Q4 2022 Silvergate Capital Corp Earnings Call
Speaker 2: Hello and welcome to today's Silvergate Capital Operation 4th Quarter 2022 Earnings Conference Call. My name is Bailey and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
Speaker 3: If you would like to ask a question, please press star followed by 1 on your telephone keypad. I would now like to pass the conference to our host, Hunter Stenbach, Silvergate Capital Investment Relations. Please go ahead.
Speaker 4: Thank you, operator, and good morning, everyone. We appreciate your participation in the Silvergate Capital Corporation's fourth quarter 2022 earnings call.
Speaker 5: With me here today are Allen Lane, our Chief Executive Officer, Tony Martino, our Chief Official Officer, and Ben Reynolds, our President.
Speaker 6: As a reminder, a telephonic replay of this call will be available through 1159 p.m. Eastern time on January 31, 2023.
Speaker 7: Access to the replay is also available on the investor relations section of our website. Additionally, the slide deck to complement today's discussion is available on the IR section of our website.
Speaker 8: 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 of 1995.
Speaker 9: These include remarks about management's future expectations, beliefs, estimates, plans, and prospects.
Speaker 10: 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.
Speaker 11: Such risks and other factors are set forth in our periodic and current reports filed with the Securities and Exchange Commission. Do not undertake any duties to update such forward-looking statements.
Speaker 12: Now, I would like to turn the call over to Alan.
Speaker 13: Thank you, Hunter, and good morning, everyone.
Speaker 14: As many of you know, we provided select preliminary and unaudited fourth quarter financial metrics on January 5. In November 2017, assessment projects offered Room togent angle Camp and began an Hoffman Group meeting.
Speaker 15: Before I dive into our full
Speaker 16: I want to provide a recap of what happened in the digital asset industry in recent months and its impact on Silvergate.
Speaker 17: Significant overleverage in the industry has led to several profile bankruptcies and sparked a crisis of confidence and lack of trust across the entire digital asset ecosystem.
Speaker 18: As a result, many industry participants have shifted to a risk-off position across digital asset trading platforms.
Speaker 19: To that end, we saw a modest decline in Silvergate's digital asset customers in the fourth quarter.
Speaker 20: a trend that we expect to continue in 2023 as the digital asset industry undergoes further transformation. One thing we have learned on this event shows us that the PM southeast found a bluff, in
Speaker 21: In turn, total deposits from digital asset customers declined to $3.8 billion on September 31, 2022, compared to $1.9 billion at September 30, 2020.
Speaker 22: Average deposits were $7.3 billion with a high of $11.9 billion and a low of $5 billion during the fourth quarter.
Speaker 23: As of December 31, 2022, approximately $150 million of Silvergate deposits were from customers that had filed for bankruptcy.
Speaker 24: In order to satisfy these deposit outflows, we took commensurate steps to ensure that we were maintaining cash liquidity in excess of digital asset related deposits.
Speaker 25: We initially utilized wholesale funding to satisfy outflows, and subsequently we sold debt securities to accommodate sustained lower deposit levels and maintain our highly liquid balance sheet.
Speaker 26: Importantly, we currently maintain a cash position in excess of our digital asset-related deposit.
Speaker 27: and customers know they can access 100% of their deposits.
Speaker 28: Sony will provide more color on the security sales and balance sheet management strategy in a few minutes.
Speaker 29: Turning to our core operating.
Speaker 30: the Silver Gate Change Network or SIN.
Speaker 31: Despite the significant decline in deposits, transfer volume on the SIN was $117 billion, an increase of 4% on a sequential basis, demonstrating that our platform continues to serve as critical market infrastructure for the digital asset industry.
Speaker 32: The SAN has operated uninterrupted 24 hours a day, 7 days a week.
Turning to send leverage.
Total approved commitments declined 23% to $1.1 billion, compared to $1.5 billion at the end of the third quarter.
In addition, we experienced a range of outstanding send leverage balances during the quarter between $282 million and $377 million with an average outstanding balance of $328 million.
All of our SEND leverage loans continued to perform as expected with no loss of force liquidation.
Looking ahead, we expect to maintain existing utilization for FEN leverage in 2023.
and expect commitments to shrink to approximately $400 million by the end of the second quarter of 2023.
As we discussed on our business update call, we are taking several decisive actions to ensure our business remains resilient during a sustained period of lower deposit levels.
To that end, we are in the process of evaluating our product portfolio and customer relationships with a focus on profitability.
As it relates to our customer base, after a thorough analysis, we have made the difficult but deliberate decision to off-board certain non-core customers in the coming weeks.
Importantly, we are prioritizing and remain committed to our core customers who routinely transact on the fence.
While our evaluation is still being conducted, we believe the impact of these customer exits will not exceed 10% of our digital asset related deposits.
We will also be eliminating certain products that have become too costly or complex.
We have concluded that products such as digital asset custody and certain cash management services, which are used by a minority of our customers and require significant resources to operate, can no longer be offered profitably.
While we remain focused on providing innovative solutions, reducing our product portfolio will allow us to better serve our core institutional digital asset customers.
Moving forward, our product operation consists of our most value-added solutions and reflect what we do best, with solutions like the FEN, WIRES via our proprietary API, and deposit accounts.
In addition, we made the difficult decision to reduce our workforce by approximately 200 percent or 40 percent.
We estimate aggregate costs associated with a reduction in force of approximately $8 million.
primarily consisting of severance payments, employee benefits, and related costs.
We expect to incur the majority of these charges in the first quarter of 2023.
Taken together, we believe that focusing on providing a streamlined offering to our core customers and managing expenses will help Silvergate return to profitability in the second half of 2023.
While we are narrowing our focus, I want to emphasize that Silvergate's mission has not changed.
I recognize that we've made some difficult decisions recently, but we are confident that these changes will enable us to serve our core customers in a responsible and profitable manner.
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.
We continue to believe in the digital asset industry and stand ready to support our customers.
I'll now turn the call over to Tony to review our financial results in more detail before we take your questions.
Tony?
Thank you, Alan, and good morning, everyone.
Starting on slide three with our key financial results.
Silvergate reported a net loss attributable to common shareholders of $1 billion or a loss of $33.16 per common share.
Excluding the loan securities and derivatives, impairment charges, and restructuring charges, adjusted net income available to common shareholders was $15.1 million, or 48 cents per adjusted diluted share.
Tier 1 leverage ratio was 5.36%, based on average assets of approximately $15 billion, and continues to exceed the well-capitalized standards as defined by federal banking regulations.
We expect our Tier 1 leverage ratio to improve over time as we reduce wholesale funding and the resultant size of our balance sheet.
In addition, book value per common share was $12.93.
Moving on to slide five.
As we disclosed earlier this month, total deposits from digital asset customers declined to $3.8 billion during the quarter, compared to $11.9 billion in the third quarter and $14.1 billion in the fourth quarter of 2021.
Average digital asset customer deposits were $7.3 billion in the quarter, down 40% compared to last quarter.
As a result of the crisis of confidence the industry experienced, we saw higher volatility in our deposit base as the range of deposits during the quarter widened within a high of $11.9 billion to a low of $3.5 billion.
Our weighted average cost of deposits for the quarter increased to 77 basis points compared to 16 basis points during the third quarter.
As Alan mentioned, we initially utilized wholesale funding to satisfy outflows.
The annualized cost of digital asset deposits remained at zero, reflecting our low-cost digital asset deposit strategy.
As we have said before, deposits with Silvergate have been and continue to be safely held.
At the end of the fourth quarter, we held total cash and cash equivalents of $4.6 billion, which is in excess of deposits from digital asset customers.
Our business is designed to accommodate deposit inflows and outflows under arranged market conditions.
Turning to slide six, net interest income was $53.7 million in the fourth quarter.
a decrease of $27.2 million compared to the third quarter, and an increase of $15.5 million compared to the fourth quarter of 2021.
Net interest margin was 1.54% for the fourth quarter compared to 2.21% in the third quarter and 1.11% in the fourth quarter of last year.
As we outlined in our business update earlier this month,
We sold debt securities for cash proceeds in order to accommodate sustained lower deposit levels and maintain our highly liquid balance sheet.
We sold $5.2 billion of debt securities during the quarter, resulting in a loss on the sale of securities of $751.4 million.
This sale included available for sale securities as well as certain securities that were previously identified as held to maturity.
Our securities portfolio had an average outstanding balance of $9.8 billion, with a corresponding yield of 2.61% for the fourth quarter.
down from an average balance of $11.8 billion at the end of the third quarter, with its corresponding yield of 2.09%.
As of quarter end, our securities portfolio had a balance of $5.7 billion.
As part of our risk management strategy, we hedged approximately 35% of our interest earning assets to protect against downside interest rate risk.
Looking ahead, we expect to sell a portion of these securities estimated to be $1.7 billion in early 2023 to reduce wholesale borrowings, which resulted in the recognition of impairment charge of $134.5 million in the fourth quarter related to the unrealized loss
on those securities expected to be sold.
Subsequent to the end of the year, we sold approximately $1.5 billion of securities, and as always, we will continue to evaluate our balance sheet and liquidity management needs.
which will depend on deposit flows and customer behavior. Turning to slide seven, non-interest loss for the fourth quarter of 2022 with $887.3 million compared to non-interest income of $8.5 million in the prior quarter.
and $11.1 million in the fourth quarter of 2021.
Losses on securities were $885.8 million and losses on derivatives were $8.7 million, resulting from the sale of debt securities and related derivatives.
and impairment charge during the quarter.
Excluding these losses on securities derivatives, adjusted non-interest income for the quarter with $7.2 million.
As a result of the strategic actions Alan outlined earlier, we expect quarterly net interest income and fee income in 2023 to trend lower than adjusted 4th quarter 2022 levels.
Flight 8 shows non-interest expense for the quarter of $238.5 million compared to $33.2 million in the prior quarter and $25.7 million in the same quarter of last year.
The increase sequentially and year-over-year primarily resulted from a $196.2 million impairment charge on developed technology assets we acquired earlier in the year.
as well as increases in salaries and employee benefits attributable to a $3.7 million restructuring charge related to exiting the mortgage lending product during the fourth quarter of 2022.
Excluding the impairment on intangible assets and restructuring charges, adjusted non-interest expense for the quarter was $38.6 million.
As Alan discussed earlier this month, we announced the reduction in force of approximately 200 employees, or 40%, in order to account for the economic realities facing the business and industry today.
We estimate the aggregate costs associated with the reduction in force of approximately $8.1 million, primarily consisting of severance payments, employee benefits and related costs, and we expect to incur the majority of these charges in the first quarter.
Cost savings associated with the reduction in force are expected to be $7 million to $8 million per quarter.
Our expense base in the first half of the year will continue to be assessed as we evaluate individual vendor contracts and other costs as a result of the strategic actions that Alan mentioned.
We expect expenses in the second half of the year to be lower compared to the first half of the year.
We recognize the tax benefit of $24.3 million for the fourth quarter of 2022, reflecting an effective tax recovery rate of 2.3%.
compared to an expense of $13.5 million for the third quarter of 2022, with a corresponding effective tax rate of 23.7%.
The income tax benefit recorded in the fourth quarter of 2022 was driven by the loss recognized during the quarter and the resulting reversal of prior period income tax expense incurred during the first three quarters of the year. The income tax benefit recorded in the fourth quarter of 2022 was driven by the loss recognized
to 100% valuation allowance on deferred tax assets. As a result of losses incurred during the quarter, we have established a deferred tax asset balance of $342 million and applied 100% valuation allowance against this asset.
The deferred tax asset balance associated with net operating losses will carry forward indefinitely and can be utilized against 80% of future taxable income.
While this was a tough quarter in light of significant challenges in the broader digital asset industry and difficult decisions we had to make as a company, we remain committed to serving our core customers.
We look forward to providing further updates on our business throughout 2023.
With that, I would like to ask the operator to open up the line for any questions. Operator? Yes, sir.
Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad.
If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, please press star followed by 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We politely request that you keep to one question and one follow-up. Thank you.
Our first question today comes from the line of Michael Rito from KBW. Please go ahead, line is now open.
Hey, good morning guys, thanks for taking my questions.
I have a few things I want to get to but I'll let some of my colleagues on the others. The one I wanted to start on was kind of your your comment about deposit flows and customer behavior driving decisions around selling securities and I'm just I guess I'm curious you know what
what the recent update is on both. I mean, it seems like you sold some, but not all of the securities that you earmarked for sale when you pre-released earlier this month. And I'm just curious if there's any update to deposit flows and customer behavior that you're willing to provide at this point.
Yeah, I'll touch on the deposit question and turn it over to Tony.
for the securities question. So on the deposit question, Mike, we are not, we're gonna stick with our standard approach here, which is to not provide any guidance whatsoever. As I think abundantly clear in the fourth quarter.
any guidance in this initiative is speculation and and
in similar fashion, reporting on deposit movement in a two-week period is not indicative of what we might expect for the entire quarter. And so we don't want to provide any update at this point.
you know, that would cause people to think that, you know, deposits are going to be surging higher or that they're going to be lower. You know, the SEND continues to operate 24-7. We continue to maintain cash on balance sheet in excess of all of our deposits in this initiative. So our customers.
know that they can access their deposits 24 hours a day, seven days a week. If they bring additional deposits on, as some customers have, we're going to continue to hold those in cash on our balance sheet. And if customers choose to withdraw, as some have, they know that they can have 24-7, well, they can have
since we got into this business nine years ago. And so with that, Tony, would you like to touch on the security sales?
Yeah, sure. Thanks, Ellen. As we disclosed, we anticipated selling approximately a billion seven of securities and had recorded an impairment charge for that sale, which is
part of a loss. And as Alan said, we're only two weeks into the year, but we did execute on that plan. We've sold a billion five of the billion seven that we have earmarked.
And so, you know, that's transpired in the first two weeks. And beyond that, as Alan said, you know, it's early, it's too early in the quarter to guide further. But as we've said, you know, we have the remark at those curies for...
you know, appreciate all the commentary, Alan, around how you're kind of refocusing the business and trying to right size the OPEX side for the new kind of lower deposit level. I'm just curious, though, you know, the kind of focusing and removing some functionality that that's more expensive and non core is element but then the other element right is making sure you're getting paid for what you're providing.
bit more amplified in this business than your typical commercial deposit. Just curious what your updated thought processes are there.
Yeah, I appreciate that question and I'll ask Ben to address it. Thanks.
Yeah, so as Alan mentioned in his prepared comments, some of the products that we offer today have just become too costly or complex to continue offering.
So, you know, as with any business, you make assumptions about customer adoption of new products and when they don't scale the way that you anticipated, you know, sometimes it's you need to make course corrections.
So digital asset custody is an example of that for us. It's a very competitive space and difficult to differentiate yourself. Kind of switching gears to the cash management solutions that we mentioned, we don't want to provide more details at this time related to that because we want to make sure that we notify some of our strategic partners and customers.
you know.
we just won't continue to do that. So we do expect a boost to profitability by discontinuing those products, despite an overall decline in fee income next several quarters. The other thing, Mike, that's worth mentioning on this topic is that as we do offer the SIN and wires and hasaci that doesn't have any Canadian technology there it that will still lead to a a
other products that are critical to our core customer base. We do expect those products to generate significant C income, but that is difficult to predict as it's often dependent on market conditions. So, you know, sort of everything's on the table in terms of how to monetize the platform.
But I'd say more work is probably needed in order to say exactly how we're going to do that beyond the way we do today, which is through deposits. Thanks for the question.
Thank you guys.
Thank you.
The next question today comes from the line of Joseph Farfy from Canaccord. Please go ahead your line is now open.
Hey, guys. Good morning. Thanks for the extra color here in your report. I just wanted to circle back maybe on to some of your comments you made a couple of weeks ago on pre-release. I know you're not providing guidance, but kind of a broad rule of thumb is to...
continued. A couple weeks ago you said to look at you know where Silvergate's deposit base was. You know perhaps
six or eight quarters ago and kind of extrapolate out interest income.
today based on that same level of deposits, then just wanted to make sure you think that that kind of rule of thumb still makes sense now of a follow-up.
Yeah, Joe, I really appreciate you asking for that clarity because that's not what I meant when I was referring back to, as you said, six or eight quarters ago. I wasn't at all focused on.
like the interest income, the net interest income side of things, it was more reflective, my comments a couple weeks ago in this regard were more reflective of the fact that it was only a little over two years ago that we were essentially this size in terms of deposits.
And therefore, we have a pretty good idea as to what staffing level will be required in order to support this adjusted size. And also kind of embedded in that observation.
and tying this back to some of the comments that Ben was just making, it's also reflective of the fact that we expect to have fewer customers and also a streamlined product set which are all...
very similar to you know to kind of where we were a couple of years ago and so my comments that of a couple weeks ago were were really meant to to just share with with you all that that
that we've been here before in terms of running a profitable company that has fewer customers and lower deposits, but that still serves this ecosystem with the critical infrastructure that we provide.
As to the interest rate environment, you know, we're in a very different interest rate environment today versus where we were back then. You may recall that, you know, interest rates you know, essentially went to zero.
shortly after that, like kind of eight quarters ago when the pandemic hit. And during most of our growth throughout 2020 and 2021, over a hundred thousand people were Insurers.
we were in a zero interest rate environment, you know, with the three month treasury yielding less than 10 basis points. And so, you know, today we're in a much different interest rate environment. And so we're not at this, you know, we never try to predict interest rates.
We just try to understand how different interest rate environments might impact our business. And we're certainly going through that same analysis today with a lower balance sheet but a higher interest rate environment.
Sure, thanks for that, Color Allen. Then maybe a follow-up. I mean, obviously, you're maintaining a super liquid balance sheet right now with cash in excess of deposits, which...
is not something historically that you've done. Is there, can you provide maybe some guideposts for us on to when that, the balance sheet kind of may normalize over time here relative to,
have, you know, maybe shrinking down that overly liquid balance sheet and cash in excess of deposits. Thanks.
Yeah, it's a fair question and I'll just go ahead and take this one too and just say that, you know, I'll mention the same thing I always mention, which is, you know, we don't provide guidance and it's really difficult to predict.
But let's just focus on kind of why are we doing this right now? And it really goes back to the thing that we've been saying for the last couple of weeks, which is this industry has experienced a significant crisis of confidence across the ecosystem because of all of the...
overleverage in the system and some of the bad actors and the bankruptcies, etc. And so when market participants are looking in this ecosystem and they're trying to determine who can we trust, we want to make sure that our customers know who we are and who we are.
that we are holding 100% of their deposits in cash on our balance sheet so that they can access that cash up to 100% of their deposits. And so it really is meant to instill confidence.
We also, the other part of that confidence is to communicate to our customers that we are still committed to this ecosystem. We have the customers that we service today, our customers that we onboarded in 2014 and
in 2016, many other banks have come into the space during our nine-year tenure. Some have left, some have expanded their operations and then contracted. You know, what we're trying to communicate is that we are here, we are here for the long haul, we are here to serve our core customers with the core products that they utilize every day.
and they can have confidence that we have 100% cash on balance sheet. And so when will that change? Not for the foreseeable future. I don't know if that's one quarter, two quarters all year long. We want to instill confidence in the ecosystem, and especially with our customers. And so I really think that we can make a difference.
Please go ahead, your line is now open.
Hey, good morning everyone.
I want to start on tangible book value, which was $1293.25. In terms of a new baseline, I just wanted to confirm that we shouldn't expect any additional charges or impairments in the first quarter beyond the $8 million restructuring charge you called out, which could further reduce tangible book value.
Yeah, Steve, I'll go ahead and kick that question over to Tony.
Yeah, hey Steve. Thanks for the question. With respect to this,
tangible book value per share. As I indicated previously, we recorded an impairment for a billion seven in security sales.
and that's already embedded in there. There's puts and takes as always with tangible book value. As Alan's indicated a couple times, we don't provide forward guidance.
And, you know, it's early, it's early, really early in the quarter to, you know, to try to give a guide pop there. But there are puts and takes, you know, another example is the deferred tax carry forward of $342 million that we disclosed.
That's not built into the tangible book value because we've taken the valuation allowance for it, but it's certainly there in terms of tax losses that are available to offset future income.
So, again, it's early. We don't provide guidance, but appreciate the question. Okay. Thanks, Tony. And then for my follow-up, I don't know if you guys heard the signature call this morning, but in the Q&A session, we had a question on AMLPSA.
And they indicated that for FTX, it was more of a made-off situation. They specifically said not an AML BSA issue. Do you guys see this the same way as it relates to Silvergate, not an AML BSA concern?
Yeah, Steve, unfortunately, I did not get a chance to listen to the signature call. So I don't have the context for how they referenced it. But we're just not going to comment at all on any questions and if anybody has a question Being asked is for Steve to answer that is
any FTX related matters. And so, from my perspective,
you know, we should just focus on our core business and, you know, and all of the things that we're doing to help to help this ecosystem and, you know, let all that other stuff, you know, kind of, you know, kind of work its way out.
Okay, fair enough. Thanks for taking my questions.
You bet.
You bet. Thank you.
The next question today comes from the line of David Rochester from Compass Point. Please go ahead, your line is now open.
Hey, good morning guys. You guys had a lot of moving parts on the balance sheet in the fourth quarter that would impact the margin moving forward. And I know you don't want to give any guidance on the NIM, but can you just give some of the spot yields and costs at the end of 4Q for the major average balance sheet lines? I think that would be helpful.
Yeah, thanks for the question, Dave. So again, I think, you know, with.
If you look at the balance sheet broadly speaking, given the disclosures that we made, you know, the cash and securities are the overwhelmingly large components of the balance sheet and the securities, the cash yields are
you know, are in line with federal funds rate. With the securities, what I'll say is, you know, as of year end, we're close to about 80% of the securities portfolio being floating rate, floating rate securities and, you know, in the first two weeks,
As I indicated, we sold about a billion five of what was left in the book and I think the 80% I mean, will trend a little bit higher. But and so what is what I think the economy is looking for is you know, really an intensity
for a portfolio that's government-issued or all agency-backed and primarily mortgage-backed and other types of securities.
You know, you probably could could figure out what the yield is there in relation to the federal funds rate. But as we said, the bulk of our asset earning assets are adjustable rate. But as we've also said, you know, the makeup of the balance sheet going forward.
subject to change as the year evolves. So sorry, I can't be a little bit more clear, but.
And that's about as much as we could provide at this point in time early in the quarter.
Okay, I appreciate that. And then just one follow up. Can you just talk about a bigger picture the implications of this 100% valuation allowance on the DTA? You guys basically saying that the outlook at least near term for profitability is more negligible or maybe more
you're predicting a loss and then how far out does that analysis go? How far out do you guys need to look on that valuation test? Thanks.
You want to just keep going? Yeah.
Yeah, thanks, Alan. Yeah. So, so Dave, as far as that valuation allowance goes, so in the near term, I mean, it's, it's, you know, as I said earlier, it's, we've got a deferred tax allowance or deferred tax asset balance of $342 million driven by
by both the losses that we've incurred in the fourth quarter and some of the accrued losses that we anticipate in 2023. So from a tax perspective, we're going to be looking at the losses that we anticipate in 2023.
with some of those accrued losses that will be realized in 2023, the allowance is one of those things that's done on a year by year basis. So at this point in time,
We've assessed 100% allowance implying that there's probably not taxable income in 2023. But beyond that, you shouldn't read too much into it because it's an allowance that could be reevaluated every year-end.
And that valuation allowance could change every year end. So it's not set in stone at 100% going forward. And from a tax perspective, as we've disclosed, those losses are...
have an indefinite carry forward for federal tax purposes. And so there's future value there, to the extent that there's future taxable income.
indefinite carry forward for federal tax purposes. And so there's future value there to the extent that there's future taxable income. Got it. Thanks, guys.
Thank you.
The next question today comes from the line of Manangasalia from Morgan Stanley . Please go ahead, your line is now open.
Good morning. I appreciate all the incremental color this morning. I know you also mentioned in the slide deck that the headcount reduction will drive a 78 million reduction in comp. I guess as we think about the core expense number going into the back half of the R
Given that you also mentioned you're exiting from the custody and cash management businesses, how should we think about the core expense number as we exit the one-time expenses that you're making over the next couple of quarters?
Thanks for the question. I'm going to turn it over to Tony in just a second, but I want to clarify one thing. We are not exiting all of the cash management services, but just certain cash management services, and we have not yet disclosed which services those are.
but you could go back and contemplate Ben's comments around some of the products. You know that when you launch certain products, you make some assumption as to the customer adoption of those products, et cetera, and then as you move through time.
You know, you have to reassess those. And so, but I wouldn't want anybody to think that we're no longer going to provide cash management services. That is core to what we do. And the SIN, the 24-7 API enabled SIN that our customers have come to rely on will still be operational with API wires, etc.
We'll be able to provide more color, as Ben mentioned, once we notify some of our key partners and our customers. We don't want to get ahead of being able to have individual conversations with all the appropriate folks. But back to the expense question. Tony, you want to take that? Everything needs to be covered.
Yeah, sure. Thanks for the question, Manan. So yes, as you indicated, you know, the guidance that we provided was a seven to $8 million per quarter save related to the headcount reduction as it relates to other core expenses. As we indicated in our prepared remarks, I mean, we were intentional about saying
we're in the ecosystem, we're towards the back end of the quarter. So, you know, as Alan had said, you know, we're evaluating different products and services, we're evaluating vendor contracts, we're evaluating, you know, all of those items that would drive core expenses.
And so, you know, at this point in time, we're not in a position yet to give further guidance.
But as you indicated, we do intend to evaluate all categories and look to...
to get to a big core expense base for the second half of the year.
But is it fair to take the 33 million expense base from 3Q, remove the 7-8 million and then assume that you would move lower from there? Or is that fair?
It's not so straightforward because as you may or may not know, we were increasing head count throughout the year. And so some of those headcount increases were in flight.
at the beginning of the fourth quarter. So it's like most things, it's not that straightforward and there are many moving parts and there are a lot of puts and takes as always. So appreciate the question, but at this time.
beginning of the quarter, at the beginning of the fourth quarter. So it's like most things, it's not that straightforward. And, you know, there's, there's, there are many moving parts and there are a lot of puts and takes as always. So appreciate the question. But at this time, that's about all the guidance we can give.
Got it. And then just a quick question on the deposit side. In the past you mentioned that about 45% of your deposits come from the top 10 clients. I would assume that concentration number has gone down meaningfully. Would you have that number as of the end of the fourth quarter?
Yeah, let me jump back in and kick this over to Ben. We will certainly disclose more detail in our 10K as we do when it's filed. I'm not sure we're ready to disclose deposit concentrations today. But
the table that shows the number of customers by category and the corresponding deposits, you can see that they've gone down in every category. And so we're certainly mindful of concentrations. But what we've seen is really, as we've said many times before, kind of a crisis of confidence and risk off across the entire industry.
Thank you.
The next question today comes from the line of Will Nance from Goldman Sachs. Please go ahead your line is now open.
Hey guys, good morning. Thanks for taking the question. So I'm looking at the end of period balance sheet and even if I take into account the security sales in the first quarter, it looks like you'll still have around $5.3 billion in wholesale funding or around 50% of the balance sheet. So I know you don't want to provide guidance on deposit flows, it seems from the outside.
you can correct me if I'm wrong there. You know, are there any guardrails that you could provide about how you plan to work that down and to what level?
Yeah, well, it's a fair observation. And I think I've said, if I didn't say it in the Q&A session of the last call a couple weeks ago, I certainly addressed this question in follow-up calls, which is that your observation is correct. If you just zoom out and the way I...
wholesale funding, whether that be short-term borrowings or brokered CDs. And so, at this point, we're not providing any further guidance. And so, the comments that you made about how you might interpret us managing our balance sheet is an opinion that you're expressing.
to 100% of their deposits and we're going to do that for the foreseeable future. And as Tony mentioned, our securities portfolio, what remains of our securities portfolio is overwhelmingly adjustable rate.
And it is all government agency, either government issued or government agency sponsored investment securities. So we feel very good about our current balance sheet position.
Got it. Appreciate that. And then maybe kind of dovetailing off of the last comment you made on the security portfolio on the balance sheet, you guys have been profitable at this level of not expiring deposits in the past, but I think one thing that's different now is you sold a lot of the duration in the balance sheet and looking ahead it seems like...
the strategy of maintaining a lot of digital currency deposits or all in cash, you know, presents a lot of downside interest rate risk if we see rates kind of normalized back to, you know, well, something approximating what, you know, what we see in the current forward curve today. So how are you guys thinking about mitigating downside interest rate exposure with a significantly higher cash position, which, you know, Tony, maybe you could talk.
that we have disclosed that we've got derivatives in place to mitigate downward moves and interest rates. So that's obviously part of it. So that becomes an important component of...
balance sheet management strategy as it relates to NIM going forward. But also, as Alan said, for the foreseeable future, we want to make sure that we've got cash in place for customers. But I kind of want to reinforce the point that with a finite mapping feature of the following products on just one games with an Apiels HP clouds global witness information complete learn about the
with all of our securities being government issued or government agency backed, they also continue to be fully pleasurable for liquidity. And so all those things that we've put in place that we've talked about for several years continue to be.
in place. Perhaps the proportions change, but we're mindful of
of managing interest rate risk. As Alan said, we don't predict rates, but we try to plan for all the outcomes and...
the size of the derivatives that we've got is part of that strategy.
I appreciate you taking my questions.
I appreciate you taking my questions. Thank you.
The next question today comes from the line of Jared Shaw from Wells Fargo. Please go ahead your line is now open Hey, good morning Just looking at capital especially tier one leverage Took a obviously a big move down You commented in the opening comments about rebuilding that organically is that
Is that organic growth rate going to be enough to satisfy?
your expectations or need for tier 1 leverage in terms of trying to get closer to a double digit tier 1 leverage ratio or should we think that there may have to be some additional capital raising or other alternatives looking at?
Yeah, Jared, appreciate the question. I'm going to ask Tony to comment in just a minute. But the one thing that I would point out is, you know, again, of course, you know, we're not going to provide guidance on if and when we might, you know, quote unquote raise capital. But invite him to comment.
But I think Tony will touch on this. It's important to recognize that, number one, our risk-based capital ratios continue to be extremely robust, which is reflective of the very low credit risk on our balance sheet. But importantly, that tier one ratio,
is based on average assets. And so it's really important to think about that as we move into the first quarter here and without feeling any more of Tony's thunder. Tony, do you want to address that in a little bit more detail?
Thanks, Alan. Thanks for the question, Jared. As Alan mentioned, the tier one leverage ratio that we just call is 5.36. It's based on average assets, approximately 15 billion, as I mentioned in my prepared remarks, but the balance sheet ended it.
11.3 billion. So on a pro forma basis with the tier one capital that we had at year end, that would imply an entry point above 7%.
And then with the further guidance of our subsequent event disclosure that we've sold down a billion five in securities to reduce wholesale funding that implies a further reduction. So that's kind of step one.
in terms of the organic path of rebuilding the tier one leverage ratio.
Okay, thanks. And then my follow-up, I guess, is on the securities portfolio. What is the, after the sale, what's the expected cash flow quarterly from that and the remaining duration?
Yeah, so I don't have the expected cash flow handy in terms of expected duration.
We were, we had disclosed approximately four years as an infected duration in third quarter that's substantially reduced. It's closer to one at present to one to one and a half. And, you know, in reference to, again, you know, what Alan was mentioning.
Thanks.
Thanks. Thank you.
Our next question today comes from the line of George Sutton from Craig Hallam. Please go ahead your line is now open.
Thank you. Also on the call, you did not hear from Signature. They suggested a bit of a de-emphasis of the digital landscape. You are clearly trying to indicate a continued importance relative to how you are doing your business. I just wanted to think about that in the context of the off-boarding of the digital landscape.
clients that you mentioned, can you just give us a sense, I assume this is a relatively small number, and can you give us any sense of the additional scrutiny that's been taken to make this decision?
Yeah, George, I'm going to pass it over to Ben for that first part of your question. But as to additional scrutiny, let's just dispel that right now. And let's just frame it in the context that we've been doing this business with the full fund.
focused on regulation and risk management for nine years. We went into this business very intentionally in 2014. We engaged with our regulators that year to say this. And at the time, as I said many times before, it was Bitcoin only. And we were essentially describing to our regulators at the time, this is what Bitcoin is.
have been operating with a fully regulated offering and with the requisite regulatory scrutiny, if you will, in terms of looking at our program every single year. And so any decisions that we're making to...
question, George, you know, it was a difficult decision to off board some of our non core customers. It was our choice, though. And I think it's an example of our focus on operating a profitable business and in 2023. You know, as with any business, over time, you end up accumulating customer relationships that simply aren't profitable because
even they end up being smaller than what they had originally expected, or they don't end up using your core products. Consistent with the comments Allen was just making, it probably isn't a surprise to anyone that there are significant compliance and operational costs associated with every customer that we serve.
So now more than ever, we want to be deliberate in working with clients that are adding value to the platform. Maybe the last thing I will say is that, and I think it is important to highlight that while we expect to off-board some of our non-core customers,
We do expect that, you know, if there's a negative impact to deposits, fee income, and send metrics, that it'll be less significant than you might expect because these are smaller relationships overall.
and tend not to use our core products. But thanks for the question.
So my follow up is related to the broader market. Obviously, none of us are smart enough to know the future per se, but very quickly, Bitcoin and the broader crypto markets have turned higher. I'm just curious if we could talk about your flexibility to grow again, potentially aggressively, if that is the environment in front of us. That's it.
to one of the earlier questions that one of your colleagues was commenting on the composition of our balance sheet at year end. And you know clearly as we work to reduce the wholesale funding.
That, by definition, then makes room for deposits to grow. And again, I know you're not asking us to predict the future. I agree with your comments. It's impossible to predict. But as Ben mentioned, we are focused on the future.
gifts, but I'm also not predicting when that will happen. You know, if past is prologue, you know, this industry tends to go in four year cycles and 2023 might continue to be, you know, a kind of a sideways market for this overall ecosystem. But that will give us the time we need to retool the business and we will be.
leaner and leaner and ready to go. Perfect, thanks guys. Thank you. This concludes today's question and answer session, so I'd like to pass the call back over to Alan Lane for any closing remarks. Please go ahead.
All right, thank you very much, Bailey. Well, I just want to thank everybody for joining today and just want to again express our appreciation for all of the support that we get from our great customers and we look forward to providing additional updates as we move through 2023. So thank you everybody. Have a great day. Thank you.
This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.
And so.