Regulators Shutter Silver State Bank
By DAVID ENRICH and DAMIAN PALETTA
September 5, 2008 10:09 p.m.

State and federal regulators on Friday shut down Silver State Bank, the latest in a series of bank failures and one that could ripple through the presidential campaign.

David Enrich for the Wall Street Journal
A Silver State branch in Scottsdale, Ariz.
Until recently, the son of Republican nominee Sen. John McCain sat on Silver State's board and was a member of its three-person audit committee, which was responsible for overseeing the company's financial condition.

Andrew McCain left the Henderson, Nev., bank July 26 after five months on the board, citing "personal reasons." He is Sen. McCain's adopted son from his first marriage.

There is no evidence that Mr. McCain, 46, committed any wrongdoing. Nor are there signs that Sen. McCain, the Arizona Republican who on Thursday accepted his party's presidential nomination, had any knowledge of or involvement in Silver State's problems.

Spokespeople for the McCain campaign didn't return calls seeking comment. Efforts to reach Andrew McCain Friday night at Hensley & Co., the family-owned beer distributor where he is chief financial officer, were unsuccessful.

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The credit turmoil and other factors have led to an increase in bank failures this year. See a sortable table of banks that have been shut down by federal regulators since the start of 2008.

The lender, the 11th bank to fail in the U.S. this year, was overexposed to risky real-estate loans, a problem that's vexing many banks amid the worst financial crisis in a generation. Silver State had nearly $2 billion in assets and 17 branches in Arizona and Nevada.

The FDIC said Nevada State Bank, a Las Vegas-based unit of Zions Bancorp., is taking over the insured deposits of the failed bank, as well as some of its assets. Some $20 million of Silver State's $1.7 billion in deposits were uninsured by the FDIC, representing about 500 customer accounts, the agency said.

Silver State's failure will be costly to the FDIC's already-strained deposit insurance fund. The FDIC estimated it will incur a $450 million to $550 million hit.

The Federal Deposit Insurance Corp. had been preparing to shut down Silver State late last month, but the agency encountered resistance from the Nevada Division of Financial Institutions, according to people familiar with the matter. The Nevada regulators had final say over whether to pull the plug on the state-chartered bank, and wanted to keep it open.

Founded in 1996, Silver State specialized in construction and land-development loans to finance real-estate projects in Nevada and Arizona. In July 2007, Silver State raised about $30 million through an initial public stock offering. Its shares debuted at $20.

The business unraveled this year. By June 30, borrowers had fallen behind on about $252 million worth of loans, compared to about $11.5 million six months earlier, according to the Federal Deposit Insurance Corp. The bank's capital ratios, which represent the bank's cushion to absorb losses, have dropped sharply.

Mr. McCain's ties to Silver State date to 2006, when he became a director of Choice Bank, a small Scottsdale, Ariz., lender that Silver State acquired that year. Mr. McCain's family was an early investor in Choice, according to people familiar with the matter.

Choice was smaller than Silver State, but its finances deteriorated just as quickly and hurt the parent company. As of March 31, 2008, Choice was facing $7.9 million worth of delinquent loans, up from $1.6 million three months earlier. Silver State recently logged an $18.8 million write-down, representing the full remaining value of its investment in Choice, to reflect the "continued deterioration" of the franchise's credit quality, according to securities filings.

In June, Silver State planned to raise up to $40 million through a stock offering. As a way to entice investors, the company's 10 directors each agreed to participate. Mr. McCain, who at the time owned 1,126 shares of Silver State stock, pledged to buy another 170,648 shares, according to regulatory filings. At the $3.26-a-share offering price, it would have cost him $556,312.

A successful stock offering could have bought Silver State some time. But the offering never was consummated, in part because Silver State couldn't drum up interest from investors.

If Mr. McCain had remained on Silver State's board another four days, his position on the audit committee would have required him to sign off on the company's second-quarter financial statements.

Three weeks after Mr. McCain quit, Silver State had to revise those second-quarter numbers to reflect a loss of $72.3 million, which was larger than previously reported. It warned in the Aug. 15 regulatory filing of "uncertainty about the company's ability to continue as a going concern," a sign the bank's survival was in doubt.

Silver State said at the time its insurance carrier planned to cancel policies protecting Silver State's directors and executives from liability due to the bank's elevated risk profile, effective Oct. 7.

Mr. McCain's public role in his father's presidential campaign has been mostly limited to appearances at several events last month. A person close to Mr. McCain says he left Silver State's board because his busy schedule meant he wouldn't be able to devote enough time to the struggling bank.

Mr. McCain was a quiet presence on Choice's board, say former associates. He would occasionally ask executives about how the bank's loan portfolios were holding up, but rarely pressed for details.

William Robert, a co-founder of Choice, says Mr. McCain didn't play an active role on the boards of either Choice or Silver State. "He got on [the Silver State] board, he looked around, and he decided he shouldn't be on it," Mr. Robert said. "There's nothing suspicious here."