Silicon Valley Bancshares reported banner third-quarter earnings and improved asset quality but startled analysts by revealing that it is operating under a Federal Reserve supervisory order.
The Santa Clara, Calif., company entered into a memorandum of understanding with regulators last month and is working to address concerns over its Tier 1 capital ratio and credit quality, it told analysts during a conference call last week.
Under the supervisory agreement, the $3.7 billion-asset company must maintain a Tier 1 ratio of at least 7.25%. The actual figure was 6.7% on Sept. 30.
After praising Silicon Valley's top brass for the earnings, a half-dozen analysts peppered chief executive officer John C. Dean with questions about the agreement. They asked why it was needed, since the company's nonperforming loan portfolio had improved in the preceding two quarters.
The news "came out of the blue," said Campbell Chaney, a bank analyst at Sutro & Co. in San Francisco.
But Mr. Chaney and other analysts commended Silicon Valley for divulging the information. Banks need not publicly disclose a memorandum of understanding, which regulators consider an "informal" action.
Mr. Dean sounded confident that his company would clear this hurdle. To boost its Tier 1 capital -- calculated by dividing shareholder equity by assets -- Silicon Valley will keep moving deposits off its balance sheet into higher-yielding private mutual funds, Mr. Dean said. That would help to shrink its asset base.
The company shifted $1.4 billion of deposits and shrunk assets by $300,000 in the third quarter.
In addition, Mr. Dean said, other options may be pursued to keep capital comfortably above the minimum specified in the Fed agreement. These include an equity offering and using warrant income generated from initial public offerings made this year by two clients, he said.
"I'm not interested in waking up every morning to see if the bank's Tier 1 ratio is 7.25% or 7.26%," Mr. Dean said.
Silicon Valley found itself under regulatory scrutiny after a first-quarter pileup of nonperforming loans to start-up technology companies. Nonperformers jumped from $20 million at yearend to $52 million by March 31.
Regulators became concerned about Silicon Valley's underwriting standards and a huge influx of deposits -- spillover from venture capital that has been pouring into the area -- the company said.
By the end of September the company had whittled down the nonperformers, to $35 million, and third-quarter earnings of $10.5 million were up 23% from a year earlier.
Joseph K. Morford 3d, a San Francisco bank analyst with the Minneapolis investment firm Dain Rauscher Wessels, seemed satisfied with Mr. Dean's assurances. Though stunned by the news of the Fed order, on Monday he raised his firm's rating on Silicon Valley from "neutral" to "strong buy -- aggressive."
"I'm not that concerned," he said. "It should not have an impact on the bank's day-to-day operations."