Silvergate may face capital shortfall due to delayed filing of annual report.

The U.S. crypto-friendly bank Silvergate has submitted a report to the SEC, stating that it will not be able to file its annual financial report on time by March 16 and informing the U.S. Securities and Exchange Commission that it may face a "capital deficiency" situation.

Reasons for Inability to Submit Financial Reports

Silvergate has stated that in filing its annual 10-K report, it will reflect significant changes compared to the fourth quarter and full year ending December 31, 2021.

Silvergate mentioned that in order to fully repay advances from the Federal Home Loan Bank of San Francisco, the company sold additional investment securities beyond what was previously disclosed in the fourth quarter financials. According to Silvergate's previously released fourth-quarter financial report, to address market volatility in the cryptocurrency space and large customer withdrawals, Silvergate sold $5.2 billion in bonds for cash flow, resulting in a $718 million loss from the sale of securities and related derivatives in Q4.

The company currently holds $5.6 billion in fair value bonds, and Silvergate has continued to sell additional bonds this year, which is expected to incur further losses.

These additional losses will have a negative impact on the regulatory capital ratios of the company and its wholly-owned subsidiary, Silvergate Bank, and may lead to capital inadequacy for both the company and the bank. Additionally, the company is evaluating the impact of these subsequent events on its ability to continue operating within the next twelve months after the financial statements are issued. The company is currently reassessing its business and strategy in light of the business and regulatory challenges it faces.

Home Loan Bank Advances

According to previous reports, Silvergate holds $4.3 billion in Home Loan Bank advances as wholesale funding, which is a cheaper source of funding for the bank. However, borrowing from the Federal Home Loan Bank comes with specific conditions, and in an environment where bond market values have significantly deteriorated, at least 77 small banks have been unable to access cheaper funding through the Federal Home Loan Bank.

If Silvergate has fully repaid the advances from the Federal Home Loan Bank of San Francisco, does this mean that Silvergate no longer qualifies for borrowing and cannot obtain financing through this channel?

Continued Shorting of Stocks, Significant Stock Price Decline

After the news was announced, Silvergate fell by 29.79% in after-hours trading, hitting a new low of $9.5 per share.

Although the world's largest asset management company BlackRock and Citadel Securities have recently increased their stake in the company, according to MarketWatch data, Silvergate continues to be heavily shorted with a high short-interest (SI) indicator of 71.30%, indicating that seventy-one percent of the stock has been borrowed for short selling purposes.