Silvergate Capital Falls 40% After Revealing $718 Million Loss On Selling Debt, 40% Job Cuts

Silvergate Capital (NYSE: SI) announced preliminary Q4 2022 financials this morning, highlighted by a decline in customer deposits to $3.8 billion compared to $11.9 billion in Q3 2022.

“The digital asset industry has undergone a transformational shift, with significant over-leverage in the industry leading to several high-profile bankruptcies. These dynamics have sparked a crisis of confidence across the ecosystem and led many industry participants to shift to a “risk off” position across digital asset trading platforms,” the company said in a statement.

The firms cash position, however, is at approximately $4.6 billion, which is in excess of deposits from digital asset customers, the firm said.

“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, and we currently maintain a cash position in excess of our digital asset related deposits,” CEO Alan Lane said.

However, a number of announcements in the company’s release struck investors more. The company plans to slash around 200 jobs, or 40% of its workforce, and expects to incur $8 million in costs as a result of the downsizing. The move is said to “account for the economic realities facing the business and industry today.”

“Reducing headcount will enable Silvergate to continue to offer a tailored customer experience, while prudently managing expenses in a more challenging macro environment,” the company added.

The firm also sold debt securities for cash proceeds in order to tolerate sustained lower deposit levels and retain a highly liquid balance sheet. However, this pushed the crypto lender to sell around $5.2 billion of debt securities–which are bought at a time when interest rates were much lower–and ended up losing $718 million in doing so.

The bank’s profits since at least 2013 substantially outnumber the $718 million it lost selling the debt. The loss is also larger than the current market cap of the company at $399 million.

It also has $5.6 billion in debt instruments at fair value, all of which are backed by the United States government or an agency and are available for sale, but includes unrealized losses of around $0.3 billion.

The firm’s shares fell around 40% when the markets opened following the news. The valuation has now dropped nearly 91% since last year.

Following an impairment study of the company’s intangible assets, Silvergate will also incur a $196 million impairment charge in Q4 for developed technology assets purchased from the Diem Group.

“Given the significant changes in the digital asset industry landscape, this charge reflects the Company’s belief that the launch of a blockchain-based payment solution by Silvergate is no longer imminent. The Company will continue to seek opportunities to realize value from these technology assets,” the firm said in its statement.

The crypto lender also “exited its mortgage warehouse lending product in the fourth quarter of 2022,” incurring an additional approximately $4 million in restructuring charges.

As pointed out in an earlier article, insiders had sold $100 million worth of stock over the last year.

Some of the street’s top short sellers have targeted the stock, with Marc Cohodes predicting the firm is worth $3-$5 per share from here and Marcus Aurelius sarcastically complimenting the company on a strong quarter.

Silvergate serves the crypto industry by accepting deposits and maintaining a network that connects investors to crypto exchanges. Around $1 billion of the bank’s deposits were held by FTX and other entities controlled by its founder, Sam Bankman-Fried.

The fall of the now-bankrupt crypto exchange in November shook the crypto sector and sent Silvergate’s shares plummeting.

Silvergate has come under fire for its dealings with Bankman-Fried’s enterprises, and the collapse of the cryptocurrency market has cast doubt on the bank’s business model’s future. Earlier last week, a panel of federal officials urged banks against becoming overly involved in the cryptocurrency sector.

Full details of the Q4 2022 financials will be disclosed later this month.

Information for this briefing was found via Wall Street Journal, Seeking Alpha, and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

Leave a Reply