Bank’s practice raising concern
Silver State Bank of Henderson is on the fast track to grow big and profitable, but it gets a big chunk of its deposits from a few customers and is charging relatively high rates for potentially risky land and construction loans.
The yield on loans and leases at Silver State is 10.28 percent, compared with 7.84 percent for comparable banks, according to a financial report from June 30. That puts it in the highest 3 percent of comparable banks for interest rates.
In other words, Silver State is charging almost one-third more in loan interest than similar banks.
"I find that astonishing," said Michael Metz, chief investment strategist for Oppenheimer & Co. in New York.
"A top-quality borrower does not have to pay that kind of rate," Metz said. "These are all warning signs (for investors.)"
Individuals should review the bank’s numbers before investing in the bank holding company, Silver State Bancorp, which has shares trading on Nasdaq, he said.
Corey Johnson, chief executive officer of Silver State, said the relatively high loan yields resulted from loan fees that are added to interest income when Small Business Administration loans and real estate loans are sold. Silver State sells more of its loans than other banks, Johnson said.
Johnson’s interpretation of regulatory accounting procedures is wrong, according to a source familiar with bank accounting rules.
Those loan fees should be treated as part of the gain on the sale of the loan, rather than interest income, according to the source, who spoke on condition of anonymity.
Bauer Financial, a firm that reviews banks for depositors, rates Silver State three out of five stars, signaling it is adequately capitalized based on a March 31 financial report. The firm recommends banks with four- and five-star ratings, and it warns savers to avoid banks rated one star or two stars.
"These numbers indicate an aggressive growth strategy that could lead to higher risk," said Karen Dorway, Bauer president and research director.
Silver State has doubled in asset size over the past 2 1/2 years to $1.18 billion.
"Most banks do not double that quickly in size," although those kind of growth rates are not unheard of, she said. Johnson said $150 million of that growth came from the purchase of Choice Bank in the Phoenix area.
The bank’s holding company, Silver State Bancorp, also reported that four customers have bank balances totaling $340 million and account for 27 percent of the bank’s total deposits.
Johnson said the four customers are giant firms, such as stock brokerage A.G. Edwards & Sons, that sell bank certificates of deposit to brokerage clients.
About 30.4 percent of Silver State’s deposits were brokered, according to the Federal Deposit Insurance Corp. That percentage is much higher than the 5.2 percent of brokered deposits at peer banks.
Federal regulation restricts how much banks can raise through brokered deposits because of the risk that they may be withdrawn and put in a bank with higher rates, Silver State said in a financial report. Bankers often call brokered deposits "hot money" for that reason.
Silver State relies on more brokered deposits because of difficulty raising deposits locally, Johnson said.
"It’s harder and harder to fund these loans though pure retail deposits," Johnson explained. It’s particularly difficult for Silver State because its loan totals have been growing rapidly, he said.
Silver State pays top dollar for deposits, according to the bank’s report to federal regulators, although Johnson denies its deposit rates are higher than those of peer banks.
The Henderson bank pays higher average deposit rates than nine out of ten peer banks for certificates of deposit of $100,000 or more and for other savings deposits, according to the Federal Deposit Insurance Corp. Johnson said the bank’s deposit rate expenses are higher because it gets more deposits from CDs than other banks.
Total interest-bearing deposits at Silver State were 4.87 percent, compared with 3.66 percent for its peers, according to the FDIC. Only 6 percent of comparable banks pay more for interest-bearing deposits.
On the other side of the ledger, loans on construction and land are enough to give a bank regulator a headache. Silver States’ construction loans are more than five times its total capital, up from three times total capital a year ago.
Late last year, federal bank regulators recommended that banks have no more than the total of their capital in land and construction loans but the banking regulators did not prohibit exceeding the guidelines.
Silver State’s construction loans and leases were 520 percent of capital, compared with 139 percent for comparable banks.
Bank regulators "are satisfied with the systems and monitoring that we have in place," Johnson said.
Johnson said that loan losses and nonperforming loans are low at Silver State Bank — even lower than at other Southern Nevada banks, which also are doing well.
The Silver State CEO says the low percentages of problem loans shows the bank is pursuing a relatively low-risk strategy despite its focus on making land and construction loans. Analysts wonder how long Silver State loans can avoid an increase in problem loans if the credit crunch and residential real estate bust continues.
