IMPORTANT NOTE: Silicon Valley Bancshares (Nasdaq: SIVB) is in theprocess of performing a Statement of Financial Accounting Standards No. 142impairment test on its investment-banking subsidiary, Alliant Partners, asperiodically required. This analysis is not complete. When the analysis iscomplete the results presented in this release may be subject to change. Allnumbers in this release exclude any impact from the analysis and should beread with that in mind. We will issue a final release upon conclusion of theanalysis.
Silicon Valley Bancshares, parent company of Silicon Valley Bank, todayannounced diluted operating earnings per common share (EPS) of $0.28 for thesecond quarter of 2003, $0.01 above the top of guidance given last quarter of$0.23 to $0.27 per share, and $0.02 above the first quarter. EPS were $0.26and $0.32 in the first quarter of 2003 and second quarter of 2002,respectively. EPS for the first six months of 2003 were $0.54.
Net income totaled $10.4 million for the quarter ended June 30, 2003, asmall increase from the first quarter of 2003. Net income in the secondquarter of 2002 was $15.0 million. Net income was $20.9 million for the firstsix months of 2003 compared to $28.3 million in the same period a year ago.
"We are beginning to see signs of a slow, but noticeable improvement inthe economic outlook for our clients. Both technology spending and top-tierVC investing appear to be stabilizing after two years of declines," said KenWilcox, president and CEO. "Credit quality continues to lead Silicon ValleyBancshares' performance. With nonperforming loans (NPLs) and net charge-offscontinuing to trend downward, we have been able to reduce the provision forloan losses. That factor, combined with an increase in fee income and holdingthe line on expenses, has allowed us to exceed our guidance for the secondsuccessive quarter.
"Despite these promising signs, pressure on interest rates continues toconstrain our performance, and the recent cut in the Fed Funds rate willchallenge earnings growth," Wilcox said. "However, our fundamentals remainstrong and we expect our performance to show meaningful improvements over thelong run."Second Quarter Highlights
- Average deposit balances of $3.1 billion remained consistent with the prior quarter, at the high end of the range of $2.9 billion to $3.2 billion experienced since the fourth quarter of 2001. End of period balances at June 30, 2003 were $237.3 million above the period-end balances for the first quarter of 2003, and the highest since the second quarter of 2001.
- Credit quality continues to excel, with NPLs at 0.8 percent of total gross loans -- consistent with levels for the past seven quarters. The allowance to cover potential loan losses is at 416.8 percent of NPLs, and net charge-offs were $1.7 million or 0.3 percent of total gross loans, on an annualized basis. The company continues to emphasize credit quality and expects that the provision will be slightly below the level of net charge-offs for the remainder of the year.
- On May 7, 2003, the company's board of directors authorized an additional stock repurchase program of up to $160 million. The program became effective immediately and replaced previously announced stock repurchase programs. Additionally in May 2003, the company entered into a third accelerated stock repurchase (ASR) agreement, the terms of which are similar to those of the previous two ASR agreements entered into in January 2003 and November 2002. As of June 30, 2003, approximately $113.4 million of stock had been repurchased under the May 7th program. In the second quarter, prior to the announcement of the new program, the company purchased approximately $2.3 million of stock, bringing total repurchases for the quarter to $115.7 million. The stock repurchases in the second quarter added $0.01 to EPS. We expect second quarter's repurchases to have about a $0.03 per share impact in the third quarter. Once the full $160 million repurchase is completed, we expect it to have approximately a $0.05 impact on EPS.
- Alliant revenues rose $0.5 million to $4.6 million. An increased pace of transaction closings as well as higher average fees drove second quarter revenues. Due to the nature of the mergers and acquisitions industry, we expect Alliant revenues to continue to be volatile, but to exhibit a general upward trend over the long term.
- Average loans, at $1.8 billion, are relatively unchanged from the first quarter, down approximately $32.0 million. We expect average loan balances to move slightly down in the third quarter and then move higher toward the end of the year as our later stage corporate technology efforts continue to develop.
Total assets at $4.3 billion were up $317.5 million from March 31, 2003and up $473.8 million from June 30, 2002. Loans, net of unearned income, were$2.0 billion at June 30, 2003, down slightly from $2.1 billion at March 31,2003, and up from $1.9 billion at June 30, 2002.
Average deposit balances decreased $22.4 million from the first quarter of2003 to $3.1 billion. Period-end total deposits increased $237.3 million fromthe first quarter of 2003 and increased $495.2 million from June 30, 2002.Client funds invested in private label investment and sweep products totaled$8.2 billion at June 30, 2003, compared with $8.1 billion at March 31, 2003,and $8.7 billion at June 30, 2002. Average client investment fund balancesdecreased from $8.5 billion in the first quarter of 2003 to $8.1 billion inthe second quarter of 2003. The decline in balances resulted in a quarterlydecrease in client investment fees of $0.3 million.Income
Net interest income decreased $1.3 million from the first to the secondquarter of 2003, and decreased $2.4 million from the second quarter of 2002.The decrease in net interest income from the first quarter was due to lowerinvestment portfolio earnings and the absence of income from the collection ofnon-accrual loans, which the company had experienced in the first quarter.
Net interest margin decreased to 5.5 percent in the second quarter, from5.7 percent in the first quarter of 2003, reflecting the absence of incomefrom collection of non-accrual loans, as well as the lower level of interestrates available to investment securities. We expect that the most recent cutin the Fed Funds rate will cause modest margin erosion in the third quarterbecause a significant portion of our loans had hit their floors prior to thecut. Also, long rates in the fixed income markets increased in reaction tothe Federal Reserve's announcement, which should partially offset the impacton the short portion of the portfolio.
Noninterest income increased slightly to a total of $17.5 million in thesecond quarter of 2003. The increase resulted from higher revenues atAlliant, higher deposit fees, and smaller losses in the equity securitiesportfolio. Higher first-quarter gross securities write-downs were primarilydue to unusually large losses relating to venture capital funds in which thecompany has invested in directly or through its fund of funds. Theseimprovements were partially offset by lower letter of credit (LC) and foreignexchange (FX) income and the decrease in income from client warrants. LC andFX income in the second quarter was slightly lower due to the continued impactof global political events, as well as a narrowing of spreads. Noninterestincome was $18.9 million in the second quarter of 2002.
Income from the disposition of client warrants was $1.1 million in thesecond quarter of 2003, higher than in any quarter of 2002. Warrant incomefor the six months ended June 30, 2003 was higher than that for all of 2002.The company continues to grow its warrant portfolio in anticipation of futurereturns. Based on June 30, 2003 market valuations, the company had $1.8million in potential pre-tax warrant gains. The company is restricted fromexercising many of these warrants until later in 2003 and 2004. As of June30, 2003, the company directly held 1,845 warrants in 1,359 companies, hadmade investments in 250 venture capital funds, and had direct equityinvestments in 20 companies, many of which are private. Additionally, thecompany has made investments in 21 venture capital funds through its fund offunds, SVB Strategic Investors Fund, L.P., and made direct equity investmentsin 28 companies through its venture capital fund, Silicon Valley BancVentures,L.P. The company is typically contractually precluded from taking steps tosecure any current unrealized gains associated with many of these equityinstruments. Hence, the amount of income realized by the company from theseequity instruments in future periods may vary materially from the currentunrealized amount due to fluctuations in the market prices of the underlyingcommon stock of these companies. However, because of the potential forgrowth, income from the disposition of client warrants is a key component ofSilicon Valley Bancshares' long-term strategy.Write-downs and Expenses
Gross securities write-downs decreased quarter over quarter by$0.9 million. Write-downs of the company's equity investments, net ofminority interest, totaled approximately $1.5 million in the second quarter of2003 and $1.7 million in the first quarter of 2003.
Noninterest expense totaled $50.2 million in the second quarter of 2003,approximately the same as in the first quarter of 2003. Noninterest expenseincluded higher professional services fees, business development costs andfurniture and equipment costs offset by lower compensation costs and occupancycosts. The decrease in compensation expense was primarily due to lowerseverance expense as well as slightly reduced headcount. Noninterest expenseincreased $1.2 million from the second quarter of 2002.
The company's efficiency ratio increased from 71.4 percent in the firstquarter of 2003 to 72.9 percent in the second quarter of 2003, primarily dueto lower net interest income. The efficiency ratio is calculated by dividingadjusted noninterest expense by adjusted revenues. Noninterest expense isadjusted to exclude costs associated with tax credit funds, minority interest,and retention and warrant incentive plans. Revenues are adjusted to excludeincome associated with minority interest, the disposition of client warrantsand gains or losses related to investment securities.
Return on average equity was 8.1 percent in the second quarter of 2003,compared to 7.3 percent in the first quarter of 2003 and 9.3 percent in thesecond quarter of 2002. For the second quarter of 2003, return on averageassets was 1.1 percent, unchanged from the first quarter of 2003, and adecrease of 0.5 percent from the 1.6 percent in the second quarter of 2002.Credit Quality
NPLs fell once again to $16.7 million, or 0.8 percent of total grossloans, at June 30, 2003, from $19.1 million, or 0.9 percent of gross loans, atMarch 31, 2003. The company's management of charge-offs and NPLs allowed itto reduce the allowance for loan losses to $69.5 million, or 3.5 percent oftotal gross loans and 416.8 percent of NPLs, at June 30, 2003. This comparesto $70.0 million, or 3.4 percent of total gross loans and 366.0 percent ofNPLs, at March 31, 2003. At June 30, 2002, the allowance for loan lossestotaled $76.0 million or 4.0 percent of total gross loans and 390.8 percent ofNPLs. The company incurred $1.7 million in net charge-offs in the secondquarter, representing 0.3 percent of total gross loans, on an annualizedbasis, consistent with the first quarter of 2003. In the second quarter, thecompany recorded a $1.2 million provision for loan losses. Gross charge-offsfor the 2003 second quarter totaled $4.7 million.Convertible Debt
In May 2003, the company successfully completed the issuance of $150million of zero-coupon, zero-yield, five-year convertible subordinated notes.The notes were priced at par and are convertible into common stock at aninitial conversion price of $33.6277. The company has used a portion of thenet proceeds for repurchasing shares of its common stock. The company hasalso used a portion of the proceeds to cover the net cost of entering into aconvertible note hedge and a warrant agreement with respect to its commonstock. This arrangement limits the company's exposure to potential dilutionfrom conversion of the notes by raising the conversion price. As a result ofthe hedge, the company will only issue incremental shares to the note holdersif the price of the stock rises above $51.34. Proceeds may also be used forgeneral corporate purposes.Stock Buyback Program and Stockholders' Equity
On May 7, 2003, the company's board of directors authorized an additionalstock repurchase program of up to $160 million. The program was effectiveimmediately and replaced previously announced stock repurchase programs. Inconjunction with the convertible note offering, the company purchased 1.3million shares for approximately $33.4 million. Additionally, during thesecond quarter of 2003, the company entered into an accelerated stockrepurchase agreement (ASR). The terms of this ASR are substantially the sameas ASR agreements entered into in January 2003 and November 2002. (See "Item8. Consolidated Financial Statements and Supplementary Data - Note 15 to theConsolidated Financial Statements - Common Stock Repurchases" in our 2002Annual Report on Form 10-K, as filed with the SEC, for terms of the ASR.)
The ASR executed during the second quarter was for approximately 3.2million shares at an initial price of $80.0 million. The company hadpurchased in the open market and sold to the counterparty approximately 1.8million shares totaling $38.7 million, leaving fewer than 1.4 million sharesremaining under the forward contract obligation. Based on the company's stockprice at the end of the second quarter of 2003, the counterparty would pay thecompany $1.3 million in net settlement of the contract. However, for everydollar of change in the average price of the company's common stock during thevaluation period, the settlement would change by approximately $1.4 million.
As of June 30, 2003, the company had purchased approximately 5.2 millionshares of common stock totaling $94.3 million in conjunction with the $100million share repurchase program authorized by the Board of Directors onSeptember 16, 2002. The company terminated this program on commencement ofthe $160 million buyback program announced on May 7, 2003.
Stockholders' equity totaled $443.2 million at June 30, 2003, a decreaseof $123.0 million compared to $566.1 million at March 31, 2003. Stockholders'equity was reduced as a result of the company's share repurchase programs,offset partially by the quarter's earnings. The company's and Silicon ValleyBank's capital ratios remain strong for a well-capitalized depositoryinstitution as of June 30, 2003.Q3 Guidance
Silicon Valley Bancshares expects third quarter 2003 earnings to bebetween $0.27 and $0.31 per share. The forecast assumes slightly loweraverage loans, stable deposits, a small decrease in net interest margin, nofurther changes in the Fed Funds rate, and improved returns on investmentsecurities. The company also expects credit quality to remain high and thatadditional shares will be repurchased.Safe Harbor
This release contains forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995. The company's seniormanagement has in the past and might in the future make forward-lookingstatements orally to analysts, investors, the media and others. Forward-looking statements are statements that are not historical facts. Broadlyspeaking, forward-looking statements include:
- projections of our revenues, income, earnings per share, balance sheet, capital expenditures, capital structure or other financial items;
- descriptions of strategic initiatives, plans or objectives of our management for future operations, including pending acquisitions;
- descriptions of products, services and industry sectors;
- forecasts of venture capital funding levels;
- forecasts of future economic performance; and
- descriptions of assumptions underlying or relating to any of the foregoing.
- future EPS
- economic outlook for our clients
- future performance
- returns and growth of our warrant portfolio
- future Alliant Partners revenue
- future loan growth and yield
- future deposit trends
- future stock buybacks and the impact on future quarters EPS of the existing buybacks
- future investment portfolio returns
- client fund balance levels
- future provision for loan losses
- information technology spending
- future venture capital funding levels
You can identify these and other forward-looking statements by the use ofwords such as "becoming," "may," "will," "should," "predicts," "potential,""continue," "anticipates," "believes," "estimates," "seeks," "expects,""plans," "intends," or the negative of such terms, or comparable terminology.Although management believes that the expectations reflected in these forward-looking statements are reasonable, and it has based these expectations on itsbeliefs, as well as its assumptions, such expectations may prove to beincorrect. Actual results of operations and financial performance coulddiffer significantly from those expressed in or implied by our management'sforward-looking statements.
Factors that may cause the third quarter 2003 targets to change include:
- adjustments required in the close process
- material changes in the state of the economy or the markets served by Silicon Valley Bancshares
- material changes in credit quality
- material changes in interest rates or market levels.
For information with respect to factors that could cause actual results todiffer from the expectations stated in the forward-looking statements, see thetext under the caption "Risk Factors" included in Item 7A, page 56, of ourannual report on Form 10-K dated March 5, 2003. We urge investors to considerall of these factors carefully in evaluating the forward-looking statementscontained in this discussion and analysis. All subsequent written or oralforward-looking statements attributable to the company or persons acting onits behalf are expressly qualified in their entirety by these cautionarystatements. The forward-looking statements included in this filing are madeonly as of the date of this filing. The company does not intend, andundertakes no obligation, to update these forward-looking statements.
Certain reclassifications have been made to prior years results to conformwith 2003 presentations. Such reclassifications had no effect on thecompany's results of operations or stockholders' equity.
This release excludes any impact from the in-progress impairment test forAlliant. If it should be determined that there is impairment, the numberscontained herein will change.Earnings Conference Call
On July 17, 2003, the company will host a conference call at 2:00 p.m.(PDT) to discuss the 2003 second quarter financial results. The conferencecall can be accessed by dialing 877-630-8512 and referencing the passcode"Silicon Valley Bank." A live Webcast can be accessed at www.svb.com. Adigitized replay of this conference call will be available beginning atapproximately 4:30 p.m. (PDT), on Thursday, July 17, 2003, through 5:00 p.m.(PDT), on Saturday, August 16, 2003, by dialing 800-454-0036. A replay of theWebcast will also be available on www.svb.com beginning Thursday,July 17, 2003.About Silicon Valley Bancshares
For 20 years, Silicon Valley Bancshares, a financial holding companyproviding diversified financial services, has sustained its mission to provideinnovative solutions to help entrepreneurs succeed. The company's principalsubsidiary, Silicon Valley Bank, serves emerging growth and mature companiesin the technology and life sciences markets, as well as the premium wineindustry. Headquartered in Santa Clara, Calif., the company offers clientsfinancial products and services including commercial, investment, merchant andprivate banking, as well as value-add client services using its proprietaryknowledge base. Merger, acquisition and corporate partnering services areprovided through the company's investment banking subsidiary, AlliantPartners. More information on the company can be found at www.svb.com.