Q4 2022 Silvergate Capital Corp Earnings Call - Preliminary
Before we begin let me remind everyone that this call may contain certain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act 1995.
These include remarks about management's future expectations.
Estimate plan and prospects.
Such statements are subject to a variety of risks uncertainties and other factors, including the COVID-19 pandemic that could cause actual results to differ materially from those indicated or implied by such statements.
Such risks and other factors are set forth in our periodic and current reports filed with the Securities and Exchange Commission, we do not undertake any duty to update such forward looking statements.
Now I would like to turn the call over to al.
Yeah.
Thank you Hunter.
You everyone for joining today.
Our main goal for this call is to answer your questions.
Before we do I wanted to take a moment to provide a few brief comments.
As you know the digital asset industry has undergone a transformational shift.
With the potential for further evolution still to come.
Significant over leverage in the industry.
Has led to several high profile bankruptcies.
And sparked a crisis of confidence across the entire digital asset ecosystem.
As a result many.
Industry participants have shifted to a <unk>.
Risk off position across digital asset trading platforms.
Our first priority has been supporting our customers through this challenging period.
The Silverglade exchange network or <unk> continues to operate 24 hours a day seven days a week and serves thats critical market infrastructure for the digital asset industry.
We have seen average daily volume on this debt of $1 $3 billion during the fourth quarter of 2022.
Which compares to average daily volume of $1 $2 billion in the third quarter of 2022.
Meanwhile, Sen leverage our bitcoin collateralized lending product has continued to perform as expected with zero losses, and no forced liquidations to date.
In light of recent industry dynamics, including customers moving to a risk off position across digital asset trading platforms.
Total deposits from digital asset customers declined to $3 8 billion at December 31, 2022.
Compared to $11 9 billion.
At September 32022.
We saw a high of $11 9 billion and a low of $3 $5 billion during the fourth quarter.
As of December 31, 2022, approximately $150 million of October gates deposits were from customers that have filed for bankruptcy.
Importantly deposits with silver gate have been and continue to be safely held.
As of December 31, 2022.
<unk> held total cash and cash equivalents of approximately $4 6 billion.
Which is in excess of deposits from digital asset customers.
Overall, our business is designed to accommodate deposit inflows and outflows under a range of market conditions.
And because we maintain our cash position in excess of our digital asset related deposits our customers know they can access 100% of their deposits.
In response to the rapid changes in the digital asset industry during the fourth quarter.
We took commensurate steps to ensure that we were maintaining cash liquidity in order to satisfy potential deposit outflows.
As customers began to withdraw deposits during the quarter.
We utilize wholesale funding to satisfy outflows.
Subsequently in order to accommodate sustained lower deposit levels and maintain our highly liquid balance sheet.
Silver gate sold debt securities for cash proceeds.
We sold $5 $2 billion of debt securities during the fourth quarter of 2022.
Resulting in a loss on the sale of securities and related derivatives of $718 million.
This sale included available for sale securities as well as certain securities that were previously identified as held to maturity.
At December 31, 2022, the company held five 6 billion of total debt securities at fair value.
All of which are U S government or agency backed and available for sale.
And which include unrealized losses of approximately zero point $3 billion.
The company anticipates selling a portion of these securities in early 2023.
To reduce wholesale borrowings, which were resolved recognition of our fourth quarter impairment charge related to the unrealized loss on those securities is expected to be sold.
As we always have we will continue to evaluate our balance sheet and liquidity management needs, which will depend on deposit flows and customer behavior.
Now I would like to take a moment to outline our go forward strategy.
As we prepare for a sustained period of lower deposit levels. We are taking several decisive actions to ensure our business is resilient, including recalibrating, our expense base and evaluating our product portfolio and customer relationships going forward.
First we have made the difficult decision to reduce our workforce by approximately 200 people or 40%.
Throughout 2022, we increased employee head count at a rapid rate in an effort to keep up with our growing business and to serve our customers effectively.
It has since become clear that we need to manage expenses in order to account for the economic realities facing our business and the industry today.
We estimate aggregate costs associated with the reduction in force of approximately $8 million and expect the majority of these charges to be incurred in the first quarter of 2023.
This is a difficult moment and I'd like to extend my sincere gratitude to those impacted for their contributions to silver gate.
We are committed to providing severance and job assistance resources for all those affected by the reduction in force.
Second we are focusing our strategy to provide the most value added solutions for our core digital asset customers.
Over the coming weeks, we will be streamlining our product portfolio to reduce complexity, while ensuring our institutional clients have the tools they need to continue operating efficiently.
In line with this approach, we exited our mortgage warehouse lending product in the fourth quarter of 2022.
Incurring a restructuring charge of approximately $4 million.
Primarily related to severance and employee benefits.
Finally, after performing an impairment analysis of our intangible assets.
We took an impairment charge of $196 million in the fourth quarter of 2022 related to developed technology assets purchased from the <unk> group.
Given the significant changes in the digital asset industry landscape.
This charge reflects our belief that our launch of a blockchain based payment solution is no longer eminent.
We remain committed to seeking opportunities to realize value for these technology assets.
Before we open the line for questions.
Want to emphasize that silver gates mission has not changed.
We continue to believe in the digital asset industry and remain focused on providing value added services for our core institutional customers.
While the decisions we have had to make are difficult. We are confident that these changes will enable us to continue serving our core customers in a responsible and profitable manner.
Given the current level of industry uncertainty.
We are committed to maintaining a highly liquid balance sheet with minimal credit exposure and a strong capital position, ensuring maximum flexibility for our customers.
As we have said many times before we purpose built this business to support our customers not only during periods of growth.
But also in times of volatility.
Despite significant challenges in the broader industry, we stand ready to support our digital asset customers.
We look forward to sharing more during our earnings call on January 17.
And with that I would like to ask the operator to open up the line for questions.
Operator.
Thank you if you would like to ask a question. Please do so now by pressing star followed by the number one on your telephone keypad, we'd like you to please limit your questions to one question and one follow up if you change your mind I would like to be removed from the queue. Please press star and then K one.
When preparing to ask your question. Please ensure that your device Andrew microphone on mute you lately.
Our first question today comes from the line of micro Perito with Kb capital Michael. Please go ahead.
Good morning.
Thanks for taking my question.
So.
I have a lot, but I guess to try to keep it to two here number number. One is just can you give us a little bit more color.
On the security sales and the corresponding a corresponding impact to kind of where book value goes I know you guys arent releasing full financials, but it seems very relevant just kind of given where the stock is to try and have an idea here I mean, it seems like you're suggesting you sold some HTM securities portfolio.
Securities rather is it fair to assume that that.
That entire portfolio will have to be marked and just some parameters. There I think would be a helpful. Starting point.
Sure Mike I appreciate the question and I'll go ahead and start and then turn it over to Tony for any additional.
Detail, but you are correct.
We did make the decision.
Late in the fourth in the fourth quarter.
That we no longer had the ability and the intent to hold the securities that were previously categorized as held to maturity.
And that was.
Fairly obvious given the fact that we were selling.
A significant portion of our securities portfolio and as I mentioned in my prepared comments, we will likely sell additional securities here early in 2023 to further pay down wholesale borrowings and so on.
Yes, just just to make sure nobody's double counting here.
You could go back and look at the.
<unk>.
Mark on the available sale portfolio at September 30.
And then also look at the market.
On the HTM portfolio, which was disclosed in our 10-Q.
And you could assume that that that.
That all of that now is has either been realized through that 700 plus million dollars of loss.
And or is included in the remaining roughly $300 million of Mark on the portfolio and let me ask Tony to provide any additional comment make sure I didn't say anything incorrectly there.
Yes, Thanks, Alan and thanks for the question Mike.
Yes.
Alan covered off.
The result is as we as we indicated in the Q3 10-K, there was a.
Alright.
$26 million Mark to market.
Unrealized on the held to maturity.
But as we've disclosed the portfolio at fair value.
As of year end is $5 6 billion and it includes.
All the securities that we've got left in the portfolio and they are all mark to market through ASF.
So.
Your assumption like was correct. Thanks for the question.
Got it and then for my for my follow up just I think.
You guys don't provide deposit guidance and but the environment here is obviously pretty pretty challenging I guess.
Mike.
The short version of the question is.
<unk>.
One why why are customers pulling funds is it simply that they are not investing in crypto assets anymore, and hence moving those monies to treasuries and other things and just there's no point in holding money on the sand if they are not investing in crypto and then two as you think about where deposits go from here I mean is there still a commitment to the space.
As much as you guys are committed to it do you expect these customers to eventually start trading again once the MTX fallout kind of is closer to completion or how are you guys viewing that kind of outlook for the industry and your business on the deposit side relative to the $3 8 billion period end level.
Okay.
Yes, Mike I'm going to.
Just make a couple of high level comments, and then turn it over to Ben because I think he's got some some good market color having.
Having spoken with a lot of our customers over the last quarter.
But the first thing that I do want to say is.
I'd like to zoom out a little bit and encourage everybody to zoom out a little bit.
You asked the question there towards the end about you framed it as the Fts fallout, let's zoom out and look at what happened throughout 2022 because.
What you really saw was a significant over leveraging that began to unwind in the first half of the year.
Everybody on this call is probably well aware of the taro lunar collapse.
The subsequent collapse of three arrow capital.
The bankruptcies of.
And the second and third quarter.
Celsius, and Voyager and then more recently in the fourth quarter block Fi.
So this this was a much more widespread.
Kind of.
Deleveraging of the ecosystem that obviously culminated with with the collapse of MTX.
But when you put all of that in context.
Yes.
We have seen is a lot of the institutional players.
There's just been this crisis of confidence and in that kind of a situation.
Many of the institutional players have been pulling money.
Half of these trading platforms I would also say.
That.
We saw that happen throughout most of the fourth quarter.
But obviously at year end, we were up a little bit off of the low in terms of deposits are the low point was three 5%.
We settled in at year end at three at three eight.
Im not suggesting that that's that we've hit the bottom I'm not suggesting that we're bouncing and now we're going up.
As you correctly indicated we don't provide guidance and now everybody is probably understands why we don't provide guidance because this is a really volatile industry.
And it is impossible to predict and because it's impossible to predict that is why we structured our balance sheet. The way. We did so that we could in fact withstand essentially a 70% drawdown on our deposits and still be here today to talk with you and to also.
Be able to confidently say that we actually in addition to the 70% drawdown, we are holding cash in excess of all remaining deposits in this digital asset base. So that we are here to serve our customers 24 hours a day seven days a week and.
As I mentioned, the sand continues to operate uninterrupted.
But with that.
Ben do you want to provide some additional market color in response to Mike's question.
Yeah, Yeah. Thanks, Thanks Alan.
So as Alan characterize there was.
A crisis of confidence and a lack of trust in.
The industry that happened in the fourth quarter and so we had clients that were proprietary.
Proprietary traders.
Makers that had been doing business with each other for sometimes six eight years.
Stopped doing business with each other.
And pulled there essentially pulled out all their deposits.
Some clients that moved these are crypto need of firms that moved almost completely into U S. Treasuries.
So that was sort of the dynamic that happened in the fourth quarter as.
As we were talking with our clients and asking them.
When might you shift to a risk on position.
They really couldnt tell us.
That said, we didn't have any clients that said that they were exiting the space altogether.
Perhaps there will be some that do but we didnt receive that feedback.
And our clients were generally supportive of silver gate. Despite the fact that they pulled their deposits.
And just really given the overall circumstances.
Decided to take that action and.
But.
Seem to be committed to the space and willing to.
Come back when market conditions are right.
Yeah.
Thank you for that first question, we will now move on to our next question from Steven Alexopoulos from Jpmorgan. Steven Your line is open.
Good morning, everyone.
I wanted to stick on the.
On the expense side, so given the reduction in head count can you quantify the expected cost saves and do you expect to be profitable beyond the fourth quarter.
Yes, Steve It's a fair question.
It's a little bit too early for us.
As you know, we typically don't provide guidance we will absolutely.
When we release first quarter earnings will be able to how excuse me fourth quarter earnings will be able to have a little bit.
More.
Detail, if you will on what.
What we think the expense base will look like going forward.
As to whether or not we will be profitable in the first quarter.
As I mentioned in my prepared remarks, we are likely going to continue to sell securities here in the in the first quarter some of that.
We'll actually already be reflected in the fourth quarter via an impairment charge, we're still working on those numbers.
But then we also will be taking the restructuring charge.
For the severance et cetera here in the first quarter. So.
Or are we take a long term view here and so the goal is is to get.
As many of these.
Restructuring charges and adjustments to the business completed here in the first quarter. So that so that we can be profitable prospectively.
But at this point, we're not able to comment on whether the first quarter will actually be profitable.
Okay, Yeah, Alan I was really getting good excluding the onetime charges. If you re calibrating expenses to get to that point, where you are at least breakeven moving forward it sounds like youre, saying, yes to that.
Yes.
Again, Steve the way I would I would just.
Kind of qualify that is.
We are recalibrating our expense base and then also as as we've mentioned.
Taking a look at the products that we're offering et cetera to make sure that all of the profit of products that we offer are profitable.
But obviously.
Excuse me a big wildcard in all of this is is where our deposits right.
It's part of the reason, we've we've had too.
Essentially.
Cut as deep as we've as we have on the expense side is a reflection of looking at where we were deposits kind of settled out in the fourth quarter and assuming that.
A range of plus or minus range around that that level.
Is is where we say that's that's how we've kind of tried to recalibrate our expense base. The other thing that I would point out is is that.
It wasn't too long ago that we as a company. We're at this very spot in terms of deposit levels.
Employee count right.
It was literally two years ago, the fourth quarter of 2020.
When we were operating the bank as.
Under a $5 billion bank, we crossed over the 5 billion threshold on total assets.
At year end 2020.
And we had roughly the same head count that we do now.
After this reduction enforce that that we've just implemented so.
No.
There is absolutely precedent for looking at that silver gate through the lens of where we two years ago.
And where are we profitable then et cetera.
So without providing forward guidance I think you can look to the past.
As.
The proxy.
Thank you for the questions. Our next question comes from Joseph <unk> with Canaccord Genuity.
Please go ahead.
Hey, guys. Good morning, Thanks for hosting this call.
To get some of this information out just wondering on on on the customer side clearly there is less.
Less demand in the industry and maybe.
You're onboarding lost customers, but any change that onboarding.
Kind of profile of the customers that.
Youre looking at or May not bring on to the sudden now versus.
For this.
A quick follow up.
Yes, good morning, Joe I'll, just go ahead and kick that question directly to Ben.
Yes, Hi, Joe Good morning.
So most of that so as you know we serve the institutional side of the business and we've definitely seen a slowdown excuse me institutions coming into the space.
So most of the institutions that are clients of ours are raising money from limited partners.
Obviously, given everything that's been going on in the industry raising.
Raising money at this time is challenging so we have seen a bit of a slowdown there.
There.
That said, we've been we've always been focused on.
Adding quality clients that.
Do we believe are profitable for for the platform and so that that mission Hasnt changed and we do we do think that.
We are continuing to have discussions with folks and I would guess probably characterize it overall.
As a slowdown.
Yeah.
Okay. Thanks for that and then.
On the Gms.
Yes.
You're kind of writing down in particular, an impairment charge on.
I mean clearly.
Theres less now.
I guess operating ability right now to kind of expand the business and.
<unk> spend there.
Is it do you see it or do you see that as a as an operating constraint now or or a balance sheet constraint more.
Hum.
Not moving that forward at this point or is an industry level from where you believe that maybe the kind of just the overall environment regulatory environment et cetera.
It doesn't lend itself to moving any of that forward right now.
Yes, Joe that's that's really good question and I'm glad you asked it because.
Yeah.
I think.
What we should do is separate kind of the.
The accounting treatment of an intangible asset.
From.
What what our hope is going forward.
I would stress hope because obviously in the current operating environment.
It's going to be really challenging to bring a <unk>.
<unk> dollar.
What what others have referred to as a stable coin.
Token is deposit or Taco night dollar, it's going to be tough to bring that to market anytime soon.
And that is really what.
Has driven our decision to take to take the impairment charge essentially.
Writing down that intangible asset and as some on the call maybe aware of the accounting rules are pretty specific here on the valuing an intangible asset and.
When we look at it through the lens of can we actually.
Yes.
Essentially validate the carrying value of the asset well, how do you do that while you do that by by projecting some future revenue.
That would be generated by activity.
That would be supported by that asset.
And with no visibility in sight here certainly the way we phrase it is certainly not imminent.
Which is contrary to to how we were feeling.
As recently as the end of the third quarter of last year right.
And so at this point in time, the prudent thing to do is to take the valuation allowance against the asset.
But it doesn't change our our view that a cocainize dollar on a blockchain.
Is it will still have value to the market.
And we believe especially given.
Our recent performance.
Fully fully acknowledged the losses that we've incurred fully acknowledged the reduction in force and the changes that we're making to our business, but if you do go back and look at this through the lens.
<unk>.
Is it the fact that we were able to satisfy a 100% deposit withdrawals are 70% drawdown and we still have cash.
On hand.
And you kind of look at it through that lens and then Youll look at well how does the stable client operate I think silver gate has demonstrated that we can in fact.
B, a a responsible operator.
In this space, which would include the launch of a.
<unk>.
Token is dollar in the future.
We just don't believe that to be imminent at this point.
Our next question comes from Dave Rochester, with Compass point. Please go ahead Dave.
Hey, good morning, guys.
Are you guys anticipating any DTA impairments at this point and I appreciated the securities loss discussion from earlier and we can certainly apply those march to tangible book value to get some sense of where that is but it would be great. If you guys had some kind of a rough estimate for where you see tangible book value per share at the end of <unk> as well. Thanks.
Yeah, I'll turn it over to Tony.
The second Dave I appreciate the question.
But we aren't at this point able to.
Really kind of disclose where tam.
Tangible book value is because of the fact that we haven't closed the books.
<unk>.
And we haven't gone through our year end audit process, which is currently ongoing having said that.
The reason we're having this call. This morning is because we wanted to share with all of you.
The facts for what we actually could disclose.
What are the things that we know here at year end, what we know where deposits ended up.
No the actions we took to to sell.
Sell the securities to support the deposit withdrawals and we know the absolute losses that were taken on those sales of securities, but when you start getting into some of the other accounting treatments and things.
That all needs to go through the normal close process.
But specifically on on the DTA I don't know Tony if you want to provide any additional color on that.
Yes sure.
Good question, Dave and certainly.
As Alan said.
Disclosed.
The losses that we've taken.
On the securities and the impairment charge and Theres certainly pre tax losses.
And given the magnitude.
There is a valuation allowance.
That debt.
It needs to be looked at.
For tax purposes, and so we'll get into further detail on that.
When we do our earnings call a week from from Tuesday.
Okay. So it sounds like you are anticipating some kind of evaluation allowance against the DTA at this point.
Yes, given the size.
The losses we.
We would be considering the evaluation allowance.
Our next question comes from David <unk> with Wedbush. Please go ahead David.
Hi, Thanks for taking my questions I wanted to ask about legal and regulatory risk. So theres been some class action lawsuits can you frame your expectation of the legal liability to silver gate related to FTE X and Alameda.
Yes, David.
I'm surprised it took this long to get to that question.
But.
What I would what I would say is on and unfortunately as you know, we probably can't you can't say much but I first want to restate.
That as a federally regulated bank, we take our compliance and risk management responsibilities very seriously.
A lot of <unk> out there a lot of misinformation.
But we are a regulated financial institution operating in this space.
For nine years.
And and so we obviously take our responsibilities very seriously.
As to litigation.
We don't comment on pending lawsuits at all we're certainly aware of the loss lawsuits and we intend to defend against them bigger asleep.
Understood makes sense and then shifting over to on the regulatory risk what has the posture of regulators been with with you and and silver gate could could there be a potential change to silver gates camels rating.
Yes, as Im sure Youre aware.
No bank can can disclose their camels ratings.
And.
So im not going to.
Im not going to speculate on on the camels rating part of the question, but as to the regulatory posture.
I am sure you are aware of the joint statement that was issued this.
This past week.
By by the Federal Reserve.
The OCC and the FDIC.
Obviously, we are a fed member bank.
<unk> been a fed member bank the entire during the duration of our operating in this space and as we've characterized many times in the past.
We engaged with our regulators very early in this initiative in 2014.
In this space with bitcoin only.
And and.
We have been engaged with them.
Continuously for the last nine years not only with.
With the federal reserve, but obviously, the FDIC insures, our deposits and so they they.
Often tag along with it.
With regulatory examinations, where state chartered in California, So we have the California, DF pie as our chartering regulator.
So we have regular ongoing interaction.
Regular examinations targeted reviews of specific areas of.
As the regulators would would deem heightened risk.
Whether that be capital liquidity regulatory compliance BSA et cetera.
And so.
There is certainly a lot of attention on the space right now.
But we've been operating with the full.
Full transparency in this space with our regulators for.
For the entire duration of this initiative.
Our next question comes from Jared Shaw with Wells Fargo Securities. Please go ahead Sir.
Hey, good morning.
I guess any any thought to changing the revenue structure around around the <unk>.
In light of this or.
In terms of like charging a fee for it or do you still feel that.
Using that to two purely accumulate deposits as the best use for that for that platform.
Yes.
Yes, Jared it's a fair question and I'll kick it to Ben and just a second because we have mentioned in our prepared remarks, and I've mentioned it here now.
In the Q&A section here that we are going to be looking at at all of our products.
But I do want to.
Just just point out that.
The quote unquote gathering up deposits is is not really the way we've looked at this business for quite some time I've talked about.
Compared and contrasted.
Silver gate strategy versus other banks that have come into this space more recently.
And without at all being disparaging.
When looking at those other banks.
What I've what I've observed is that many banks that were attracted to this space over the last couple of years essentially.
Essentially we're starting where we started back in 2014, when we first started this initiative.
Bitcoin only and what we saw was that there were very few banks that understood. The space that we're willing to bank.
Participants in this ecosystem and so we saw it as an opportunity to gather deposits.
<unk> or our other asset strategies right. So that's where we started in 2014.
For the last five years or so that has not been our strategy is as we've.
As we've essentially exited others some of the other legacy community our commercial banking businesses.
There is nothing wrong with those businesses, but as you know it is very hard to differentiate yourself. When you are offering the same loans and deposit products that everybody else's offering. So then you end up having to compete on an on price or excuse me on service because you can't compete on price.
Well.
Let me not let me not get distracted there with that but.
The point I'm trying to make Jared is is that.
We do not look at this business as Oh, let's gather deposits to go fund our asset strategies.
That is why we carry cash.
Cash and securities to cover these deposits.
And at the other pricing strategies, let me ask Ben to comment.
Thanks Alan.
As we take a step back.
Look at the <unk>.
It really does provide critical market infrastructure to the digital asset industry, which trades 24, seven and even despite lower deposits. We saw incredible usage of the <unk> in the month of December and for the quarter actually finished with sand volumes above.
Third quarter sand volumes, which I think speaks to the usage of it.
Obviously usage of discern.
<unk> decreased a little bit in December as deposits decreased but it is critical market infrastructure for our clients and something that we can.
We'll continue to support and develop on them. So.
With that because it is critical market infrastructure, we do think that the clients will will pay for it.
But we're still in the process of evaluating sort of what that what that pricing structure it looks like and.
And really the whole portfolio of services that our clients are looking at.
Okay, and I guess, maybe just.
A corollary to that do you think would you consider looking too.
Yes.
Combined with the bigger company to healthcare.
Some more diversification or limit some of the distress periods of time like this put on the business or do you feel that being a monoline.
We'll call it a crypto only.
Focused institution is still the.
The most efficient structure to take.
Yeah, I'll jump back in and take that one.
We certainly.
We'll always consider.
Ways to maximize share.
Shareholder value, while also providing service to our customers.
And.
I've been in this business have been in commercial banking for 40 years.
<unk>.
And so have bought and sold many banks during my career.
This business initiative is obviously unique and the very opportunity the circumstances that created the opportunity for us to get into the business and differentiate ourselves in the way we have.
Has also.
Translated into the fact that that there are very few larger institutions that have been willing to look at this space.
But you are touching on something Jared, which is important because my experience.
<unk>.
The banks that <unk> sold in the past.
Is is that when a potential acquirer is looking at at a target.
Very often they are looking for kind of one or two specific things, whether it's a core deposit franchise.
Specific geography or specific line of business.
That that acquirer is is essentially looking for.
And that is one of the reasons, we decided to let's just focus on being the best we can at providing services to the digital asset industry. Because we don't think this is going away it's going through.
A period of significant stress, but we don't think its going away.
And at some point in the future. It is quite likely that a larger institution that wants to get into this space will will want to take a look at silver gate, because we've been operating responsibly in the space for for.
Over nine years.
Our next question comes from will Nance with Goldman Sachs. Please go ahead.
Hey, guys. Good morning. Thank you for taking my questions first I wanted to I don't want to just say congratulations I don't think that there that many banks that can stomach a 70% decline in deposits and come out of it with no operational liquidity issues I do think that there is acknowledgment.
That being said I'm wondering if you could kind of talk around the securities portfolio that remains on the balance sheet is there anything you can tell us about the yield profile of that theres been a lot of questions today about tangible book value I won't belabor that anymore, but as we think about calibrating earnings stream going forward, maybe you can hit on what the yield profile looks like of the <unk>.
<unk> done around the balance sheet and then similarly, if you could talk about the yield profile of the funding that you've raised during the fourth quarter. Thank you.
Yes.
A question best answered by Tony, but unfortunately, we're not going to be able to provide you with a lot of detail right right now well, we certainly will provide more when we released our earnings.
All of that detail as you know will be in the 10-K.
The one thing that I would point you to.
In our earnings release is or excuse me in this.
Our release. This morning is the fact that the remaining securities are all government or agency backed.
And if you were to go back and look at what the makeup of the portfolio was.
At the end of the third quarter, you would have seen that that that there were quite a few munis in there as well.
And so you can kind of deduce that that we sold.
More of the longer duration securities.
That would've been fixed rate and if you just step back.
And think about and by the way I also want to thank you for the acknowledgment on.
The fact that we survived that.
Apposite.
Essentially run.
That's what other people have been calling it.
So, but essentially well we had a playbook that we hope that we would never have to execute right.
Which is what do you do if you have.
Sustained deposit withdrawals well you initially.
You want to make sure you have a securities portfolio that is high grade high quality high credit quality that is pleasurable. So that you can borrow against it so as I said in my prepared remarks, that's what we did first I am not not knowing whether the deposit withdrawals were going to be temporary we borrowed against our securities portfolio. That's what it was therefore it was all.
Legible high quality.
And so we borrowed against it.
But then to your point when you're borrowing youre borrowing at at current rates right.
So if the securities portfolio was yielding.
A lower level at the end of the third quarter, because it had been put in place and some of it was longer duration.
Put in place in the past then you can just connect connect the dots right. We were borrowing at a higher level all in because the fed had been raising rates so rapidly during during 2022.
Once we get to the point, where it's like okay. Well this is going to be lower for longer.
And we're still in a rising rate environment.
We need to protect capital both now and in the future how do we make sure we're protecting the future capital well, it's by selling the longest duration right now.
So that we can preserve the earnings power and that and the mark to market on the capital going forward with the remaining portfolio. So.
Without diving into the weeds on spin.
Specifically on on your question hopefully that provides you with.
With enough color.
And that is very helpful. I appreciate that and obviously I'm sure things have not been fully finalized the security sales in the first quarter, but I think you gave some helpful detail there about how you thought about the sequence of events, mostly deposit decline.
Can you talk about any kind of guidepost on her arm.
Back bounce around how youre thinking about the appropriate level of securities on the balance sheet going forward.
Is it your intention to match one for one deposits for cash and we should be thinking about.
Significant reductions in the securities portfolio or.
I guess, maybe you could speak to kind of a mix of securities versus cash once the balance sheet restructuring is kind of fully finished.
Yeah, Unfortunately, well, we're kind of getting into guidance there.
What our goal is for today is to tell you exactly where we are what we've done to get here.
And then as I said in my prepared remarks, we will continue to evaluate our balance sheet liquidity management needs.
But it's going to depend on deposit flows and customer behavior and so.
I think you can look at what we've done so far look at where we are now, but it's it's anybody's guess as to what happens in the future as it relates to our our customer behavior with our hope that that that we've kind of reached a level.
With deposits.
They're going to be sustainable as Ben mentioned, we havent had any customers come to us and say, hey, where we're closing our account.
And we're leaving this ecosystem.
But our customers have.
Taken a huge pause and we're going to have to digest that and.
And we'll make the appropriate.
Actions.
Going forward.
Our next question comes from <unk> <unk> with Morgan Stanley . Please go ahead ma'am.
Hey, good morning.
I just wanted to follow up maybe on the prior line of questioning around what.
Our balance sheet should look like going into next year, just given the drawdown in deposits can you talk about how youre thinking about the Sen leverage business.
Do you expect to shrink that business overtime and also do you have the option to cancel some of those $800 million or so of Undrawn commitments that are down your book right now.
On the Sen leverage book.
One where we're going to continue to offer the product into do we have the ability to cancel.
So.
Again, we're not providing specific guidance on specific products right now.
We have said that we're going to look at our entire product portfolio with a view of.
Are the products that we offer profitable.
And.
Is there is there a good product market fit.
What what I, what I can tell you.
Is that that product continues to perform exactly as designed.
Through all of the periods of ups and downs in the price of bitcoin.
We we have control of the collateral through through our custodial partners and we have the ability to liquidate.
24 hours a day seven days a week, if our customers do not maintain there the appropriate margin. We have that we have not yet had to ever do a forced liquidation.
And.
The product continues to perform as agreed.
And as we've also.
That our commitments are slightly in excess of $1 billion.
We've been pretty we've been hovering around that $300 million range in terms of Outstandings for last couple of quarters, and I think thats reflective of the fact that.
There's just not a lot of.
Activity.
And in the related conviction in.
And the bitcoin space at the moment.
Got it.
And separately I appreciate all the comments around compliance and AML and <unk> C and as you said Theres a lot of misinformation out there. So I was hoping you can provide a general overview on the steps you take on the <unk> side before you onboard a customer and if you can any color.
And how much visibility you would have as a bank to transactions related to FTE acts in Alameda from both.
This.
<unk>.
Question has been really well covered in the past, we obviously take take our.
The.
R R.
We take our.
What am I trying to say here.
Sorry, I got distracted.
We.
Why is the requirement which includes the initial on boarding.
It then also includes.
Monitoring transactions on an ongoing basis.
And.
So a lot of as you said the misinformation out there.
Is is.
Is.
Candidly very frustrating.
We follow the Bank Secrecy Act the USA Patriot Act for every account that we open.
And we we conduct ongoing monitoring.
But but to your point to part of your question.
We can only see what we can see.
In terms of what is coming in and out of Silver Bay, we don't have visibility into what's going on.
With with.
With other banks.
Our next question comes from the line of Mark Palmer with BPI.
Mark. Please go ahead your line is open.
Yes. Thank you good morning.
<unk>.
Signature bank during the fourth quarter.
Said that they would be pulling back from the digital asset business.
Reducing the amount of deposits that they had.
Essentially.
How much overlap is there from digital asset clients using the cents on the one hand, it using cigna from signature on the other hand.
And do you anticipate that youre going to see some movement as a result of that announcement.
Yes markets, it's a good question.
I think I'll ask Ben to comment the only thing I'll say is the overriding statement is that.
Certainly.
We're not privy to.
Two signatures business in general other than what they say publicly.
But but we are aware that many of our clients.
Both the <unk> and <unk> and that's not that's not surprising given the fact that there are very few banks that operate in this space and that most of our clients don't want to have a single.
A single service provider, because then that that provides a single point of failure for for their business, but Ben do you want to comment on any more on Mark's question.
Yes, I think the point that Alan made is exactly right in that this is an under its an underbanked industry and I know that are our clients are always concerned about losing their banking relationships or having limited banking relationships.
Despite what's been going on in the fourth quarter, our clients have been.
Very supportive and proactive actually in reaching out to us and.
And.
Providing there their conviction towards silver gate and their understanding of the need for banks to be in the space and so on.
We don't.
I think the short answer is we don't really see anything changing there we think the customers will continue to use.
Silver gate in the sand as well as as well as our competitors because they understand how critical banking relationships are to their to their overall business. So I don't think we see really any any.
Any change there coming.
Thank you and I know that the question with regard to wholesale funding was asked but in terms of the interest rates associated with the advances from the federal home loan bank and the broker Cds, how should we think about the interest rates that are associated with those and how are you thinking about.
Those balances.
Over the course of 2023.
Of course, as you mentioned youre going to be selling some securities as a means of.
Reducing the wholesale.
Balances.
<unk>.
How should we think about that.
Yes, Tony do you want to jump in.
You've kind of already addressed the question, but maybe you can take it from a slightly different angle.
Yes.
I think mark as Allen said previously.
The funding the wholesale funding is.
It is more recent and therefore.
We track more in line with current rates.
And it's.
Relatively short in terms of duration so.
Yes.
From that perspective.
It's early in the year.
As Alan has said previously.
To kind of walk forward several quarters, but as we look out at this point in time.
We're signaling in our press release today that there is a portion of the securities.
That we fully mark to market that.
Tend to sell.
In the short term so I think the way Alan had categorized it previously.
Just to kind of go back.
As to what we've said.
We had a we had a portfolio.
Very high quality fully pledged securities.
Relatively short duration and Directionally, it's now of even shorter duration and and.
Good.
As we said.
The securities that are left are all U S government or agency.
Securities and therefore, you could presumably.
Municipal bonds that were fixed rate.
So.
The matching between securities and the funding.
Is more in line.
Given what's transpired in the fourth quarter and Thats probably.
Yes.
That's probably all the color I can give today.
We'll provide more details some with earnings.
You can ask them now.
Our final question today comes from George Sutton with Craig Hallum. George Please go ahead.
Thank you.
Long call. So just one quick.
Question relative to <unk>.
Just two.
Make sure I understand.
Are there still people on the project is it still something you are.
Moving forward with internally.
Is it for me thanks, guys.
Yes, George I. Appreciate the question there are still people on the project.
As as we sit here today, we will obviously.
To continue to evaluate as we do with the rest of our business.
The expenses that we're incurring for the products that we're offering as well as the products that we contemplate offering and so.
As it stands today, it's largely an accounting.
Issue that we're dealing with but we're also very mindful of the fact that there are significant headwinds.
Two launching something in the near future and so we'll have to continue to look at the expenses that we're incurring for that.
Hopeful outcome in the future and I think with that.
I suggest.
Emily will you already mentioned that that was the last question. So so I just want to once again, thank everybody for joining us today on such short notice and we look forward to sharing more when we report our first quarter results in a couple of weeks. Thank you everybody.
Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.
[music].
Yes.