Silvergate Bank “Ghost Assets” = More Shareholder Value
On January 17, Silvergate Capital Corporation (NYSE: SI) held a conference call to report unaudited, preliminary results from operations for the fiscal year ending December 31, 2023.

In that report they reported a net loss of $1B in the fourth quarter. While that loss was widely reported as being due to expenses incurred by selling treasuries before their maturity date, that only explains $718M of the loss and doesn't account for deferred tax assets (DTAs) that should have offset a substantial portion of those losses.

As a US-based bank, Silvergate has to comply with Basel II regulatory capital ratios. These come in two flavors, Tier 1 and Tier 2, and together must equal at least 8% of total qualifying assets.

Tier 1 is the most important capital requirement and refers to common stock held as well as non-dividend net earnings retained by the company. In absorbing the loss to its quarterly net earnings of $718M, offset by $342M in DTAs, Silvergate found itself out of compliance with mandated Tier 1 ratios.

Selling securities only magnified the problem since they were booked at amortized value pending maturity but had to be sold at market value. This discrepancy meant that assets were debited by the amount booked but liabilities were only credited the amount received at market, an average of 9% less. These differences came right out of shareholder's equity and Tier 1 capital.

The only way to shore up Tier 1 capital (short of finding new profits under a rock) was to reduce assets and thus lower the amount of Tier 1 capital needed since it is based on a percentage of total qualifying assets. Toward this end, Silvergate's CFO Tony Martino unbooked real assets and added negative charges to assets from this quarter onto last quarter.

Specifically, he took a valuation allowance against 100% of the deferred tax assets, wrote off $196.2M in intangible assets which had been booked at full value in previous quarters, and took an impairment charge in the fourth quarter for $134.5M attributable to security sales occurring in Q1 FY2023.

This drove book value per share to $12.93 but reduced assets sufficently to bring in Tier 1 capital at 5.36%. So the preliminary numbers reported for the year severely underreported true shareholder equity in favor of being compliant with banking regs.

Sometime between that conference call on January 17th and March 8th, when Silvergate announced they would liquidate the bank, the Federal Home Loan Bank which had advanced SI $4.3B for liquidity purposes, refused to roll over the advance and required immediate repayment.

This is the catalyst which Silvergate cites as necessitating the liquidation. Unsaid is why FHLB made things so hard on them but we do have clues. And those clues point to errors in the financial reporting.

In their NT-10-K filed March 1, which is a notification of late filing for the audited annual 10-K, Silvergate states "Registrant requires additional time to perform analysis, record journal entries related to subsequent events and to complete management’s evaluation of internal controls over financial reporting." Internal controls over financial reporting. There's one clue.

Then: "The Company is currently analyzing certain regulatory and other filings [and] [T]he Company’s independent registered public accounting firm is also requesting detailed information relating to such matters." Regulatory filings.

"These additional losses will negatively impact the regulatory capital ratios of the Company and the Company's wholly owned subsidiary, Silvergate Bank." Regulatory capital ratios.

The main things taken out were $342M in DTAs and $196.2M in intangibles for the DIEM stablecoin technology. The SEN network, for purposes of shareholder valuation, has garnered wide attention in the media amid rumors of multiple suitors in the $500M range. These add over $1B to shareholder value, or over $20 per share in book value.

Earnings are due Tuesday.