Shoulder Innovations, Inc.

Hello and welcome to today's Silvergate Capital Corporation fourth quarter 2022 earnings conference call. My name is Bailey and I'll 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. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference to our host, Hunter Stenback, Silvergate Capital Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate your participation in the Silvergate Capital Corporation fourth quarter 2022 earnings call. With me here today are Alan Lane, our chief executive officer, Tony Martino, our chief financial officer, and Ben Reynolds, our president. As a reminder, a telephonic replay of this call will be available through 1159 p.m. Eastern Time on January 31st, 2023. 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. 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, and good morning, everyone. As many of you know, we provided select preliminary and unaudited fourth quarter financial metrics on January 5th. Before I dive into our focus, I want to provide a recap of what happened in the digital asset industry in recent months and its impact on Silvergate. Significant over-leverage in the industry has led to several profile bankruptcies, and sparks a crisis of confidence and lack of trust across the entire digital asset ecosystem. As a result, many industry participants have shifted to a risk-off position across digital asset trading platforms. To that end, we saw a modest decline in Silvergate's digital asset customers in the fourth quarter, a trend that we expect to continue in 2023 as the digital asset industry undergoes further transformation. In turn, total deposits from digital asset customers declined to $3.8 billion, December 31st, 2022, compared to $11.9 billion at September 30th, 2020. Average deposits were $7.3 billion with a high of $11.9 billion and a low of $5 billion during the fourth quarter. As of December 31st, 2022, approximately $150 million of Silvergate deposits were from customers that had filed for bankruptcy. 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. 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. Importantly, we currently maintain a cash position in excess of our digital asset-related deposits. And customers know they can access 100% of their deposits. Tony will provide more color on the security sales and balance sheet management strategy in a few minutes. Turning to our core offering, the Silver Gate Exchange Network, or SEND, despite the significant decline in deposits, transfer volume on the SEND 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. The SEND has operated uninterrupted 24 hours a day, seven 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 force liquidation. Looking ahead, we expect to maintain existing utilization for SEND 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 offer consists of our most value added solution and reflect what we do best with solutions like the SEND, wires via our proprietary API and deposit accounts. In addition, we made the difficult decision to reduce our workforce by approximately 200 people or 40%. We estimate aggregate costs associated with the 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?