When Silicon Valley Bancshares announced last month that it had entered into a disciplinary agreement with the Federal Reserve, investors and analysts were plainly stunned.
Yet since the Oct. 14 disclosure, the stock price of the Santa Clara, Calif., company has risen faster than that of any other bank. Shares of $3.7 billion-asset Silicon Valley were trading at $35.625 at midday Friday, up 50% since Oct. 15. That compares with a 26.5% gain for the American Banker index of 225 banks, a 10.4% rise for the S&P 500, and a 7.2% gain for the Dow Jones Industrial Average.
The Fed issued a memorandum of understanding in September because it was concerned about Silicon Valley's Tier 1 capital ratio and loan underwriting standards. And though a memorandum of understanding is far less serious than, say, a cease-and-desist order, analysts said it should never be taken lightly.
"I'm very surprised that the stock has run up the way it has," said Lana Chan, analyst at CIBC Oppenheimer in New York.
The swift rise of Silicon Valley's stock price has fueled speculation that the company may be a takeover target. But those who follow Silicon most closely attribute the run-up to a recent road show in which executives visited investors in Chicago, New York, and Boston to talk up their company's profit potential. Specifically, they said it stands to earn significant income from stock warrants.
Silicon Valley specializes in lending to start-up technology firms. In some cases, it takes warrants in companies that hope to go public. If they do, the warrants can be converted to stock and later sold for big gains.
Through Sept. 30, the company reported, it had earned $8.5 million from warrants and by yearend could realize additional pretax profits of $28 million.
Ken Wilcox, president and chief operating officer of Silicon Valley, acknowledged the importance of the warrant income but said other factors are also fueling the surge. He cited Silicon Valley's improving credit quality -- nonperforming loans have dropped by 25% since June 30 -- and profits from its international banking and cash management programs.
"People find the warrant income interesting," Mr. Wilcox said, "but I don't think that alone would lift the stock price."
Silicon Valley's ties to the technology industry could also be working in its favor.
With many high-tech stocks trading at prices beyond the reach of certain investors, some "are seeing Silicon Valley as an alternative way to participate in the technology sector," said Joseph K. Morford 3d, analyst at Dain Rauscher Wessels in San Francisco.