Why Silvergate Capital Stock fell again on Friday

What happened

Shares of Silvergate Capital (IF -10.75%) had another tough day on Friday. The regional bank at the heart of the cryptocurrency sector continues to face further fallout from the financial collapse of the FTX exchange. Silvergate shares were trading down 11.7% at 12:24 p.m. ET.

So what

Silvergate has already issued a statement, explaining that its exposure to financial damage from the FTX crash is limited to “less than 10%” of the bank’s $11.9 billion in customer deposits. The exchange had not signed any loans from Silvergate, and FTX has never been an active custodian of Silvergate Exchange Network (SEN) liquidity products.

This Wednesday, the company also released a mid-quarter update with updated financials. Excluding assets held by FTX and related parties, Silvergate customer deposits now stand at $9.8 billion, suggesting that other customers have withdrawn around $0.1 billion from their funds in recent years. weeks. Meanwhile, SEN is performing as expected and Silvergate has no losses on hand to report.

FTX is now run by a different management team, led by CEO John J. Ray III. If the name sounds familiar, you might remember him managing the bankruptcy proceedings of Enron, GMAC ResCap, Nortel Networks, Eastman Kodak and Overseas Shipholding Group, to name a few. Given Ray’s track record, I don’t think FTX will ever get back into the business of managing cryptocurrency trading platforms. Still, FTX asset holders such as Silvergate certainly have an experienced name responsible for reimbursing some of the losses.

However, the sands are still moving. This morning, institutional crypto-trading platform FalconX announced to its clients that it would stop using Silvergate SEN “out of an abundance of caution for our clients”. Instead, FalconX will manage its back-end business with the Coinbase-stablecoin supported USD coin (USDC 0.09%) until further notice. Tweets sharing this news sparked this morning’s price drop in Silvergate shares.

For the record, USD Coin was unmoved by the news and remained perfectly pegged at a value of $1. Coinbase fell over 7% for a different set of FTX-related reasons.

Now what

How bad is FTX mess? Well, I’ve already mentioned Ray’s long history of dealing with financial calamities, and his presence alone can’t be a good sign. But it’s getting worse.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial reporting as has occurred here,” Ray wrote in the motion for the Chapter 11 proceeding. .

Silvergate’s price drop on Friday reflects how this event is rattling investors’ nerves. It’s a legitimate reaction to a scary situation, but I think the price drop is overdone at this point.

It’s never a good thing when a client crashes so hard that you lose the trust of other clients. However, Silvergate stays arm’s length from the FTX scandal and regularly passes the financial stress tests that every US bank must perform. For example, Silvergate’s Tier 1 leverage ratio stood at 10.7% in the recently reported third quarter. This measure of financial health, where a higher score is better, ranks in the top 20% of all banks in the third quarter.

The next few quarters will be painful as the crypto industry as a whole navigates its way through the FTX debacle, but I don’t fear Silvergate will buckle under the pressure. Silvergate shares appeared undervalued ahead of today’s decline. Now that it’s lost 30% of its value in five days, it seems like a solid buy to me.

Just make sure you agree with my assumptions and analysis before hitting that buy button. The road ahead is sure to be bumpy, so you should be prepared for some wild price swings in the months ahead.

Anders Bylund holds positions at Coinbase Global, Inc. and Silvergate Capital Corporation. The Motley Fool holds positions and endorses Coinbase Global, Inc. The Motley Fool endorses Silvergate Capital Corporation. The Motley Fool has a disclosure policy.

Sallie R. Loera