Research: Rating Action: Moody’s downgrades Silvergate Bank’s deposit ratings to Caa1 from Ba3; ratings on review for downgrade
New York, March 03, 2023 — Moody’s Investors Service (“Moody’s”) has downgraded the ratings of Silvergate Capital Corporation (Silvergate Capital) and its bank subsidiary Silvergate Bank, following the downgrade of the bank’s Baseline Credit Assessment (BCA) to caa3 from b2. Silvergate Capital’s long-term issuer rating was downgraded to Ca from B3 and its non-cumulative preferred stock to C from Caa3. The bank’s long-term deposit rating was downgraded to Caa1 from Ba3 and its long-term issuer rating to Ca from B3. The ratings were also placed on review for downgrade.
RATINGS RATIONALE
The ratings downgrade is driven by the company’s 1 March announcement that it is evaluating its ability to continue as a going concern and that it is unable to timely file its annual report. In addition, the company reported that it has sold additional investment securities to fully repay its outstanding Federal Home Loan Bank advances. As a result of such sale of securities, the company realized additional investment losses, which had previously been recorded as other-than-temporary impairment of securities. The company reported that such additional losses will negatively impact the company’s regulatory capital ratios which may result in the company and the bank being deemed less than well-capitalized.
Another driver of the ratings action was governance. The delay in being able to timely file its annual report, the asset and liability mismatch leading to higher-than-expected realized losses while selling investment securities, the potential for no longer being deemed well-capitalized, and rising legal and regulatory risks highlight significant governance deficiencies in terms of the bank’s risk management and its ability to properly assess and respond to abruptly changing operating conditions for its specialized business model, increasing the institution’s exposure to adverse developments. Additionally, the firm’s public filing stated that its external auditor needs additional time to complete certain audit procedures, including the review of adjustments not yet recorded and the evaluation of the effectiveness of the company’s internal controls over financial reporting. The bank’s negative governance risk has a discernible negative impact on Silvergate’s credit ratings.
The caa3 BCA reflects our expectation that the company will continue to experience further declines in deposits forcing it to continue selling securities, potentially at further losses. In addition, particularly in the event of a winddown, it is uncertain the amount that the bank will realize on its loan portfolio and other assets.
The review for downgrade reflects the high level of uncertainty with respect to the bank’s financial profile, the bank’s viability and the unknown costs in the event of a winddown.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
As the ratings are on review for downgrade, there is currently no upward pressure on the ratings of Silvergate Capital or its bank subsidiary.
In the longer term, the BCA could be upgraded if legal and regulatory risks or volatility in the crypto currency market decrease materially and if the bank’s capitalization, profitability, and funding profile strengthen materially.
The BCA could be downgraded in the event of legal or regulatory findings or if the bank’s financial profile deteriorates as a result of a further decline in equity, deposit funding, or liquidity. A lower BCA would likely lead to a ratings downgrade.
The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Downgrades:
..Issuer: Silvergate Capital Corporation
…. LT Issuer Rating (Local Currency), Downgraded to Ca RUR from B3 NEG; Placed Under Review for further Downgrade
….Pref. Shelf Non-cumulative (Local Currency), Downgraded to (P)C from (P)Caa3
….Pref. Stock Non-cumulative (Local Currency), Downgraded to C from Caa3
Outlook Actions:
..Issuer: Silvergate Capital Corporation
….Outlook, Changed To Rating Under Review From Negative
..Issuer: Silvergate Bank
…. Adjusted Baseline Credit Assessment, Downgraded to caa3 from b2; Placed Under Review for further Downgrade
…. Baseline Credit Assessment, Downgraded to caa3 from b2; Placed Under Review for further Downgrade
…. LT Counterparty Risk Assessment, Downgraded to Caa2(cr) from B1(cr)
…. LT Counterparty Risk Rating (Foreign Currency), Downgraded to Caa3 from B2; Placed Under Review for further Downgrade
…. LT Counterparty Risk Rating (Local Currency), Downgraded to Caa3 from B2; Placed Under Review for further Downgrade
…. LT Issuer Rating (Local Currency), Downgraded to Ca RUR from B3 NEG; Placed Under Review for further Downgrade
…. LT Deposit Rating (Local Currency), Downgraded to Caa1 RUR from Ba3 NEG; Placed Under Review for further Downgrade
Affirmations:
..Issuer: Silvergate Bank
…. ST Counterparty Risk Assessment, Affirmed NP(cr)
…. ST Counterparty Risk Rating (Foreign Currency), Affirmed NP
…. ST Counterparty Risk Rating (Local Currency), Affirmed NP
…. ST Bank Deposit (Local Currency), Affirmed NP
Outlook Actions:
..Issuer: Silvergate Bank
….Outlook, Changed To Rating Under Review From Negative
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
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Sadia Nabi
Vice President – Senior Analyst
Financial Institutions Group
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