As their company's name suggests, executives at Silicon Valley Bankshares have had their share of stress since the region's technology industry collapsed four years ago.
The bursting of the tech bubble in the spring of 2000, the subsequent economic downslide, and plummeting interest rates cast a pall on Silicon Valley's two main revenue sources: commercial lending and private equity activity.
Now, with the markets on the mend and private equity making a comeback, the clouds seem to be lifting. Silicon Valley posted a profit of $14 million for the first quarter, more than for all of 2003.
With optimism returning, the Santa Clara, Calif., company began a national print ad campaign this month in The Wall Street Journal, Business Week, and Fortune. Silicon Valley is also opening a London office and plans to open operations in China and India in the next two years.
Though it has made some moves to diversify, Silicon Valley is sticking to its niche: corporate finance and venture capital for start-up technology and life-sciences companies, banking services for venture capital firms and wineries. It does not plan a push into retail banking (as some large banking companies, such as J.P. Morgan Chase & Co., have made to offset earnings volatility from market-related activities) or other businesses unrelated to commercial banking.
Silicon Valley executives acknowledge that their model invites volatility - and analyst skepticism. About 70% of the company's revenue comes from commercial banking, and the rest from merchant banking.
Some observers say the company relies too much on the fortunes of venture capital. In a recent interview, chief executive Ken Wilcox said that was an "understandable critique" but argued that its business is "extremely difficult to do effectively unless you're highly focused and develop a great deal of expertise."
To stray far from this primary expertise - into retail, for example - would blur Silicon Valley's focus, Mr. Wilcox said. "We think it's best to stick to your knitting and do what you do best."
Considering the heights that the late-1990s economy reached, the executives said, they expected a rough landing.
Silicon Valley was founded in 1983 as a bank for emerging-tech companies. It began experimenting with other business lines in the 1990s.
Some things, such as private equity and banking for venture capital firms and premium wineries, stuck. Others, like independent film investment, health-care banking, and financing the construction of churches, did not.
By 2000 management had decided to expand its core commercial banking offerings rather than move into new territory in search of smoother earnings. The company added myriad products - insurance, broker-dealer, and cash and asset management services - that would particularly appeal to clients as they matured into larger, more established companies.
It acquired an Alliant Partners, a merger advisory boutique, and Woodside Asset Management, which brought investment banking, M&A capability, asset management, and private placement services. (A change in accounting for Alliant's purchase forced a $63 million charge last year, but Silicon Valley executives say the unit will play an important role in future earnings.)
In 2000, Silicon Valley's profits hit a record $159 million, more than three times 1999 and almost six times the mid- to late 1990s, when annual net income never exceeded $28 million.
After the company posted earnings of $88.2 million in 2001, however, things quickly went downhill. Profit fell 40% in 2002, to $53.4 million, and plummeted 77% in 2003, to $12 million.
Low interest rates exacerbated revenue declines in commercial banking. Margins narrowed painfully and with virtually no retail businesses, Silicon Valley did not have a natural consumer-lending hedge that many commercial banks leaned on during the recession, when mortgages boomed.
Last summer heralded an awakening in the markets, however, both for start-ups and the venture capitalists that fund them. The trend caught up with Silicon Valley in the first quarter.
Four of its clients are preparing to go public: Alnylam Pharmaceuticals Inc. and Momenta Pharmaceuticals Inc., both in Cambridge, Mass.; Cutera Ince in Brisbane, Calif.; and San Francisco's Tercica Inc. Three private equity clients were recently sold: Cicada Semiconductor (to Vitesse), Ejasent Inc. (to Veritas), and Bridlewood Estate Winery (to Ernest & Julio Gallo).
These are the "liquidity events" private equity firms point to as evidence that business is rebounding.
Mr. Wilcox said Silicon Valley's business has increased "almost on a month-per-month basis" for the past nine months. Its venture-backed customers have had rising sales, and venture investing has increased.
With expectations that the Federal Reserve's Open Market Committee will raise rates, the final piece of the earnings puzzle seems to be coming into place.
"The only thing that hasn't improved from our perspective would be interest rates," Mr. Wilcox said. "It would be fantastic what kind of an improvement that would yield."
In late April, Joe Morford, an analyst with Royal Bank of Canada's RBC Capital Markets, upgraded Silicon Valley's stock to "outperform" from "sector perform." With "macro trends turning positive," he said, the company "should enjoy outsized earnings growth" over the next several years.
"Silicon Valley should be well positioned … based on the benefits expected to be had from an acceleration in VC investing, increased IPO and M&A activity, and now seemingly rising rates as well," Mr. Morford wrote in his note on the upgrade. "We believe Silicon Valley could easily see EPS growth in excess of 20% for the next three years, or double that of the average bank."
Silicon Valley says it wants to continue to work with clients even after they pass the start-up stage and churn out annual revenue of up to $1 billion. Management "made the decision that we are going to be very focused on our market areas," said Marc Verissimo, chief strategy and risk officer. "We know them very well, and we can maintain a sustainable competitive advantage over time."
The Silicon Valley executives said they are glad they did not go after financing for Web companies.
"I just was flabbergasted at the money that was being thrown around and how little due diligence was being done by the equity investors," Mr. Verissimo said. "People could just come up with five PowerPoint slides and walk away with $20 million."
The potential flood of business was tempting, he said, but Silicon Valley was cautious. "We never lent a lot of money to the dot-com companies," he said. "I tried to figure out why selling pet food over the Internet was good."
