 million or ~~23.4%~~61.1% in salaries and employee benefits was primarily due to an increase in ~~leased space~~headcount and an increase in cost per full-time equivalent employee. The Company’s average full-time equivalent employees increased by 52.9% from 225 for the ~~corporate headquarters partially offset by~~nine months ended September 30, 2021 to 344 for the ~~sale of the San Marcos branch.~~nine months ended September 30, 2022. Communications and data processing increased ~~$1.3~~$3.7 million or ~~60.9%~~71.6% primarily due to ~~updating our IT~~blockchain infrastructure hosting costs as well as continued investment in enterprise cloud storage solutions and ~~expansion projects~~scalable cloud-based software solutions to ~~support our digital currency initiative. We continue~~scale technology needs for the growing organization and to invest in scalable technology, and recently committed to expand our banking platform with a cloud-based API-enabled payment hub to complement our API-enabled SEN. Alongside the implementation of the Bank’s payments hub, the Bank is implementing a customer-facing foreign exchange platform. While we continue to invest in projects to strengthen our ability to operate efficiently and effectively while leveraging existing and new technology, professional service fees have decreased by $0.5meet strategic objectives. Professional services increased $6.8 million or ~~13.0%~~99.8% due primarily to consulting fees associated with our strategic initiatives, increased talent acquisition costs and consulting costs related to other corporate matters. Federal deposit insurance expense decreased $6.0 million due to ~~decreased consulting expense. The decrease of $0.7~~a lower growth rate in deposit levels. Other general and administrative expense increased $1.9 million or

~~64.6% in federal deposit insurance payments was~~ 41.5% primarily due to an ~~FDIC assessment credit as well as~~increase for expanded insurance coverage and increases in charitable donations, offset by a ~~reduction~~decrease in the ~~multiplier based on significant asset growth~~provision for ~~the prior fiscal year relative to the current comparable period.~~unfunded commitments.

Income Tax Expense

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

Income tax expense was ~~$2.6~~$13.5 million for the three months ended September 30, ~~2019~~2022, compared to ~~$2.5~~$10.6 million for the three ~~nine~~ months ended ~~September~~June 30, ~~2018.~~2022. Our effective tax rates for the three months ended September 30, ~~2019~~2022 and ~~2018~~June 30, 2022 were ~~28.3%~~23.7% and ~~28.1%~~21.5%, respectively. The increase in income tax expense and effective tax rate was primarily due to an increase in pre-tax income. The increase in the effective tax rate for the three months ended September 30, 2022 compared to the three months ended June 30, 2022 was driven by the increase in overall earnings in proportion to tax-exempt income earned on certain municipal bonds which remained relatively consistent.

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Income tax expense was ~~$8.3~~$31.1 million for the nine months ended September 30, ~~2019~~2022, compared to ~~$5.5~~$4.7 million for the nine months ended September 30, ~~2018. The increase was primarily related to increased pre-tax income.~~2021. Our effective tax rates for the nine months ended September 30, ~~2019~~2022 and ~~2018~~2021 were ~~28.1%~~22.1% and ~~27.9%~~7.5%, respectively. The increase in ~~our effective~~income tax ~~rate~~expense was primarily ~~related~~due to an increase in ~~our state blended~~pre-tax income and a decrease in tax ~~rate and non-deductible~~benefits recognized on exercise of stock options. The increase in the effective tax ~~treatment~~rates was due to lower excess tax benefits recognized on the exercise of ~~certain noninterest expenses.~~stock options when compared to the nine months ended September 30, 2021.

Financial Condition

As of September 30, ~~2019,~~2022, our total assets ~~increased~~decreased to ~~$2.1~~$15.5 billion compared to ~~$2.0~~$16.0 billion as of December 31, ~~2018.~~2021. Shareholders’ equity ~~increased $39.4 million,~~decreased $0.3 billion, or ~~20.6%~~17.2%, to ~~$230.6 million~~$1.3 billion at September 30, ~~2019~~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 ~~discussed~~set 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, ~~2018~~2021 to ~~$156.2 million~~$1.4 billion at September 30, ~~2019.~~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 with~~driven by the ~~FRB and purchases~~purchase of securities ~~particularly during the first half of 2019~~and a decrease in digital asset deposits 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 appropriate~~a 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,~~$2.8 billion, or ~~154.8%~~32.4%, from ~~$357.2 million~~$8.6 billion at December 31, ~~2018~~2021 to ~~$909.9 million~~$11.4 billion at September 30, ~~2019. To supplement interest income earned on our loan portfolio, we~~2022. We invest in high quality mortgage-backed securities, collateralized mortgage obligations, ~~and~~other asset backed securities. Our securities portfolio has grown substantially due to the implementation of a hedging strategy and utilizing cash to purchase high quality available-for-sale securities. In March 2019, the Bank implemented a hedging strategy that includes purchases of interest rate floors and commercial mortgage-backed securities, primarily funded by callable brokered certificates of deposit. We entered into repurchase agreements to temporarily fund the purchase 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-rate commercial mortgage-backed securities and issued $325.0 million of callable brokered certificates of deposit related to this hedging strategy. The callable brokered certificates of deposit had an unamortized premium of $2.3 million and have an average life of 4.2 year as of September 30, 2019. These certificates of deposit are initially callable six months after issuance and monthly thereafter. The initial call dates for all callable brokered certificates of deposit are from October 2019 through January 2020. At September 30, 2019, we held a total of $196.0 million in callable certificates of deposit and $1.3 million of related unamortized premium, which was subsequently called after the end of the third quarter. In addition, we purchased $214.8 million in adjustable rate residential mortgage-backed securities duringmunicipal bonds. During the nine months ended September 30, ~~2019 and sold $30.0~~2022, we purchased $4.7 billion of securities, including $1.3 billion of U.S. Treasuries, $1.1 billion of tax-exempt municipal bonds, $1.1 billion of agency residential mortgage-backed securities, $432.6 million of U.S. agency securities excluding mortgage-backed securities, $348.3 million of private label commercial mortgage-backed securities, $291.4 million of agency commercial mortgage-backed securities, and $143.0 million of private label mortgage-backed securities. During the nine months ended September 30, 2022, we sold $507.2 million of longer duration securities and recognized a net loss of $0.8 million. In addition, we sold the related interest rate cap contracts that hedged a portion of the securities that were sold and a gain on sale of $0.4 million was recognized in other noninterest income.

During the nine months ended September 30, 2022, we purchased $5.0 billion notional amount of interest rate derivatives, including a $2.5 billion receive fixed/pay floating interest rate swap, a $1.5 billion forward starting pay fixed/receive floating interest rate swap, and a $1.0 billion interest rate floor, primarily as hedges against our securities portfolio. The receive fixed/pay floating interest rate swap and interest rate floor are intended to partially mitigate our exposure to a decline in net interest income in a declining rate environment, while the pay-fixed/receive float interest rate swap is a fair value hedge to partially mitigate a decline in accumulated other comprehensive income in a rising rate environment.

During the nine months ended September 30, 2022, we transferred, at fair value, $1.9 billion of residential mortgage-backed securities, commercial mortgage-backed securities, and ~~commercial government agency collateralized mortgage obligations.~~

municipal bonds from available-for-sale to held-to-maturity securities. Our decision to re-designate the securities was based on our ability and intent to hold these securities to maturity. Factors used in assessing the ability to hold these securities to maturity were future liquidity needs and sources of funding. The related net unrealized after-tax loss of $40.6 million remained in accumulated other comprehensive income and will be amortized as a yield adjustment through earnings over the remaining life of the securities, offsetting the related net amortization of premium on the transferred securities. No gain or loss was recognized at the time of the transfer.

The following tables summarize the contractual maturities and weighted-average yields of investment securities at September 30, ~~2019~~2022 and the amortized cost and ~~carrying~~fair 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.

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SECURITIES


																						One Year or Less				More Than One Year Through Five Years				More Than Five Years Through 10 Years				More Than 10 Years				Total
	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
September 30, 2022																					September 30, 2022
Securities Available-for-Sale:																					Securities Available-for-Sale:
U.S. Treasuries																					U.S. Treasuries	$	34,972	0.48	%	$	—	—		$	—	—		$	—	—		$	34,972	$	34,834	0.48	%
U.S. agency securities - excluding mortgage-backed securities																					U.S. agency securities - excluding mortgage-backed securities	—		—		8,705		2.06	%	1,392,998		2.51	%	—		—		1,401,703		1,401,123		2.50	%
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	—		—		—		—		—		—		1,765,029		3.24	%	1,765,029		1,681,119		3.24	%
Government agency collateralized mortgage obligation	—		—		—		—	—		—	246,689		2.67	%	246,689		246,323		2.67	%	Government agency collateralized mortgage obligation	—		—		—		—		—		—		1,226,242		2.12	%	1,226,242		1,161,537		2.12	%
Private-label collateralized mortgage obligation	—		—		—		—	—		—	27,385		3.86	%	27,385		27,741		3.86	%	Private-label collateralized mortgage obligation	—		—		129,635		4.52	%	—		—		1,119		4.73	%	130,754		126,961		4.53	%
Commercial mortgage-backed securities:	Commercial mortgage-backed securities:																				Commercial mortgage-backed securities:
Government agency mortgage-backed securities																					Government agency mortgage-backed securities	—		—		—		—		34,913		3.80	%	1,278,256		2.77	%	1,313,169		1,307,026		2.79	%
Government agency collateralized mortgage obligation																					Government agency collateralized mortgage obligation	—		—		—		—		10,204		2.51	%	—		—		10,204		9,964		2.51	%
Private-label collateralized mortgage obligation	—		—		—		—	—		—	363,782		3.14	%	363,782		380,780		3.14	%	Private-label collateralized mortgage obligation	—		—		—		—		—		—		487,732		3.22	%	487,732		463,144		3.22	%
Municipal bonds:																					Municipal bonds:
Tax-exempt																					Tax-exempt	—		—		—		—		—		—		2,329,021		1.88	%	2,329,021		1,928,011		1.88	%

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	—		—		—		—		—		—		209,288		3.06	%	209,288		203,528		3.06	%
Total securities available-for-sale																					Total securities available-for-sale	$	34,972	0.48	%	$	138,340	4.37	%	$	1,438,115	2.54	%	$	7,296,687	2.53	%	$	8,908,114	$	8,317,247	2.55	%

Securities Held-to-Maturity:																					Securities Held-to-Maturity:
U.S. Treasuries																					U.S. Treasuries	$	—	—		$	1,246,108	1.33	%	$	—	—		$	—	—		$	1,246,108	$	1,165,887	1.33	%

Residential mortgage-backed securities:																					Residential mortgage-backed securities:
Government agency mortgage-backed securities																					Government agency mortgage-backed securities	—		—		—		—		—		—		505,600		1.34	%	505,600		433,809		1.34	%
Government agency collateralized mortgage obligation																					Government agency collateralized mortgage obligation	—		—		—		—		35		0.32	%	101,301		1.57	%	101,336		89,880		1.57	%

Commercial mortgage-backed securities:																					Commercial mortgage-backed securities:

Government agency collateralized mortgage obligation																					Government agency collateralized mortgage obligation	—		—		—		—		53,383		1.77	%	—		—		53,383		43,167		1.77	%

Municipal bonds:																					Municipal bonds:
Tax-exempt																					Tax-exempt	—		—		—		—		—		—		800,492		2.45	%	800,492		630,699		2.45	%
Taxable																					Taxable	—		—		—		—		234,858		1.88	%	162,780		2.37	%	397,638		314,392		2.08	%

Total securities held-to-maturity																					Total securities held-to-maturity	$	—	—		$	1,246,108	1.33	%	$	288,276	1.86	%	$	1,570,173	2.03	%	$	3,104,557	$	2,677,834	1.73	%
Total securities	$	5	2.25	%	$	—	—	$	—	—	$	897,257	2.95	%	$	897,262	$	909,917	2.95	%	Total securities	$	34,972	0.48	%	$	1,384,448	1.63	%	$	1,726,391	2.42	%	$	8,866,860	2.44	%	$	12,012,671	$	10,995,081	2.34	%

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

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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


	September 30, 2022				December 31, 2021
	Amount		Percent		Amount		Percent

	(Dollars in thousands)
Real estate(1):
One-to-four family	$	37,636	8.0	%	$	105,098	11.8	%
Multi-family	9,028		1.9	%	56,751		6.3	%
Commercial	63,979		13.5	%	210,136		23.5	%
Construction	—		—		7,573		0.8	%
Commercial and industrial(2)	302,160		63.9	%	335,862		37.6	%

Reverse mortgage and other	1,270		0.3	%	1,410		0.2	%
Mortgage warehouse	58,760		12.4	%	177,115		19.8	%
Total gross loans held-for-investment	472,833		100.0	%	893,945		100.0	%
Deferred fees, net	(1,871)				275
Total loans held-for-investment	470,962				894,220
Allowance for loan losses	(3,176)				(6,916)
Total net loans held-for-investment	$	467,786			$	887,304
Loans held-for-sale(3)	$	924,644			$	893,194

________________________

(1)In 2022, the Company sold or transferred to held-for-sale real estate loans which decreased overall gross loans by approximately $197.2 million, net of participations purchased, compared to December 31, 2021.

(2)Commercial and industrial loans includes $302.2 million and $335.9 million of SEN Leverage loans as of September 30, 2022 and December 31, 2021, respectively.

(3)Loans held-for-sale include $891.5 million and $893.2 million of mortgage warehouse loans as of September 30, 2022 and December 31, 2021, respectively.

Commercial and Industrial Loans

Commercial and industrial loans comprise our largest loan segment. Such loans consist of U.S. dollar denominated loans to businesses that are collateralized almost exclusively by bitcoin, also known as our core lending product, SEN Leverage. The Bank does not lend on any digital asset other than bitcoin. Borrowers accessing SEN Leverage provide bitcoin as collateral in an amount greater than the credit eligible to be advanced. The Bank works with regulated digital asset exchanges and custodians as well as other indirect lenders, to act as its collateral custodians for such loans and to liquidate the collateral in the event of a decline in collateral coverage below levels required in the borrower’s loan agreement. At no time does the Bank directly hold the pledged bitcoin. 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. Specific collateral coverage ratios vary based on, among other factors, management’s credit evaluation of the customer. The outstanding balance of gross SEN Leverage loans was $302.2 million and $335.9 million at September 30, 2022 and December 31, 2021, respectively. At September 30, 2022, the bitcoin serving as collateral for the Bank's SEN Leverage loans amounted to $769.9 million. The Bank's high and low daily collateral values related to such lending during the nine months ended September 30, 2022 amounted to $1.6 billion and $314.6 million, respectively. The Bank's collateral coverage is subject to fluctuation due to the fair value of bitcoin serving as collateral.

In March 2022, the SEC released 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 safeguarding asset, both of which are measured at fair value. The Company adopted this guidance as of June 30, 2022 with retrospective application as of January 1, 2022 and concluded that as of June 30, 2022, $52.8 million of safeguarding liabilities and corresponding safeguarding assets were subject to the guidance in SAB 121 and were recorded on the statement of financial

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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

position. The bitcoin collateral for our SEN Leverage loans may be subject to SAB 121 depending on, among other factors, the underlying contracts with the custodians, including direct or indirect relationships with the custodian and the titling of the custodial accounts in the name of the Bank for the benefit of the borrowers. These specific collateral arrangements resulted in a risk profile consistent with the intent of SAB 121, and therefore were recorded on the statement of financial condition. This type of custodial arrangement is no longer being used by the Bank for new loans and existing arrangements are being replaced with those that are not subject to SAB 121. We will continue to emphasize SEN Leverage as our core lending product. For further information, see “Notes 1— Nature of Business and Summary of Significant Accounting Policies—Adopted Accounting Pronouncements” contained herein. At September 30, 2022, the balance of safeguarding liabilities and corresponding safeguarding assets was zero.

The repayment of loans is a source of additional liquidity for ~~us.~~the Bank. The following table details maturities and sensitivity to interest rate changes for our ~~loan portfolio~~loans held-for-investment at September 30, ~~2019:~~2022:

LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES


	September 30, 2019									September 30, 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	$	—	$	48	$	892	$	37,000	$	37,940
Multi-family	1,255		31,097		45,549		77,901		Multi-family	—		9,028		—		—		9,028
Commercial	38,265		128,332		156,136		322,733		Commercial	3,764		53,830		6,376		—		63,970
Construction	3,870		116		—		3,986

Commercial and industrial	12,515		2,048		—		14,563		Commercial and industrial	45,612		254,372		1		—		299,985
Consumer and other	76		—		—		76
Reverse mortgage	—		—		1,629		1,629

Reverse mortgage and other									Reverse mortgage and other	145		—		—		1,134		1,279
Mortgage warehouse	61,856		—		—		61,856		Mortgage warehouse	58,760		—		—		—		58,760
Total gross loans held-for-investment	$	117,844	$	162,428	$	414,912	$	695,184
Total loans held-for-investment									Total loans held-for-investment	$	108,281	$	317,278	$	7,269	$	38,134	$	470,962
Amounts with fixed rates	$	87,638	$	129,680	$	83,893	$	301,211	Amounts with fixed rates	$	1,320	$	62,851	$	81	$	324	$	64,576
Amounts with floating rates	$	30,206	$	32,748	$	331,019	$	393,973	Amounts with floating rates	$	106,961	$	254,427	$	7,188	$	37,810	$	406,386

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.

~~Nonperforming~~Nonaccrual loans decreased to ~~$6.7~~$3.7 million, or ~~0.96%~~0.79% of total loans, at September 30, ~~2019~~2022, compared to ~~$8.3~~$4.0 million, or ~~1.39%~~0.45% of total loans, at December 31, ~~2018.~~2021. The decrease in ~~nonperforming~~nonaccrual loans during the nine months ended September 30, ~~2019~~2022 was due primarily to ~~principal repayments on nonperforming commercial and industrial loans, offset partially by an increase~~a 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~~$3.7 million and ~~$8.3~~$4.0 million at September 30, ~~2019~~2022 and December 31, ~~2018,~~2021, respectively, or ~~0.32%~~0.02% and ~~0.42%~~0.03%, respectively, of total assets.

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The following table presents information regarding nonperforming assets at the dates indicated:

NONPERFORMING ASSETS


	September 30, 2019			December 31, 2018				September 30, 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	$	3,079		$	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	619			923

Total nonaccrual loans							Total nonaccrual loans	3,698			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	3,698			4,003
Other real estate owned, net	81			31			Other real estate owned, net	45			—
Total nonperforming assets	$	6,788		$	8,334		Total nonperforming assets	$	3,743		$	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)	0.79		%	0.45		%
Ratio of allowance for loan losses to nonaccrual loans							Ratio of allowance for loan losses to nonaccrual loans	85.88		%	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	$	658		$	564
Restructured loans-accruing	631			213			Restructured loans-accruing	965			1,149
Total troubled debt restructurings	$	1,840		$	514		Total troubled debt restructurings	$	1,623		$	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,~~2022, the Company held ~~nine~~eight loans ~~amounting to $1.8~~totaling $1.6 million ~~which~~that were TDRs, compared to ~~seven~~eight loans ~~amounting to $0.5~~totaling $1.7 million at December 31, ~~2018.~~2021.

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

Table of Contents

The following table presents the loan balances by segment as well as risk rating. No assets were classified as loss during the periods presented.

LOAN CLASSIFICATION


	Credit Risk Grades
	Pass		Special Mention		Substandard		Doubtful		Total

	(Dollars in thousands)
September 30, 2022
Real estate loans:
One-to-four family	$	33,838	$	1,023	$	3,079	$	—	$	37,940
Multi-family	9,028		—		—		—		9,028
Commercial	59,548		3,247		1,175		—		63,970

Commercial and industrial	299,985		—		—		—		299,985

Reverse mortgage and other	660		—		619		—		1,279
Mortgage warehouse	58,760		—		—		—		58,760
Total loans held-for-investment	$	461,819	$	4,270	$	4,873	$	—	$	470,962


	Credit Risk Grades
	Pass		Special Mention		Substandard		Doubtful		Total

	(Dollars in thousands)
December 31, 2021
Real estate loans:
One-to-four family	$	102,307	$	451	$	3,080	$	—	$	105,838
Multi-family	56,855		—		—		—		56,855
Commercial	199,598		10,528		—		—		210,126
Construction	7,502		—		—		—		7,502
Commercial and industrial	335,362		—		—		—		335,362

Reverse mortgage and other	499		—		923		—		1,422
Mortgage warehouse	177,115		—		—		—		177,115
Total loans held-for-investment	$	879,238	$	10,979	$	4,003	$	—	$	894,220

Allowance for Loan Losses

We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks inherent in our loan portfolio. The amount of the allowance for loan losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts, or at all. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.

~~In reviewing our loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality~~

Table of ~~individual loans. Some of the risk elements we consider include:~~ Contents

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


	Three Months Ended						Nine Months Ended
	September 30, 2022			June 30, 2022			September 30, 2022			September 30, 2021

	(Dollars in thousands)
Allowance for loan losses at beginning of period	$	4,442		$	4,442		$	6,916		$	6,916
Charge-offs(1):
Real estate:
One-to-four family	665			—			665			—







Total charge-offs	665			—			665			—










Total recoveries	—			—			—			—
Net charge-offs	665			—			665			—
Reversal of provision for loan losses	(601)			—			(3,075)			—
Allowance for loan losses at period end	$	3,176		$	4,442		$	3,176		$	6,916

Total loans outstanding (end of period)	$	470,962		$	599,113		$	470,962		$	816,661
Average loans outstanding	$	570,270		$	856,741		$	738,881		$	761,136

Allowance for loan losses to period end loans	0.67		%	0.74		%	0.67		%	0.85		%
Net charge-offs to average total loans	0.12		%	0.00		%	0.09		%	0.00		%
Net charge-offs to average total loans by segment:
Real estate:
One-to-four family	0.85		%	0.00		%	0.74		%	0.00		%

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

Total gross loans outstanding (end of period) $ 695,184
$ 694,585
Average loans outstanding $ 655,790
$ 694,272

Allowance for loan losses to period end loans 0.89 % 1.21 %
Net charge-offs (recoveries) to average loans 0.01 % (0.01 )%
________________________

(1)Includes write-downs arising from transfers of loans to held-for-sale.

Our allowance for loan losses at September 30, ~~2019~~2022, June 30, 2022 and September 30, ~~2018~~2021 was ~~$6.2~~$3.2 million, $4.4 million and ~~$8.4~~$6.9 million, respectively, or ~~0.89%~~0.67%, 0.74% and ~~1.21%~~0.85% 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 June 30, 2022 was due to decreases to the qualitative factors impacted by one-to-four-family COVID-19 related adjustments and volatility in collateral value related to SEN Leverage loans. The decrease in the ratio of the allowance for loan losses to loans held-for-investment from September 30, 2021 was primarily due to the lower risk profile of the loan portfolio as a result of the loan sales discussed above.

We had ~~$93,000 in~~$0.7 million of charge-offs and no recoveries for the three and nine months ended September 30, ~~2019 compared~~2022. During the three months ended September 30, 2022, $33.9 million of loans were transferred to held-for-sale and a $0.6 million fair value reduction was recorded as a write-down to the loans and a charge-off to the allowance. There were no charge-offs ~~of $6,000~~ and ~~$81,000 of~~no recoveries for the three and nine months ended September 30, ~~2018.~~2021.

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.

Table of Contents

The following table shows the allocation of the allowance for loan losses among loan categories and ~~certain other information~~percent 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					September 30, 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	$	266	8.0	%	$	1,023	11.8	%
Multi-family	653		0.09	%	483		0.08	%	Multi-family	97		1.9	%	682		6.3	%
Commercial	2,791		0.40	%	3,854		0.65	%	Commercial	370		13.5	%	2,017		23.5	%
Construction	96		0.01	%	98		0.02	%	Construction	—		—		776		0.8	%
Commercial and industrial	312		0.04	%	156		0.03	%	Commercial and industrial	2,173		63.9	%	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	12		0.3	%	12		0.2	%
Mortgage warehouse	250		0.04	%	229		0.04	%	Mortgage warehouse	258		12.4	%	840		19.8	%
Total allowance for loan losses	$	6,191	0.89	%	$	6,723	1.13	%
Total									Total	$	3,176	100.0	%	$	6,916	100.0	%

________________________

(1)Loan ~~category~~amount as a percentage of total ~~gross~~ loans.

Deposits

Deposits are the major source of funding for the ~~Company. We offer a variety of deposit products including interest and noninterest bearing demand accounts, money market and savings accounts and certificates of deposit,~~Company, substantially all of which ~~we market at competitive pricing. We generate deposits~~are derived from our ~~customers on a relationship basis and through the efforts of our commercial lending officers and our business banking officers.~~digital asset customer base. Deposits ~~remained flat at $1.8~~decreased $1.1 billion or 7.4% to $13.2 billion at September 30, ~~2019~~2022, compared to $14.3 billion at December 31, ~~2018.~~2021. Noninterest bearing deposits totaled ~~$1.4~~$12.0 billion, ~~(representing~~representing approximately ~~75.5%~~90.7% of total ~~deposits)~~deposits at September 30, ~~2019,~~2022, compared to ~~$1.6~~$14.2 billion, ~~(representing~~representing approximately ~~88.7%~~99.5% of total ~~deposits)~~deposits at December 31, 2018. Total deposits increased slightly due to the issuance of $325.0 million in callable brokered certificates of deposit associated with the implementation of a hedging strategy, offset by the sale of the San Marcos branch, which reduced total deposits by $74.5 million.2021. The decrease in noninterest bearing deposits ~~reflect changes~~as a percentage of total deposits was due to the utilization of brokered certificates of deposit that were issued during the three months ended September 30, 2022 as part of the Company’s liability management strategy.

At September 30, 2022, deposits by foreign depositors amounted to $5.2 billion or 39.1% 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 $6.3 billion in deposits, or approximately 47.9% of total deposits at September 30, 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 $11.8 billion at September 30, 2022. The amounts stated for uninsured deposits as of the reported period are estimates due to the impracticability of precisely measuring amounts of uninsured deposits for accounts held through fiduciary relationships, some portion of which may qualify for “pass-through” insurance coverage under FDIC regulations. Accordingly, a portion of our reported uninsured deposits may be eligible for pass-through deposit insurance coverage. There were no uninsured certificates of deposit at September 30, 2022.

Our growth has been accompanied by significant fluctuations in the level of our deposits, in particular our deposits from customers in the digital asset industry. The Bank’s average total digital asset deposits during the nine months ended September 30, 2022 amounted to $13.5 billion, the high and low daily total digital asset deposit levels during such time were $17.6 billion and $11.1 billion, respectively, compared to an average of $10.2 billion during the year ended December 31, 2021, and high and low daily deposit levels of ~~our digital currency customers. While deposits may fluctuate in~~$16.0 billion and $4.6 billion, respectively.

Table of Contents

Demand for new deposit accounts is generated by the ~~ordinary course of~~Company’s banking platform for innovators that includes the SEN, which is enabled through Silvergate’s proprietary API, and other cash management solutions. These tools enable Silvergate’s clients to grow their business ~~we continue to add new digital currency customers each quarter.~~

and scale operations. The following table presents a breakdown of our digital ~~currency~~asset customer base and the deposits held by such customers at the dates noted below:


	September 30, 2022			December 31, 2021
	Number of Customers	Total Deposits(1)		Number of Customers	Total Deposits(1)

	(Dollars in millions)
Digital asset exchanges	108	$	7,579	94	$	8,288
Institutional investors	1,069	3,043		894	4,220
Other customers	500	1,247		393	1,603
Total	1,677	$	11,869	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%~~0.05% and ~~0.41%~~0.10%, respectively, for the nine months ended September 30, ~~2019 as~~2022, compared to ~~0.11%~~0.00% and ~~0.18%~~0.01%, respectively, for the nine 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.

2021.

The following table presents the average balances and average rates paid on deposits for the periods indicated:

COMPOSITION OF DEPOSITS


	Nine Months Ended September 30, 2022				Year Ended December 31, 2021
	Average Balance		Average Rate		Average Balance		Average Rate

	(Dollars in thousands)
Noninterest bearing demand accounts(1)	$	13,614,495	—		$	10,319,141	—
Interest bearing accounts:
Interest bearing demand accounts	4,076		0.03	%	21,310		0.12	%
Money market and savings accounts(2)	61,526		0.05	%	70,215		0.15	%



Certificates of deposit	319,584		2.18	%	612		0.65	%
Total interest bearing deposits	385,186		1.82	%	92,137		0.15	%
Total deposits	$	13,999,681	0.05	%	$	10,411,278	0.00	%

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:

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 $5.0 billion and $3.1 billion of foreign deposits for the ~~maturities of our certificates of deposit as of~~nine months ended September 30, ~~2019:~~2022 and the year ended December 31, 2021, respectively

~~MATURITIES OF CERTIFICATES OF DEPOSIT~~

Three
Months
or Less Over
Three
Through
Six
Months Over Six
Through
Twelve
Months Over
Twelve
Months Total

(Dollars in thousands)
$100,000 or more $ 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
(2)Money market and savings accounts includes an average balance of $0.5 million of foreign deposits with an average rate paid of 0.02% and 0.05% for the nine months ended September 30, 2022 and the year ended December 31, 2021, respectively.

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,~~2022, approximately ~~$695.7 million~~$2.7 billion in ~~real estate~~ loans and securities were pledged as collateral for our FHLB borrowings. We ~~utilize~~may 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,~~2022, we had ~~$529.4~~$700.0 million of outstanding FHLB advances and had an additional $1.6 billion in available borrowing capacity from the FHLB. ~~Our use~~

Table 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.~~Contents

The following table sets forth certain information on our overnight FHLB borrowings ~~during~~as of the ~~periods presented:~~dates indicated:

FHLB ADVANCES

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 %


	September 30, 2022			December 31, 2021

	(Dollars in thousands)
Amount outstanding	$	700,000		$	—
Weighted average interest rate	3.18		%	—

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’s~~Bank’s borrowing capacity under the Federal Reserve’s discount window program was ~~$7.4~~$35.2 million as of September 30, ~~2019.~~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.~~2022.

The Company has also issued subordinated debentures, ~~obtained a term loan,~~ entered into repurchase agreements and ~~purchased~~has access to borrow federal ~~funds.~~funds or lines of credit with correspondent banks. At September 30, ~~2019,~~2022, these outstanding borrowings amounted to ~~$19.8~~$15.9 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,~~2022, the interest rate for the Company’s next scheduled payment was ~~5.94%~~7.13%, based on six-month LIBOR of ~~2.19%~~3.38%. 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,~~2022, the interest rate for the Company’s next scheduled payment was ~~3.97%~~5.14%, based on three-month LIBOR of ~~2.12%~~3.29%. 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.

Other Borrowings. At September 30, ~~2019,~~2022, the Company had no outstanding balance of repurchase agreements or federal funds purchased and had available lines of credit of ~~$32.0~~$138.0 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.

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We maintain high levels of liquidity for our customers who operate in the digital ~~currency~~asset 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 is~~we 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 ~~present~~result in liquidity issues or require any borrowing by the Company or the Bank. In addition, to the extent that SEN participants fully withdraw funds from the Bank, ~~no material~~an extreme liquidity ~~issues or borrowing needs would~~event can be ~~presented~~mitigated since the majority of SEN ~~deposit funds~~participants deposits are held in liquid assets, such as available-for-sale securities and cash, or used to fund short-term mortgage warehouse loans or SEN Leverage loans. In addition, the Bank has access to other ~~short duration liquid assets.~~potential funding sources.

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, reverse repurchase agreements, other lines of credit and ~~if necessary,~~ brokered certificates of deposit. At September 30, 2019, 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,~~2022, we had ~~$529.4 million~~$1.6 billion of available borrowing capacity from the FHLB, ~~$7.4~~$35.2 million of available borrowing capacity from the FRB and available lines of credit of ~~$32.0~~$138.0 million with other correspondent banks. Cash and cash equivalents at September 30, ~~2019~~2022 were ~~$160.3 million.~~$1.9 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 aware~~At September 30, 2022, we had $1.2 billion 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.

Capital Resources

~~Non-GAAP Financial Measures~~

~~Our accounting~~Shareholders’ equity decreased $277.5 million to $1.3 billion at September 30, 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 $513.2 million due to the decrease in unrealized gains on available-for-sale securities portfolio and ~~reporting policies conform to GAAP~~derivatives, partially offset by a $134.4 million increase in additional paid-in capital driven by common stock issuance in exchange for assets acquired and the prevailing practices in the banking industry. However, we also evaluate our performance 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, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP in our statements 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~~net income for the nine months ended September 30, ~~2019 in order~~2022 of $109.3 million.

The Company and the Bank are subject to ~~present our results~~various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of ~~operations~~its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of common equity Tier 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for ~~that period~~risk

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weights ranging from 0% to 1,250%. The Bank is also required to maintain capital at a minimum level based on ~~a basis consistent with our historical operations. On November 15, 2018,~~quarterly average assets, which is known as the leverage ratio.

As of September 30, 2022, the Company and the Bank ~~entered into a purchase~~were in compliance with all applicable regulatory capital requirements to which they were subject, and ~~assumption agreement~~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 ~~HomeStreet Bank~~all regulatory capital standards applicable to ~~sell~~us.

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 that~~Bank 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)
September 30, 2022
The Company
Tier 1 leverage ratio	$	1,672,886	10.71	%	$	624,666	4.00	%	N/A		N/A
Common equity tier 1 capital ratio	1,463,765		40.72	%	161,753		4.50	%	N/A		N/A
Tier 1 risk-based capital ratio	1,672,886		46.54	%	215,671		6.00	%	N/A		N/A
Total risk-based capital ratio	1,676,080		46.63	%	287,561		8.00	%	N/A		N/A
The Bank
Tier 1 leverage ratio	1,631,662		10.45	%	624,574		4.00	%	$	780,717	5.00	%
Common equity tier 1 capital ratio	1,631,662		45.45	%	161,568		4.50	%	233,376		6.50	%
Tier 1 risk-based capital ratio	1,631,662		45.45	%	215,424		6.00	%	287,232		8.00	%
Total risk-based capital ratio	1,634,856		45.53	%	287,232		8.00	%	359,040		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 loss~~an increase or decrease of future net interest income or ~~a loss~~an increase or decrease of current fair market value.

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Exposure to interest rates is managed by structuring the balance sheet in a ‘business as usual’ or ‘base case’ scenario. We do not enter into instruments such as leveraged derivatives, financial options or financial future contracts for the purpose of reducing interest rate risk. We hedge interest rate risk by utilizing interest rate floors, interest rate caps, and interest rate ~~caps.~~swaps. The interest rate floors and interest rate swaps hedge our cash and securities and the interest rate caps hedge our ~~subordinated debentures.~~securities. Based on the nature of our operations, we are not materially 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 significant~~While the Company is asset sensitive, ~~position,~~ we have ~~hedged~~various instruments that help reduce our interest rate risk exposure in a ~~decreasing~~declining rate environment, ~~by implementing our hedging strategy. For a discussion of our hedging strategy, see “—Financial Condition—Securities.”~~such as interest rate floors, interest rate swaps, 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)
September 30, 2022
Assets
Interest earning assets
Loans(1)	$	1,256,161	$	6,604	$	38,891	$	1,301,656	$	93,950	$	1,395,606
Securities(2)	5,858,026		50,836		182,249		6,091,111		5,389,462		11,480,573
Interest earning deposits in other banks	1,417,704		250		2,036		1,419,990		980		1,420,970
Total earning assets	$	8,531,891	$	57,690	$	223,176	$	8,812,757	$	5,484,392	$	14,297,149
Liabilities
Interest bearing liabilities
Interest bearing deposits	$	48,446	$	—	$	—	$	48,446	$	358	$	48,804
Certificates of deposit	400,081		517,712		266,110		1,183,903		—		1,183,903
Total interest bearing deposits	448,527		517,712		266,110		1,232,349		358		1,232,707
FHLB advances	700,000		—		—		700,000		—		700,000
Total interest bearing liabilities	$	1,148,527	$	517,712	$	266,110	$	1,932,349	$	358	$	1,932,707
Period gap	$	7,383,364	$	(460,022)	$	(42,934)	$	6,880,408	$	5,484,034	$	12,364,442
Cumulative gap	$	7,383,364	$	6,923,342	$	6,880,408	$	6,880,408	$	12,364,442


Ratio of cumulative gap to total earning assets						51.64		%				48.42		%				48.12		%				48.12		%				86.48		%

________________________


~~(1)~~	~~Includes loans held-for-sale.~~


~~(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.

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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:~~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	%
September 30, 2022											September 30, 2022	(14.81)	%	0.00	%	13.66	%	24.79	%	34.71	%

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.~~2022.

ECONOMIC VALUE OF EQUITY ANALYSIS UNDER A STATIC BALANCE SHEET, PARALLEL INTEREST RATE SHOCK


As of:	-100 bps		Flat		+100 bps		+200 bps		+300 bps
September 30, 2022	10.20	%	0.00	%	(10.01)	%	(19.54)	%	(28.50)	%

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 ~~(as~~as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, ~~2019.~~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, ~~2019~~2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

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 addition~~There have been no material changes to the ~~other information set forth in this report, you should carefully consider the other~~risk factors ~~discussed~~disclosed in the ~~“Risk Factors” section of our registration statement~~Company’s Annual Report on Form ~~S-1~~10-K for the year ended December 31, 2021, as filed with the SEC on ~~October~~February 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, the Company had one employee exercise options for shares of 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.None.

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, in reliance upon Rule 701 promulgated under Section 3(b) of the Securities Act as a transaction by an issuer pursuant to benefit plans and contracts relating to compensation as provided under Rule 701.

On November 12, 2019, the Company completed its initial public offering 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 Company and 2,508,728 shares of which were sold by the selling shareholders. The net proceeds to the Company from the IPO were $6.8 million after deducting 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 SEC 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 prospectus filed with the SEC on November 8, 2019 pursuant to Rule 424(b)(4) under the Securities Act.

~~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.

Table of Contents

Item 6. Exhibits


Number		Description


~~Number~~3.1		~~Description~~

~~3.1~~	Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 28, 2019 (File No. 333-228446)).
3.2		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 ~~of the Registrant’s Registration Statement~~to Silvergate Capital Corporation’s Current Report on Form ~~S-1~~8-K filed ~~with the Securities and Exchange Commission~~ on ~~October 28, 2019 (File No. 333-228446))~~June 16, 2022).
~~31.1~~3.3		Articles Supplementary of 5.375% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to Exhibit 3.1 to Silvergate Capital Corporation’s Current Report on Form 8-K filed on August 4, 2021).
3.4		Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Silvergate Capital Corporation’s Current Report on Form 8-K filed on June 16, 2022).

31.1		Rule 13a-14(a) Certification of the Principal Executive Officer.
31.2		Rule 13a-14(a) Certification of the Principal Financial Officer.
32.1		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.
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)

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SILVERGATE CAPITAL CORPORATION

Date:

~~December 4, 2019~~November 7, 2022

By:

/s/ Alan J. Lane

Alan J. Lane

~~President and~~ Chief Executive Officer (Principal Executive Officer)

Date:

~~December 4, 2019~~November 7, 2022

By:

/s/ Antonio Martino

Antonio Martino

Chief Financial Officer (Principal Financial and Accounting Officer)

6365



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

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



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

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



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

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



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

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



Operating leases	September 30, 2019

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



	Nine Months Ended September 30, 2019

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



	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			Interest Variance			Volume			Rate			Interest Variance

	(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



	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



	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



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