SVB Financial Group (SIVB) 2003 Q3 法說會逐字稿

Good afternoon, and welcome to the Silicon Valley Bancshares Third Quarter Financial Results Conference Call, with leader Ken Wilcox, President and Chief Executive Officer. All participants will be able to listen only until the question and answer session. At that time, you will be given instructions as to how you may ask a question. This conference is being recorded. If there are any objections, you may disconnect at this time.

I will now turn the call over to the first presenter, Ms. Meghan O'Leary. You may begin.

Thank you. Good afternoon and welcome to the Silicon Valley Bancshares Third Quarter 2003 Financial Conference Call. I'm Megan O'Leary, Director of Public Relations. Today, Ken Wilcox, our President and Chief Executive Officer, and Lauren Friedman, our Chief Financial Officer, will discuss the company's third quarter financial results. Following their presentation, Ken and Lauren, along with Marc Verissimo, our Chief Strategy and Risk Officer, and Dave Jones, our Chief Credit Officer, will be available to answer your questions.

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 will 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 S3, filed September 30th, 2003, and form 10K, titled March 5, 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'd like to turn the call over to Ken Wilcox.

Hello, and thank you for joining us. It's my pleasure to talk to you today about the very strong quarter we've just completed, a quarter marked by a significant jump in key financial metrics, such as earnings per share and net income. While we have been appropriately cautious in recent quarters not to characterize such positive performance as a definitive sign of an improving economic picture, we are tremendously encouraged by our results this quarter and by the consistent, modest growth we've enjoyed this year. As Lauren will tell you in more detail, we logged earnings per share this quarter at the top of our guidance, which we revised upward mid-quarter. This result is related in part to the continued positive impact of our capital plan, and our strong performance on credit quality. It also stems from our successful efforts to increase revenues through new products, services, and lines of business. As a result of this strategy, we are experiencing the highest deposit levels in two years, a fact that suggests our clients are also enjoying greater liquidity and potential for growth and investment.

While we believe there is sufficient evidence to suggest the economic picture is finally, though slowly, improving, we will continue to focus relentlessly on the health of those business fundamentals within our control. We controlled expenses this past quarter and will tighten our grip in the coming year. We maintained our highly disciplined process for ensuring credit quality in this quarter, and we will not relax those standards. We have actively and successfully pursued the recovery of our sole remaining [film] loan this quarter, and we will take the same approach with loan recoveries in the future. These elements of our performance are not tied to the performance of our clients or to the economy, but we have demonstrated that they are as important to our success as any external factor. We can control them, and use them to position ourselves to take better advantage of economic improvements when they occur.

We've made important strides this quarter in our strategic diversification of financial products and services to address clients' needs throughout their lifecycles. In particular, we are seeing bottom line gains from our work to expand offerings for more established private and public companies. We are also planning a major push this quarter for our global financial services group, which has built a powerful international network of capabilities to assist clients in doing business globally. Alliant Partners, our mergers and acquisition subsidiary, recently launched a private placement group, which will allow them to offer greater flexibility to middle market companies for whom private financing may be a better option than a sale.

Throughout all of this expansion, our dedication to our technology, life science, and premium wine clients has not faltered. We have made several key changes in the organization to allow me to put more of my energies into affecting our diversification strategy across the company. We promoted Greg Becker to Chief Operating Officer of the commercial bank, and Joan Parsons to Chief Banking Officer. We've appointed Tim Harden Chief Operating Officer of the merchant bank, freeing Harry Kellogg to focus more intently on the long-term relationships and strategies that will drive their growth. We've added key people to our private bank as well, setting the stage for continued client acquisition and as the development of new products. Finally, we made Tom Wagner, former head of sales for SVB Securities, responsible for leading the development of new products and services for that group.

As always, Silicon Valley Bancshares' employees are the key ingredient in the gains we've seen in all areas this quarter. Without their focused dedication and intelligent, innovative risk-taking on behalf of clients, we would not have succeeded as we have. Through their continued strong performance and the apparent easing of the difficult economic conditions of the past few years, we are confident we will enjoy more significant and meaningful improvement in quarters to come.

It is customary for me to hand the call over to our Chief Financial Officer, Lauren Friedman, at this point. But before I do, I'd like to say a few words. As many of you know, Lauren will be retiring at the end of this week, having spent the last two years creating and implementing our strategic financial plan with great success. We are sorry to lose Lauren's leadership, but we are enormously pleased with her accomplishments to date, and confident that the strategies she initiated will continue to benefit our shareholders. I want to thank Lauren for her contributions to our success, and wish her the best of luck in her retirement. Thank you. Now I'd like to turn the call over to Lauren.

Thank you, Ken. Good afternoon. Third quarter results reflect the success of our efforts to improve our performance and strengthen our financial position. Loan quality exceeds even our high standards, average deposits are at the highest level in two years, warrant gains have continued to make a significant contribution to revenues for the third quarter in succession, and equity investment results have turned around.

Third quarter net income was 49 cents per share, up 51 cents per share from the second quarter, at the higher end of our revised guidance. Included in this was the film lending recovery that contributed 13 cents to our earnings. Even excluding this recovery, and taking into account the 30 cents per share FAS 142 charge, taken last quarter, related to Alliant, third quarter earnings per share were up noticeably over the second quarter.

Credit quality continues to be a major factor in our earnings success, allowing us to once again reduce the level of the allowance. Non-performing loans were at the lowest level in ten years. Our balance sheet continues to provide the foundation of our strength and forms the basis for future earnings growth. Our capital position remains very strong, while over the past couple of years, we have reduced our common equity to improve our financial return.

We are building our client base and strengthening our relationships with existing clients. We are adding to our product and services offerings, which will position us to provide even more value to clients throughout their lifecycle. We have recently realigned our management team, to put more emphasis on accelerating our strategic vision of growth, in part through acquisition. All of these efforts will provide a level of return consistent with our investors' expectations.

Average deposits, at $3.4B, were at the highest level in two years. Third quarter period end deposits were virtually flat compared to the second quarter. We expect average deposits to remain at current levels throughout the fourth quarter. Credit quality continues to exceed expectations. Non-performing loans were lower in the third quarter then in the second, dropping 25% to $12.6M. Charge offs were also lower in the third quarter. Gross charge offs were $3.5M, a level not seen for six years. Recoveries, including the previously reported film loan collection, were $8.9M. Recoveries exceeding gross charge offs resulted in a net recovery of $5.4M. Had the film loan recovery not been received in the third quarter, net charge offs would have been nearly zero, as recoveries on technology, life science, and wine loans were marginally less than the charge offs from the same portfolios.

Our exceptional management of non-performing loans, charge offs, and other portfolio metrics compelled a lowering of the allowance for loan losses. The model-driven reserve decreased by $2M. Despite the reduction in the reserve, the allowance was a flat 3.5% of gross loans in each of the second and third quarters. When compared with non-performing loans, the allowance ballooned from 417% to 536%, between the June and September quarter-end. The third quarter level of non-performing loans, net charge offs, and loan loss provisioning should be considered unsustainable. Non-performing loans can be expected to rise to 75 to 100 basis points from the third quarter's 66 basis points. Net charge offs might, in the fourth quarter, normalize in a range from 50 to 100 basis points, annualized. Nevertheless, continued improvement in economic conditions and the underlying credit quality of the portfolio will most likely precipitate a further reduction in the allowance for loan losses in the fourth quarter.

With respect to loans, second quarter to third quarter average loan balances fell $86.7M, the largest portion of which is the planned reductions in our religious lending and media lending businesses. We expect loan balances to grow slowly in the fourth quarter.

Third quarter net interest margin was 5%, down 50 basis points from the second quarter. Four items negatively impacted the third quarter net interest margin. First, FAS 150 compelled us to reclassify costs associated with our trust preferred stock, to interest expense from non-interest expense. Second, we initiated amortization of issuance costs related to the convertible debt. Third, the cut in the Fed Funds Rate late in the second quarter hurt loan yields slightly. And fourth, the decline in loan balances shifted funds into lower-yielding portfolio assets.

The change in accounting for the trust preferred stock had an $800,000 impact on net interest income, and a nine basis point impact on the margin. We expect the impact of the trust preferred stock to be smaller going forward, as we intend to refinance our existing trust-preferred stock with a lower yielding issuance. The convertible debt amortization cost the margin three basis points. The impact of the reduction in loan balances on the margin was approximately 17 basis points. Our net interest margin was down fairly significantly; net interest income was down only $400,000, or less than 1%. Without the impact of the change in accounting, net interest income would have increased.

We are beginning to see more gains than losses from our private equity securities investment, which showed a net gain for the first time since the fourth quarter of 2000. Both of our managed funds had net gains this quarter, as did direct investments in companies. However, there was a small loss recorded for direct investment in venture capital funds. The gain from direct investment in companies was primarily the result of the sale of one investment. Gross private equity security gains were $1.3M, as compared to a $3.8M loss last quarter. Net of minority interest, gains were $900,000 in the third quarter, as compared to a $1.5M net loss in the second quarter.

Warrant gains continued to run at well above the 2002 pace. Gains for the quarter were $500,000 higher than in the second quarter, at $1.5M. Year-to-date, warrant gains have been $4.5M, roughly 2.5 times the total amount for 2002. We expect fourth quarter warrants gains to be the highest for the year. We continue to add to our warrant portfolio, collecting 81 new warrant contracts in the third quarter.

Revenues from Alliant Partners, our investment banking subsidiary, decreased $1.9M from the second quarter, to $2.7M. Alliant's third quarters are seasonally the weakest of the year, but we still expect an excellent year. Alliant's pipeline continues to strengthen. As of October 15th, Alliant had already recorded $1M of fourth quarter revenues. They have a transaction that has been delayed, due to regulatory requirements, which we expect to close in the fourth quarter and which will generate a very material fee for them. Alliant expects that the fourth quarter will be the best quarter they have had since the merger. Alliant recently announced they are entering the private placement business. We expect this private capital group to also be a major revenue contributor.

Non-interest expense was down $18.4M from the second quarter. Most of the difference was due to the absence of the FAS 142 charge related to Alliant. The remainder of the decrease was due to lower professional services costs and a reduction in other expenses, and was partially offset by higher compensation costs to increased incentive compensation accruals related to improving performance. Professional services were reduced in part due to the some reimbursements related to the film recovery.

Period-end private label client investments were approximately $8.4B, nearly the same as the $8.3B in the second quarter. Average balances were slightly higher than in the second quarter, at $8.3B. Fee income decreased $200,000, due to a continued lowering average fee.

In the second quarter, we entered into an accelerated stock repurchase program for approximately 3.2 million shares at an initial price of approximately $80M. At the end of the second quarter, we had an obligation to cover about 1.4 million shares remaining under the ASR. During the third quarter, we fulfilled that obligation. No additional shares were purchased. On September 30th, we filed a form S3 with the Securities and Exchange Commission to issue $50M of trust preferred stock. This issuance will be used to refund the existing trust preferred stock as well as to slightly strengthen our capital position.

Turning to the future, we expect fourth quarter earnings per share to be between 34 and 38 cents. This guidance assumes the continuation of existing interest rate levels. We expect net interest margin and net interest income to be approximately the same in the fourth quarter. The allowance for loan losses is likely to be reduced again. Non-interest income will continue to rise due to higher Alliant revenue and a continuation of reasonably strong equity, security, and warrant performance. Non-interest expense will remain steady.

In summary, third quarter performance was better than we had expected. Even ignoring the recovery, the company's earnings per share are the highest they have been since the third quarter of 2001. Led by outstanding credit, continued strong loan and deposit levels, and equity investment and warrant gains, Silicon Valley Bancshares' financial performance is clearly showing strength. We are seeing increased investment activities by top-tier VCs, more activity in the technology and life sciences industries, and more technology M&A activity. We think the future for Silicon Valley Bancshares is bright.

Please note, our fourth quarter earnings release and investment conference call will be on January 29th, 2004. This is a week later than usual, to accommodate our board of directors’ schedule.

Finally, on a personal note, this is my last investor call for Silicon Valley Bancshares. I am retiring tomorrow. I've found my experience at Silicon Valley Bancshares to be both professionally challenging and rewarding. I have enjoyed working with the exceptional team and interacting with the investors who have had faith in our ability to perform.

Thank you, Lauren. Christina, we'd like to open the call for questions.

[Operator Instructions] The first question comes from Ms. Charlotte Chamberlain with Jefferies and Company. Ma'am, you may ask your question.

Yes, congratulations on a fabulous quarter, and more especially, that particularly good guidance, or optimistic guidance, going forward. Certainly will-- I will personally miss you, Lauren, and all the work that you've done. We're actually having trouble getting to your 38 cents from the high side and we're wondering what the share count we should be using? We figure there's about 35.5 million shares that went into your average share count for the quarter and we're wondering what we should we using for the fourth quarter?

Charlotte, this is Lauren, and we are- yes, 35.5 million shares is about right, both third and fourth quarter. That's-- as I mentioned, we did not buy any shares in the third quarter, and you know, we haven't made decisions yet about what we will do in the fourth quarter, but in terms of our forecast, we are using a 35.5 million share count.

OK. I guess I'm also a little confused about what you're saying about loan loss provisioning. You know, when I look at your [Canary] ratings, you had the lowest of any bank we cover. It's a one. You know, the only better one you could have is a zero. And you have this huge 3.5% of gross loans, and 500% of NPLs. Did I hear you-- are you planning to do a negative provision for loan losses next quarter? I mean, it just seems kind of-- you know, really very, very high.

Charlotte, this is Dave Jones. Let me answer that question. At this point in time, I am trying to offer guidance that we will have a net charge off as opposed to a net recovery in the fourth quarter. And we will have-- I expect we will have a provision, but it will be less than the amount of our net charge off, driving our loan loss reserve down slightly.

OK, all right, thanks very much.

Your next question comes from Mr. Joe Morford with RBC Capital Markets. Sir, you may ask your question.

Thanks. Good afternoon, everyone. I guess, I don't know if this is for Ken or Lauren, whoever, but I look at the two-one leverage ratio over the past year, it has gone down from 15% to 10%, and share buybacks have been an active part of getting there, and I just wondered, what's the current thought process of how much lower you might take that leverage ratio, and the types of things that you might-- or the uses for that capital? Should we be expecting more buybacks and other types of acquisitions, what have you?

Joe, I think that Ken and I are going to both try to answer your question. This is Lauren, and the-- let me start with the-- what we're thinking about in terms of capital. What we're trying to do right now is bring our capital up slightly, so we can bring it back down again, and the-- you know, you've seen the announcement on the trust preferred stock, and that is a little more than we have right now -- we guided bringing our capital up a little bit, will give us some room to do some things, and so you know, we don't think that our capital should get too much lower than where it is right now. It can go a little lower, but not a lot. In terms of how we're going to use it, I think I'm going to let Ken address that issue.

Well, that's very difficult to say, Joe, because as you know, we are constantly looking for opportunities in terms of product acquisitions and as they present themselves, we examine them. We are hopeful that we will be able to continue to add to our product set in the same way that we did with Alliant and then with Woodside Asset Management. But that all depends on what we see and how well it fits and how much it costs.

Sure.

Under any circumstances, our intention would be to, in proportionate terms, keep the capital approximately where it is right now, which is with some cushion vis a vis regulatory requirements.

OK. And then a separate kind of follow-up is, as the kind of level of activity seems to be picking up in the business, things turning around, and VCs have been a little more active, what have you. Are you starting to see some of the competitors you've had in the past come back into the market, or are there new ones popping up in different forms, or any kind of recent changes on the competitive landscape you could talk about?

Joe, this is Marc Verissimo. I would say the competitive environment is remaining favorable at this time. We do not see any new competitors come in, and actually we see one existing competitor that's actually having a little bit of trouble. So, there's nothing new on that front, so it's still a favorable competitive environment for us.

OK, thanks so much.

Your next question comes from Mr. Gary Townsend from Friedman Billings Ramsey. Sir, you may ask your question.

Yes, thank you. You know, actually the question has been answered. Maybe one thing -- the timing of your new trust preferred would be fourth quarter, is that correct?

Gary, this is Lauren. Yes, we expect it to happen in the fourth quarter and-- although one of the things that I've learned from the experience of trying to do this trust preferred stock is that it's real hard to figure out when these things actually happen, but we would expect it to be earlier as opposed to later in the quarter.

In any case, it won't be your problem?

Gary, I have a strong affinity for Silicon Valley Bancshares, and certainly anything that I can do going forward to help the company, I intend to do.

Of course. I just want to wish you well and it's been delightful working with you.

Thank you, Gary. Likewise.

[Operator Instructions] Your next question comes from Mr. Brock Vandervliet with Lehman Brothers. Sir, you may ask your question.

Thanks very much. I was wondering, given the quarter to quarter volatility in Alliant, which is to be expected, given that business, is there any sort of longer-term guidance you could offer or update us with at this point?

Brock, by longer term, are you referring to the fourth quarter or are you referring to 2004?

Well, there's a lot of quarterly volatility, so I'm wondering if not necessarily for '04, but what you see them generating over a longer term period of time?

Yeah-- first of all, I think one thing that would be important to point out and maybe helpful to you, Brock, would be that there's a certain seasonality to their business, meaning that all other factors being equal, in any given year, you could expect that the second and the fourth quarters will be the best, with the fourth quarter being better than the second, and the first and third quarters will be the least productive, with the first quarter being better than the third. And that simply has to do with, you know, the business calendar and the nature of a transaction-oriented business, coupled with the fact that large parts of the world take August off, which is only 1/3 of a quarter, but tends to disrupt the flow and the momentum of a deal. So, that would be one thing. The second thing would be that obviously, in conjunction with the impairment test that we undertook prior to the end of last quarter, Alliant would have undertaken a long-term set of projections. Of course, that would be part of a normal planning cycle anyway, and those projections certainly would indicate a growth over time, and that that growth, on an annual basis. And that that growth would stem from a number of different factors, including the following -- addition of products, and I think that we mentioned that some private placements have been added to the product set of Alliant just recently. Secondly, geographic expansion, as Alliant leverages the platforms that Silicon Valley Bank has in place nationwide. And third would be expansion into other niches. As you know, Alliant's stronghold, historically, was in semiconductors and software. Since becoming part of Silicon Valley Bank, Alliant expanded into not just wine, but also life sciences, so we expect growth to come from a number of different areas, and on a regular and ongoing basis. Does that help, Brock?

Yes, thanks very much.

OK, well, if there are no more questions, we're going to close the call with information about the replay. Thank you all very much. Christina, I'll turn it over to you.

Thank you, ma'am. Thank you for participating in today's conference. As a reminder, there will be a rebroadcast of today's conference available one hour after its completion, running through 8:00 p.m. Central Time on November 16th. You may access this rebroadcast by dialing 1-800-216-4453. This concludes today's conference. Once again, thank you for your participation. You may disconnect at this time.