What happened
Shares of crypto bank Silvergate Capital (SI 2.50%) dropped as much as 11.4% in early trading on Friday after suspending its preferred stock dividend. Shares ended the day down almost 4% after a recovery in late trading.
So what
In a press release before the market opened, management said they were suspending dividend payments on 5.375% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A. This is a form of equity that pays a dividend, so there's an obligation to pay the dividend, but it's not as burdensome as debt.
The move comes as investors are seeing customers flee Silvergate Capital, which could turn into a run on the bank. Management wants to preserve liquidity, which is the right thing to do but shows what a weak financial position it's in.
Now what
We still don't know where the bottom is for Silvergate Capital, and it's possible the company doesn't survive without going through bankruptcy restructuring. Given this level of uncertainty, this isn't a stock I would be speculating on now. But to be clear, this dividend suspension does not impact the upside potential if the company pulls through this situation.
Unlike most banks, Silvergate has systemic risks from industry players that we may not know about. It's lost money when Three Arrows Capital went bankrupt, when FTX collapsed, and even $2.5 million from Genesis's bankruptcy. We don't know where there are further risks in the system that may push Silvergate Capital over the edge to potential insolvency.
