Silver State Bancorp raised $55 million of capital last July and used it quickly to bolster its residential construction lending in and around booming Las Vegas.
But then the mortgage meltdown struck, and home building in Las Vegas slowed to a trickle. Now, less than a year after its public offering, Silver State is staring at what could be tens of millions of dollars of losses and a stock that has lost roughly 85% of its value.
Silver State's chief executive, Corey L. Johnson, says he is confident that the Las Vegas market and his company will rebound next year as the economy gets a lift from the construction of tens of thousands of hotel rooms.
Meanwhile, investors and analysts are waiting to see whether the $1.6 billion-asset company will have to raise capital once again to deal with the potential credit messes it faces, and whether regulators will impose sanctions relating to both the company's loan portfolio and a perceived overreliance on brokered deposits.
In the first quarter, Silver State's provision for loan losses rose more than 24-fold from a year earlier, to $31 million, as more residential projects were delayed and their underlying value fell substantially. As a result, Silver State lost $14.4 million in the quarter, compared with a $5.6 million profit a year earlier.
In an interview last week, Mr. Johnson said his company has made a series of moves to address its credit troubles, starting with hiring a third party to review its loan portfolio and assigning a team of six lenders to develop workout plans with borrowers. Part of the team's efforts include trying to obtain additional collateral from borrowers and, in some cases, helping them find developer partners so that they can complete their projects.
"We haven't buried our head in the sand," Mr. Johnson said. "We are taking a very aggressive approach of identifying problem loans, and we are working with our borrowers to determine if they can go forward with their projects or, in the last resort," whether "a foreclosure is something we might have to do."
On May 27, Silver State named its Arizona region president, Mike Thorell, chief lending officer and credit administration officer, succeeding Douglas E. French, who had resigned a week earlier for personal reasons. (Mr. Johnson said he was not asked to leave.)
The company has also hired KBW Inc.'s Keefe, Bruyette & Woods Inc. to review "strategic alternatives." Though Silver State is well-capitalized, with a total risk-based capital ratio of 11.4% at March 31, it will most likely try to raise additional capital, Mr. Johnson said. It will not rule out the idea of a sale, he said, "but it's not the primary objective right now."
Silver State is not alone in tackling severe credit-quality troubles in the wake of the mortgage collapse. Banking companies in other fast-growing regions such as South Florida, the Atlanta area, and California's central valleys have been hit hard as developers struggle to sell homes they built in order to repay their loans.
In Las Vegas Silver State was one of the more aggressive lenders, taking advantage of the region's explosive population growth fueled by casino development. The population of Clark County, where Las Vegas is, grew 33%, to 1.8 million, from 2000 to 2007, according to the U.S. Census.
Silver State completed a $25.5 million initial public offering on July 18 and raised another $30 million in a trust-preferred securities offering completed six days later. At the time the company was bullish on growth prospects in both Las Vegas and Phoenix, where it has three branches, and it wasted little time putting the new capital to use.
"Our tremendous growth last year was financed through the capital we raised," Mr. Johnson said.
Total loans grew 53.3% last year, to $1.5 billion. Most of the growth was in construction and land loans, up 72%, to $1 billion. The explosive rise was on top of several years of steady growth in that sector, which made up 69% of Silver State's total loans at March 31.
The Las Vegas area, though, has been among the hardest-hit by the housing downturn; one in every 146 Nevada households received a foreclosure filing in April, 3.6 times the national average and the highest foreclosure rate in any state, according to RealtyTrac Inc. in Irvine, Calif.
At Silver State, construction and land development loans accounted for 82% of its $78 million of nonaccrual loans at March 31. And nonaccruing loans were 4.79% of total loans, compared with 0.84% a year earlier.
Silver State will probably report losses this quarter and for the full year, Mr. Johnson said. Though he would not estimate the size of the loss for this quarter, the loss provision should not be as high as previously, he said, because the only loans left to review are commercial construction loans and "we don't believe they will have the same type of results as the residential construction loans."
The company also intends to decrease its reliance on construction loans by making more Small Business Administration, commercial real estate, and commercial and industrial loans, Mr. Johnson said.
"We're scaling down the construction lending until we start seeing the economy significantly improve," he said.
Brad Milsaps, an analyst in the Atlanta office of Sandler O'Neill & Partners LP, said that Silver State did not reduce its underwriting standards, it "just had a higher willingness to lend whereas others were pulling back."
For example, the $1.7 billion-asset Community Bancorp in Las Vegas had also been an active construction lender, but its total loans rose just 13.2% last year.
Mr. Milsaps estimated that Silver State would lose $2.40 a share this year and may break even in 2009.
"If they can get capital, they'll be fine, but if they have difficulty in raising capital and their losses get worse, then they are going to be more challenged," he said. He expects to have a clearer picture of Silver State's overall credit quality once the outside loan review is complete and after a regulatory examination, scheduled to begin next week, is concluded.
Silver State's shares were at $2.97 in late trading Tuesday. "The big question overhanging the stock" is whether the company will be slapped with an enforcement order, Mr. Milsaps said.
Regulators could require Silver State to reduce its reliance on brokered deposits, Mr. Milsaps said. The Federal Deposit Insurance Corp. said brokered deposits accounted for 37% of the bank's total at March 31, roughly six times the national average for commercial banks with assets of $1 billion to $10 billion.
Mr. Johnson said the company stated in its first-quarter conference call to analysts and investors that it has already begun trying to attract core deposits and wean itself off brokered deposits.
Both Mr. Johnson and Mr. Milsaps said that Silver State will be aided by the planned construction of 46,000 hotel rooms in Las Vegas in the next 18 months. The creation of about 145,000 jobs should attract more people to the region who could, in turn, buy up the houses built by Silver State borrowers, they said.
