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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, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from __________________  to  __________________
Commission file number 001-39123
SILVERGATE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Maryland33-0227337
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
4250 Executive Square, Suite 300, La Jolla, CA 92037
(Address of principal executive offices, including zip code)
(858) 362-6300
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, par value $0.01 per shareSINew 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 ASI PRANew York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
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Emerging growth company
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Non-accelerated Filer
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Smaller reporting company
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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 October 31, 2022, the registrant had 31,658,603 shares of Class A voting common stock outstanding.


SILVERGATE CAPITAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page

1
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,
2022		December 31,
2021
ASSETS
Cash and due from banks$465,853 $208,193 
Interest earning deposits in other banks1,420,970 5,179,753 
Cash and cash equivalents1,886,823 5,387,946 
Securities available-for-sale, at fair value8,317,247 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 value924,644 893,194 
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 investments60,428 34,010 
Accrued interest receivable78,799 40,370 
Premises and equipment, net3,518 3,008 
Intangible assets194,045 — 
Derivative assets153,990 34,056 
Other assets275,503 100,348 
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 accounts1,232,707 77,156 
Total deposits13,238,426 14,290,628 
Federal home loan bank advances
700,000 — 
Subordinated debentures, net15,855 15,845 
Accrued expenses and other liabilities181,714 90,186 
Total liabilities14,135,995 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 capital1,555,996 1,421,592 
Retained earnings295,115 193,860 
Accumulated other comprehensive loss(520,085)(6,922)
Total shareholders’ equity1,331,345 1,608,836 
Total liabilities and shareholders’ equity$15,467,340 $16,005,495 
See accompanying notes to unaudited consolidated financial statements
2
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited) 
Three Months Ended
September 30,		Nine Months Ended
September 30,
 2022202120222021
Interest income
Loans, including fees$20,663 $16,972 $61,004 $50,727 
Taxable securities47,401 14,000 96,166 25,916 
Tax-exempt securities14,412 5,014 42,416 9,832 
Other interest earning assets8,001 1,755 12,394 4,633 
Dividends and other289 195 1,211 804 
Total interest income90,766 37,936 213,191 91,912 
Interest expense
Deposits5,221 26 5,244 107 
Federal home loan bank advances and other4,399 — 5,265 — 
Subordinated debentures258 247 753 744 
Total interest expense9,878 273 11,262 851 
Net interest income before provision for loan losses80,888 37,663 201,929 91,061 
Reversal of provision for loan losses(601)— (3,075)— 
Net interest income after provision for loan losses81,489 37,663 205,004 91,061 
Noninterest income
Deposit related fees7,953 8,171 25,729 26,603 
Mortgage warehouse fee income482 665 1,688 2,372 
Gain (loss) on sale of securities, net— 5,182 (804)5,182 
Loss on sale of loans, net(329)— (329)— 
Other income348 24 834 44 
Total noninterest income8,454 14,042 27,118 34,201 
Noninterest expense
Salaries and employee benefits19,632 10,729 51,532 31,979 
Occupancy and equipment822 523 2,471 1,736 
Communications and data processing3,210 1,793 8,939 5,210 
Professional services4,314 2,471 13,548 6,782 
Federal deposit insurance1,217 4,297 4,474 10,437 
Correspondent bank charges902 572 2,531 1,881 
Other loan expense529 299 1,595 753 
Other general and administrative2,527 1,655 6,633 4,686 
Total noninterest expense33,153 22,339 91,723 63,464 
Income before income taxes56,790 29,366 140,399 61,798 
Income tax expense13,462 5,874 31,080 4,661 
Net income43,328 23,492 109,319 57,137 
Dividends on preferred stock2,688 — 8,064 — 
Net income available to common shareholders$40,640 $23,492 $101,255 $57,137 
Basic earnings per common share$1.28 $0.89 $3.21 $2.29 
Diluted earnings per common share$1.28 $0.88 $3.20 $2.26 
Weighted average common shares outstanding:
Basic31,655 26,525 31,505 24,927 
Diluted31,803 26,766 31,669 25,308 
See accompanying notes to unaudited consolidated financial statements
3
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In Thousands)
(Unaudited)
Three Months Ended
September 30,		Nine Months Ended
September 30,
 2022202120222021
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-maturity1,611 — 4,042 — 
Income tax effect33,383 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 effect21,894 471 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
4
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In Thousands, Except Share Data)
(Unaudited)

Preferred StockClass A Common StockClass B Common StockAdditional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Total
Shareholders’
Equity
SharesAmountSharesAmountSharesAmount
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, net200,000 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, 2021200,000 $2 26,535,611 $265 — $— $891,611 $175,485 $4,718 $1,072,081 
5
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Continued)
(In Thousands, Except Share Data)
(Unaudited)
Preferred StockClass A Common StockClass B Common StockAdditional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Total
Shareholders’
Equity
SharesAmountSharesAmountSharesAmount
Balance at January 1, 2022200,000 $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, 2022200,000 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, 2022200,000 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, 2022200,000 $2 31,658,603 $317 — $— $1,555,996 $295,115 $(520,085)$1,331,345 
See accompanying notes to unaudited consolidated financial statements

6
SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended September 30,
 20222021
Cash flows from operating activities
Net income$109,319 $57,137 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization2,531 1,900 
Amortization of securities premiums and discounts, net126,247 28,069 
Amortization of loan premiums and discounts and deferred loan origination fees and costs, net(1,854)422 
Stock-based compensation2,831 1,373 
Reversal of provision for loan losses(3,075)— 
Originations of loans held-for-sale(7,776,631)(9,440,843)
Proceeds from sales of loans held-for-sale7,776,994 9,488,357 
Other gains, net(2,321)(7,650)
Other, net(1,844)(655)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets5,268 (24,216)
Accrued expenses and other liabilities31,680 15,238 
Net cash provided by operating activities269,145 119,132 
Cash flows from investing activities
Purchases of securities available-for-sale(3,481,713)(6,921,562)
Proceeds from sale of securities available-for-sale507,186 338,851 
Proceeds from paydowns and maturities of securities available-for-sale478,086 215,278 
Purchases of securities held-to-maturity(1,250,420)— 
Proceeds from paydowns and maturities of securities held-to-maturity80,521 — 
Loan payments and (originations), net227,182 (63,415)
Proceeds from sale of loans, net165,665 — 
Purchase of federal home loan and federal reserve bank stock, net(24,758)(19,160)
Purchase of premises and equipment(1,394)(267)
Payments to acquire intangible assets(62,471)— 
Payments for derivative contracts, net(46,183)(21,540)
Other, net(1,715)— 
Net cash used in investing activities(3,410,014)(6,471,815)
Cash flows from financing activities
Net change in noninterest bearing deposits(2,207,753)6,452,739 
Net change in interest bearing deposits1,155,551 (38,245)
Net change in federal home loan bank advances700,000 — 
Proceeds from common stock issuance, net(57)567,521 
Proceeds from preferred stock issuance, net— 193,653 
Payments of preferred stock dividends(8,064)— 
Proceeds from stock option exercise378 1,559 
Taxes paid related to net share settlement of equity awards(309)(2,143)
Net cash (used in) provided by financing activities(360,254)7,175,084 
Net (decrease) increase in cash and cash equivalents(3,501,123)822,401 
Cash and cash equivalents, beginning of period5,387,946 2,962,087 
Cash and cash equivalents, end of period$1,886,823 $3,784,488 
Supplemental cash flow information:
Cash paid for interest$8,110 $1,004 
Income taxes paid, net12,789 3,702 
Supplemental noncash disclosures:
Transfers of securities from available-for-sale to held-to-maturity$1,945,473 $— 
Common stock issued in exchange for assets acquired131,574 — 
Loans held-for-investment transferred to loans held-for-sale56,884 — 
Loans held-for-sale transferred to loans held-for-investment11,780 — 
See accompanying notes to unaudited consolidated financial statements
7
SILVERGATE CAPITAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Nature of Business and Summary of Significant Accounting Policies
Nature of Business
The accompanying consolidated financial statements include the accounts of Silvergate Capital Corporation, a Maryland corporation, and its wholly-owned subsidiary, Silvergate Bank (the “Bank”), collectively referred to as (the “Company” or “Silvergate”).
The Company’s assets consist primarily of its investment in the Bank and its primary activities are conducted through the Bank. The Company is a registered bank holding company that is subject to supervision by the Board of Governors of the Federal Reserve (“Federal Reserve”). The Bank is subject to regulation by the California Department of Financial Protection and Innovation, Division of Financial Institutions (“DFPI”), and, as a Federal Reserve member bank since 2012, the Federal Reserve Bank of San Francisco (“FRB”). The Bank’s deposits are insured up to legal limits by the Federal Deposit Insurance Corporation (“FDIC”).
Financial Statement Preparation and Presentation
The accompanying interim consolidated financial statements have been prepared by the Company, without an audit, in accordance with the instructions to the Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnotes necessary for a fair presentation of its consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”).
In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, consisting of only normal and recurring adjustments, necessary for a fair statement of the Company’s consolidated financial statements. These consolidated statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K dated 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 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.
Recently Issued Accounting Pronouncements Not Yet Effective
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (or “ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326) to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (or “CECL”) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held to maturity debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. These amendments were initially effective for fiscal years beginning after December 15, 2019 for SEC registrants and after December 15, 2020, for Public Business Entities, or PBEs. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (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. The new methodology replaces the other-than-temporary impairment model and requires the recognition of an allowance for 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
8
beginning of the first reporting period in which the guidance is effective. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. The amendment eliminates the accounting guidance for troubled debt restructurings by creditors in Subtopic 310-40, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrow is experiencing financial difficulty. In addition, the update requires public business entities to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination. In preparation for the adoption of 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. In relation to the loan portfolio, significant progress has been made in the implementation efforts, which include model development, documentation, and validation, identification of data sources, processes and internal controls, and establishment of formal governing policies and standards. The Company has determined loan pool segmentation under CECL, as well as 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 has not yet completed an internal and third-party model validation and has not yet finalized selection of internal controls and 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 impact upon adoption will depend on a variety of factors as of the date of 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 regulatory capital amounts and ratios. Federal banking regulatory agencies have provided relief for an initial decrease at adoption by allowing the impact to be phased-in over three years on a straight-line basis.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (or “ASU 2020-04”), which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the London Interbank Offered Rate (or “LIBOR”) or other interbank offered rate (reference rates) on financial reporting. 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 Asset Liability Management Committee to address the LIBOR transition and phase-out issues. The Company has identified its LIBOR-based contracts that will be impacted by the transition away from of LIBOR, and is incorporating fallback language in negotiated contracts and incorporating non-LIBOR reference rate and/or fallback language in new contracts to prepare for these changes. The Company is continuing to evaluate the impact that ASU 2020-04 will have on those financial assets where LIBOR is used as an index rate.
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
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 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
9
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 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 securities1,401,703 7,339 (7,919)1,401,123 
Residential mortgage-backed securities:
Government agency mortgage-backed securities1,765,029 — (83,910)1,681,119 
Government agency collateralized mortgage obligation1,226,242 — (64,705)1,161,537 
Private-label collateralized mortgage obligation130,754 — (3,793)126,961 
Commercial mortgage-backed securities:
Government agency mortgage-backed securities1,313,169 2,919 (9,062)1,307,026 
Government agency collateralized mortgage obligation10,204 — (240)9,964 
Private-label collateralized mortgage obligation487,732 — (24,588)463,144 
Municipal bonds:
Tax-exempt2,329,021 — (401,010)1,928,011 
Asset backed securities:
Government sponsored student loan pools209,288 — (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 securities505,600 — (71,791)433,809 
Government agency collateralized mortgage obligation101,336 — (11,456)89,880 
Commercial mortgage-backed securities:
Government agency collateralized mortgage obligation53,383 — (10,216)43,167 
Municipal bonds:
Tax-exempt800,492 — (169,793)630,699 
Taxable397,638 — (83,246)314,392 
Total held-to-maturity$3,104,557 $— $(426,723)$2,677,834 
10
December 31, 2021
 Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
 (Dollars in thousands)
Available-for-sale securities
U.S. agency securities - excluding mortgage-backed securities$1,177,452 $7,320 $(6,005)$1,178,767 
Residential mortgage-backed securities:
Government agency mortgage-backed securities1,428,365 130 (14,378)1,414,117 
Government agency collateralized mortgage obligation1,659,125 1,617 (15,739)1,645,003 
Private-label collateralized mortgage obligation1,425 19 (11)1,433 
Commercial mortgage-backed securities:
Government agency mortgage-backed securities1,106,680 1,886 (4,962)1,103,604 
Government agency collateralized mortgage obligation212,266 19 (1,370)210,915 
Private-label collateralized mortgage obligation144,204 227 (797)143,634 
Municipal bonds:
Tax-exempt2,272,794 33,153 (8,210)2,297,737 
Taxable403,279 341 (6,016)397,604 
Asset backed securities:
Government sponsored student loan pools233,374 97 (1,026)232,445 
Total available-for-sale$8,638,964 $44,809 $(58,514)$8,625,259 
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 time of the transfer.
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, 2021.
At September 30, 2022, the total fair value of securities issued by one individual issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity was $261.0 million.
11
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 Months12 Months or MoreTotal
 Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
 (Dollars in thousands)
Available-for-sale securities
U.S. Treasuries$34,834 $(138)$— $— $34,834 $(138)
U.S. agency securities - excluding mortgage-backed securities199,505 (1,661)400,765 (6,258)600,270 (7,919)
Residential mortgage-backed securities:
Government agency mortgage-backed securities1,547,470 (75,738)133,649 (8,172)1,681,119 (83,910)
Government agency collateralized mortgage obligation33,617 (1,180)1,127,920 (63,525)1,161,537 (64,705)
Private-label collateralized mortgage obligation126,372 (3,776)377 (17)126,749 (3,793)
Commercial mortgage-backed securities:
Government agency mortgage-backed securities587,420 (7,639)119,201 (1,423)706,621 (9,062)
Government agency collateralized mortgage obligation9,964 (240)— — 9,964 (240)
Private-label collateralized mortgage obligation394,780 (14,900)68,364 (9,688)463,144 (24,588)
Municipal bonds:
Tax-exempt1,644,444 (324,689)283,567 (76,321)1,928,011 (401,010)
Asset backed securities:
Government sponsored student loan pools111,687 (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 Months12 Months or MoreTotal
Fair ValueUnrecognized
Losses		Fair ValueUnrecognized
Losses		Fair ValueUnrecognized
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 securities433,809 (76,806)— — 433,809 (76,806)
Government agency collateralized mortgage obligation95 (2,524)89,785 (11,755)89,880 (14,279)
Commercial mortgage-backed securities:
Government agency collateralized mortgage obligation43,167 (11,227)— — 43,167 (11,227)
Municipal bonds:
Tax-exempt621,808 (206,751)8,891 (2,315)630,699 (209,066)
Taxable297,112 (85,838)17,280 (2,659)314,392 (88,497)
$2,561,878 $(463,367)$115,956 $(16,729)$2,677,834 $(480,096)
12
December 31, 2021
 Less than 12 Months12 Months or MoreTotal
 Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
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 securities1,357,080 (14,378)70 — 1,357,150 (14,378)
Government agency collateralized mortgage obligation1,513,388 (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 securities435,055 (4,962)— — 435,055 (4,962)
Government agency collateralized mortgage obligation189,397 (1,370)— — 189,397 (1,370)
Private-label collateralized mortgage obligation98,173 (656)6,791 (141)104,964 (797)
Municipal bonds:
Tax-exempt1,025,689 (8,210)— — 1,025,689 (8,210)
Taxable339,041 (6,016)— — 339,041 (6,016)
Asset backed securities:
Government sponsored student loan pools168,204 (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, 2022, the Company’s investment securities had gross unrealized losses totaling approximately $1.1 billion, compared to approximately $58.5 million at December 31, 2021. The Company analyzes all of its securities with an unrealized loss position. For each security, the Company analyzed the credit quality and performed a projected cash flow analysis. In analyzing the credit quality, management may consider whether the securities are issued by the federal government, its agencies or its sponsored entities, or non-governmental entities, whether downgrades by bond rating agencies have occurred, and if credit quality has deteriorated. When performing a cash flow analysis, the Company uses models that project prepayments, default rates, and loss severities on the collateral supporting the security, based on underlying loan level borrower and loan characteristics and interest rate assumptions. 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, 2022. Management continues to expect to recover the adjusted amortized cost basis of these securities.
As of September 30, 2022, the Company had 633 securities whose estimated fair value declined 10.13% from the Company’s amortized cost and at December 31, 2021, the Company had 323 securities whose estimated fair value declined 0.98% from the Company’s amortized cost. These unrealized losses on securities are primarily due to changes in market interest rates or widening of credit spreads since their purchase dates. Current unrealized losses are expected to be recovered as the securities approach their respective maturity dates. Management believes it will more than likely not 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 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, 2021, the Company received $338.9 million in proceeds and recognized $5.2 million of gains and no losses on sales of available-for-sale securities.
The amortized cost and estimated fair value of investment securities as of the periods presented by contractual maturity are shown below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the following table, the entire outstanding balance of
13
residential and 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 years138,340 134,166 2,243 2,170 
After five years through ten years1,438,115 1,435,430 1,406,395 1,401,733 
After ten years7,296,687 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 years1,246,108 1,165,887 — — 
After five years through ten years288,276 234,981 — — 
After ten years1,570,173 1,276,966 — — 
Total$3,104,557 $2,677,834 $— $— 
Note 3—Loans
The following disclosure reports the Company’s loan portfolio segments and classes. Segments are groupings of similar loans at a level in which the Company has adopted systematic methods of documentation for determining its allowance for loan and credit losses. Classes are a disaggregation of the portfolio segments. The Company’s loan portfolio segments are:
Real estate. Real estate loans 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 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 businesses 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. 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. Borrowers accessing SEN Leverage provide bitcoin or U.S. dollars as collateral in an amount greater than the line of credit eligible to be advanced. The Bank works with regulated digital asset exchanges and other indirect lenders, as the case may be, to both act as its collateral custodian for such loans, and to liquidate the collateral in the event of a decline in collateral coverage below levels required in the borrower’s loan agreement. At no time does the Bank directly hold the pledged bitcoin. 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 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 and other. From 2012 to 2014, the Company purchased home equity conversion mortgage (“HECM”) loans (also known as reverse mortgage loans) which are a special type of home loan, for homeowners aged 62 years or older, that requires no monthly mortgage payments and allows the borrower to receive payments from the lender. Reverse mortgage loan insurance is provided by the U.S. Federal Housing Administration through the HECM program which protects lenders from losses due to non-repayment of the loans when the outstanding loan balance exceeds collateral value at the time the loan is required to be repaid. Other loans consist of consumer loans and loans secured by personal property.
14
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. The Company holds legal title to such loans from the date they are funded by the Company until the loans are sold to secondary market investors pursuant to pre-existing take out commitments, 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. At September 30, 2022 and December 31, 2021, gross mortgage warehouse loans were approximately $1.0 billion and $1.1 billion, respectively.
A summary of loans as of the periods presented are as follows:
September 30,
2022		December 31,
2021
 (Dollars in thousands)
Real estate loans:
One-to-four family$37,636 $105,098 
Multi-family9,028 56,751 
Commercial63,979 210,136 
Construction— 7,573 
Commercial and industrial302,160 335,862 
Reverse mortgage and other1,270 1,410 
Mortgage warehouse58,760 177,115 
Total gross loans held-for-investment472,833 893,945 
Deferred fees, net(1,871)275 
Total loans held-for-investment470,962 894,220 
Allowance for loan losses(3,176)(6,916)
Total loans held-for-investment, net$467,786 $887,304 
Total loans held-for-sale(1)
$924,644 $893,194 
________________________
(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, 2022 and December 31, 2021, approximately $111.8 million and $381.0 million, respectively, of the Company’s gross loans held-for-investment were collateralized by various forms of real estate, primarily located in California. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. At September 30, 2022 and December 31, 2021, approximately $302.2 million and $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 the bitcoin drops precipitously. The Company monitors and 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.
Recorded investment in loans excludes accrued interest receivable due to immateriality. Accrued interest on loans held-for-investment totaled approximately $2.5 million and $3.3 million at September 30, 2022 and December 31, 2021, respectively.
15
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		ConstructionCommercial
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 losses287 (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		ConstructionCommercial
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		ConstructionCommercial
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		ConstructionCommercial 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.
16
 September 30, 2022
 One-to
-Four
Family		Multi-
Family		Commercial
Real Estate		ConstructionCommercial
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 allocation241 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 evaluated33,895 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 
 December 31, 2021
 One-to
-Four
Family		Multi-
Family		Commercial
Real Estate		ConstructionCommercial
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 allocation994 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 evaluated101,609 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 $— 
Commercial1,175 1,175 — 
Reverse mortgage and other613 619 — 
5,577 5,544 — 
With a specific allowance recorded:
Real estate loans:
One-to-four family291 295 25 
291 295 25 
Total impaired loans$5,868 $5,839 $25 
17
December 31, 2021
 Unpaid
Principal
Balance		Recorded
Investment		Specific
Allowance
 (Dollars in thousands)
With no specific allowance recorded:
Real estate loans:
One-to-four family$4,616 $3,927 $— 
Commercial1,955 1,956 — 
Reverse mortgage and other914 923 — 
7,485 6,806 — 
With a specific allowance recorded:
Real estate loans:
One-to-four family323 302 29 
323 302 29 
Total impaired loans$7,808 $7,108 $29 
Three Months Ended September 30,
 20222021
 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 
Commercial1,175 18 9,970 135 
Commercial and industrial— — 174 3 
Reverse mortgage and other614 — 893 — 
6,730 39 17,910 188 
With a specific allowance recorded:
Real estate loans:
One-to-four family294 2 301 6 
294 2 301 6 
Total impaired loans$7,024 $41 $18,211 $194 
18
Nine Months Ended September 30,
 20222021
 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 
Commercial1,625 66 9,890 396 
Commercial and industrial— — 212 12 
Reverse mortgage and other692 — 796 — 
6,504 152 17,159 598 
With a specific allowance recorded:
Real estate loans:
One-to-four family297 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 individually evaluated impaired loans, loans for which the accrual of interest has been discontinued and loans 90 days or more past due and still accruing interest.
The following tables present by loan class the aging analysis based on contractual terms, nonaccrual loans, and the Company’s recorded investment in loans held-for-investment as of the periods presented:
 September 30, 2022
30-59
Days
Past Due		60-89
Days
Past Due		Greater
than 89
Days
Past Due		Total
Past Due		CurrentTotalNonaccruingLoans
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 $— 
19
 December 31, 2021
 30-59
Days
Past Due		60-89
Days
Past Due		Greater
than 89
Days
Past Due		Total
Past Due		CurrentTotalNonaccruingLoans
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, 2022 and December 31, 2021, the Company had a recorded investment in TDRs of $1.6 million and $1.7 million, respectively. The Company has allocated $25,000 of specific allowance for those loans at September 30, 2022 and $29,000 at December 31, 2021. The Company has not committed to advance additional amounts on these TDRs. No loans were modified as TDRs during the three months ended September 30, 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 family1 $63 $136 
Three and Nine Months Ended September 30, 2021
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 family2 $547 $590 
20
The 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, 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, 2022 or 2021. There was no provision for loan loss or charge-offs for TDRs that subsequently defaulted during the three and nine months ended September 30, 2022 or 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
 PassSpecial MentionSubstandardDoubtfulTotal
 (Dollars in thousands)
September 30, 2022
Real estate loans:
One-to-four family$33,838 $1,023 $3,079 $— $37,940 
Multi-family9,028 — — — 9,028 
Commercial59,548 3,247 1,175 — 63,970 
Commercial and industrial299,985 — — — 299,985 
Reverse mortgage and other660 — 619 — 1,279 
Mortgage warehouse58,760 — — — 58,760 
Total loans held-for-investment$461,819 $4,270 $4,873 $— $470,962 
21
 Credit Risk Grades
 PassSpecial MentionSubstandardDoubtfulTotal
 (Dollars in thousands)
December 31, 2021
Real estate loans:
One-to-four family$102,307 $451 $3,080 $— $105,838 
Multi-family56,855 — — — 56,855 
Commercial199,598 10,528 — — 210,126 
Construction7,502 — — — 7,502 
Commercial and industrial335,362 — — — 335,362 
Reverse mortgage and other499 — 923 — 1,422 
Mortgage warehouse177,115 — — — 177,115 
Total loans held-for-investment$879,238 $10,979 $4,003 $— $894,220 
Purchases and Sales
The following table presents loans held-for-investment purchased and/or sold during the year by portfolio segment:
Nine Months Ended September 30,
20222021
Purchases
Sales(1)
PurchasesSales
(Dollars in thousands)
Real estate loans:
One-to-four family$— $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 no outstanding balance of related party loans at September 30, 2022 and $7.7 million outstanding as of December 31, 2021. During the nine months ended September 30, 2022, the Company received $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 overnight FHLB advances as of the dates indicated:
September 30,
2022		December 31,
2021
 (Dollars in thousands)
Amount outstanding$700,000 $— 
Weighted average interest rate3.18 %— 
FHLB advances or borrowing capacity can be secured with eligible collateral consisting of qualifying real estate loans or certain securities. Advances from the FHLB are subject to the FHLB’s collateral and underwriting requirements and as of September 30, 2022 and December 31, 2021, were limited in the aggregate to 35% of the Bank’s total assets. Loans and securities of approximately $2.7 billion and $1.4 billion were pledged to the FHLB as of September 30, 2022 and December 31, 2021, respectively. Unused borrowing capacity based on the lesser of the percentage of total assets and pledged collateral was approximately $1.6 billion and $1.0 billion as of September 30, 2022 and December 31, 2021, respectively.
22
FRB Advances
The 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 $67.9 million and $6.0 million were pledged to the FRB at September 30, 2022 and December 31, 2021, respectively. The Bank’s borrowing capacity under the Federal Reserve’s discount window program was approximately $35.2 million and $5.2 million as of September 30, 2022 and December 31, 2021, respectively. At September 30, 2022 and December 31, 2021, there were no FRB advances outstanding.
Repurchase Agreements
The Bank occasionally borrows under repurchase agreements with brokers, accounted for as secured borrowings. At September 30, 2022 and December 31, 2021, there were no repurchase agreements outstanding.
Federal Funds Purchased
The Bank may borrow up to an aggregate $138.0 million, overnight on an unsecured basis, from three of its correspondent banks. Access to these funds is subject to liquidity availability, market conditions and any negative material change in the Bank’s credit profile. At September 30, 2022 and December 31, 2021, the Company had no outstanding balance of federal funds purchased.
Note 5—Intangible Assets
On January 31, 2022, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) under which it acquired from the Libra Association, Diem Networks US HoldCo, Inc., Diem Networks US, Inc., Diem Networks II LLC, Diem LLC, and Diem Networks LLC, (collectively, the “Sellers”) certain intellectual property and other technology assets related to running a blockchain-based payment network. The assets acquired by the Company included development, deployment and operations infrastructure and tools for running a blockchain-based payment network designed to facilitate payments for commerce and cross-border remittances as well as proprietary software elements that are critical to running a regulatory-compliant stablecoin network. The technology is currently in a pre-launch phase, and no related amortization expense has been recorded for the acquired asset. The amortization period will begin when the developed technology is available for intended use.
Under the terms of the Purchase Agreement, the aggregate purchase price for the acquired assets consisted of (i) $50.0 million in cash consideration and (ii) 1,221,217 shares of the Company’s Class A common stock. The value of the total transaction consideration was $181.6 million. The Company accounted for the purchase as an asset acquisition and has capitalized direct transaction costs related to the purchase as well as development costs of $12.5 million, bringing the total intangible asset to $194.0 million at September 30, 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, 2022, the interest rate for the Company’s next scheduled payment was 7.13%, based on six-month LIBOR of 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, 2022, the interest rate for the Company’s next scheduled payment was 5.14%, based on three-month LIBOR of 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 (“AOCI”), reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. For cash flow and fair value hedges, the initial fair value of hedge components excluded from the assessment of effectiveness is recognized in earnings under a systematic and rational method over the life of the hedging instrument and is presented in the same income statement line item as the earnings effect of the hedged item. Any difference between the change in the fair value of the hedge components excluded from the assessment of effectiveness and the amounts recognized in earnings is recorded as a component of other comprehensive income. For a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. The 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 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”) for a total notional amount of $400.0 million to hedge cash flow receipts on cash and securities or loans, if needed. The original Floor Agreements expire on various dates in April 2024 and July 2029. The Company utilizes one-month LIBOR and three-month LIBOR interest rate floors as hedges against adverse changes in cash flows on the designated cash, securities or loans attributable to fluctuations in the federal funds rate or three-month LIBOR below 2.50% or 2.25%, as applicable. The Floor Agreements were determined to be fully effective during all periods presented and, as such, no amount of ineffectiveness has been included in net income. The upfront fee paid to the counterparty in entering into these Floor Agreements was approximately $20.8 million. During the three months ended March 31, 2020, the Company sold $200.0 million of its total $400.0 million notional amount of interest rate floors for $13.0 million, which resulted in a net gain of $8.4 million, to be recognized over the weighted average remaining term of 4.1 years. The remaining agreements are one-month LIBOR floors with a strike price of 2.25% and expire in July 2029.
Interest rate caps. In 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
24
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 “LIBOR Cap Agreements”) to hedge its variable rate subordinated debentures. The $3.0 million LIBOR Cap Agreement and $12.5 million LIBOR Cap Agreement matured during the nine months ended September 30, 2022.
The table below presents the fair value of the Company’s derivative financial instruments as well as the classification within the consolidated statements of financial condition.
 September 30,
2022		December 31,
2021
 Balance Sheet
Location		Fair ValueBalance Sheet
Location		Fair Value
(Dollars in thousands)
Derivatives designated as hedging instruments:
Cash flow hedge interest rate swapOther liabilities$64,220 Other liabilities$— 
Cash flow hedge interest rate floorDerivative assets35,367 Derivative assets18,992 
Fair value hedge interest rate swapDerivative assets55,925 Derivative assets— 
Fair value hedge interest rate capDerivative assets62,698 Derivative assets15,064 
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 $(102,236)$— 
25
The following table summarizes the effects of derivatives in cash flow and fair value hedging relationships designated as hedging instruments on the Company’s AOCI and consolidated statements of operations for the periods presented.
Amount of Gain (Loss)
Recognized in OCI		Location of Gain (Loss)
Reclassified from Accumulated
OCI into Income		Amount of Gain (Loss)
Reclassified from Accumulated
OCI into Income
Three Months Ended
September 30,		Three Months Ended
September 30,
2022202120222021
(Dollars in thousands)
Derivatives designated as hedging instruments:
Cash flow hedge interest rate swap$(45,232)$— Interest income—Taxable securities$2,824 $— 
Cash flow hedge interest rate floor(478)(216)Interest income—Other interest earning assets(54)142 
Cash flow hedge interest rate floor(22,563)(863)Interest income—Taxable securities(2,557)1,089 
Cash flow hedge interest rate cap— — Interest expense—Subordinated debentures(22)(101)
Fair value hedge interest rate cap(1)
(8,844)459 
Amount of Gain (Loss)
Recognized in OCI		Location of Gain (Loss)
Reclassified from Accumulated
OCI into Income		Amount of Gain (Loss)
Reclassified from Accumulated
OCI into Income
Nine Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
(Dollars in thousands)
Derivatives designated as hedging instruments:
Cash flow hedge interest rate swap$(57,474)$— Interest income—Taxable securities$6,746 $— 
Cash flow hedge interest rate floor(2,283)(1,361)Interest income—Other interest earning assets149 418 
Cash flow hedge interest rate floor(34,239)(5,442)Interest income—Taxable securities(1,549)3,214 
Cash flow hedge interest rate cap— — Interest expense—Subordinated debentures(199)(301)
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 $46.3 million of net derivative loss for cash flow hedges included in AOCI will be reclassified into earnings within the next 12 months. No gain or loss was reclassified from AOCI into earnings as a result of forecasted transactions that failed to occur during the periods presented.
26
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,
20222021
Interest income - Taxable securitiesInterest income - Tax-exempt securitiesInterest income - Taxable securitiesInterest 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,
20222021
Interest income - Taxable securitiesInterest income - Tax-exempt securitiesInterest income - Taxable securitiesInterest 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,
 20222021
 AmountRateAmountRate
 (Dollars in thousands)
Statutory federal tax$11,926 21.0 %$6,167 21.0 %
State tax, net of federal benefit4,617 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, net613 1.2 %(27)(0.1)%
Actual tax expense$13,462 23.7 %$5,874 20.0 %
Nine Months Ended September 30,
 20222021
 AmountRateAmountRate
 (Dollars in thousands)
Statutory federal tax$29,484 21.0 %$12,978 21.0 %
State tax, net of federal benefit11,498 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, net630 0.4 %(83)(0.1)%
Actual tax expense$31,080 22.1 %$4,661 7.5 %
Income tax expense was $13.5 million for the three months ended September 30, 2022 compared to $5.9 million for the three months ended September 30, 2021. The effective tax rates for the three months ended September 30, 2022 and 2021 were 23.7% and 20.0%, respectively. Income tax expense was $31.1 million for the nine months ended September 30, 2022 compared to $4.7 million for the nine months ended September 30, 2021. The effective tax rates for the nine months ended September 30, 2022 and 2021 were 22.1% and 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 tax expense and effective tax rates for the three and nine months ended September 30, 2022 were partially offset by an increase in tax-exempt income earned on certain municipal bonds compared to the three and nine months ended September 30, 2021.
The deferred tax asset balance as of September 30, 2022 was $219.9 million compared to $6.5 million as of December 31, 2021. The increase in the deferred tax asset is attributable to the unrealized losses on the available-for-sale securities portfolio and 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 $18,000 and $0.6 million at September 30, 2022 and December 31, 2021, respectively.
28
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,
2022		December 31,
2021
 (Dollars in thousands)
Unfunded lines of credit$1,191,043 $248,092 
Letters of credit470 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 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.
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 accordance with authoritative guidance for stock-based compensation, compensation expense is recognized only for those shares expected to vest, based on the Company’s historical experience and future expectations. The Company has elected a policy of estimating expected forfeitures.
Total stock-based compensation expense was $1.1 million and $0.6 million for the three months ended September 30, 2022 and 2021, respectively. Total stock-based compensation expense was $2.8 million and $1.4 million for the nine months ended September 30, 2022 and 2021, respectively.
29
Stock Options
A summary of stock option activity as of September 30, 2022 and changes during the nine months ended September 30, 2022 is presented below:
Number of
Options		Weighted
Average Exercise
Price
Weighted
Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic Value
(in thousands)
Outstanding at January 1, 2022191,191 $24.97 
Granted29,117 110.84 
Exercised(24,736)14.72 
Forfeited or expired(1,831)16.09 
Outstanding at September 30, 2022193,741 $39.27 6.8 years$8,995 
Exercisable at September 30, 202276,758 $20.68 5.2 years$4,520 
Vested or Expected to Vest at September 30, 2022189,325 $39.02 6.8 years$8,823 
As of September 30, 2022, there was $1.8 million of total unrecognized compensation cost related to nonvested stock options which is expected to be recognized over a weighted-average period of 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 SharesWeighted-Average
 Grant Date Fair Value
Per Share
Nonvested at January 1, 202256,871 $72.53 
Granted55,461 $102.25 
Vested(12,520)$111.48 
Forfeited(1,774)$87.01 
Nonvested at September 30, 202298,038 $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. 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, 2022, the Company and the Bank met all capital adequacy requirements to which they were subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. For the periods presented, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.
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Actual capital amounts and ratios for the Company and the Bank as of September 30, 2022 and December 31, 2021, are presented in the following tables:
 Actual
Minimum capital
adequacy(1)
To be well
capitalized
 AmountRatioAmountRatioAmountRatio
 (Dollars in thousands)
September 30, 2022
The Company
Tier 1 leverage ratio
$1,672,886 10.71 %$624,666 4.00 %N/AN/A
Common equity tier 1 capital ratio
1,463,765 40.72 %161,753 4.50 %N/AN/A
Tier 1 risk-based capital ratio
1,672,886 46.54 %215,671 6.00 %N/AN/A
Total risk-based capital ratio
1,676,080 46.63 %287,561 8.00 %N/AN/A
The Bank
Tier 1 leverage ratio1,631,662 10.45 %624,574 4.00 %$780,717 5.00 %
Common equity tier 1 capital ratio1,631,662 45.45 %161,568 4.50 %233,376 6.50 %
Tier 1 risk-based capital ratio1,631,662 45.45 %215,424 6.00 %287,232 8.00 %
Total risk-based capital ratio1,634,856 45.53 %287,232 8.00 %359,040 10.00 %
 Actual
Minimum capital
adequacy(1)
To be well
capitalized
 AmountRatioAmountRatioAmountRatio
 (Dollars in thousands)
December 31, 2021
The Company
Tier 1 leverage ratio
$1,631,257 11.07 %$589,614 4.00 %N/AN/A
Common equity tier 1 capital ratio
1,422,136 49.53 %129,198 4.50 %N/AN/A
Tier 1 risk-based capital ratio
1,631,257 56.82 %172,264 6.00 %N/AN/A
Total risk-based capital ratio
1,638,794 57.08 %229,686 8.00 %N/AN/A
The Bank
Tier 1 leverage ratio1,546,693 10.49 %589,595 4.00 %$736,994 5.00 %
Common equity tier 1 capital ratio1,546,693 53.89 %129,162 4.50 %186,567 6.50 %
Tier 1 risk-based capital ratio1,546,693 53.89 %172,216 6.00 %229,622 8.00 %
Total risk-based capital ratio1,554,230 54.15 %229,622 8.00 %287,027 10.00 %
_______________________
(1)Minimum capital adequacy for common equity tier 1 capital ratio, tier 1 risk-based capital ratio and total risk-based capital ratio excludes the capital conservation buffer.
The Bank is restricted as to the amount of dividends that it can pay to the Company. Dividends declared in excess of the lesser of the Bank’s undivided profits or the Bank’s net income for its last three fiscal years less the amount of any distribution made to the Bank’s shareholder during the same period must be approved by the California DFPI. Also, the Bank may not pay dividends that would result in capital levels being reduced below the minimum requirements shown above.
Note 12—Fair Value
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This standard’s fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1—Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
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Level 2—Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3—Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Financial Instruments Required To Be Carried At Fair Value
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:
Securities. The fair values of securities available-for-sale and trading securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1). 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 is a mathematical technique commonly used to 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 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. Appraisals may be adjusted by management for qualitative factors such as economic factors and estimated liquidation expenses. The range of these possible adjustments may vary. Impaired loans presented in the table below as of the periods presented include impaired loans with specific allowances as well as impaired loans that have been partially charged-off.
The following tables provide the hierarchy and fair value for each class of assets and liabilities measured at fair value for the periods presented.
As of September 30, 2022 and December 31, 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 1Level 2Level 3Total
 (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 $— $64,220 
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 Fair Value Measurements Using
 Quoted Prices
in Active
Markets for
Identical Assets		Significant Other
Observable
Inputs		Significant
Unobservable
Inputs		 
 Level 1Level 2Level 3Total
 (Dollars in thousands)
December 31, 2021
Assets
Securities available-for-sale$— $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 nonrecurring basis as 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 1Level 2Level 3Total
 (Dollars in thousands)
September 30, 2022
Financial assets:
Cash and due from banks$465,853 $465,853 $— $— $465,853 
Interest earning deposits1,420,970 1,420,970 — — 1,420,970 
Securities held-to-maturity3,104,557 1,165,887 1,511,947 — 2,677,834 
Loans held-for-sale924,644 — 924,644 — 924,644 
Loans held-for-investment, net467,786 — — 465,996 465,996 
Accrued interest receivable78,799 1,021 25,978 51,800 78,799 
Financial liabilities:
Deposits$13,238,426 $— $12,357,500 $— $12,357,500 
FHLB advances700,000 — 700,000 — 700,000 
Subordinated debentures, net15,855 — 15,855 — 15,855 
Accrued interest payable3,375 — 3,375 — 3,375 
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 Carrying
Amount		Fair Value Measurements Using
 Level 1Level 2Level 3Total
 (Dollars in thousands)
December 31, 2021
Financial assets:
Cash and due from banks$208,193 $208,193 $— $— $208,193 
Interest earning deposits5,179,753 5,179,753 — — 5,179,753 
Loans held-for-sale893,194 — 893,194 — 893,194 
Loans held-for-investment, net887,304 — — 891,166 891,166 
Accrued interest receivable40,370 41 8,980 31,349 40,370 
Financial liabilities:
Deposits$14,290,628 $— $14,167,200 $— $14,167,200 
Subordinated debentures, net15,845 — 15,646 — 15,646 
Accrued interest payable223 — 223 — 223 
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,
2022202120222021
(In thousands, except per share data)
Basic
Net income$43,328 $23,492 $109,319 $57,137 
Less: Dividends paid to preferred shareholders2,688 — 8,064 — 
Net income available to common shareholders$40,640 $23,492 $101,255 $57,137 
Weighted average common shares outstanding31,655 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 share31,655 26,525 31,505 24,927 
Add: Dilutive effects of stock-based awards148 241 164 381 
Average shares and dilutive potential common shares31,803 26,766 31,669 25,308 
Dilutive earnings per common share$1.28 $0.88 $3.20 $2.26 
Stock-based awards for 104,000 and 44,000 shares of common stock for the three months ended September 30, 2022 and 2021, respectively, and 85,000 and 44,000 shares of common stock for the nine months ended September 30, 2022 and 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,(“Articles”) authorize the Company to issue up to (i) 150,000,000 shares of Class A Common Stock, par value $0.01 per share (“Class A Common Stock”) and (ii) 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 Common Stock or, except as may be otherwise provided in the terms of any series of preferred stock of which there are shares outstanding, holders of preferred stock adopt resolutions to designate and establish a new series of preferred stock. Upon establishing such a series of preferred stock, the board will determine the number of shares of preferred stock of that series that may be issued and the rights and preferences of that series of preferred stock. The rights of any series of preferred stock may include, among others, general or special voting rights; preferential liquidation or preemptive rights; preferential cumulative or noncumulative dividend rights; redemption or put rights; and conversion or exchange rights.
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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 DateAmount Per ShareAmount Per Depository Share
Total Dividend
(In Thousands)
Period CoveredRecord DateDividend Paid Date
October 14, 2021$15.08 $0.377 $3,016 August 4, 2021 through November 14, 2021October 29, 2021November 15, 2021
January 14, 202213.44 0.336 2,688 November 15, 2021 through February 14, 2022January 31, 2022February 15, 2022
April 11, 202213.44 0.336 2,688 February 15, 2022 through May 14, 2022April 29, 2022May 16, 2022
July 11, 202213.44 0.336 2,688 May 15, 2022 through August 14, 2022July 29, 2022August 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 was non-voting while held by the initial holder with certain limited exceptions. Each share of Class B Non-Voting Common Stock 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 were 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 June 10, 2022, at the Annual Meeting of Stockholders of the Company, 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 Class B Non-Voting common stock, $0.01 par value, were cancelled and reallocated as Class A common stock, $0.01 par value. The reallocation of the shares of authorized Class B Non-Voting common stock increased the total authorized shares of Class A Common Stock by 25,000,000 shares.
On January 26, 2021, the Company completed its underwritten public offering of 4,563,493 shares of Class A Common Stock at a price of $63.00 per share, including 595,238 shares of Class A Common Stock upon the exercise in full by the underwriters of their option to purchase additional shares. The aggregate gross proceeds of the offering were $287.5 million and net proceeds to the Company were $272.4 million after deducting underwriting discounts and offering expenses.
On March 9, 2021, the Company entered into an equity distribution agreement pursuant to which the Company could issue and sell, from time to time, up to an aggregate gross sales price of $300.0 million of the Company’s shares of Class A Common Stock through an “at-the-market” equity offering program, or ATM Offering. As of June 30, 2021, the Company had completed the ATM Offering with a total of 2,793,826 shares of Class A Common Stock sold at an average price of $107.38. The transactions resulted in net proceeds to the Company of $295.1 million after deducting commissions and expenses.
On December 9, 2021, the Company completed its underwritten public offering of 3,806,895 shares of Class A Common Stock at a price of $145.00 per share, including 496,551 shares of Class A Common Stock upon the exercise in full by the underwriters of their option to purchase additional shares. The aggregate gross proceeds of the offering were $552.0 million and net proceeds to the Company were $530.3 million after deducting underwriting discounts and offering expenses.
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On January 31, 2022 the Company issued 1,221,217 shares of the Company’s Class A Common Stock to the Sellers for the purchase of certain technology assets, at a price of $107.74 per share for a total value of $131.6 million.
Note 15—Subsequent Event
Preferred Stock Dividend
On 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 Annual Report on Form 10-K, which contains audited financial statements of the Company as of and for the year ended December 31, 2021, previously filed with the Securities and Exchange Commission (“SEC”). Results for the three and nine months ended September 30, 2022 are not necessarily indicative of results for the year ending December 31, 2022 or any future period.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “projection,” “forecast,” “goal,” “target,” “would,” “aim” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry and management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. The inclusion of these forward-looking statements should not be regarded as a representation by us or any other person that such expectations, estimates and projections will be achieved. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence. In addition, we cannot assess the impact of each risk and uncertainty on our business or the extent to which any risk or uncertainty, or combination of risks and uncertainties, may cause actual results to differ materially from those contained in any forward-looking statements. 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 asset industry. Key to our leadership position and growth strategy is the Silvergate Exchange Network (“SEN”), our proprietary, virtually instantaneous payment network for participants in the digital 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 significantly grow our noninterest bearing deposit product for digital asset industry participants, which has provided the majority of our funding over the last four years. This unique source of funding is a 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 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 whose assets consist primarily of its investment in the Bank and its primary activities are conducted through the Bank. The Company is a registered bank holding company that is subject to supervision by the Board of Governors of the Federal Reserve (“Federal Reserve”). The Bank is subject to supervision by the California Department of Financial Protection and Innovation, Division of Financial Institutions (“DFPI”), and, as a Federal Reserve member bank since 2012, the Federal Reserve Bank of San Francisco (“FRB”). The Bank’s deposits are insured up to legal limits by the Federal Deposit Insurance Corporation (“FDIC”).
In 2013, we began exploring the digital asset industry and have significantly expanded and reoriented our product and service menus since that time to support our growing digital asset initiative, including the implementation of deposit and cash management services for digital asset related businesses, 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 loans. In fact, our SEN Leverage lending product, which was piloted during 2020, is now one of the Company’s core lending products.
Digital Asset Initiative
We leverage the SEN and our management team’s expertise in the digital asset industry to develop, implement and maintain critical financial infrastructure solutions and services for many of the largest U.S. digital asset exchanges and global investors, as well as other digital 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 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 vision and advanced approach to compliance complement the SEN and empower us to extend our leadership position in the industry by developing additional infrastructure solutions and services that will facilitate growth in our business.
We began exploring the digital asset industry in 2013 based on market dynamics which we believed were highly attractive:
•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 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 eight years has provided us with a first-mover advantage within the digital asset industry that is the cornerstone of our leadership position today.
Digital 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 asset industry, which includes our unique technology solutions. As of September 30, 2022, we had over 300 prospective digital 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 asset customers interested in using our proprietary, cloud-based application programming interface (“API”).
The following list sets forth summary information regarding the types of market participants who are our primary 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 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 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 asset miners, custodians and general industry participants that need our solutions and services.
Silvergate Exchange Network
For the three and nine months ended September 30, 2022, there were $112.6 billion and $446.2 billion, respectively, of U.S. dollar transfers that occurred on the SEN, compared to $162.0 billion and $568.1 billion during the 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.
39
The following table presents the components of results of operations, performance ratios and share data for the periods indicated:
Three Months EndedNine Months Ended
September 30, 2022June 30, 2022September 30, 2022September 30, 2021
(In thousands, except per share data)
Statement of Operations Data:
Interest income$90,766 $71,587 $213,191 $91,912 
Interest expense9,878 1,041 11,262 851 
Net interest income80,888 70,546 201,929 91,061 
Reversal of provision for loan losses(601)— (3,075)— 
Net interest income after provision81,489 70,546 205,004 91,061 
Noninterest income8,454 9,214 27,118 34,201 
Noninterest expense33,153 30,552 91,723 63,464 
Income before income taxes56,790 49,208 140,399 61,798 
Income tax expense13,462 10,603 31,080 4,661 
Net income43,328 38,605 109,319 57,137 
Dividends on preferred stock2,688 2,688 8,064 — 
Net income available to common shareholders$40,640 $35,917 $101,255$57,137 
Financial Ratios(1):
Return on average assets (ROAA)1.04 %0.89 %0.84 %0.75 %
Return on average equity (ROAE)11.24 %9.58 %8.85 %9.73 %
Return on average common equity (ROACE)12.99 %10.99 %10.13 %10.27 %
Net interest margin(2)
2.31 %1.96 %1.86 %1.24 %
Noninterest income to average assets0.22 %0.23 %0.22 %0.45 %
Noninterest expense to average assets
0.85 %0.75 %0.76 %0.83 %
Efficiency ratio(3)
37.11 %38.30 %40.05 %50.67 %
Loan yield(4)
5.83 %5.23 %5.16 %4.43 %
Cost of deposits0.16 %0.00 %0.05 %0.00 %
Cost of funds0.28 %0.03 %0.10 %0.01 %
Share Data:
Basic earnings per common share$1.28 $1.14 $3.21 $2.29 
Diluted earnings per common share$1.28 $1.13 $3.20 $2.26 
Basic weighted average shares outstanding
31,655 31,635 31,505 24,927 
Diluted weighted average shares outstanding
31,803 31,799 31,669 25,308 
________________________
(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.

40
The following table presents the components of financial condition and ratios at the dates indicated:
September 30,
2022		December 31,
2021
 (Dollars in thousands, except per share data)
Statement of Financial Condition Data:
Cash and cash equivalents$1,886,823 $5,387,946 
Securities11,421,804 8,625,259 
Loans held-for-sale
924,644 893,194 
Loans held-for-investment, net
467,786 887,304 
Other766,283 211,792 
Total assets
$15,467,340 $16,005,495 
Deposits
$13,238,426 $14,290,628 
Borrowings
715,855 15,845 
Other liabilities
181,714 90,186 
Total liabilities
14,135,995 14,396,659 
Total shareholders’ equity
1,331,345 1,608,836 
Total liabilities and shareholders' equity$15,467,340 $16,005,495 
Nonperforming Assets:
Nonaccrual loans$3,698 $4,003 
Troubled debt restructurings
$1,623 $1,713 
Other real estate owned, net
$45 $— 
Nonperforming assets
$3,743 $4,003 
Asset Quality Ratios:
Nonperforming assets to total assets
0.02 %0.03 %
Nonperforming loans to total loans(1)
0.79 %0.45 %
Net charge-offs to average total loans(1)(2)
0.09 %0.00 %
Allowance for loan losses to total loans(1)
0.67 %0.77 %
Allowance for loan losses to nonaccrual loans85.88 %172.77 %
Company Capital Ratios:
Tier 1 leverage ratio10.71 %11.07 %
Common equity tier 1 capital ratio40.72 %49.53 %
Tier 1 risk-based capital ratio46.54 %56.82 %
Total risk-based capital ratio46.63 %57.08 %
Common equity to total assets7.36 %8.84 %
Book value per common share$35.94 $46.55 
Bank Capital Ratios:
Tier 1 leverage ratio
10.45 %10.49 %
Common equity tier 1 capital ratio
45.45 %53.89 %
Tier 1 risk-based capital ratio
45.45 %53.89 %
Total risk-based capital ratio
45.53 %54.15 %
Other:
Total headcount
439 279 
________________________
(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.
41
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, 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 Annual Report on Form 10-K filed with the SEC on February 28, 2022.
Accounting policies, as described in detail in the notes to our consolidated financial statements, included in the Company’s Annual Report on Form 10-K, are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that those critical accounting policies and estimates require us to make difficult, subjective or complex judgments about matters that are inherently uncertain. Changes in these estimates, which are likely to occur from period to period, or use of different estimates that we could have reasonably used in the current period, would have a material impact on our financial position, results of operations or liquidity.
Results of Operations
Net Income
The following table sets forth the principal components of net income for the periods indicated.
Three Months EndedNine Months Ended
September 30,
2022		June 30,
2022
% Increase/
(Decrease)
September 30,
2022		September 30,
2021
% Increase/
(Decrease)
(Dollars in thousands)
Interest income$90,766 $71,587 26.8 %$213,191 $91,912 132.0 %
Interest expense9,878 1,041 848.9 %11,262 851 N/M
Net interest income80,888 70,546 14.7 %201,929 91,061 121.8 %
Reversal of provision for loan losses(601)— N/M(3,075)— N/M
Net interest income after provision81,489 70,546 15.5 %205,004 91,061 125.1 %
Noninterest income8,454 9,214 (8.2)%27,118 34,201 (20.7)%
Noninterest expense33,153 30,552 8.5 %91,723 63,464 44.5 %
Income before income taxes56,790 49,208 15.4 %140,399 61,798 127.2 %
Income tax expense13,462 10,603 27.0 %31,080 4,661 566.8 %
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, 2022 was $43.3 million, an increase of $4.7 million or 12.2% from net income of $38.6 million for the three months ended June 30, 2022. The increase was primarily due to a $10.3 million increase in net interest income and a $0.6 million reversal of provision for loan losses, offset by a $0.8 million decrease in noninterest income, a $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, 2022 was $109.3 million, an increase of $52.2 million or 91.3% from net income of $57.1 million for the nine months ended September 30, 2021. The increase was primarily due to a $110.9 million increase in net interest income and a $3.1 million reversal of provision for loan losses, offset by a $7.1 million decrease in noninterest income, a $26.4 million increase in income tax expense and a $28.3 million increase in noninterest expense, all as described below.
42
Net Interest Income and Net Interest Margin Analysis (Taxable Equivalent Basis)
We analyze our ability to maximize income generated from interest earning assets and control the interest expenses of our liabilities, measured as net interest income, through our net interest margin and net interest spread. Net interest income is the difference between the interest and fees earned on interest earning assets, such as loans, interest earning deposits in other banks and securities, and the interest expense incurred on interest bearing liabilities, such as deposits and borrowings, which are used to fund those assets.
Changes in market interest rates and the interest rates we earn on interest earning assets or pay on interest bearing liabilities, as well as in the volume and types of interest earning assets, interest bearing and noninterest bearing liabilities and shareholders’ equity, are usually the largest drivers of periodic changes in net interest income, net interest margin and net interest spread. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. 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 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%.
43

AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
Three Months Ended
September 30, 2022June 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 securities8,868,639 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 %
Other62,835 289 1.82 %58,852 719 4.90 %
Total interest earning assets14,552,516 94,597 2.58 %15,257,875 75,526 1.99 %
Noninterest earning assets942,110 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 borrowings769,565 4,399 2.27 %397,810 796 0.80 %
Subordinated debentures15,854 258 6.46 %15,850 243 6.15 %
Total interest bearing liabilities1,786,034 9,878 2.19 %481,788 1,041 0.87 %
Noninterest bearing liabilities:
Noninterest bearing deposits12,139,522 13,951,397 
Other liabilities134,164 330,658 
Shareholders’ equity1,434,906 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 
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Nine Months Ended
September 30, 2022September 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 securities8,808,166 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 %
Other54,556 1,211 2.97 %25,308 804 4.25 %
Total interest earning assets15,308,756 224,466 1.96 %10,092,992 94,526 1.25 %
Noninterest earning assets882,854 130,766 
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 borrowings415,388 5,265 1.69 %15 — 0.00 %
Subordinated debentures15,850 753 6.35 %15,836 744 6.28 %
Total interest bearing liabilities816,424 11,262 1.84 %112,899 851 1.01 %
Noninterest bearing liabilities:
Noninterest bearing deposits13,614,495 9,288,468 
Other liabilities231,158 37,124 
Shareholders’ equity1,529,533 785,267 
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.
(3)Interest income includes amortization of deferred loan fees, net of deferred loan costs.
(4)Net interest spread is the difference between interest rates earned on interest earning assets and interest rates paid on interest bearing liabilities.
(5)Net interest margin is a ratio calculated as annualized net interest income, on a taxable equivalent basis, divided by average interest earning assets for the same period.
Information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest bearing liabilities and distinguishes between the changes
45
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, 2022For the Nine Months Ended September 30, 2022 Compared to September 30, 2021
 Change Due ToInterest
Variance		Change Due ToInterest
Variance
 
VolumeRateVolumeRate
 (Dollars in thousands)
Interest Income:
Interest earning deposits in other banks$(246)$5,239 $4,993 $(2,725)$10,486 $7,761 
Taxable securities(318)16,733 16,415 47,816 22,434 70,250 
Tax-exempt securities(1)
(444)(72)(516)37,930 3,315 41,245 
Loans(4,536)3,145 (1,391)4,847 5,430 10,277 
Other57 (487)(430)929 (522)407 
Total interest income(5,487)24,558 19,071 88,797 41,143 129,940 
Interest Expense:
Interest bearing deposits4,011 1,208 5,219 88 5,049 5,137 
FHLB advances and other borrowings762 2,841 3,603 477 4,788 5,265 
Subordinated debentures3 12 15 1 8 9 
Total interest expense4,776 4,061 8,837 566 9,845 10,411 
Net interest income, taxable equivalent basis$(10,263)$20,497 $10,234 $88,231 $31,298 $119,529 
________________________
(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 $10.2 million to $84.7 million for the three months ended September 30, 2022, compared to $74.5 million for the three months ended June 30, 2022, due to an increase of $19.1 million in interest income partially offset by an increase of $8.8 million in interest expense.
Average total interest earning assets decreased $0.7 billion or 4.6% for the three months ended September 30, 2022, compared to the three months ended June 30, 2022, primarily due to decreased securities and loan balances. The average annualized yield on total interest earning assets increased from 1.99% for the three months ended June 30, 2022, to 2.58% for the three months ended September 30, 2022, primarily due to 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, 2022, due to an increase in market interest rates.
Average interest bearing liabilities increased $1.3 billion or 270.7% for the three months ended September 30, 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 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 nine months ended
46
September 30, 2021, to 1.96% for the nine months ended September 30, 2022, primarily due to higher yields on the securities portfolio due to an increase in market interest rates and a higher proportion of 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 deposit and higher average balances of FHLB advances. The average annualized rate on total interest bearing liabilities increased to 1.84% for the nine months ended September 30, 2022, compared to 1.01% for the same period in 2021, primarily due to interest expense associated with recently issued brokered certificates of deposit and an increase in interest rates on FHLB advances.
For the nine months ended September 30, 2022, the net interest spread was 0.12% and the net interest margin was 1.86%, compared to 0.24% and 1.24%, respectively, for the comparable period in 2021. The decrease in 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 for the nine months ended September 30, 2022 was primarily due to a higher proportion of 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 as well as increased market interest rates on interest earning assets.
Provision for Loan Losses
The provision for loan losses is a charge to income to bring our allowance for loan losses to a level deemed appropriate by management. For a description of the factors considered by our management in determining the allowance for loan losses see “—Financial Condition—Allowance for Loan Losses”.
We recorded a $0.6 million reversal of provision for loan losses for the three months ended September 30, 2022 and no provision for the three months ended June 30, 2022. We recorded a $3.1 million reversal of provision for loan losses for the nine months ended September 30, 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 0.67% at September 30, 2022, compared to 0.74% and 0.85% at June 30, 2022 and September 30, 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 changes in loan product and segment mix in the portfolio, including the net impact of the sales and transfer to 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 EndedNine Months Ended
 September 30,
2022		June 30,
2022
% Increase/
(Decrease)
September 30,
2022		September 30,
2021
% Increase/
(Decrease)
 (Dollars in thousands)
Noninterest income:
Deposit related fees$7,953 $8,808 (9.7)%$25,729 $26,603 (3.3)%
Mortgage warehouse fee income482 555 (13.2)%1,688 2,372 (28.8)%
(Loss) gain on sale of securities, net— (199)N/M(804)5,182 (115.5)%
Loss on sale of loans, net(329)— N/M(329)— N/M
Other income348 50 596.0 %834 44 N/M
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, 2022, compared to the three months ended June 30, 2022. This decrease was primarily due to a decrease of $0.9 million 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, 2022, the Company sold approximately $3.6 million of one-to-four family real estate loans and recognized a loss on sale of $0.3 million.
47
Noninterest income decreased $7.1 million or 20.7% for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. This decrease was primarily due to a $6.0 million decrease in gain (loss) on sale of securities, a $0.9 million decrease in deposit related fees and a $0.7 million decrease in mortgage warehouse fee income. This was offset by an increase of $0.8 million in other income.
Noninterest Expense
The following table presents, for the periods indicated, the major categories of noninterest expense:

NONINTEREST EXPENSE
 Three Months EndedNine Months Ended
 September 30,
2022		June 30,
2022		% Increase/
(Decrease)		September 30,
2022		September 30,
2021
% Increase/
(Decrease)
 (Dollars in thousands)
Noninterest expense:
Salaries and employee benefits$19,632 $16,356 20.0 %$51,532 $31,979 61.1 %
Occupancy and equipment822 1,063 (22.7)%2,471 1,736 42.3 %
Communications and data processing3,210 2,967 8.2 %8,939 5,210 71.6 %
Professional services4,314 6,280 (31.3)%13,548 6,782 99.8 %
Federal deposit insurance1,217 1,495 (18.6)%4,474 10,437 (57.1)%
Correspondent bank charges902 801 12.6 %2,531 1,881 34.6 %
Other loan expense529 682 (22.4)%1,595 753 111.8 %
Other general and administrative2,527 908 178.3 %6,633 4,686 41.5 %
Total noninterest expense$33,153 $30,552 8.5 %$91,723 $63,464 44.5 %
Noninterest expense increased $2.6 million or 8.5% for the three months ended September 30, 2022, compared to the three months ended June 30, 2022, primarily due to increases in salaries and employee benefits and other general and administrative expense, offset by a decrease in professional services. The increase of $3.3 million or 20.0% in salaries and employee benefits was primarily due to an increase in headcount. The Company’s average full-time equivalent employees 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 salaries and employee benefits, communications and data processing, professional services, and other general and administrative expense, partially offset by a decrease in federal deposit insurance expense. The increase of $19.6 million or 61.1% in salaries and employee benefits was primarily due to an increase in headcount and an increase in cost per full-time equivalent employee. The Company’s average full-time equivalent employees increased by 52.9% from 225 for the nine months ended September 30, 2021 to 344 for the nine months ended September 30, 2022. Communications and data processing increased $3.7 million or 71.6% primarily due to blockchain infrastructure hosting costs as well as continued investment in enterprise cloud storage solutions and scalable cloud-based software solutions to scale technology needs for the growing organization and to meet strategic objectives. Professional services increased $6.8 million or 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 a lower growth rate in deposit levels. Other general and administrative expense increased $1.9 million or 41.5% primarily due to an increase for expanded insurance coverage and increases in charitable donations, offset by a decrease in the provision for unfunded commitments.
Income Tax Expense
Income tax expense was $13.5 million for the three months ended September 30, 2022, compared to $10.6 million for the three months ended June 30, 2022. Our effective tax rates for the three months ended September 30, 2022 and June 30, 2022 were 23.7% and 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 $31.1 million for the nine months ended September 30, 2022, compared to $4.7 million for the nine months ended September 30, 2021. Our effective tax rates for the nine months ended September 30, 2022 and 2021 were 22.1% and 7.5%, respectively. The increase in income tax expense was primarily due to an increase in pre-tax income and a decrease in tax benefits recognized on exercise of stock options. The increase in the effective tax rates was due to lower excess tax benefits recognized on the exercise of stock options when compared to the nine months ended September 30, 2021.
Financial Condition
As of September 30, 2022, our total assets decreased to $15.5 billion compared to $16.0 billion as of December 31, 2021. Shareholders’ equity decreased $0.3 billion, or 17.2%, to $1.3 billion at September 30, 2022, compared to $1.6 billion at December 31, 2021. A summary of the individual components driving the changes in total assets, total liabilities and shareholders' equity is set forth below.
Interest Earning Deposits in Other Banks
Interest earning deposits in other banks decreased from $5.2 billion at December 31, 2021 to $1.4 billion at September 30, 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 driven by the purchase of securities and a decrease in digital asset deposits as discussed in more detail below.
Securities
We use our securities portfolio to primarily provide a source of liquidity, provide a return on funds invested and manage interest rate 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.
Total securities increased $2.8 billion, or 32.4%, from $8.6 billion at December 31, 2021 to $11.4 billion at September 30, 2022. We invest in high quality mortgage-backed securities, collateralized mortgage obligations, other asset backed securities and municipal bonds. During the nine months ended September 30, 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 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, 2022 and the amortized cost and 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
Amortized
Cost		Weighted
Average
Yield		Amortized
Cost		Weighted
Average
Yield		Amortized
Cost		Weighted
Average
Yield		Amortized
Cost		Weighted
Average
Yield		Amortized
Cost		Fair
Value		Weighted
Average
Yield
(Dollars in thousands)
September 30, 2022
Securities Available-for-Sale:
U.S. Treasuries$34,972 0.48 %$— — $— — $— — $34,972 $34,834 0.48 %
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:
Government agency mortgage-backed securities— — — — — — 1,765,029 3.24 %1,765,029 1,681,119 3.24 %
Government agency collateralized mortgage obligation— — — — — — 1,226,242 2.12 %1,226,242 1,161,537 2.12 %
Private-label collateralized mortgage obligation— — 129,635 4.52 %— — 1,119 4.73 %130,754 126,961 4.53 %
Commercial 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— — — — 10,204 2.51 %— — 10,204 9,964 2.51 %
Private-label collateralized mortgage obligation— — — — — — 487,732 3.22 %487,732 463,144 3.22 %
Municipal bonds:
Tax-exempt— — — — — — 2,329,021 1.88 %2,329,021 1,928,011 1.88 %
Asset backed securities:
Government sponsored student loan pools— — — — — — 209,288 3.06 %209,288 203,528 3.06 %
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 $8,317,247 2.55 %
Securities Held-to-Maturity:
U.S. Treasuries$— — $1,246,108 1.33 %$— — $— — $1,246,108 $1,165,887 1.33 %
Residential mortgage-backed securities:
Government agency mortgage-backed securities— — — — — — 505,600 1.34 %505,600 433,809 1.34 %
Government agency collateralized mortgage obligation— — — — 35 0.32 %101,301 1.57 %101,336 89,880 1.57 %
Commercial mortgage-backed securities:
Government agency collateralized mortgage obligation— — — — 53,383 1.77 %— — 53,383 43,167 1.77 %
Municipal bonds:
Tax-exempt— — — — — — 800,492 2.45 %800,492 630,699 2.45 %
Taxable— — — — 234,858 1.88 %162,780 2.37 %397,638 314,392 2.08 %
Total securities held-to-maturity$— — $1,246,108 1.33 %$288,276 1.86 %$1,570,173 2.03 %$3,104,557 $2,677,834 1.73 %
Total securities$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 %
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Loan Portfolio
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. 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
 AmountPercentAmountPercent
 (Dollars in thousands)
Real estate(1):
One-to-four family$37,636 8.0 %$105,098 11.8 %
Multi-family9,028 1.9 %56,751 6.3 %
Commercial63,979 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 other1,270 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
51
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 the Bank. The following table details maturities and sensitivity to interest rate changes for our loans held-for-investment at September 30, 2022:

LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES
 September 30, 2022
 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)
Real estate:
One-to-four family$— $48 $892 $37,000 $37,940 
Multi-family— 9,028 — — 9,028 
Commercial3,764 53,830 6,376 — 63,970 
Commercial and industrial45,612 254,372 1 — 299,985 
Reverse mortgage and other145 — — 1,134 1,279 
Mortgage warehouse58,760 — — — 58,760 
Total loans held-for-investment$108,281 $317,278 $7,269 $38,134 $470,962 
Amounts with fixed rates$1,320 $62,851 $81 $324 $64,576 
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 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.
Nonaccrual loans decreased to $3.7 million, or 0.79% of total loans, at September 30, 2022, compared to $4.0 million, or 0.45% of total loans, at December 31, 2021. The decrease in nonaccrual loans during the nine months ended September 30, 2022 was due primarily to a decrease in nonaccrual reverse mortgage loans.
Total nonperforming assets were $3.7 million and $4.0 million at September 30, 2022 and December 31, 2021, respectively, or 0.02% and 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,
2022		December 31,
2021
 (Dollars in thousands)
Nonaccrual loans
Real estate:
One-to-four family$3,079 $3,080 
Reverse mortgage and other619 923 
Total nonaccrual loans3,698 4,003 
Accruing loans 90 or more days past due— — 
Total nonperforming loans3,698 4,003 
Other real estate owned, net45 — 
Total nonperforming assets$3,743 $4,003 
Ratio of nonaccrual loans to total loans(1)
0.79 %0.45 %
Ratio of allowance for loan losses to nonaccrual loans85.88 %172.77 %
Ratio of nonperforming assets to total assets0.02 %0.03 %
Troubled debt restructurings
Restructured loans-nonaccrual$658 $564 
Restructured loans-accruing965 1,149 
Total troubled debt restructurings$1,623 $1,713 
________________________
(1)Total loans exclude loans held-for-sale at each of the dates presented.
Impaired Loans and TDRs.
Impaired loans also include certain loans that have been modified as troubled debt restructurings, or TDRs. As of September 30, 2022, the Company held eight loans totaling $1.6 million that were TDRs, compared to eight loans totaling $1.7 million at December 31, 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
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).
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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
 PassSpecial MentionSubstandardDoubtfulTotal
 (Dollars in thousands)
September 30, 2022
Real estate loans:
One-to-four family$33,838 $1,023 $3,079 $— $37,940 
Multi-family9,028 — — — 9,028 
Commercial59,548 3,247 1,175 — 63,970 
Commercial and industrial299,985 — — — 299,985 
Reverse mortgage and other660 — 619 — 1,279 
Mortgage warehouse58,760 — — — 58,760 
Total loans held-for-investment$461,819 $4,270 $4,873 $— $470,962 
Credit Risk Grades
 PassSpecial MentionSubstandardDoubtfulTotal
 (Dollars in thousands)
December 31, 2021
Real estate loans:
One-to-four family$102,307 $451 $3,080 $— $105,838 
Multi-family56,855 — — — 56,855 
Commercial199,598 10,528 — — 210,126 
Construction7,502 — — — 7,502 
Commercial and industrial335,362 — — — 335,362 
Reverse mortgage and other499 — 923 — 1,422 
Mortgage warehouse177,115 — — — 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.
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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 EndedNine Months Ended
 September 30, 2022June 30, 2022September 30, 2022September 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 family665 — 665 — 
Total charge-offs665 — 665 — 
Total recoveries— — — — 
Net charge-offs665 — 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 loans0.12 %0.00 %0.09 %0.00 %
Net charge-offs to average total loans by segment:
Real estate:
One-to-four family0.85 %0.00 %0.74 %0.00 %
________________________
(1)Includes write-downs arising from transfers of loans to held-for-sale.
Our allowance for loan losses at September 30, 2022, June 30, 2022 and September 30, 2021 was $3.2 million, $4.4 million and $6.9 million, respectively, or 0.67%, 0.74% and 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 $0.7 million of charge-offs and no recoveries for the three and nine months ended September 30, 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 and no recoveries for the three and nine months ended September 30, 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.
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The following table shows the allocation of the allowance for loan losses among loan categories and 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,
2022		December 31,
2021
 Amount
Percent(1)
Amount
Percent(1)
 (Dollars in thousands)
Real estate:
One-to-four family$266 8.0 %$1,023 11.8 %
Multi-family97 1.9 %682 6.3 %
Commercial370 13.5 %2,017 23.5 %
Construction— — 776 0.8 %
Commercial and industrial2,173 63.9 %1,566 37.6 %
Reverse mortgage and other12 0.3 %12 0.2 %
Mortgage warehouse258 12.4 %840 19.8 %
Total$3,176 100.0 %$6,916 100.0 %
________________________
(1)Loan amount as a percentage of total loans.
Deposits
Deposits are the major source of funding for the Company, substantially all of which are derived from our digital asset customer base. Deposits decreased $1.1 billion or 7.4% to $13.2 billion at September 30, 2022, compared to $14.3 billion at December 31, 2021. Noninterest bearing deposits totaled $12.0 billion, representing approximately 90.7% of total deposits at September 30, 2022, compared to $14.2 billion, representing approximately 99.5% of total deposits at December 31, 2021. The decrease in noninterest bearing deposits 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 $16.0 billion and $4.6 billion, respectively.
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Demand for new deposit accounts is generated by the Company’s banking platform for innovators that includes the SEN, which is enabled through Silvergate’s proprietary API, and other cash management solutions. These tools enable Silvergate’s clients to grow their business and scale operations. The following table presents a breakdown of our digital 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 exchanges108 $7,579 94 $8,288 
Institutional investors1,069 3,043 894 4,220 
Other customers500 1,247 393 1,603 
Total1,677 $11,869 1,381 $14,111 
________________________
(1)Total deposits may not foot due to rounding.
Our cost of total deposits and our cost of funds was 0.05% and 0.10%, respectively, for the nine months ended September 30, 2022, compared to 0.00% and 0.01%, respectively, for the nine months ended September 30, 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 accounts4,076 0.03 %21,310 0.12 %
Money market and savings accounts(2)
61,526 0.05 %70,215 0.15 %
Certificates of deposit319,584 2.18 %612 0.65 %
Total interest bearing deposits385,186 1.82 %92,137 0.15 %
Total deposits$13,999,681 0.05 %$10,411,278 0.00 %
________________________
(1)Noninterest bearing demand accounts includes an average balance of $5.0 billion and $3.1 billion of foreign deposits for the nine months ended September 30, 2022 and the year ended December 31, 2021, respectively
(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, 2022, approximately $2.7 billion in loans and securities were pledged as collateral for our FHLB borrowings. We may use these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio. As of September 30, 2022, we had $700.0 million of outstanding FHLB advances and had an additional $1.6 billion in available borrowing capacity from the FHLB.
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The following table sets forth certain information on our overnight FHLB borrowings as of the dates indicated:

FHLB ADVANCES
 September 30,
2022		December 31,
2021
 (Dollars in thousands)
Amount outstanding$700,000 $— 
Weighted average interest rate3.18 %— 
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 Bank’s borrowing capacity under the Federal Reserve’s discount window program was $35.2 million as of September 30, 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, 2022.
The Company has also issued subordinated debentures, entered into repurchase agreements and has access to borrow federal funds or lines of credit with correspondent banks. At September 30, 2022, these outstanding borrowings amounted to $15.9 million.
Subordinated Debentures. A trust formed by the Company issued $12.5 million of floating rate trust preferred securities in July 2001 as part of a pooled offering of such securities. The Company issued subordinated debentures to the trust in exchange for its proceeds from the offering. The debentures and related accrued interest represent substantially all the assets of the trust. The subordinated debentures bear interest at six-month LIBOR plus 375 basis points, which adjusts every six months in January and July of each year. Interest is payable semiannually. At September 30, 2022, the interest rate for the Company’s next scheduled payment was 7.13%, based on six-month LIBOR of 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, 2022, the interest rate for the Company’s next scheduled payment was 5.14%, based on three-month LIBOR of 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.
Other Borrowings. At September 30, 2022, the Company had no outstanding balance of repurchase agreements or federal funds purchased and had available lines of credit of $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 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, 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 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, an extreme liquidity event can be mitigated since the majority of SEN participants deposits are held in liquid assets, such as available-for-sale securities and cash, or used to fund short-term mortgage warehouse loans or SEN Leverage loans. In addition, the Bank has access to other 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 brokered certificates of deposit. As of September 30, 2022, we had $1.6 billion of available borrowing capacity from the FHLB, $35.2 million of available borrowing capacity from the FRB and available lines of credit of $138.0 million with other correspondent banks. Cash and cash equivalents at September 30, 2022 were $1.9 billion. Accordingly, our liquidity resources were at sufficient levels to fund loans and meet other cash needs as necessary.
Off-Balance Sheet Items
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated statements of financial condition. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and issue letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk exceeding the amounts recognized in our consolidated statements of financial condition. Our exposure to credit loss is represented by the contractual amounts of these commitments. The same credit policies and procedures are used in making these commitments as for on-balance sheet instruments. At September 30, 2022, we had $1.2 billion of credit extension commitments. For details of our commitments to extend credit, and commercial and standby letters of credit, please refer to “Note 9—Commitments and Contingencies—Off-Balance Sheet Items” of the “Notes to Unaudited Consolidated Financial Statements” under Part I, Item 1 of this Quarterly Report on Form 10-Q.
Capital Resources
Shareholders’ equity 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 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 net income for the nine months ended September 30, 2022 of $109.3 million.
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 Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of common equity Tier 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk
59
weights ranging from 0% to 1,250%. The Bank is also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.
As of September 30, 2022, 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(1)
To be well
capitalized
 AmountRatioAmountRatioAmountRatio
 (Dollars in thousands)
September 30, 2022
The Company
Tier 1 leverage ratio$1,672,886 10.71 %$624,666 4.00 %N/AN/A
Common equity tier 1 capital ratio1,463,765 40.72 %161,753 4.50 %N/AN/A
Tier 1 risk-based capital ratio1,672,886 46.54 %215,671 6.00 %N/AN/A
Total risk-based capital ratio1,676,080 46.63 %287,561 8.00 %N/AN/A
The Bank
Tier 1 leverage ratio1,631,662 10.45 %624,574 4.00 %$780,717 5.00 %
Common equity tier 1 capital ratio1,631,662 45.45 %161,568 4.50 %233,376 6.50 %
Tier 1 risk-based capital ratio1,631,662 45.45 %215,424 6.00 %287,232 8.00 %
Total risk-based capital ratio1,634,856 45.53 %287,232 8.00 %359,040 10.00 %
 Actual
Minimum capital
adequacy(1)
To be well
capitalized
 AmountRatioAmountRatioAmountRatio
 (Dollars in thousands)
December 31, 2021
The Company
Tier 1 leverage ratio$1,631,257 11.07 %$589,614 4.00 %N/AN/A
Common equity tier 1 capital ratio1,422,136 49.53 %129,198 4.50 %N/AN/A
Tier 1 risk-based capital ratio1,631,257 56.82 %172,264 6.00 %N/AN/A
Total risk-based capital ratio1,638,794 57.08 %229,686 8.00 %N/AN/A
The Bank
Tier 1 leverage ratio1,546,693 10.49 %589,595 4.00 %$736,994 5.00 %
Common equity tier 1 capital ratio1,546,693 53.89 %129,162 4.50 %186,567 6.50 %
Tier 1 risk-based capital ratio1,546,693 53.89 %172,216 6.00 %229,622 8.00 %
Total risk-based capital ratio1,554,230 54.15 %229,622 8.00 %287,027 10.00 %
________________________
(1)Minimum capital adequacy for common equity tier 1 capital ratio, tier 1 risk-based capital ratio and total risk-based capital ratio excludes the capital conservation buffer.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our Asset Liability Management Policy sets forth guidelines for effective funds management and establishes an approach for measuring and monitoring our net interest rate sensitivity.
Interest rate risk is the probability of an increase or decline in the value of an asset or liability due to fluctuations in interest rates. These fluctuations have an impact on both the level of interest income and interest expense as well as the market value of all interest earning assets and liabilities. The objective is to measure the impact that different interest rate scenarios have on net interest income and ensure that the results are within policy limits while maximizing income. The results can be reflected as an increase or decrease of future net interest income or an increase or decrease of current fair market value.
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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 swaps. The interest rate floors and interest rate swaps hedge our cash and securities and the interest rate caps hedge our securities. Based on the nature of our operations, we are not materially subject to foreign exchange or commodity price risk.
Exposure to interest rate risk is managed by the Bank’s Asset Liability Committee in accordance with policies approved by the board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital under the current interest rate outlook, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans, and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits, and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk that include an analysis of relationships between interest earning assets and interest-bearing liabilities as well as utilizing an interest rate simulation model where various rate scenarios can be analyzed.
The following table indicates that, for periods less than one year, rate-sensitive assets exceed rate-sensitive liabilities, resulting in an asset-sensitive position. For a bank with an asset-sensitive position, or positive gap, rising interest rates would generally be expected to have a positive effect on net interest income, and falling interest rates would generally be expected to have the opposite effect. While the Company is asset sensitive, we have various instruments that help reduce our interest rate risk exposure in a declining rate environment, 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, 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 deposit400,081 517,712 266,110 1,183,903 — 1,183,903 
Total interest bearing deposits
448,527 517,712 266,110 1,232,349 358 1,232,707 
FHLB advances700,000 — — 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.
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, 2022:

IMPACT ON NET INTEREST INCOME UNDER A STATIC BALANCE SHEET, PARALLEL INTEREST RATE SHOCK
Earnings at Risk as of:-100 bpsFlat+100 bps+200 bps+300 bps
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, 2022.

ECONOMIC VALUE OF EQUITY ANALYSIS UNDER A STATIC BALANCE SHEET, PARALLEL INTEREST RATE SHOCK
As of:-100 bpsFlat+100 bps+200 bps+300 bps
September 30, 202210.20 %0.00 %(10.01)%(19.54)%(28.50)%
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 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, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently subject to any material legal proceedings. We are from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as well as claims or litigation relating to intellectual property, securities, breach of contract and tort. We intend to defend ourselves vigorously against any pending or future claims and litigation.
In the current opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on our results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 28, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
NumberDescription
3.1
3.2
3.3
3.4
31.1
31.2
32.1
101.INSXBRL 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.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definitions Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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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:November 7, 2022By: /s/ Alan J. Lane
 Alan J. Lane
 Chief Executive Officer (Principal Executive Officer)
Date:November 7, 2022By: /s/ Antonio Martino
 Antonio Martino
 Chief Financial Officer (Principal Financial and Accounting Officer)
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