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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
Table of Contents
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)

SILVERGATE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Par Value and Per Share Amounts)
(Unaudited) 
 September 30,
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