Silicon Valley Stock Issue Draws Criticism of Bank's Ex-Underwriter
SAN FRANCISCO -- In an unusual turn of events, Silicon Valley Bancshares' impending stock offer is being criticized by the investment bank that managed its first stock offer three years ago.
The investment bank, Hoefer & Arnett, is quietly telling clients it has concerns about Silicon's latest 1.2 million-share issue, which is expected to raise some $15 million.
The San Francisco-based investment firm questions the timing of the offering because of Silicon's heightened exposure to the depressed Northern California real estate market. Silicon Valley's real estate construction portfolio rose almost 70% last year.
But sources close to the deal maintain there is an element of sour grapes behind Hoefer & Arnett's actions. The sources said the investment firm is piqued that Silicon Valley chose the much larger Oppenheimer & Co. to manage its lastest stock issue.
Hoefer & Arnett "wanted into the deal as late as two weeks ago," said one source.
A Hoefer official said the firm was invited to join the sales syndicate for Silicon's latest offering, but declined for "business reasons." He would not elaborate. Spokesmen for Silicon and Oppenheimer declined to comment.
One organization that talked with Hoefer was T. Rowe Price Investment Services Inc. the Baltimore mutual fund group. In a telephone conversation, a Hoefer represntative "raised five or six issues, all negative" about Silicon's offering, a Price employee said.
Silicon's stock, adjusted for splits, has more than tripled since it was offered at $3.86 a share three years ago. The company stock was trading at $12.50 a share late Tuesday, suggesting the offering would raise about $15 million.
Is Wall St. Receptive?
Silicon's offering, the first by an independent bank this year, is regarded as a bellwether of Wall Street's receptiveness to stock issues by smaller banks in the state.
The company, with $776 million in assets, has headquarters in Santa Clara near San Jose and is one of the Golden State's fastest-growing and best-performing independent business banks.
It reported a 1990 profit of $10.1 million, or $1.66 a share, which represented a 2.1% return on assets. It earned $2.9 million, or 46 cents a share, in the first quarter.
To be sure, Hoefer's actions are not likely to derail the Silicon Valley stock issue, but observers say it could affect the pricing of the issue.
Stock's Multiple Is Soft
Whatever Hoefer's motives, many share the company's concerns about Silicon's short-term prospects. The shares have been selling at a price-earnings multiple of about 7 recently, a bit below average for bank stocks.
The bank specializes in financing custom-built luxury houses and small-scale luxury developments in the corridor between San Jose and San Francisco. Although growth of Silicon's real estate portfolio has flattened in the last two quarters, construction credits represented 34.5% of total loans at the end of the March.
"The red flag I see is that high growth," said Campbell K. Chaney, analyst with Sutro & Co. Silicon's nonperforming loans represented a still-healthy 2% of total loans at the end of March, but that was a big jump from the 1.1% level the previous quarter. Silicon's stock prospectus says that credit quality could be "adversely affected if California economic conditions and the Bay Area real estate market continue to weaken."
But the bank's underwriters have told investors they don't expect the level of bad loans to vary greatly in the next few quarters.
Silicon also has its strengths. These include a talented management cadre, a phenomenal earnings record, a cheap deposit base, and very low overhead.
"They have a history of making good loans," said Dan Bandi, an analyst with Olde Discount Corp., Detroit.
"Silicon still has good growth potential, particularly when the real estate market picks up."
Silicon is also seeking capital by other means. Sources say it is talking with Allstate Insurance Co. about selling $15 million in seven-year subordinated notes with an interest rate of 10.46%. [Graph Omitted]