What happened
Shares of the crypto bank Silvergate Capital (SI 11.11%) crashed today after it delivered select preliminary results for the fourth quarter of the year. Shares were down more than 46% as of 10:38 a.m. ET on Thursday.
So what
Silvergate runs a real-time payments system called the Silvergate Exchange Network (SEN) that enables institutional traders and crypto exchanges to transfer dollars around the clock.
SEN makes crypto trading more efficient because the U.S. banking system does not run in real time, and the network also helps crypto exchanges conduct their daily business. As crypto took off in 2020 and 2021, Silvergate gained lots of customers who brought lots of deposits that the bank pays no interest on.
But as the crypto winter came on and trading activity slowed, deposits began to leave the bank. Then the FTX debacle happened.
FTX had been a major client of Silvergate, and the incident has really shaken the faith of the crypto community, leading a lot of investors to pull out of the space. It also led to the bankruptcies of other clients that used Silvergate and SEN.
In its preliminary update this morning, Silvergate announced that deposits fell from about $12 billion in the third quarter to $3.8 billion in the fourth quarter.
The bank keeps a very liquid balance sheet, mostly investing its deposits in liquid government-backed bonds. But it had to sell those to meet deposit outflows, and bonds have been underwater due to soaring interest rates.
Silvergate took a $718 million loss on the sale of bonds and expects to have to sell more in the first quarter of this year, which could result in another $300 million of losses.
The bank also had to take an impairment charge of $196 million on intangible assets it acquired in its purchase of Diem from Meta because it does not anticipate being able to move ahead with the project in the foreseeable future.
Lastly, Silvergate announced it will lay off about 40% of its workforce to reflect a more accurate expense base for what is now a much smaller balance sheet and a subdued crypto outlook.
Now what
This update turned into a disastrous scenario and was much worse than I had anticipated. The bank did manage to survive after a roughly 68% drop in deposits in a single quarter. But the losses in the bond portfolio have destroyed a significant amount of its tangible common equity.
I've owned this stock for a while, but I definitely would not recommend buying right now while the outlook for crypto is so discouraging. Also Silvergate might face regulatory actions or fines due to its connection with FTX.
