Silicon Valley Bank lived by the high-tech industry, but it nearly died by the real estate industry.
Three years after being reprimanded by regulators for its reckless growth and losing millions in botched commercial real estate, Silicon Valley is back where it belongs: entrenched firmly in the venture capital, high-technology world in which it was founded in 1983.
"Part of the secret is, we're executing well and we're back in our niche, which is lending to high-tech companies," said John C. Dean, chief executive. "We've redirected the bank back to where it was before."
The bank has fashioned a remarkable recovery less than three years after being placed under a consent order. The 1995 profits of its holding company, Silicon Valley Bancshares, have been projected at more than $15 million
"We've done very well this past year, as have banks in general. But that doesn't mean we can't continue to outperform this market," Mr. Dean said. "I think we've got an opportunity to show continued improvement in 1996, '97, and '98."
Analysts chalk up the recovery to the bank's core customer strategy and the ability of Mr. Dean's team to focus on it while working its way through asset quality problems.
"They really know their business, that's their key," said Joseph K. Morford, an analyst with Alex. Brown & Sons in San Francisco. "They represent niche banking at its best."
In the third quarter of 1995 Silicon Valley Bancshares had a return on assets of 1.8% and a return on equity of 22.4%. Both measures had just about doubled from the year-earlier period.
Just three years ago, things weren't nearly so rosy. Silicon Valley Bank was placed under consent agreements with both the Federal Reserve Bank of San Francisco and the California State Banking Department because of heavy real estate loan losses. The company lost more than $2.2 million in 1992 and had veered considerably off its original course.
Silicon Valley Bank's mission from the outset was to provide deposit and lending services to emerging growth and middle-market technological companies that had been underserved by larger banks, largely because of the risk involved. Indeed, that part of its business was always successful: Today, the bank estimates it does business with two-thirds of the start-up companies in the San Francisco Bay area that use venture capital.
But, tempted by wildly rising real estate values, Silicon Valley Bank began diversifying in the late '80s by lending on residential development projects in Northern California. What had been a $240 million bank had grown to $1 billion by 1992, but its internal controls and systems lagged behind.
As California dragged through a prolonged recession, real estate prices tumbled and the bank's nonperforming assets jumped to more than $80 million, about 12% of its loan portfolio, by the third quarter of 1992. That year, the company lost $2.2 million, compared with a $12.3 million profit in 1991.
That's when Mr. Dean came into the picture. The former CEO of both First Interstate Bank of Washington and First Interstate Bank of Oklahoma, Mr. Dean was lured away from Pacific First Bank, Seattle, where he was president and CEO.
In four years Mr. Dean has gotten rid of bad assets - a demanding job in California because so many banks are doing the same thing - while continuing to expand the high-tech business. And the work is paying off.
For the third quarter of 1995, Silicon Valley Bancshares had net income of $5.5 million, a 159% increase from the same period the year before. For the first three-quarters of 1995, the company had a net income of $12.7 million, compared with $6.1 million the year before. And nonperforming loans were less than 3% of total loans.
The bank is still under consent orders, but vice president Steve Ainsworth said the bank has hopes the orders will be lifted soon.
And for the long run, Silicon Valley Bank isn't relying on the Santa Clara Valley market alone. It also has offices in Baltimore; Wellesley, Mass.; Beaverton, Ore.; and several California locations, including Menlo Park, the heart of the venture capital world.
According to Mr. Morford, Northern California clients now make up less than 60% of the loan portfolio, down from nearly 100% five years ago. This geographic diversity decreases the effect of local economic factors on Silicon Valley Bank, making it unique among community banks.
"Wherever there's a conclave of high-tech companies, Silicon Valley is there," said Campbell Chaney, an analyst with Rodman & Renshaw.
In addition, Silicon Valley Bank is moving into several other niche markets, including wineries, churches and ministries, and trade finance.