SVB Financial Group (SIVB) 2003 Q2 法說會逐字稿

Good afternoon and welcome to the Silicon Valley Bancshares second quarter financial results conference call. All participants will be able to listen only until the question and answer session of the conference. This conference is being recorded. If anyone has any objections, please disconnect at this time.

I will now turn the call over to Miss Jane Lodato, Head of Marketing for Silicon Valley Bancshares. Miss Lodato you may begin.

Thank you. Good afternoon and welcome to the Silicon Valley Bancshares's second quarter 2003 financial conference call. I'm Jane Lodato, Head of Marketing. Today Lauren Friedman, our Chief Financial Officer, will discuss the company's final second quarter financial results.

I would like to start the meeting by reading the safe harbor disclosure. This presentation may contain projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are just predictions and that actual events or results may differ materially. We refer you to the documents the company files from time-to-time with the Securities and Exchange Commission. Specifically, the company's last filed form 10-K filed March 5th, 2003. These documents contain and identify important risk factors that could cause the company's actual results to differ materially from those contained in our projections or other forward-looking statements.

Now I would like to turn the call over to our CFO, Lauren Friedman.

Thank you. Hello and thank you for joining us. When we announced our quarterly earnings last month we were in the process of completing evaluation analysis of our M&A subsidiary, Alliant Partners, as required by Statement of Financial Accounting Standards 142. The results of that analysis are complete resulting in non-cash, pre-tax charge of $17m in the second quarter.

I would like to stress that we cannot be happier with Alliant's performance to date and with the acquisition. When we purchased Alliant we used certain criteria to determine its value to Silicon Valley Bancshares and Alliant has met our expectations regarding those criterions in every respect since the acquisition.

We engaged two consulting firms to conduct evaluation analysis separately and received two different valuations. One indicated no impairment. The other showed a possible impairment. In keeping with the spirit of the rule we chose to apply the more conservative valuation.

The role of Alliant in the future success of Silicon Valley Bancshares is undiminished. This valuation is the result of some specific accounting rules but do not necessarily reflect their value to us.

With me today is Kenneth Wilcox, our Chief Executive Officer and Jim Kochman, Head of Alliant Partners and we'd be happy to take your questions. Operator, please open the call for questions now.

Thank you. At this time we are ready to begin the question and answer session. If you would like to ask a question, please press '*' '1'. You will be announced prior to asking your question. To withdraw your question, press '*' '2'. Once again, to ask a question please press '*' '1'. One moment please.

Our first question comes from Brock Vandervliet with Lehman Brothers. You may ask your question.

Thanks and good afternoon. If you could just spend a moment reviewing the particulars behind the purchase of Alliant in terms of ... from what I understand and recall there is $100m initial payment would have been stepped out over four years, plus an incentive payment of up to $85m on top of that. Where does that stand? Thanks.

Nothing has changed. We've paid originally as you mentioned $100m spread out over four years.

Five years.

Over five years and I believe there is $28m remaining to be paid of that amount and we charged then most of that $100m to goodwill. A little over $98m. So this $70m will take the goodwill balance down from the roughly $98m to the roughly $81m. There is an earn out as well. It's up to $75m. That covers a period from September of '02 to '05. The earn out still potentially could be earned and actually we hope that it is. Does that answer your question?

Yes. Thanks.

Mr. Joe Moreford with RBC Capital Markets, you may ask your question.

It's actually Frank Hun. Just if you guys could give us a little more information on the two evaluations from the consultant and how they came to a different conclusion on whether Alliant was impaired or not?

Secondly, in this interim period were you guys allowed to repurchase shares and I guess are you allowed to now going forward?

The two valuations were you know if you looked at them they were not all that different except in some judgment items involving things like what discount rate should be used. There were some fairly what I would consider to be not pretty critically noticeable differences in assumptions but they added up to $70m, which is quite a difference. But in terms of how the analysis was done, both companies did things the same. Both of them used a cash flow test and a market value test and they came to very different conclusions.

As far as buying back shares is concerned, yes we have been in an open period. We have been allowed to buy back shares and we certainly can now as well.

Thank you.

Miss Charlotte Chamberlain with Jefferies & Company, you may ask your question.

Lauren just following up, so you were between July 17th and today you were able to buy back shares is that what I just heard you respond to the last question?

Charlotte, we were able to. I'm not saying we did. I'm just saying that we had the freedom to do it.

Okay. Now looking forward, the two questions would be what assurances, if any, can you give us that we'll not see another hit to earnings and book value from Alliant next year? And what would be the early warning signals that you would advise us to look for as a sign that another impairment charge could happen this time next year?

Charlotte, I can't predict the future.

Right.

And so my trying to tell you that there could not be another charge next year is that I really can't do that. But we don't think there will be another charge next year and in fact if anything, we would expect the valuation next year to show perhaps that we took too much this year. But you can never reverse it.

Right but what would be the basis? I mean was the impairment done because of revenues, because of what lines of business they were in? What was the basis?

Well it really wasn't anything like that. It was more that when they did their discounted cash flow analysis and using the discount rate ... they're using pretty steep discount rates. When they put these discount rates to the future cash flows and then following the somewhat archaic rules of FASB142 resulted in impairment. The valuation of Alliant, even the lower one, was still on the order of $98m. Roughly the same as our carrying value. But then they have to allocate assets to. They have to look at the tangible assets. They have to allocate money to that. They have to allocate money to deferred income taxes and all kinds of things like that and that's how they got to an impairment.

Next year you have to really I think the important question here is what are the warning signs for next year. I think if you continue to see Alliant revenues growing, then you don't need to worry about impairment. On the other hand if Alliant's revenues were not continuing to grow, then I think that would be an indication that we could have an additional charge.

We've made some assumptions about what their revenues will be over the course of the next actually 10 years and the important thing is that they need to meet those projections. And we're very confident that they will.

Okay. So there is nothing in terms of looking at what actual revenues were versus what your assumptions were when you went into the transaction in terms of calculating what price you would pay?

The methodology that is employed in an impairment test involving FAS142 does not involve a comparison between a perception of today's value with a perception of the value at the time of the purchase. It's simply a question of applying a discount rate to one's best estimate of projections going forward. Because this is the best estimate of projections going forward and there can be no better estimate of projections going forward, in essence the only variable is the discount rate. If you apply a discount rate that is high enough, the value is correspondingly lower and if you apply a discount rate that is low enough, the value is correspondingly higher.

Unless one wants to quibble with the discount rate, this is the absolute best guess of the company's value as of today.

Okay. All right, thanks.

Mr. Brian Harvey with Fox-Pitt Kelton, you may ask your question.

Thank you. I just had a couple of questions. One small question related to the other assets category that seemed to be up about $6m from what you guys originally reported.

Then my second question is can you just talk about the pipeline of business at Alliant to give us some idea of how things are progressing and if there has been any change or update in your financial goals or financial guidance that you provided after last month's earnings?

I'll speak to the question about Alliant's pipeline and then refer to Lauren on the question regarding the other assets.

Our deal flow is continuing to grow. Our challenge has been not necessarily finding new clients but rather securing enough staff to be able to execute the backlog we have. So our deal flow is right now quite healthy. We're seeing buyers come back into the market, as I believe you heard previously. At the end of Q2 we had completed 20 M&A assignments and six opinions, putting us on pace by a large measure to have a record year and our backlog has actually increased since the last conference call. Lauren.

Are you talking quarter-over-quarter or are you comparing the two releases?

I'm comparing the two releases.

Okay. We think that what that is it has to do with the taxes. This is a before tax asset because what happens is we tax effectively the write down. So that ended up in other assets.

Okay and just if I could Jim, just in terms of the deal flow, can you give us some perspective of what it was today versus what it was say in 2001, 2002?

In terms of 2001, 2002 in both of those years we completed transaction count in the 30s and so as with six months this year we were at 26. Valuations have gone up and quite frankly more importantly, our average fees have gone up as well per assignment by something in the range of 20%.

All right, thank you.

Mr. Brock Vandervliet with Lehman Brothers, you may ask your question.

Hi, just a follow up question. In terms of how you valued Alliant at the time of purchase, can you give us a sense of ... I'm assuming you used some discount rate at that time. I know based on Ken's comment the point you're making about the changeover time. But can you give us a sense of order of magnitude? How different the discount rate used today may have differed from what you used then?

Allow me to speak to that if I will. At the time of the acquisition, while there was a discount rate calculation done for purposes of the fairness opinion, the purchase price was set on arms length negotiations that were based on multiples of the prior year's earnings. And that's where the primary driver of purchase price came from.

The discount rate that was used by the Silicon Valley Bank's financial advisor was again probably in the range of 13%-17%. But that was less academic to how the price was developed.

Okay. As you look at potentially doing similar deals in the future, what have you learned from this exercise and this episode?

I would say that the best thing that you can learn from this episode would be that at the time of the purchase, unless you want to have an impairment, which obviously nobody does, at the time of the purchase you need to apply a very high discount rate. That would be apparently irrespective of prevailing market values, as well as values derived from a combination of cash flows and multiples or comparables.

All right. Okay. Thank you.

Once again, to ask a question please press '*' '1'. Miss Charlotte Chamberlain with Jefferies & Company, you may ask your question.

Certainly this calculation appears to have been massively disrupted, at least due to the concentration of management on the business of Silicon Valley Bank. It sounds also like it was a big diversion at Alliant as well. Could you give us a sense if there was any, how shall I say this? If there were any Alliant revenues that in fact might not have been recognized in the June quarter because you were forced to attend this distraction that we might see in subsequent quarters?

I think while it was certainly exhausting and comprehensive and a touch emotional, I believe it is our job to keep them from impacting revenues and hopefully we've accomplished that.

So there were no deals that might have closed in the June quarter that might slip over to this quarter?

No.

Okay. Thanks.

Operator that's all the time we have today so we won't be taking further questions. Thank you all very much for joining us.

Thank you for your participation on today's conference call. To listen to the replay please dial 1-888-566-0514. The replay will be available until September 12th, 2003. This concludes today's conference call.