Calling a spade a spade

January 15, 2002 Posted: 2152 GMT

By Adam Lashinsky

SAN FRANCISCO (CNN/Money) -- During the last half decade investors perceived all sorts of companies to be things they weren't. Amazon.com, really just a retailer at its core, was a hot tech stock. Enron, just an energy company, became an Internet company. And Silicon Valley Bancshares, the parent company of feisty Silicon Valley Bank, became a proxy for the Nasdaq stock market.

Now it seems that Silicon Valley Bank, based in Santa Clara, Calif., is just a bank after all, and its still richly valued stock price ought to reflect that better than it does.

The perception of Silicon Valley Bank as a Nasdaq phenomenon wasn't untoward. True, it takes in deposits and makes loans just like a normal commercial lender. But since many of its clients were technology start-ups, its performance was heavily leveraged to the technology revolution.

Because the company extracted healthy dollops of warrants from its banking clients, Silicon Valley Bank was able to triple year-over-year earnings in 2000 to $159 million. Its stock shot up from around $9 (adjusted for a subsequent  split) at the beginning of 1999 to more than $60 in late 2000. As the Nasdaq swooned, however, so too did Silicon Valley's (SIVB: up $0.35 to $26.32, Research, Estimates) shares. They fell below $16 in September and closed Tuesday at $26.12.

But even after the fall, clear-thinking banking observers see Silicon Valley Bank, which reports year-end earnings on Thursday, as overvalued. "What makes (the stock) unattractive is that it's trading at almost 18 times 2002 earnings," says Charlotte Chamberlain, banking analyst for regional brokerage Jefferies in Los Angeles. "That's just astronomically high for a bank at this point in the economic cycle. And it's hemorrhaging deposits."

Indeed, as numerous dot.com and other technology concerns went belly up, the bank's deposits fell from $4.9 billion at the end of 2000 to $3.3 billion on Sept. 30, 2001. As for the valuation, Chamberlain examined the PE ratios for a group of 24 bigger and better known banks, including US Bancorp, Northern Trust and Comerica. Their average PE was less than 15.

Nevertheless, Silicon Valley Bank has a few things that are tempting investors. For one thing, it is still making money (though a lot less than it was at the top of the Nasdaq market). And CEO Ken Wilcox says his goal is to "go way beyond purely commercial banking" in order to keep the profits flowing. As an example, the bank last year paid $30 million in cash and promised another $100 million over four years to buy Alliant Partners, a boutique M&A advisory firm in Palo Alto, Calif. The firm also is an investor in a "fund of funds" for venture-capital investments, meaning that it is investing in the same companies to whom it lends money.

If this all sounds risky, it is. Typical banks rely on predictable cash flows for loan repayment. "Our typical source of repayment is the next equity infusion," says Wilcox. "Our secondary source of repayment is the sale of intellectual property," in other words, the sale of a client's patents and engineering teams.

As long as venture capitalists continue to have money to invest in startups, it's a good bet those startups will bank with Silicon Valley Bank. And Wilcox is convinced "the market, and therefore Silicon Valley Bank, are at bottom right now."

That's lots of ifs for what, at end of the day, is just a bank.

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