Following the flow of high-profile collapses in the virtual-currency industry last year, Silvergate Capital Corp. on Thursday surprised investors with some startling fourth-quarter numbers two weeks early.
The company’s premarket release set up a decline of as much as 49% for its stock, reversing a 27% increase a day earlier, when heavily shorted stocks in the crypto space rallied. Silvergate’s SI, -42.64% shares are now down 85% from a year earlier.
The news came after a bruising year for the crypto industry, including the bankruptcy of FTX, the collapse of BlockFi and fraud charges against the founder of Celsius Network.
In its Jan. 5 press release, Silvergate cautioned that the limited set of numbers it released were unaudited and subject to change, per the normal course of preparing its fourth-quarter financial statements. The full release is scheduled for Jan. 17.
Here’s a snapshot:
In a conference call before the stock market opened, CEO Alan Lane said the bank’s customers were “moving to a risk-off position in digital trading platforms.”
“Significant overleverage in the industry has led to several high-profile bankruptcies and sparked a crisis of confidence across the entire digital asset ecosystem,” Lane said, according to a transcript provided by FactSet.
In addition to its increase in brokered deposits, Silvergate increased wholesale borrowings. Short-term borrowings from the Federal Home Loan Bank (FHLB) of San Francisco increased to $4.3 billion as of Dec. 31 from $700 million three months earlier.
FHLB borrowings funded only 5% of $13.9 billion in total funding (deposits plus borrowings) as of Sept. 30. That is a level Marinac termed “normal,” because the current industry norm is for FHLB borrowings to provide about 5% to 6% of funding.
But that ballooned to 41% of total funding as of Dec. 31.
As part of its efforts to raise cash to cover deposit outflows during the fourth quarter, Silvergate said it sold $5.2 billion in securities, booking related losses of about $718 million.
That left the bank with $5.6 billion in securities as of Dec. 31, with most of that pledged to secure the FHLB borrowings.
Silvergate said it plans to sell more securities to pay down some borrowings, and that action will result in a fourth-quarter impairment charge.
The remaining $5.6 billion in securities as of Dec. 31 included about $300 million in unrealized losses, the bank said.
In an interview with MarketWatch on Jan. 5, Christopher Marinac, the director of research at Janney Montgomery Scott in Atlanta, said the U.S. banking industry’s exposure to the virtual-currency industry was “very limited,” with only three others significantly exposed:
From investors’ reaction on Jan. 5, it appears many were shocked by Silvergate’s liquidity challenges.
But Marinac, whose firm doesn’t cover Silvergate, said a high-quality securities portfolio and low credit exposure enabled the company to handle the deposit outflow. He expects the bank to have remained well-capitalized, under regulatory guidelines, as of Dec. 31.
Credit exposure is low because most of the bank’s loans are held for sale — those are mortgage-warehouse loans that are typically sold within a few weeks after they are funded.
The bank’s capital ratios will likely hold up because unrealized losses on securities had already been factored in, Marinac said. He estimated the bank’s tangible capital ratio was “about 6%” as of Sept. 30 and that he expects it to “be the same or greater” when Silvergate’s fourth-quarter numbers are announced. There are many different regulatory capital ratios. The leverage ratio Marinac referred to nets intangible assets, such as goodwill or intellectual property, from equity capital.
When Silvergate releases more fourth-quarter numbers on Jan. 17, investors will get to see how the securities losses, impairment charges and other items related to the layoffs of 200 staff members — 40% of the total — boil down to the bottom line.
Investors and analysts will be focusing on the accounting for deferred tax assets (DTA), which will be created when the bank’s fourth-quarter net loss is reported.
As far as Silvergate’s overall liquidity strategy goes, Lane said it would depend on “deposit flows and customer behavior.”
Silvergate Capital is the holding company for Silvergate Bank of La Jolla, Calif., which focuses on providing a payment network and other services to institutions in the virtual-currency industry. Both were founded in 2014.
When asked during the conference call if the bank might consider merging with a larger company, Lane said it was “likely” a larger institution would be interested because “we’ve been operating responsibly in the space for over nine years.”
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Philip van Doorn writes the Deep Dive investing column for MarketWatch. Follow him on Twitter @PhilipvanDoorn.
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