SVB Financial Group (SIVB) 2004 Q1 法說會逐字稿

Welcome to the Silicon Valley Bancshares first quarter earnings conference call. I would like to remind all parties that your lines are going to be on a listen-only line until the question and answer session of today's program, when your speakers will address your questions. I'd also like to remind all participants that today's conference call is being recorded; if you have any objections, you would disconnect at this time. At this time it is also my pleasure to introduce your first speaker for today, Ms. Lisa Bertolet, Investor Relations Manager.

Thank you. Good afternoon and welcome to Silicon Valley Bancshares' first quarter financial conference call. Today, Ken Wilcox, our President and Chief Executive Officer, and Marc Verissimo, our interim Chief Financial Officer, will discuss the Company's financial results. Following their presentations, Ken and Marc, along with 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 the 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 Form 10-K filed March 10, 2004. 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 Ken Wilcox.

Good afternoon and thank you for joining us. I am Ken Wilcox, President and CEO of Silicon Valley Bancshares. During the past few quarters, we have noted an apparent easing of the challenging economic conditions of the last three years, and expressed our cautious optimism about slight improvements in the funding and IPO markets. In each quarter, we have discussed the metrics that fueled our optimism, while noting the realities that encouraged continued caution. Today, I am pleased to report that we are still optimistic. And while we are also still cautious, for the first time in several years we feel confident that we are now seeing meaningful and sustained momentum, both in our business and in the market.

Silicon Valley Bancshares is well-positioned to take advantage of this momentum, thanks to our strategy of focusing on a discrete set of clients and offering them the greatest depth and breadth possible in terms of products and services that span the entire corporate lifecycle. A key part of this diversification strategy is our commitment to offering a comprehensive global infrastructure. Our efforts have been further supported by our persistent focus on improving efficiency and competitiveness across the organization. Together, these strategies have allowed us to hold steady over the past several years. Moving forward, they will all us to become the organization for growing technology, life science and private equity companies, as well as premium wineries of any size from inception to infinity.

Our emphasis on diversification and globalization is paying off, allowing us to maintain our strong base of emerging companies while augmenting our roster of more established clients. Among the larger clients we formed relationships with in the past quarter are SofTech, the storage management software company that until very recently was part of Fujitsu; TDS (ph) Group, a leading contract manufacturer of electronics; and Roxio, the publicly held maker of digital media software that now owns Napster. More importantly, our diversification strategy allows clients to stay with us throughout their lifecycles, leveraging and expanding a ray of relevant complementary products and services.

We see evidence of these enriched client relationships throughout the organization. For example, our corporate asset management group demonstrated strong growth this quarter, passing the $1 billion mark for assets under management. Our investment banking subsidiary, SVB Alliant, under the leadership of the executive committee formed to oversee it in January, completed a number of outstanding transactions this quarter, while maintaining its strong pipeline. SVB Alliant is closing new deals on target, and we expect to see returns very soon from its recently-formed private capital group, which provides private placement services for established companies seeking liquidity options beyond M&A.

As part of the push to grow our funds business, last quarter our merchant bank announced the formation of a venture distribution services group to assist venture capital clients with stock distributions to limited partners. Although less than three months old, the special equities group, as it is called, is already successfully leveraging its reputation and expertise to win new clients, providing a natural and beneficial extension to our existing relationships with private equity firms and limited partners.

On the globalization front, we saw a 33 percent quarterly increase in foreign exchange revenues this quarter. While foreign exchange is just one aspect of our overall global financial services activity, it signals to us the growing relevance of the role we play in helping our clients grow into new geographies. While our global cash management infrastructure is relatively new, Silicon Valley Bancshares' tradition of helping companies expand and do business internationally is well-established.

As evidence of the momentum we have built over time, the Export-Import Bank of the United States notified us this quarter that in 2003, Silicon Valley Bank was the leading lender in its working capital loan guarantee program, making more than 132 million in loans to help Silicon Valley Bank finance the sale of their goods and services abroad. We have achieved such momentum as a result of many years of regularly assisting clients with their international financial needs, and of quietly calling on venture capitalists, prospective clients, and other influencers around the world. Our steady focus on building connections in international markets has put us in the position of helping partners and clients learn to navigate these markets in an era of dramatic opportunity, colored by stringent international business and banking regulations.

Last year, we hosted a delegation of top Silicon Valley venture capitalists in what became an enormously popular fact-finding trip to India. In March of this year, working with our friends at Lightspeed Venture Partners and the California Israel Chamber of Commerce, we traveled to Israel with another group of venture capitalists and investors to meet with business and government leaders there. A similar trip to China is slated for later this year. For our venture capitalist clients and partners, these trips serve as both a primer to doing business in these markets, as well as a way to meet other people who can make that possible. The high level of interest in these international trips has led us to establish greater (technical difficulty) in several key international markets. As we have stated in previous calls, we are in the process of establishing an office in London and we plan to have offices in India and China as well.

While we are excited about the progress we are seeing in our newer business activities, we continue to be pleased with our core business performance. Our continued excellent credit quality remains a testament to our corporate health, demonstrating the powerful convergence of knowledge, networks, and intelligent risk management that is the cornerstone of our business model.

Loans are holding steady near their all-time high and we expect them to rise modestly throughout the year. Average deposits, which most strongly mirror activity levels in the venture capital and fund environments, are at their highest level in over three years. Deposits are also one of the fundamental measures of continued strength in our client numbers. Income from client investments is up and we continue to see greater distributions from our funds.

Returning for a moment to my initial statements about cautious optimism, I want to say that in our opinion, the upturn has finally begun and we are in an ideal position to take advantage of it. In a moment, we will take you through the financial highlights of the quarter. But before we do, I want you to know that our new Chief Financial Officer, Jack Jenkins-Stark, is here with us today.

As many of you already know, Jack is a veteran CFO with nearly 25 years of experience in senior financial and operational leadership positions. Jack's extensive and varied experience with regulated public, as well as private companies, his success in managing large portfolios and funds, and his first-hand knowledge of effective financial strategies for growing companies makes him a powerful addition to our management team. Welcome, Jack.

Thank you. Now I would like to turn the call over to our interim Chief Financial Officer, Marc Verissimo.

Think you, ken. In the first quarter, we steadily improved on our core business metrics, in keeping with our intention and our recent past performance. I will go into specifics about the performance in a moment, but first I want to talk about several events that resulted in a higher EPS last quarter than we expected.

The first factor was our continued excellent credit quality. We had anticipated provision for loan losses in Q1 of up to 2.5 million. Our gross charge-offs at 4.1 million were less than the 5 million quarterly average for 2003. At the same time, recoveries were higher than the 1.8 million we expected, owing to a $1.1 million collection of a five-year old charge-off. Had these two events not occurred, the resulting provision would've been very close to our original estimates.

We also had higher-than-expected foreign exchange fees, due in part to an increase in clients' business activity overseas. Fee volumes were also higher, owing to greater transaction volume from client hedges on foreign business activities due to the volatility of the global currency markets in the first quarter. Client investment fees were also higher-than-expected. Client balances in our funds rose as a result of greater liquidity in the technology and life science markets, stemming from increases in the IPO market and venture investments. Finally, certain expenses related to our ongoing business initiatives did not materialize in Q1 as we expected. We expect these expenses, at roughly $1 million, to factor into Q2. And now I would like to take you through our quarterly results.

First quarter net income was 14 million, or 38 cents per diluted share, up 82 cents from a loss of 44 cents per share in the fourth quarter of 2003. Fourth quarter 2003 results included a $46 million pre-tax impairment of goodwill charge related to SVB Alliant, a 1.3 million pre-tax charge related to the retirement of a $40 million 8.25 percent trust-preferred security, and the reversal of the 1.7 million of certain net state tax benefits associated with the Company's REIT. We did make the reversal of the REIT tax benefits in response to a decision by the California Franchise Tax Board regarding new tax shelter regulations. In spite of this reversal, we continue to believe that our tax position on the REIT has merit.

Moving on to credit quality. We are continuing the strong performance we delivered in 2003, and our nonperforming loan to gross loan ratios remain near historic lows. At 14 million, nonperforming loans were a mere 0.7 percent of total gross loans at quarter end, compared to 12.3 million, or 6.6 percent, at December 31, 2003. While we believe that improving economic conditions in our target markets are partly responsible for our consistently low nonperforming loan levels, our ability to effectively assess and manage client credit risk through the strategic focus on our core industries is an equally important factor.

Gross charge-offs were up slightly to 4.1 million compared to 3.3 million in the fourth quarter, which at the time was the lowest quarterly level of gross charge-offs in six years. Net charge-offs were modest due in part to the unexpected recovery of a five-year old charge-off, as I had mentioned earlier. Our consistently strong credit quality and low charge-off rate has allowed us to keep our provision for loan losses low. After effectively no provision, our allowance was 63.3 million, or 3.2 percent of total gross loans and 453 percent of nonperforming loans at March 31, 2004. This compares to 64.5 million, or 3.2 percent of total gross loans and 522 percent of nonperforming loans at December 31, 2003.

As expected, average deposits grew 4.9 percent in the first quarter to 3.6 billion, their highest level in nearly three years. Period-end deposits also increased to 3.7 billion. Average non-interest-bearing deposits increased 159 million in the first quarter to 2.1 billion and constituted 58 percent of all deposits. Also as expected, period-end total loans and average loans were relatively unchanged from fourth quarter levels. Period-end total loans were 2 billion and average loans held steady at 1.8 billion.

Net interest income increased 2.9 million from the fourth quarter to 50.8 million, and net interest margin increased 5.2 -- 5.2 percent versus 5 percent in the fourth quarter. In the fourth quarter, net interest income and net interest margin were negatively impacted by 1.3 million and 13 basis points, respectively, as a result of a charge associated with the retirement of the 8.25 percent trust-preferred issuance. Investment gains including activity related to minority interests were 1.3 million. Equity investment losses net of minority interests were unchanged at 500,000 in the first quarter. We expect improvement in our private securities and managed funds in 2004.

Income from client warrants remained consistent in the first quarter at 2.9 million, compared to 3 million in the fourth quarter. The past two quarters represent the highest quarterly warrant income gains since the first quarter of 2001. First quarter non-interest expense decreased 43.3 million to 53.2 million. Non-interest expense was unusually high at 96.6 million in the fourth quarter of 2003, primarily due to the Company's recognition of 46 million of pre-tax impairment of a goodwill charge in that quarter. First quarter compensation and benefits increased 4.7 million from the fourth quarter of 2003. This increase was due to higher incentive compensation expenses associated with the Company's (indiscernible) as well as just seasonal increases in various benefits.

Moving to the client investment figures, average client investment balance of sweep and managed assets were 9.6 billion, the highest average balance in over two years. This represents an $800 million increase from the fourth quarter and the second consecutive quarter-over-quarter increase in three years. The increase in these funds resulted in improved client investment income, which rose from 5.8 million in the fourth quarter to 6.3 million in the first quarter, another second consecutive quarterly increase. Client investment sweep and managed assets rose nearly 7 percent, to 10 billion at March 31, 2004.

For Q2 guidance, we expect earnings per diluted share to be between 37 cents and 41 cents in the second quarter. Our forecast assumes no changes in market interest rates, an increase in average deposit and loans. We are also assuming no provisions, although the allowance for loan losses may drop approximately 4 million in the second quarter, which could result in reversal of provisions should gross charge-offs not be that high. In addition, our second quarter guidance assumes non-interest income at approximately first quarter levels, slightly higher non-interest expense, a stable economic environment, no dilution from the zero-coupon convertible debt and no further share repurchases.

In closing, I would like to say that from our vantage point all the metrics are looking good. Our core numbers are stable and in many cases growing. The external business environment is improving and we're seeing signs of that improvement in the activity among our clients. We've been successful at taking advantage of these improvements and we're looking forward to a solid second quarter.

Thank you, Marc. We would like to open it up for Q&A now.

(OPERATOR INSTRUCTIONS). Campbell Chaney.

I have a question on your investment portfolio. I noticed it looks as though you took a lot of your more liquid funds at the end of December and put it to use in securities during the first quarter. Can you give us an idea what the duration is on the securities portfolio now, and what you were investing in? And what do you think you may be doing in the second quarter? I believe your guidance was looking for higher securities in the second quarter as well.

I'll go ahead and take that question. Our duration at March 31 was approximately 1.6 years, and we would expect that, given the change in interest rates, that it would probably go to about 2, 2.5 years. That's our target. And we were primarily growing in the mortgage-backed securities.

And one follow-up. On the margin at 520 -- can you give us an idea for -- I know the first 25 or 50 basis points you're not going to get much movement because of floors in the portfolio -- but can you give us an idea of once we go past the 50 basis point hike in rates, what that would do for your margin for every 25 basis point move?

I would say -- certainly you can (indiscernible) in our various scenarios -- I would say a good rule of thumb would maybe be 50 percent of any increase that we'll be able to drop to the margin.

Joe Morford.

I had two questions. First, Marc, I wondered if you could quantify the amount of seasonal increase in benefits this quarter? And then secondly, just kind of broadly, I wondered if you could comment on what activity you are seeing in the BC (ph) market right now? And given the pickup, what you would expect in terms of loan and deposit growth over the next year? And specifically, maybe Dave, where you could see this loan to deposit ratio go -- which is now around 50 percent, and we were 60 percent or higher maybe a year ago.

I will take the first couple and then pass it to Dave. I would say roughly $1 million would be attributable to increased benefit cost; that's 401(k) matches, etc. Regarding the venture capital market, we believe this quarter will show an increase quarter-to-quarter, and we do believe that this year everything we're seeing in the marketplace and in talking to various venture capitalists and their limiteds, we expect that this year more will be invested than was last year. So for 2003 according to venture economics, a little over 20 billion was invested, and we expect more -- getting closer to the 24, $25 billion for this year.

This is Dave Jones. In terms, Joe, of the loan to deposit ratio and what may happen with it, we are going to see some growth in the loan portfolio. But remember that we are as anxious to increase our deposits as we are our loans. So as we successfully sell into new companies, it may be that what will happen to our loan to deposit ratio is it will go down in the direction that it was when the market was much better three or four years ago. So with growth we may also see more growth in deposits and a lower loan to deposit ratio.

Charlotte Chamberlain.

I was wondering if you could give us a per-share estimate of your option expense for the quarter? And the second question has to do with Alliant. You told us as of the end of January that Alliant had booked about 3 million, and if I'm hearing this right it sounds like for the entire quarter it was roughly 4.1 million. So it sounds as if the activity level shifted down pretty dramatically in February and March. So a comment to that. And I take it there's the decrease in other borrowings from the December quarter simply because -- there was a blip in December because of the expense of your euros (ph). Is that (indiscernible) am I reading that right? Thanks.

I will take the first question and pass on to Ken for the Alliant. Regarding the option expense, in the first quarter it would be roughly 13 cents a share.

Okay. That's for the quarter?

Yes.

Charlotte, I will take the second question. With respect to the second question, I would say that Alliant has a robust backlog and pipeline, and that it is stronger than it has been in the entire time that we have been together now.

Okay. But I kind of remember similar words during the October conference call, and then we got hit with this $46 million worth of impairment. If it was 3 million at the end of January it seems to have slowed. Is that factual? Is it really -- did they really only do roughly 1.1 million total in February and March?

Charlotte, the Alliant revenue stream continues to be a highly volatile revenue stream. And I think that the continued focus on individual months is not going to give us the big picture that really is important in terms of Alliant's significance to Silicon Valley Bank, both strategically and for that matter financially, over time.

I understand that, but you must have a little bit of empathy for us in the sense that we felt -- we felt or we were assured with similar statements at the end of last year, and then got hit with 46 million of impairment. You know, is there anything kind of more than verbal assurances to make us feel anymore comfy now than in October?

Charlotte, I'm going to go back to what I said before that the price line and the backlog are really the strongest we have seen in the entire, whatever, 2.5 years now, and that it's a highly volatile business and can barely be measured over quarters much less over months.

The other thing is about the borrowing; was there a blip in December? Is that what we saw there?

You're discussing the other liabilities section on our balance sheet?

Yes.

That decrease is due to the payout of the ITP in the first quarter.

The payout of the what?

The payout of our incentive (technical difficulty) program. So we accrue that, and it accrues in other liabilities; and we pay it out -- we take out in the first quarter. So it accrues during 2003 and it's paid out in the first quarter of 2004.

I was talking about the other interest expense, the other borrowings.

Oh, the other interest expense. The reason why it went down?

Yes. Was that 2.5 -- that was that prepayment of -- or not prepayment, but the fees up for the zero?

There was the early retirement of the $40 million 8.25 percent trust-preferred; that is in that. ? That's almost -- that's a good chunk of that.

And then the 726 is a good run rate to use?

Yes it is.

Gary Townsend.

I wanted to follow-up on the (indiscernible) comp question. It was 13 cents from the first quarter; but what are your plans to come into compliance with FAS 123 and its fair value requirements?

We are currently evaluating it. I think there is also a position paper that comments are due back on June 30, so we will be in full compliance of what the final outcome of that is. It's still a little bit fuzzy, but we're evaluating all the alternatives now.

If we're casting forward the 2005 estimates and trying to assess what the impact could be, would you likely do some retroactive adjustments to your 2004 numbers? What would you suggest with regard -- we had about 51 cents last year in terms of this kind of expense. Do you have some advice for us in terms of approaching this issue?

We will do what is -- becomes widely done out there in the marketplace. I don't think -- I haven't seen any position papers as to whether people are going to go back and restate all their earnings, and so they'll be comparable. But we will stay close to what the market is doing.

With regard to the recovery of the past five-year-old credit, congratulations David. But was there any recovery, too, of interest income that was applied in the quarter that upped the (indiscernible) interest margin, or not?

This is Dave. To my knowledge, any amount of interest recapture would have been minimal. The one credit that we had, the $1.1 million recovery, still has a few million dollars to go of principal recovery before we get interest. So unrealistic to ever expect interest on that.

Brian Harvey.

Just had a couple of questions. I just want to get back to the VC environment. Marc, can you just maybe give us a little more color on what you are hearing about the pace of new company formations?

A little broader coverage; yesterday, Venture Economics came out with their review for the year of 2003, and it was the first positive year we have seen in three years out of the venture industry. They were positive, I think, a little over 8 percent, after two years of being fairly down. So you're starting to see returns kick up. What we're seeing -- anecdotally there are several ways of looking at it -- one, money going into the industry; two, well-known funds have gone out to raise money, and the first one was probably oversubscribed somewhere in the neighborhood of 8 to 10 times. They went out for 400 million and they got 3.5 to 4 billion thrown at them. We had another firm go out for maybe a little over a billion and they had in excess of $3 billion thrown at them. So there appears to be a lot of demand out there in the marketplace to get into the venture market, so there doesn't seem to be a supply of money. The funds have lots of dry powder. And as to new company formation, we are seeing an increase in that. And I think that's the venture numbers you see coming out, whether it's Venture Economics or Venture One, are showing that through the year you saw more and more money going to new formation. So we're very encouraged by that.

Is that an indication of the amount of warrant that you picked up this quarter compared to last?

Slightly; although, I think it's just being in the market consistently.

Second question is just on the competition; are you seeing any new entries into the market, and how has the competition been at sort of the higher and of the spectrum?

I will answer for -- as far as new competitors, no; we have not seen any new competitors come into the marketplace, and particularly on the commercial bank side, it's very scarce on it. On the upper end --

I'll speak to that; this is Ken again. On the upper end we don't see any new competitors at all, and the existing competitors are -- don't appear to be competing that intensely; meaning that -- we actually have put a lot of emphasis in the past couple of years on keeping larger companies with us longer, and in some cases actually winning back companies that at one point in the distant past had moved on to what they perceives to be a larger bank, and are now coming back to us. Because they feel that our product set is every bit as deep and broad, and that our service levels and our understanding, most importantly, of the technology industry of which they are a part is greater. So that effort is paying off nicely, and I would say that the competition among the existing players at the upper end is modest at best, or at worst.

Fred Cannon.

A couple of quick questions. In the warrant disclosure you said that the unrealized gains at the end of the quarter were 4.6 million compared to, I believe, 7.5 million at the end of the year. Does that imply any trends, or should we just expect volatility in that line?

I think you need to expect volatility in that line, both in unrealized gains and realized gains.

So we shouldn't use it as an indicator of what the coming quarter warrant income necessarily would be?

No, not for the coming quarter.

Just one follow-up question on the option expensing. I noticed in the proxy it looks like the new plan, I believe, that is going in place, there was considerable amount of restricted stock use. Could we potentially expect to see some of the option expense shift into compensation expense moving forward, or is it difficult to say?

Yes. Particularly when the rules get nailed down, we'll be looking very closely at the efficiency of these various ways. And we, clearly, will be trying to pick the most efficient way to reward employees. And if that is restricted stock, you'll definitely see a movement towards restricted stock.

Charlotte Chamberlain.

Let me ask my question a different way and try -- so that we don't have one of our little contentious (indiscernible) here. If you put it over the long-term, say a year, in 12 months, and let's say worst of all possible worlds that Alliant for the next three quarters also contributes roughly 4.1 million. Can you assure us that if that were the case that there would be no further impairment write-down on the goodwill for Alliant, if it continued at the 4.1 pace?

First of all, Charlotte, you're asking me to answer a questions that only God could answer. We're not in the business of telling you what is going to happen four quarters out in the M&A market. Having said that, it's our firm belief based on pipeline and backlog that Alliant will be growing its revenues over time. And we don't anticipate any further impairment or we would have already taken it.

Charlotte, to add, we were conservative in our analysis of Alliant at the last time we did a valuation scenario.

So you of all of our constituencies should understand the volatile nature of the Alliant business, given that you -- your firm purchased our closest competitor last year.

That may be the case, but under the new rules in terms of who you can talk to, unfortunately I don't have a whole lot of dialogue with those people. My concern as an analyst is that the biggest contributor to you're missing estimates last year were these impairment write-downs, although there was, obviously, noncash charges. And quite frankly, we were looking for a whole lot more than 4 million this quarter in terms of our own modeling. So this is exactly the thing that I didn't want to be asking this quarter; I was hoping we would see $10 million worth of Alliant revenues, because -- but it's not here. So these nagging questions, at least in my mind, keep coming up. I understand you can't forecast venture M&A, but as I said, I didn't ask that; I just said if it were 4.1 million for the next three quarters, in your estimate would there be an additional impairment. And I guess what I heard Marc saying in saying that it's conservative is that even if it were 4.1 million we still wouldn't have another big write-down. Is that a reasonable assessment of what you said?

That's a reasonable assessment, but I would just like to go back to the basic parameters, meaning we give guidance on a quarterly basis and with respect to the entire corporation; that's why we have a diversified product set.

I understand. Okay, thanks.

Mike Barone (ph).

My question has been answer. Thank you, gentlemen.

At this time I show no further questions.

Thank you very much for participating in today's call. Have a good afternoon.