Summary Current deposits are likely significant lower than the average presented in the November 16 update. Extreme customer deposit concentration. Questions on loan quality. Silvergate ( SI ) has some serious red flags that should be addressed. The company has lost at least $1 billion (8.1%) of deposits from the end of Q3 2022 to their November 15 update. Further, there is an extremely high percentage of deposits from Digital banking clients and an absurd concentration of deposits from the top 10 customers. On the asset side, a lot of attention is given to the $205 million SEN leverage loan made to MicroStrategy ( MSTR ), but little attention is given to the other loans the company made and the creditworthiness of their borrowers. Deposit Liabilities At the end of Q3 2022, SI had $13.2 billion of total deposits, of which $11.9 billion were held by digital asset customer base. In a press release dated Nov. 11th, SI disclosed that FTX represented less than 10% of deposits as of Q3 2022, which implies that non-digital deposits are $1.4 billion as of Q3 2022. SI disclosed that AVERAGE quarter-to-date deposits totaled $9.8 billion. Assuming that non-FTX Digital deposits are $9.8 billion on November 15, 2022 and non-Digital deposits and FTX have not changed since Q3 2022, that would imply that total deposits have fallen by at least $1 billion, or 8.1%, which is a large outflow in half a quarter. (all numbers are in $ thousands) Estimated Deposits as of Nov. 15 2022 (Company Filings; Press Releases, and Author Estimates) Further, it is suspect that SI released the figures as AVERAGE instead of ending deposits. Market volatility has been particularly pronounced in crypto since early November and I believe it's likely that deposits are much lower today than presented by using an average. Another major red flag is that the top 10 customers represent 47.9% of TOTAL DEPOSITS as of Sept. 30, 2022. That is $6.3 billion. While it's not known who these 10 customers are - 8 customers are on the SEN Exchange network - FTX (FTT-USD); Coinbase (COIN); Paxos; Cypto.com; Gemini; Kraken; Bitstamp; and Cycle. In the week ending November 14, 2022 alone, users yanked $3.7 billion worth of Bitcoin and $2.5 billion worth of Ether. If SI is the bank of choice where is that money ultimately going to go out of? One of the downsides of having a banking monopoly on crypto infrastructure built on assets that in my view are worthless (another discussion) is that this ecosystem becomes vulnerable to complete collapse. Assets When exchanges face withdrawals, they send cash back to customers. The exchanges withdraw deposits from Silvergate to do so and Silvergate needs to sell assets to provide this liquidity. Looking at the balance sheet from the recent Call Report and company filings, the assets look pretty good at first blush - the company has $13.3 billion of cash and cash equivalents and securities. ($ in Thousands, except where noted) SI Immediate Liquidity (Call Report Dated 09/30/2022; Company Filings; Author Estimates) However, SI would likely take realized losses to sell securities to cover withdrawals. There have been many articles mentioning that SI holds AA+ securities. But I think, in practice, if SI gets hit with say $6 billion of withdrawals, they would have to immediately sell at least $4 billion of securities on demand, and many of the securities they traffic in don't have that kind of volume. Non-Agency CMBS has $1 billion ADV; ABS has $2.1 billion ADV. Further, the increase in yields had decreased the price for even the highest-rated bonds. In the following example, Total Consolidated Assets are reduced by $3.12 billion, which is a 20% haircut to Average Total Consolidated Assets. I'm assuming that SI would have to take $1 billion of realized loss when selling securities to cover withdrawals. In this instance, Tier 1 capital will be reduced to 5.1%, compared to 12.1% for the entire banking industry. Hypothetical Tier 1 Capital Ratio (Call Report; Author Estimates) The loan book also has concerns: notably sensitivity to interest rates and credit quality of the borrowers. A large portion of their loan book is marked as held for sale. These loans are likely to have incurred significant losses since mortgage rates have almost doubled. Per the Call Report, 27.5% of the residential loans are adjustable mortgages, meaning that 72.5% of the loans are fixed rate loans. Who are these mortgages made to? If Silvergate is the digital currency bank, then it would be safe to assume that most of these mortgages are being made to customers that earn income and wealth from digital currencies, which have plummeted in value. SI should disclose the credit scores and delinquencies of their loan book. Finally, the SEN Leverage loan made to MicroStrategy gets a lot of attention. This loan is $205 million and is secured against 30,051 Bitcoin, or a loan per Bitcoin of $6,822. In a scenario where Bitcoin fell to $1,000 per coin, the loan will have a recovery value of approximately $30 million. Under the terms of the loan agreement, MicroStrategy needs to keep the LTV of this loan at 50% or needs to keep $410 million worth of Bitcoin posted as collateral. At a price of $1,000 Bitcoin, MicroStrategy would need to deposit 380,000 Bitcoins additional Bitcoin to Silvergate. Unfortunately for Silvergate, MicroStrategy owns 130,000 Bitcoins, of which 115,110 are held by MicroStrategy, LLC, the borrower of the SEN Loan. I think a drop of Bitcoin below $3,561 per coin would likely cause MicroStrategy to file for bankruptcy. Below is the potential liquidation value of the loan book. This analysis assumes that there is a bank run and SI needs to sell assets at current prices. ($ in Thousands, except where noted) Loans Receivable (Call Report; Author Estimates) Note: I'm not a bank analyst just a curious crypto skeptic. I could be completely wrong, and in theory, SI could withstand significant withdrawals without writing down tier 1 capital. Most of the figures are from the Call report filed with the Federal Financial Institutions Examination Council. All figures are in thousands of USD.
