Silvergate Capital Plagued By 'Regulatory And Liquidity Challenges,' JPMorgan Analyst Says

Shares of cryptocurrency-focused Silvergate Capital Corp SI fell off of a cliff Thursday, plummeting 45% on its warning of a delay in its annual report and concerns over its ability to operate as a going concern.

This comes after the bank reported a staggering $1 billion loss for the fourth quarter, as investors frantically withdrew deposits in the wake of FTX's bankruptcy.

JPMorgan analyst Steven Alexopoulos downgraded Silvergate from Neutral to Underweight and withdrew its price target.

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Alexopoulos cited concerns over the impact of subsequent events since Dec. 31, 2022, including the sale of investment securities beyond what was previously disclosed, on the bank's ability to continue as a going concern. It was revealed that the bank had to sell additional securities beyond what was anticipated to repay its outstanding advances from the Federal Home Loan Bank (FHLB).

In the most recent quarter, Silvergate experienced losses of $886 million from selling underwater securities, resulting in its crypto-related deposits falling by 68% quarter on quarter from $11.9 billion to $3.8 billion.

As a result, its tangible book value was more than halved to $12.93, JPMorgan said. The bank sold additional securities beyond what was guided at a loss in January and February, indicating that it is facing continued liquidity challenges.

While the magnitude of the reduction to tangible book value is unknown, the losses from the securities sales appear to be large enough for the bank to call out that it may now be less than well-capitalized on its regulatory capital ratios, with the "going concern" risk also being cited.

JPMorgan noted that the company is facing significant regulatory challenges as well, including pending investigations from regulators, and business challenges, including liquidity challenges amid a crisis of confidence from digital asset customers.

Last week, three federal bank regulators (Fed, FDIC, and OCC) released a joint statement highlighting liquidity risks related to deposits from crypto-asset customers given their high volatility. The net effect of the statement, in JPM’s view, is that the deposits from crypto-related customers ultimately may not be able to be loaned out, but rather maintained in high-quality liquid assets.

Price action: Shares of Silvergate Capital are trading 45.49% lower to $7.37, according to Benzinga Pro.

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