Silver State Bancorp Q2 2008 Earnings Call Transcript

Silver State Bancorp (SSBX)

Q2 2008 Earnings Call

August 4, 2008 12:00 pm ET

Executives

Michael J. Thorell - Acting President, Chief Executive Officer; Acting Chief Executive Officer of Silver State Bank

Michael J. Threet - Chief Financial Officer, Chief Operating Officer

Analysts

[Tom Dulhaney - Decade Capital]

Donald Worthington - Howe Barnes Hoefer & Arnett, Inc.

Presentation

Operator

Welcome to the Q2 2008 Silver State Bancorp earnings conference call. (Operator Instructions) I would now like to turn the call over to Michael Threet, Chief Financial Officer.

Michael J. Threet

Before we get started I will read our disclosure regarding forward-looking statements. This call will contain forward-looking statements and terms such as will, should, plan, intend, expect, continue, believe, anticipate, seek, and similar expressions are forward-looking in nature and reflect management’s view only as the date hereof. Actual results and events could differ materially from those expressed or anticipated and are subject to a number of risks and uncertainties including but not limited to fluctuations in interest rates, asset quality, government regulations, economic conditions, and competition into the geographic and business areas in which Silver State Bancorp conducts its operations. We undertake no obligation to review or update any forward-looking statements whether as a result of new information, future events, or otherwise.

As all of you were made aware last Friday, the company announced several key changes to both the Board of Directors and executive management. First, Philip C. Peckman was elected as the new Chairman of the Board of Directors. Mr. Peckman has been a member of the company’s Board of Directors since 1997 and has previously served as chairman of the company’s Audit Committee. More recently Mr. Peckman served as the company’s lead independent director and share person of the company’s Nomination and Corporate Governance Committee. Mr. Peckman is a long-standing member of the business community in southern Nevada having previously served as partner in charge of the Public Accounting Firm McGladrey & Pullen and more recently as Chief Executive Officer of the Greenspun Corporation.

On Friday the company also announced the acceptance of the resignation of Corey Johnson as President and Chief Executive Officer of the company and the appointment of Michael J. Thorell in that new position. Mr. Thorell was recently appointed as the Chief Lending Officer and Chief Credit Administration Officer of Silver State Bank. Prior to that Mr. Thorell was President of Choice Bank, the company’s Arizona chartered bank subsidiary. Throughout his career Mr. Thorell has held numerous positions in both lending and bank operations.

Both of the aforementioned appointments are subject to regulatory approval. The management and employees of the company welcome Mr. Thorell in his new capacity and look forward to working with him under his leadership. I will now turn the time over to Mike Thorell.

Michael J. Thorell

I also want to welcome everyone to our second quarter earnings conference call. This morning I’d like to talk briefly about our credit quality and several key action items management is currently working on.

First of all, as you all are aware from our earnings release on Friday the second quarter results were directly affected by the significant increase in our loan loss provision resulting from the impact on deteriorating economies in the Nevada and Arizona market on our loan portfolio, particularly our residential construction and land loans. Last quarter we described the status of Nevada and Arizona real estate markets in our efforts to identify potential problem loans. Both of these markets are experiencing unprecedented challenges.

The significant increase in non-accrual loans is the direct result of enhanced actions to address the quality of our loan portfolio. This was done with an aggressive loan review process over the past quarter, which not only included internal loan reviews but three separate external loan reviews on construction and land loans, commercial real estate, and residential mortgages. Residential real estate values have continued to decline as foreclosures and short sales have risen in the past several months.

The new appraisals we’ve been receiving continue to have a negative impact on the collateral value supporting our loans. Furthermore, the appraisals we are receiving are showing a significant decrease in collateral value from those we were receiving nine months ago. We have received over 125 new appraisals in the past four months. Upon receipt of the valuations on the projects we have aggressively reserved against any deficiencies and in many cases placed the loan into non-accrual. Nonperforming loans increased 14.7% of gross loans. Non-accruals consisted of 125 loans, 110 conventional and 15 of that being SBA loans, with two loans nearly $15 million each being the largest with the average non-accrual loan size of $1.95 million. 82% of the loans in non-accrual are residential construction related. The remaining 18% is commercial real estate and C&I loans. The geographic distribution is 67% of the loans located within Nevada with the remainder in Arizona and Utah.

Currently the special assets department is working with borrowers to develop strategic solutions for problem credits. We have expanded its staff to cope with the increased level of workout loans. The department is aggressively pursuing all avenues to eliminate the nonperforming loans from our balance sheet. We have also begun the process of developing an REO management component of the special assets department as we anticipate gaining control over properties currently in foreclosure. This group will work to preserve asset quality and maximize the level of recovery when these assets are subsequently sold.

So the main objective for the company is to focus on what we need to do to fix the problems. And although the answer is not simple, there is a definite plan. The first part of the plan includes continuing to work with our financial advisor KBW to seek the necessary capital for the company. Secondly, continue to aggressively seek good core deposits through our branch network especially since we possess one of the best SBA departments in the region which allows us excellent access to business account relationships. In addition to SBA our residential mortgage department is originating new loans well above their stated goals for 2008 and they too will provide access to new deposit relationships. So while those strategies are put into place we have taken steps to build up our excess liquidity reserves to ensure we can always be able to meet the needs of our depositors. Finally, I will work directly with our special assets department on all problem loan situations. The action plan for this group is to continue working with borrowers to either liquidate collateral, the pledging of additional collateral to help shore up the project, or in some cases filing default and proceeding with the foreclosure. My direct experience in this area will certainly help us come to resolutions with the loans in a timely manner.

Despite the challenges facing our company we will remain optimistic regarding our markets we serve and plan to grow in them for years to come. Nevada and Arizona are still very desirable places to live and work; thus we are certain for the recovery and their future as long-term growth areas. Working with senior management we will continue to approach the balance of 2008 with caution but feel that our direct dynamic strategy moving forward will be strong enough o restore Silver State Bank to its former strength and profitability.

I’ll now turn it back to Mike Threet.

Michael J. Threet

At this time we’re not going to really drill down the fluctuations in the balance sheet or income statement but we will open it up to questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from [Tom Dulhaney - Decade Capital].

[Tom Dulhaney - Decade Capital]

I was wondering if you could provide an update on potential problem loans. I think there was something like $275 million in the last 10Q. I would assume a lot of that moved into NPA this quarter. Could you provide an update there?

Michael J. Thorell

As I mentioned in my comments, we’ve been just very aggressively addressing the problems. They’re evident by the movement of those loans. The market continues to be very challenging as we’re working with customers. There’s really no surprise in some of it because of the nature of what we’re hearing out of both markets. We’re continuing to drill down on all areas of the portfolio but obviously the residential side is one that is getting most of our attention and thus those aggressive strategies have resulted in the numbers you see.

[Tom Dulhaney - Decade Capital]

But in terms of that actual figure, the potential problem I guess we’ll have to wait for the 10Q for that?

Michael J. Thorell

Yes.

[Tom Dulhaney - Decade Capital]

Can you comment on your ability to accept and retain brokered deposits after falling below well capitalized in the second quarter?

Michael J. Threet

We currently have a broker deposit waiver application submitted to the regulators, to the FDIC, and we’re trying to get that moved through the system right now.

[Tom Dulhaney - Decade Capital]

If that waiver was approved, does it allow you to retain your existing broker deposits or accept additional? I’m not sure how that works exactly.

Michael J. Threet

It would be to accept additional deposits.

[Tom Dulhaney - Decade Capital]

I can see you provided updates on your maximum capacity to purchase fed funds under agreements with other banks. Is there any update on that?

Michael J. Threet

We’ve had some fall off. Some of the correspondent banks have pulled their unsecured borrowing commitments from us.

[Tom Dulhaney - Decade Capital]

As far as the capital status, what is the status of the actual rights offering at this point? Is that being shelved or I know you said you’re working with your advisors, but just on that piece alone?

Michael J. Threet

At this point in time we’re still working with KBW on all those options, so none of those at this time have been shelved.

[Tom Dulhaney - Decade Capital]

The dollar amount of capital, is there an update on the capital needs of the company? I think one thing that’s obviously changed is the pre-provision earnings as I look back at the presentation filed in June, I think you used a two year pre-tax pre-provision number in the $69 million area and that’s obviously fallen, but some of that seems like it’s - Just any update there and what your thoughts are?

Michael J. Threet

All I can tell you at this point is we’re continuing to evaluate that at this point with our advisors.

Operator

Our next question comes from Donald Worthington - Howe Barnes Hoefer & Arnett, Inc.

Donald Worthington - Howe Barnes Hoefer & Arnett, Inc.

You reported in the earnings release on nonperformers. What about impaired loans that are still performing? What’s the current balance of those?

Michael J. Threet

Don, were you looking for impaired with or impaired that are still performing, you said?

Donald Worthington - Howe Barnes Hoefer & Arnett, Inc.

Yes.

Michael J. Threet

Approximately $149 million.

Donald Worthington - Howe Barnes Hoefer & Arnett, Inc.

In terms of the deposits in the last Q I think there were four to five pretty large deposit relationships. I was just wondering what the current status is there, say the top four what the amount is and maybe the maturity of those deposits?

Michael J. Threet

We’ve had some of those deposits go away but the top two relationships were brokered money market accounts. Those balances have declined pretty significantly. We did consciously build up our liquidity position for the obvious reasons but most of the money that came in, in the second quarter was more term brokered money.

Donald Worthington - Howe Barnes Hoefer & Arnett, Inc.

One other question more for Mike Thorell, in terms of functioning as a CEO are you still the Chief Lending Officer as well?

Michael J. Thorell

At this time but obviously the Board is examining along with management making sure that those other duties in some capacity are shored up.

Donald Worthington - Howe Barnes Hoefer & Arnett, Inc.

In terms of the federal home loan bank borrowings, is your availability still there and if so, are you required to deliver collateral against those borrowings?

Michael J. Threet

Yes, the availability is still there, Don. Subsequent to quarter end we did pull down some additional borrowing capacity that we had. I don’t think it’s appropriate for us to comment on the terms of collateral delivery right now.

Operator

There are no further questions at this time.

Michael J. Thorell

Ladies and Gentlemen, thank you for your participation. We appreciate all the time. Senior management is obviously very dedicated to all the challenges we’re facing. Obviously we’ll have more communications that will be forthcoming. And again we appreciate the support that we’re getting from the investment community. Thank you.

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