SANTA CLARA, Calif. - Silicon Valley Bancshares is spearheading the creation of a global Internet portal to connect high-tech entrepreneurs with venture capitalists, service providers, and other third-party vendors.
According to chief executive John C. Dean, the $3.7 billion-asset banking company is testing the waters for the massive project by contacting other commercial and investment banks as well as legal and accounting firms in such far-flung locales as Israel, Germany, India, and Japan.
"The world of technology has changed in the past 10 years, and it's not just Silicon Valley anymore," Mr. Dean said in an interview at the company's headquarters here. "We are now in the process of determining the level of interest, need, and demand for a global portal for entrepreneurs."
Its attempt to tap into foreign high-tech centers illustrates the central role Silicon Valley Bancshares envisions itself playing in this business. So far, its intimate relationships in the locale that gave it its name has led Wall Street to align the company more with high-flying tech stocks than the rest of the banking sector.
The stock price of Silicon Valley Bancshares has soared 198% this year, to $44.625 a share at midday Tuesday. The price has nearly doubled since Oct. 14, when the company announced record third-quarter earnings.
"While all banks have been moving as a group on good or bad news, Silicon Valley has really broken out of the pack," said Erika Hill, a bank analyst at Pacific Crest Securities in Seattle. "You can't look at this company as a bank stock anymore."
But Silicon Valley is clearly on treacherous ground, tied so closely to the volatile dot-com economy.
In its 16-year history, the company has taken warrants from 1,250 borrowers; 42% of those deals were done in the past two years alone. When these companies go public, the value of the bank's warrants can skyrocket. For instance, Silicon Valley has made an estimated $29 million this year on initial public offerings by four borrowers.
Silicon Valley also has invested roughly $20 million in more than 85 venture funds that fuel high-tech firms. Mr. Dean said one $250,000 investment was recently valued at $14 million. The banking concern also has directly invested about $1 million in 10 e-commerce ventures such as Garage.com and Startups.com.
Though the gains have been spectacular, even Mr. Dean said it is too early to judge how most of the investments will pan out.
Still, this kind of news has intrigued technology analysts. Mark Alpert, an analyst at Deutsche Banc Alex. Brown in New York, said that during a series of investor meetings last month, "there were as many tech analysts as bank analysts" interested in hearing Silicon Valley's pitch.
But bank regulators are also watching the company closely.
Silicon Valley stunned analysts in October when it disclosed that the Federal Reserve Board had just issued an enforcement action against it.
In a conference call on third-quarter earnings, analysts peppered management with questions about the Fed's memorandum of understanding. (These are informal enforcement actions, and the Fed will only provide information on its formal actions.)
Mainly, analysts wanted to know why the Fed had moved against the bank in September if Silicon Valley had already improved its credit quality as Mr. Dean asserted. Mr. Dean declined to answer these questions, citing a confidentiality agreement with the regulators, but he insisted that the enforcement action would not have a material impact on the company's operations.
In the interview, Mr. Dean said regulators were concerned about the company's underwriting standards and low Tier 1 capital. Silicon Valley agreed to boost this core capital measure to 7.25% by Dec. 31.
To that end, after the markets closed Monday, the company sold 1.4 million shares at $42 per share. Roughly $41 million of the proceeds are to bolster its subsidiary bank's capital, and the holding company said it would invest the balance in venture capital funds.
Mr. Dean said Silicon Valley has "aggressively" corrected its underwriting criteria and improved credit quality. Nonperforming loans have been reduced by 32.6%, to $35 million, he said.
"We stumbled a little bit," Mr. Dean said, adding that he regretted being the one in charge when this happened. "But we've attacked the problem, not hidden from it."
Silicon Valley, he predicted, will rank in the top 15% of all banks in return on equity for 1999.
Analysts seem convinced.
After questioning the credibility of Silicon Valley's management this year, Wall Street has increased its earnings per share estimates. The fiscal 1999 consensus estimate was recently raised by 6 cents, to $1.90, and fiscal 2000 by 26 cents, to $2.59, according to First Call/Thomson.
Mr. Alpert at Deutsche Banc Alex. Brown maintained that Silicon Valley's core operating earnings are driving its soaring stock price - more so than the lucrative warrant income gains.
"Their net interest margin continues to improve, and loan demand is strong," he said. "And next year, those heavy loan provisioning expenses will not impact earnings."
However, some analysts who follow Silicon Valley would not comment for this story because their investment bank was selling shares in Monday's deal. One such analyst said Silicon Valley's business model has become so dependent on the IPO market that it may have higher loan losses later. Fierce competition, he said, is forcing technology companies to get their products to market quickly or perish.
So what does the future hold for Silicon Valley? That depends on the evolution of the technology industry and how the banking company reacts to such changes. Its drive to help build a global resources portal for entrepreneurs underscores that, according to Mr. Dean.
Silicon Valley plans to use its own password-protected Web site - known as eSOURCE, which it launched in September - as a model for international high-tech communities. It plans to forge relationships with commercial banks worldwide to collect and present the data the portal will require.
It also said it is eager to expand its 16-branch network in 11 states. Mr. Dean said it is exploring opportunities to open offices in technology hotbeds such as New York City, Salt Lake City, Dallas, and Raleigh, N.C.
"Our struggle is not a question of where is the opportunity," he said. "Ours is a struggle of all these opportunities and how do we capitalize prudently."
