Hello, everyone, and welcome to the Silvergate Capital Corporate Business Update call. My name is Emily, and I'll be coordinating your call today. At the end of the presentation, you will have the opportunity to ask a question by pressing star followed by the number one on your telephone keypad. I'll now turn the call over to our host, Hunter Stenback, Investor Relations at Silvergate Capital. Please go ahead, Hunter. Good morning. Thank you for joining us today to discuss Silvergate's business update and select preliminary and unaudited fourth quarter 2022 financial metrics. These metrics are subject to change in connection with conducting and completing normal closing procedures and an audit for the year ended December 31st, 2022. With me here today are Chief Executive Officer, Alan Lane, Chief Financial Officer, Tony Martino, and President, Ben Reynolds. Alan will kick off the call with a few prepared remarks, and then we will dive into your questions. As a reminder, a telephonic replay of this call will be available through 11:59 P.M. Eastern Time on January 19th, 2023. Access to the replay is also available on the investor relations section of our website. 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. These include remarks about management's future expectations, beliefs, estimates, plans, 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 Alan. Thank you, Hunter. Thank 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 risk-off position across digital asset trading platforms. Our first priority has been supporting our customers through this challenging period. The Silvergate Exchange Network, or SEN, continues to operate 24 hours a day, seven days a week, and serves as critical market infrastructure for the digital asset industry. We have seen average daily volume on the SEN 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 31st, 2022, compared to $11.9 billion at September 30th, 2022. We saw a high of $11.9 billion and a low of $3.5 billion during the fourth quarter. As of December 31st, 2022, approximately $150 million of Silvergate's deposits were from customers that have filed for bankruptcy. Importantly, deposits with Silvergate have been and continue to be safely held. As of December 31st, 2022, Silvergate 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. Because we maintain a 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 utilized wholesale funding to satisfy outflows. Subsequently, in order to accommodate sustained lower deposit levels and maintain our highly liquid balance sheet, Silvergate 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 31st, 2022, the company held $5.6 billion of total debt securities at fair value, all of which are U.S. government or agency-backed and available for sale. Which include unrealized losses of approximately $0.3 billion. The company anticipates selling a portion of these securities in early 2023 to reduce wholesale borrowings, which will result in recognition of a fourth quarter impairment charge related to the unrealized loss on those securities 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 headcount 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 Silvergate. 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. 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 Diem 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 imminent. We remain committed to seeking opportunities to realize value for these technology assets. Before we open the line for questions, I want to emphasize that Silvergate's 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 17th. 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 1 on your telephone keypad. We would like you to please limit your questions to 1 question and 1 follow-up. If you change your mind and would like to be removed from the queue, please press Star and then 2. When preparing to ask your question, please ensure that your device and your microphone are unmuted locally. Our first question today comes from the line of Michael Perito with KBW. Michael, please go ahead. Good morning. Thanks for taking my question. I have a lot, but I guess to try to keep it to 2 here. Number one is just, can you give us a little bit more color, you know, on the security sales and the corresponding impact to kind of where book value goes? I know you guys aren't 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, you know, that entire portfolio will have to be marked? Just some parameters there, I think would be a helpful starting point. Sure, Mike, I appreciate the question. I'll go ahead and start and then turn it over to Tony for any additional detail. You are correct. We did make the decision late 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. That was, you know, fairly obvious given the fact that we were selling, you know, a significant portion of our securities portfolio. As I mentioned in my prepared comments, we will likely sell additional securities here early in 2023 to further pay down wholesale borrowings. Yeah, just to make sure nobody's double counting here, you could go back and look at the mark on the available sale portfolio at September thirtieth, and then also look at the mark on the HTM portfolio, which was disclosed in our 10-Q. You could assume that all of that now has either been realized through that $700+ million of loss, and/or is included in the remaining, roughly $300 million of mark on the portfolio. Let me ask Tony to provide any additional comment, make sure I didn't say anything incorrectly there. Yeah. Thanks, Alan, and thanks for the question, Mike. Yeah, Alan covered off, you know, the result. As we, as we indicated in the Q3 10-Q, there was a $426 million mark-to-market unrealized on the held-to-maturity. 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're all mark-to-market through AFS. Your assumption, Mike, was correct. Thanks for the question. Got it. Then for my for my follow-up, just, you know, I think I know you guys don't provide deposit guidance and, you know, but the environment here is obviously pretty challenging. You know, I guess the short version of the question is, you know, 1, why are customers pulling funds? Is it simply that they are not investing in crypto assets anymore and hence, you know, moving those monies to treasuries and other things, and just there's no point in holding money on the SEN if they're not investing in crypto? 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 FTX 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? Yeah. Mike, I'm gonna just make a couple of high-level comments and then turn it over to Ben because I think he's got some good market color, having spoken with a lot of our customers over the last quarter. The first thing that I do wanna say is, you know, I'd like to zoom out a little bit and encourage everybody to zoom out a little bit. You know, you asked the question there toward the end about, you know, you framed it as the FTX 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 Terra Luna collapse, you know, the subsequent collapse of Three Arrows Capital, the bankruptcies of, you know, in the second and third quarter of Celsius and Voyager, more recently in the fourth quarter, BlockFi. This was a much more widespread, you know, kind of deleveraging of the ecosystem that obviously culminated with the collapse of FTX. When you put all of that in context, yeah, what we have seen is a lot of institutional players. There's just been this crisis of confidence and, in that kind of a situation, you know, many of the institutional players have been pulling money off of these trading platforms. I would also say, you know, that we saw that happen throughout most of the fourth quarter. You know, but obviously at year-end, we were up a little bit off of the low in terms of deposits. Our, you know, the low point was $3.5. You know, we settled in at year-end at $3.8. You know, I'm not suggesting that that's, you know, that we've hit the bottom. I'm not suggesting that we're bouncing and now we're going up. You know, as you correctly indicated, we don't provide guidance. Now everybody probably understands why we don't provide guidance, because this is a really volatile industry, and it is impossible to predict. 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 space. That we are here to serve our customers 24 hours a day, seven days a week. As I mentioned, the SEN continues to operate uninterrupted. With that, Ben, do you wanna provide some additional market color in response to Mike's question? Yeah. Thanks, Alan. As, as Alan characterized, you know, there was a crisis of confidence and a lack of trust... In the industry that happened in the fourth quarter. We had clients that were, you know, proprietary traders, market makers that had been doing business with each other for, you know, sometimes six, eight years, that just stopped doing business with each other and pulled their, you know, essentially pulled all their deposits. We had some clients that moved. You know, these are crypto native firms that moved, you know, almost completely into U.S. Treasuries. That was sort of the dynamic that happened in the fourth quarter. As we were talking with our clients and asking them, you know, "Hey, when might you shift to a risk on position?" They really couldn't tell us. That said, we didn't have any clients that said that they were, you know, exiting the space altogether. Perhaps there will be some that do, but we didn't receive that feedback. Our clients were generally supportive of Silvergate, despite the fact that they pulled their deposits. You know, just really given the overall circumstances, you know, decided to take that action and, you know. You know, seem to be committed to the space and willing to, you know, come back when market conditions are right. 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. Hey, good morning everyone. Thank you. I wanted to start on the, on the expense side. Given the reduction in headcount, can you quantify the expected cost saves? Do you expect to be profitable beyond the fourth quarter? Yeah. Steve, it's a fair question. It's a little bit too early for us. You know, as you know, we typically don't provide guidance. We will absolutely, you know, when we release first quarter earnings, we'll be able to have, excuse me, fourth quarter earnings, we'll be able to have a little bit more, you know, detail, if you will, on what we think the expense base will look like going forward. You know, as to whether or not we'll be profitable in the first quarter, you know, as I mentioned in my prepared remarks, we are likely going to continue to sell securities here in the first quarter. Some of that will actually already be reflected in fourth quarter via an impairment charge. We're still working on those numbers. We also will be taking the restructuring charge for the severance, et cetera, here in the first quarter. You know, our We take a long-term view here. You know, the goal is to get as many of these restructuring charges and adjustments to the business completed here in the first quarter so that we can be profitable prospectively. 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 at excluding the one-time charges if you're recalibrating expenses to get to that point where you're at least break even moving forward. It sounds like you're saying yes to that. Yeah, I mean, again, Steve, the way I would just kind of qualify that is we are recalibrating our expense base. Then also as we've mentioned, taking a look at the products that we're offering, et cetera, to make sure that all of the products that we offer are profitable. Obviously a big, excuse me, a big wildcard in all of this is where are deposits, right? It's part of the reason we've had to, essentially, cut as deep as we have on the expense side, is a reflection of looking at where deposits kind of settled out in the fourth quarter. Assuming that, you know, a range of plus or minus range around that level, is where we stay. You know, that's how we've kind of tried to recalibrate our expense base. The other thing that I would point out is that, you know, it wasn't too long ago that we as a company were at this very spot in terms of deposit levels, and employee count, right? It was literally years ago, the fourth quarter of 2020, when we were operating the bank as, you know, under a $5 billion bank. We crossed over the $5 billion threshold in total assets right at year end 2020, and we had roughly the same head count that we do now, you know, after this reduction in force that we've just implemented. There is absolutely precedent for looking at Silvergate through the lens of where were we two years ago, and were we profitable then, et cetera. Without providing forward guidance, I think you can look to the past, you know, as a proxy. Thank you for the questions. Our next question comes from Joseph Vafi with Canaccord. Joseph, please go ahead. Hey guys. Good morning. Thanks for hosting this call to get some of this information out. Just wondering on the customer side, you know, clearly there's, you know, less demand in the industry and maybe, you know, you're onboarding less customers. Any change to that onboarding kind of profile of customers that you're looking at or, you know, may not bring onto the SEN now versus before this? I have a quick follow-up. Yeah. Good morning, Joe. I'll just go ahead and kick that question directly to Ben. Yeah. Hi, Joe. Good morning. You know, 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. You know, 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, you know, raising money at this time is challenging. We have seen a bit of a slowdown there. That said, you know, we've always been focused on, you know, adding quality clients that we believe are profitable for the platform. That mission hasn't changed. You know, we do, you know, we do think that, you know, we are continuing to have, you know, discussions with folks, and I would guess, probably characterize it overall as a slowdown. Okay. Thanks for that. On the GM assets that you're kind of writing down or taking an impairment charge on, you know, I mean, clearly, you know, if there's, you know, less, you know, I guess, operating ability right now to kind of expand the business and to investment spend there, you know, Do you see it or, you know, do you see that as an operating constraint now or a balance sheet constraint more in not moving that forward at this point? Or, you know, is it an industry-level thing where, you know, you believe that, you know, maybe the kind of just the overall environment, regulatory environment, et cetera, just doesn't, you know, lend itself to moving any of that forward right now? Thanks. Yeah, Joe, that's a really good question, and I'm glad you asked it because, you know, I, I think what we should do is separate kind of the accounting treatment of an intangible asset from, you know, what our hope is going forward. I, you know, I, I would stress hope because obviously in the current operating environment, it's going to be really challenging to bring a tokenized dollar, you know, what others have referred to as a stablecoin or, you know, a tokenized deposit or a tokenized dollar. It's gonna be tough to bring that to market anytime soon. That is really what has driven our decision to take, you know, to take the impairment charge, you know, essentially, writing down that intangible asset. As some on the call may be aware, the accounting rules are pretty specific here on the valuing an intangible asset. You know, when we look at it through the lens of can we actually, you know, yeah, essentially validate the carrying value of the asset. Well, how do you do that? Well, you do that by projecting some future revenue, you know, that would be generated by activity that would be supported by that asset. With no visibility in sight, here, you know, certainly, you know, the way we phrased it is, you know, certainly not imminent, which is contrary to, you know, to, how we were feeling, you know, as recently as the end of the third quarter of last year, right? At this point in time, the prudent thing to do is to take the valuation allowance against the asset. It doesn't change our view that a tokenized dollar on a blockchain is, it will still have value to the market. We believe, especially given, our recent performance, you know, and I fully, you know, wanna fully acknowledge the losses that we've incurred, fully acknowledge the reduction in force and the changes that we're making to our business. If you do go back and look at this through the lens of the fact that we were able to satisfy 100% deposit withdrawals of a 70% drawdown, and we still have cash, you know, on hand. You kind of look at it through that lens, and then you look at, well, how does the stablecoin operate? I think Silvergate has demonstrated that we can, in fact, you know, be a responsible operator, you know, in this space, which would include the launch of a tokenized 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? I appreciated the securities loss discussion from earlier, and we can certainly apply those marks to tangible book value to get some sense of where that is. It'd 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 4-Q as well. Thanks. Yeah. I'll turn it over to Tony in just a second, Dave. I appreciate the question. You know, we aren't at this point able to, you know, really kind of disclose where tangible book value is because of the fact that we, you know, we haven't closed the books completely. You know, we haven't gone through our year-end audit process, which is currently ongoing. Having said that, you know, 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. You know, what are the things that we know here at year-end? Well, we know where deposits ended up. We know the actions we took to sell the securities to support the deposit withdrawals. We know the absolute losses that were taken on those sales of securities. When you start getting into some of the other accounting treatments and things, you know, that all needs to go through the normal close process. Specifically on the DTA, I don't know if, Tony, if you wanna provide any additional color on that. Yeah, sure. It's a good question, Dave. Certainly, you know, as Alan said, we've disclosed the losses that we've taken on the securities and the impairment charge, and they're certainly pre-tax losses. Given the magnitude, you know, there is a valuation allowance that needs to be looked at for tax purposes. We'll get into further detail on that when we do our earnings call a week from Tuesday. It sounds like you are anticipating some kind of a valuation allowance against the DTA at this point. Yes. Given the size of the losses, yeah, we would be considering evaluation allowance. Our next question comes from David Chiaverini with Wedbush. Please go ahead, David. Hi. Thanks for taking the questions. I wanted to ask about legal and regulatory risk. There's been some class action lawsuits. Can you frame your expectation of the legal liability to Silvergate related to FTX and Alameda? Yeah, David. I'm surprised it took this long to get to that question. you know, but, what I would say is on... and unfortunately, as you know, we probably can't, we can't say much. I first want to restate that as a federally regulated bank, we take our compliance and risk management responsibilities very seriously. There's a lot of FUD out there, a lot of misinformation. We are a regulated financial institution operating in this space for nine years. 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 lawsuits, and we intend to defend against them vigorously. Understood. Makes sense. Then shifting over to on the regulatory risk, what has the posture of regulators been with you and Silvergate? Could there be a potential change to Silvergate's CAMELS rating? Yeah. As I'm sure you're aware, you know, no bank can disclose their CAMELS ratings. So I'm not gonna, you know, I'm not gonna speculate on the CAMELS rating part of the question. As to the regulatory posture, I'm sure you're aware of the joint statement that was issued this past week, you know, by the Federal Reserve, the OCC and the FDIC. Obviously, we are a Fed member bank. We've been a Fed member bank the entire, you know, during the duration of our operating in this space. As we've characterized many times in the past, we engaged with our regulators very early in this initiative in 2014, when this space was Bitcoin only. We have been engaged with them continuously for the last nine years, not only with the Federal Reserve, but obviously the FDIC insures our deposits. They often tag along with regulatory examinations. We are state chartered in California, so we have the California DFPI as our chartering regulator. We have regular ongoing interaction, regular examinations, targeted reviews of specific areas as the regulators would deem heightened risk, whether that be capital liquidity, regulatory compliance, BSA, et cetera. There's certainly a lot of attention on this space right now. We've been operating with the full, you know, full transparency in this space with our regulators for, you know, for the entire duration of this initiative. Our next question comes from Jared Shaw with Wells Fargo Securities. Please go ahead, Jared. Hi, good morning. You know, I guess any thought to changing the revenue structure around SEN, in light of this. In terms of like charging a fee for it, or do you still feel that, you know, using that to purely accumulate deposits is the best use for that, for that platform? Yeah, Jared, it's a fair question, and I'll kick it to Ben in just a second, because, you know, we have mentioned in our prepared remarks, and I've mentioned it here now, in the Q&A section here, that, you know, we are gonna be looking at all of our products. I do want to, you know, just point out that, you know, the quote unquote gathering of deposits is not really the way we've looked at this business for quite some time. I've talked about, you know, I've compared and contrasted the Silvergate strategy versus other banks that have come into this space more recently. Without at all being disparaging, when looking at those other banks, what I've observed is that many banks that were attracted to this space over the last couple of years essentially were starting where we started back in 2014. When we first started this initiative, it was Bitcoin only. What we saw was that there were very few banks that understood the space that were willing to bank, you know, participants in this ecosystem. We saw it as an opportunity to gather deposits to fund our other asset strategies, right? That's where we started in 2014. For the last five years or so, that has not been our strategy. As we've essentially exited some of the other legacy community or commercial banking businesses, which there's nothing wrong with those businesses, but as you know, it is very hard to differentiate yourself when you're offering the same, you know, loans and deposit products that everybody else is offering. You end up having to compete on price, or excuse me, on service, because you can't compete on price. Well, let me not get distracted there with that. The point I'm trying to make, Jared, 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 and securities to cover these deposits. As to other pricing strategies, let me ask Ben to comment. Thanks, Alan. Yeah. As we take a step back, and look at the SEN, you know, it really does provide critical market infrastructure to the digital asset industry, which trades 24/7. Even despite lower deposits, we saw incredible usage of the SEN in the month of December. For the quarter, you know, actually finished with SEN volumes above third quarter SEN volumes, which I think speaks to the usage of it. Obviously, usage of the SEN decreased a little bit in December as deposits decreased, but it is critical market infrastructure for our clients and something that we can will continue to support and develop on. You know, with that, because it is critical market infrastructure, we do think that there, you know, the clients will pay for it. We're still in the process of evaluating sort of what that pricing structure looks like, and really the whole portfolio of services that our clients are looking at. Okay. I guess maybe just a corollary to that. Would you consider looking to, you know, combining with a bigger company to help get some more diversification or limit some of the stress, you know, periods of time like this put on the business? Or do you feel that being a monoline, you know, we'll call it a crypto-only focused institution is still the most efficient structure to take? Yeah. I'll jump back in and take that one. You know, we, you know, we certainly will always consider, you know, ways to maximize shareholder value, while also providing service to our customers. You know, I've been in this business, I've been in commercial banking for 40 years, and so have bought and sold many banks during my career. This business initiative is obviously unique. You know, the circumstances that created the opportunity for us to get into the business and differentiate ourselves in the way we have, has also, you know, translated into the fact that there are very few larger institutions that have been willing to look at this space. You are touching on something, Jared, which is important because my experience in the banks that I've sold in the past is that when a potential acquirer is looking at a target, very often they're looking for, you know, kind of one or two specific things, whether it's a core deposit franchise, you know, a specific geography, a specific line of business, you know, that acquirer is essentially looking for. That is one of the reasons, you know, we decided to, you know, 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 it's going away. At some point in the future, it is quite likely that a larger institution that wants to get into this space will want to take a look at Silvergate because we've been operating responsibly in the space for over nine years. Our next question comes from Will Nance with Goldman Sachs. Please go ahead. Hey, guys. Good morning. Thank Thank you for taking my question. You know, first I want to just say congratulations. I don't think that there are that many banks that could stomach a 70% decline in deposits and come out of it with no operational liquidity issues. I do think that, you know, that bears acknowledgement. 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? You know, there's been a lot of questions today about tangible book value. I won't belabor that anymore. As we think about calibrating the earnings stream going forward, maybe you can hit on what the yield profile looks like of the securities that are on 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. Yeah, that's probably a question best answered by Tony. Unfortunately, we're not going to be able to provide you with a lot of detail right now, Will. We certainly will provide more when we release our earnings. All of that detail, as you know, will be in the 10-K. You know, the one thing that I would point you to in our earnings release is or excuse me, in this, in the release this morning, is the fact that the remaining securities are all government or agency backed. 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 there were quite a few MUNIS in there as well. You can kind of deduce that we sold more of the longer duration securities that would have been fixed rate. You know, if you just step back and think about, by the way, I also want to thank you for the acknowledgement on the fact that we survived the, you know, this deposit essentially run. You know, that's what other people have been calling it. Essentially, Will, we had a playbook that we hoped 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 pledgeable so that you can borrow against it. As I said in my prepared remarks, that's what we did first. Not knowing whether the deposit withdrawals were going to be temporary, we borrowed against our securities portfolio. That's what it was there for. It was all pledgeable, high quality, you know, so we borrowed against it. To your point, when you're borrowing, you're borrowing at current rates, right? So if the security portfolio was yielding, you know, a lower level at the end of the third quarter because it had been put in place and some of it was longer duration, you know, put in place in the past, then you could just connect the dots, right? We were borrowing at a higher level all in because the Fed had been raising rates so rapidly during 2022. Once we get to the point where it's like, okay, well, this is gonna 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? It's by selling, the longest duration right now, you know, so that we can preserve the earnings power and the mark to market on the capital going forward with the remaining portfolio. Without diving into the weeds on, you know, specifically on your question, hopefully that provides you with, you know, with enough color. Yeah, no, that is very helpful. I appreciate that. you know, obviously, I'm sure things have not been fully finalized on the securities sales in the first quarter. I think, you know, you gave some helpful detail there about how you thought about, you know, the sequence of events post the deposit decline. Could you talk about any kind of guideposts or guardrails around how you're thinking about the appropriate level of securities on the balance sheet going forward? I mean, is it your intention to match one-for-one deposits with cash, and we should be thinking about, you know, significant reductions in the securities portfolio? you know, I guess maybe you could speak to kind of a mix of securities versus cash, you know, once the balance sheet restructuring is kind of fully finished. Yeah. Unfortunately, Will, we're kind of getting into guidance there. You know, what our goal is for today is to tell you exactly where we are, what we've done to get here. As I said in my prepared remarks, we'll continue to evaluate our balance sheet and liquidity management needs, but it's gonna depend on deposit flows and customer behavior. You know, I think you can look at what we've done so far, look at where we are now, but it's anybody's guess as to what happens in the future as it relates to our customer behavior. It's, you know, it's our hope that we've kind of reached a level, you know, with deposits, that are gonna be sustainable. As Ben mentioned, you know, we haven't had any customers come to us and say, "Hey, we're closing our account, and we're leaving this ecosystem." Our customers have taken a huge pause, and we're gonna have to digest that and, you know, and we'll make the appropriate actions, you know, going forward. Our next question comes from Manan Gosalia with Morgan Stanley. Please go ahead, Manan. Hey, good morning. I just wanted to follow up maybe on the Bryar line of questioning, around, you know, what balance sheets should look like going into next year. Just given the drawdown in deposits, can you talk about how you're thinking about the SEN Leverage business? Do you expect to shrink that business over time? Also, do you have the option to cancel some of those $800 million or so of undrawn commitments that are there on your book right now? On the SEN Leverage book. One, were we gonna continue to offer the product, and two, do we have the ability to cancel? You know, again, we're not providing specific guidance on specific products right now. You know, 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? You know, is there good product market fit? You know, what I can tell you, is that that product continues to perform exactly as designed, through all the periods of ups and downs in the price of Bitcoin. You know, we have control of the collateral 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 the appropriate margin. We have not yet had to ever do a forced liquidation. The product continues to perform as agreed. As we've also Fact that our commitments are slightly in excess of $1 billion, You know, we've been hovering around that $300 million range in terms of outstandings for the last couple of quarters. I think that's reflective of the fact that, you know, there's just not a lot of, you know, activity and the related conviction in the Bitcoin space at the moment. Got it. You know, separately, I appreciate all the comments around compliance and AML and KYC. You know, as you said, there's a lot of misinformation out there. I was hoping you can provide a general overview on the steps you take on the AML KYC side before you onboard a customer. If you can, you know, any color on how much visibility you would have as a bank to transactions related to FTX and Alameda from both. This question has been really well covered in the past. We obviously take our KYC requirements, which includes the initial onboarding. It then also includes monitoring transactions on an ongoing basis. So a lot of, you know, as you said, the misinformation out there is, you know, is candidly very frustrating. You know, we follow the Bank Secrecy Act, the USA PATRIOT Act, for every account that we open. We conduct ongoing monitoring. You know, to your point, you know, to part of your question, we can only see what we can see, you know, in terms of what is coming in and out of Silvergate. We don't have visibility into what's going on, you know, with other banks. Our next question comes from the line of Mark Palmer with BTIG. Mark, please go ahead. Your line is open. Yes, thank you. Good morning. 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, intentionally. How much overlap is there from digital asset clients using the SEN on the one hand and using Signet from Signature on the other hand? Do you anticipate that you're going to see some movement as a result of that announcement? Yeah, Mark, it's a good question. I, and I think I'll ask Ben to comment. The only thing I'll say as an overriding statement is that it, you know, it's certainly. We're not privy to, you know, to Signature's business in general, other than what they say publicly. You know, we are aware that many of our clients use both the SEN and Signet, 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, you know, a single service provider, because then that provides a single point of failure for their business. Ben, do you wanna comment on any more on Mark's question? Yeah. I think the point that Alan made is exactly right in that, you know, this is an underbanked industry. I know that our clients are always concerned about losing their banking relationships or having limited banking relationships. You know, despite what's been going on in the fourth quarter, our clients have been, you know, very supportive and proactive actually in reaching out to us and, you know, and, you know, providing their conviction towards Silvergate and their understanding of the need for banks to be in the space. You know, we don't, you know, 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 Silvergate and the SEN as well as our competitors because, you know, they understand, you know, how critical, you know, banking relationships are to their, to their overall business. I don't think we see really any change there coming. Thank you. I know that the question regarding 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, you're gonna be selling some securities as a means of reducing the wholesale balances. How should we think about that? Yeah. Tony, do you wanna jump in, since I've kind of already addressed the question, but maybe you can take it from a slightly different angle? Yeah. No, I think Mark, as Alan had said previously, you know, the funding, the wholesale funding is, you know, is more recent and therefore would track more in line with current rates. It's relatively short in terms of duration. You know, from that perspective, it's early in the year to, as Alan had said previously, to kind of walk forward several quarters. As we look out, you know, at this point in time, you know, we're signaling in our press release today that there's a portion of the securities that we fully mark to market that we intend to sell in the short term. I think the way Alan had categorized it previously, if you know, just to kinda go back as to what we've said, we've, you know, we had a portfolio of very high quality, fully pledgeable securities, relatively short duration, and directionally, it's now of even shorter duration. As we said, the securities that are left are all U.S. government or agency securities and therefore, you know, you can presume we've sold the municipal bonds that were fixed rate. The matching between the securities and the funding is more in line given what's transpired in the fourth quarter. That's probably, you know, that's probably all the color I can give today. You know, we'll provide more details with earnings in a week and a half from now. Our final question today comes from George Sutton with Craig-Hallum. George, please go ahead. Thank you. Long call, just one quick question relative to Diem. Just to make sure I understand, are there still people on the project? Is this still something you are moving forward with internally? That's it for me. Thanks, guys. Yeah. George, appreciate the question. There are still people on the project. As we sit here today, we will obviously have to continue to evaluate as we do with the rest of our business, you know, the expenses that we're incurring for the products that we're offering, as well as the products that we contemplate offering. As it stands today, it's largely an accounting issue that we're dealing with. We're also very mindful of the fact that there are significant headwinds, you know, to launching something in the near future. We'll have to continue to look at the expenses that we're incurring for that you know, hopeful outcome in the future. I think with that, You've already mentioned that that was the last question. I just wanna, 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.