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As filed with the Securities and Exchange Commission on March 17, 2000
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________.
Commission File Number: 33-41102
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SILICON VALLEY BANCSHARES
(Exact name of registrant as specified in its charter)
Delaware 91-1962278
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3003 Tasman Drive
Santa Clara, California 95054-1191
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 654-7400
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($0.001 par value) Nasdaq National Market
(Title of each class) (Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of its common stock on January 31,
2000, on the Nasdaq National Market was $1,276,717,983.
At January 31, 2000, 22,900,771 shares of the registrant's common stock
($0.001 par value) were outstanding.
Documents Incorporated by Reference
Parts of Form 10-K
Documents Incorporated Into Which Incorporated
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Definitive proxy statement for the Company's 2000 Annual
Meeting of Stockholders to be filed within 120 days of
the end of the fiscal year ended December 31, 1999 Part III
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This report contains a total of 101 pages, including exhibits.
The Exhibit Index is on page 87.
TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS.................................................... 3
ITEM 2. PROPERTIES.................................................. 13
ITEM 3. LEGAL PROCEEDINGS........................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 14
ITEM 6. SELECTED FINANCIAL DATA..................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 84
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 84
ITEM 11. EXECUTIVE COMPENSATION...................................... 84
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 84
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 84
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 84
85
SIGNATURES............................................................
87
INDEX TO EXHIBITS.....................................................
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PART I
ITEM 1. BUSINESS
General
Silicon Valley Bancshares is a bank holding company incorporated in
Delaware. Our principal subsidiary, Silicon Valley Bank, is a California
state-chartered bank and a member of the Federal Reserve System and its deposits
are insured by the Federal Deposit Insurance Corporation. Our headquarters are
located at 3003 Tasman Drive, Santa Clara, California 95054 and our telephone
number is (408) 654-7400. When we refer to "Silicon Valley Bancshares," or "we"
or similar words, we intend to include Silicon Valley Bancshares and its
subsidiaries collectively, including Silicon Valley Bank. When we refer to
"Silicon," we are referring only to Silicon Valley Bancshares.
Business Overview
We provide innovative banking products and services to emerging growth and
middle-market companies, focusing primarily on companies in the technology and
life sciences industries that are backed by venture capital investors. A key
component of our business strategy is to develop relationships with our clients
at a very early stage, and to offer them banking products and services which
meet their needs throughout their life cycle. We have cultivated strong
relationships with venture capital firms, many of whom are our clients, which
provide us with access to many potential banking clients.
Our unique business strategy and focus has resulted in significant growth in
recent years. Our banking operations have expanded from a single location in
Santa Clara, California to a national network of 22 offices located in Arizona,
California, Colorado, Georgia, Illinois, Massachusetts, Minnesota, Oregon,
Pennsylvania, Texas, Virginia, and Washington.
TECHNOLOGY AND LIFE SCIENCES NICHE
Our technology and life sciences niche serves primarily venture
capital-backed companies within a variety of technology and life sciences
industries and markets throughout the United States. Because these companies'
primary source of funding is equity from venture capitalists, they generally
keep large cash balances in their deposit accounts with us and often do not
borrow large amounts under their credit facilities. Lending to this niche
typically involves working capital lines of credit, equipment financing, asset
acquisition loans, and bridge financing. Our technology and life sciences niche
includes the following practices.
Our COMMUNICATIONS AND ON-LINE SERVICES practice serves companies in the
networking, telecommunications and on-line services industries. The networking
industry includes companies supplying the equipment and services that facilitate
distributed enterprise networks such as local and wide area networks. The
telecommunications industry encompasses the suppliers of equipment and services
to companies and consumers for the transmission of voice, data and video.
Companies included in the on-line services industry supply access, content,
services, and support to individuals and businesses participating on the
internet, or in other on-line activities.
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Our COMPUTERS AND PERIPHERALS practice focuses on companies that are engaged
in the support and manufacturing of computers, electronic components and related
peripheral products. Specific markets these companies serve include personal
computers, specialty computer systems, add-in boards, printers, storage devices,
networking equipment, and contract manufacturing.
Our SEMICONDUCTORS practice serves companies involved in the design,
manufacturing and marketing of integrated circuits. This includes companies
involved in the manufacturing of semiconductor production equipment and
semiconductors, testing and related services, electronic parts wholesaling,
computer-aided design, and computer-aided manufacturing.
Our SOFTWARE practice primarily serves companies that design integrated
computer systems, provide computer programming services and develop and market
commercial and industrial applications as well as prepackaged software.
Our LIFE SCIENCES practice serves companies in the biotechnology, medical
devices and health care services industries. The biotechnology industry includes
companies involved in research and development of therapeutics and diagnostics
for the medical and pharmaceuticals industries. The medical devices industry
encompasses companies involved in the design, manufacturing and distribution of
surgical instruments and medical equipment. Companies included in the health
care services industry deal with patients, either in a primary care or secondary
care role.
In addition to the industry-related practices discussed above, we provide
commercial lending and other financial products and services to other clients
associated with the technology and life sciences industries. Through our PACIFIC
RIM practice, we serve U.S.-based technology and life sciences companies that
receive equity funding from Asian or Asian-based venture capital sources.
Through our VENTURE CAPITAL practice, we provide venture capital firms with
financing and other specialized products and services. Lastly, through our
EMERGING TECHNOLOGIES practice, we target non-venture-backed technology
companies in northern California, with a primary focus on the software industry.
SPECIAL INDUSTRY NICHES
We have always served a variety of commercial enterprises unrelated to our
technology and life sciences niche. We serve these clients through several
special industry niche practices. We continue to follow this strategy by
identifying industries whose financial services needs we believe are
underserved. The following is a brief summary of our special industry niche
practices.
Our REAL ESTATE practice makes real estate construction and term loans whose
primary source of repayment is cash flow or sales proceeds from real property
collateral. We focus on construction loans for residential and commercial
projects, and construction and mini-permanent loans on retail, industrial and
office projects in northern California.
Our PREMIUM WINERIES practice focuses on wineries which produce select or
exclusive vintages of up to 150,000 cases annually. Our lending in this niche
consists of both short-term inventory loans and term loans related to vineyard
acquisition and development, equipment financing and cooperage.
Our MEDIA PRACTICE focuses on acquisition, recapitalization and plant
upgrade financings of less than $10 million for radio, television, outdoor
advertising, and cable television operators.
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In addition to serving the special industry niches listed above, we serve a
broad array of industries in northern California through our DIVERSIFIED
INDUSTRIES practice. This practice allows us to continue to evaluate potential
niches by initially identifying and serving a few clients in related industries
or markets.
SPECIALIZED PRODUCTS AND SERVICES
We offer a variety of specialized lending products and other financial
products and services to clients in various stages of development. These
services allow us to begin serving companies in their start-up phases, and then
gradually expand the services we provide as the companies grow.
From the time companies receive their initial funding, we seek to serve
their cash management needs. Initially, we provide investment services to assist
our clients with managing their short-term investments. On behalf of clients, we
purchase investment securities that include U.S. Treasury securities, U.S.
agency securities, commercial paper, Eurodollar deposits, and bankers'
acceptances. We also offer our clients access to private label mutual fund
products as an alternative to our deposit products.
In addition, our new Internet site, eSource-TM-, provides our early stage
clients with an on-line resource providing access to various services that
technology and life sciences entrepreneurs require. In eSource-TM- we have
formed a broad national and global network of service providers in a variety of
areas important to our clients, including financial and administrative services,
office set-up services, human resources, staffing services, risk management
services, and industry specific research.
As our clients conduct research and development and prepare for production,
we offer equipment leasing services as well as vendor financing for many types
of technology purchases, including software, hardware, maintenance, and
professional services. We structure these arrangements to suit the risk profile
of the client in its stage of growth.
Once our clients enter production, many experience rapid growth and
consequently require banking products which augment their cash flow. We offer
factoring services, which involves purchasing clients' accounts receivable at a
discount, making operating funds immediately available to the clients, and then
managing the collection of these receivables.
As our clients mature, we may offer more advanced cash management products,
providing services to help our customers manage cash collections and
disbursements efficiently and cost effectively. These services include wholesale
lockbox services, electronic information reporting and controlled disbursement
services. In addition, we also provide real estate loans, typically to finance
commercial real estate to be owned and operated by our clients.
We also assist our many clients who do business internationally by providing
foreign exchange, import and export letters of credit, documentary collections,
and a number of other trade finance products and services. We have been granted
delegated authority by the Export-Import Bank of the U.S. and the California
Export Finance Office. This enables us to provide our clients with working
capital loans guaranteed by the Export-Import Bank and California Export Finance
Office to finance foreign receivables and inventory intended for export, as well
as to provide purchase order financing.
If our clients experience periods when their profit performance has been
interrupted or where they need greater financial flexibility, we may assist them
by providing asset-based credit facilities that involve
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frequent monitoring of the underlying collateral, which generally consists of
accounts receivable, inventory and equipment.
For clients in the more advanced stages of growth, we pursue opportunities
in mezzanine lending and will provide private equity and debt placement
services, high yield debt services and mergers and acquisitions advice. We also
assist our clients through investment bank referrals for public offerings,
equity research, sales and trading services, asset securitizations, and fixed
income services.
For clients in all stages of their growth cycle, we focus on serving the
personal banking needs of senior executives and owners of our client companies.
In addition, we serve the personal banking needs of partners and senior
executives of venture capital firms and other professionals whose businesses are
related to our niche practices.
Supervision and Regulation
Our operations are subject to extensive regulation by federal and state
banking regulatory agencies. This regulatory framework is intended primarily to
protect Silicon Valley Bank's depositors and the federal deposit insurance fund
from losses and not for the benefit of our stockholders. As a bank holding
company, Silicon is subject to the Federal Reserve Board's supervision and
examination under the Bank Holding Company Act. Silicon Valley Bank, as a
California-chartered bank and a member of the Federal Reserve System, is subject
to supervision and examination by the Federal Reserve Board and the Commissioner
of the California Department of Financial Institutions. The following summary
describes some of the more significant laws, regulations and policies that
affect our operations. It is not intended to be a complete listing of all laws
that apply to us. Any change in the statutes, regulations or policies that apply
to our operations may have a material effect on our business.
MEMORANDUM OF UNDERSTANDING.
In late September 1999, Silicon Valley Bank entered into an agreement
pursuant to a memorandum of understanding with the Federal Reserve Bank of San
Francisco (as the delegate for the Federal Reserve Board) and the California
Department of Financial Institutions. The key feature of this arrangement was
Silicon Valley Bank's commitment to maintain its Tier 1 leverage ratio--the
ratio of a bank's Tier 1 capital to its total quarterly average tangible
assets--at a minimum of 7.25%. This is a higher ratio than the 5% ratio usually
required for a bank to be considered well-capitalized for bank regulatory
purposes. Silicon Valley Bank also committed to obtain the regulators' consent
before paying dividends; further enhance its credit monitoring and review
policies and submit reports to the regulators regarding credit quality. The
Federal Reserve Bank of San Francisco also directed Silicon to obtain its
approval before paying dividends, incurring debt, repurchasing capital stock, or
entering into agreements to acquire any entities or portfolios.
During the first nine months of 1999, Silicon Valley Bank's Tier 1 leverage
ratio had declined below internally established target levels, largely as a
result of the rapid growth in deposits experienced by Silicon Valley Bank.
Silicon Valley Bank's deposit growth in 1999 was driven by high levels of client
liquidity attributable to a strong inflow of investment capital into the venture
capital and emerging growth company communities, and by growth in the number of
clients served by Silicon Valley Bank. In order to slow the growth in deposits
due to the Tier 1 leverage ratio capital requirements, Silicon Valley Bank
implemented a program during the third quarter of 1999 to market off-balance
sheet products, such as mutual fund
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products, to clients. This allowed Silicon Valley Bank to continue serving its
clients' needs while restraining balance sheet growth driven by deposits.
Silicon also contributed $41.6 million of the proceeds of its common stock
offering in December 1999 to the capital of Silicon Valley Bank. As a result of
these measures, Silicon Valley Bank's Tier 1 leverage ratio was 7.9% at December
31, 1999, well in excess of the amount required by the regulators under the
memorandum of understanding. Silicon Valley Bank believes that it was in full
compliance with the capital requirements [and other provisions] of the
memorandum of understanding at the end of 1999. For a more complete discussion
of our regulatory capital requirements and capital levels at the end of 1999,
see "Item 1. Business--Supervision and Regulation--Capital Standards Applicable
to Silicon and Silicon Valley Bank" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Capital Resources."
RECENT ADOPTION OF GRAMM-LEACH BLILEY ACT.
On November 12, 1999, the President signed into law the Gramm-Leach-Bliley
Act, or GLB Act, which significantly changed the regulatory structure and
oversight of the financial services industry. Effective March 12, 2000, the GLB
Act repealed the provisions of the Glass-Steagall Act that restricted banks and
securities firms from affiliating. It also revised the Bank Holding Company Act
to permit a qualifying bank holding company, called a financial holding company,
to engage in a full range of financial activities, including banking, insurance,
securities, and merchant banking activities. It also permits [qualifying] bank
holding companies to acquire many types of financial firms without the prior
approval of the Federal Reserve Board.
The GLB Act thus provides expanded financial affiliation opportunities for
existing bank holding companies and permits other financial services providers
to acquire banks and become bank holding companies without ceasing any existing
financial activities. Previously, a bank holding company could only engage in
activities that were "closely related to banking." This limitation no longer
applies to bank holding companies that qualify to be treated as financial
holding companies. To qualify as a financial holding company, a bank holding
company's subsidiary depository institutions must be well-capitalized and have
at least satisfactory general, managerial and Community Reinvestment Act
examination ratings. Effective March 11, 2000, a nonqualifying bank holding
company becomes limited to activities that were permissible under the BHCA as of
November 11, 1999. Silicon expects that it will elect financial holding company
status at some point after the effective date of the financial holding company
provisions of the GLB Act, although it would not currently qualify to elect to
be treated as a financial holding company.
Also effective on March 12, 2000, the GLB Act changed the powers of national
banks and their subsidiaries, and made similar changes in the powers of state
bank subsidiaries. It permits a national bank to underwrite, deal in and
purchase state and local revenue bonds. It also allows a subsidiary of a
national bank to engage in financial activities that the bank cannot, except for
general insurance underwriting and real estate development and investment. In
order for a subsidiary to engage in new financial activities, the national bank
and its depository institution affiliates must be well capitalized, have at
least satisfactory general, managerial and Community Reinvestment Act
examination ratings and meet other qualification requirements relating to total
assets, subordinated debt, capital, risk management, and affiliate transactions.
Subsidiaries of state banks can exercise the same powers as national bank
subsidiaries if they satisfy the same qualifying rules that apply to national
banks. Although Silicon Valley Bank expects to take advantage of these expanded
powers at some point in the future, it does not currently qualify to do so.
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The GLB Act also reformed the overall regulatory framework of the financial
services industry. In order to implement its underlying purposes, the GLB Act
preempted state laws that would restrict the types of financial affiliations
that are authorized or permitted under the GLB Act, subject to specified
exceptions for state insurance laws and regulations. With regard to securities
laws, effective May 12, 2001, the GLB Act will remove the current blanket
exemption for banks from being considered brokers or dealers under the
Securities Exchange Act of 1934 and replaces it with a number of more limited
exemptions. Thus, previously exempted banks, such as Silicon Valley Bank, may
become subject to the broker-dealer registration and supervision requirements of
the Securities Exchange Act of 1934. The exemption that prevented bank holding
companies and banks that advise mutual funds from being considered investment
advisers under the Investment Advisers Act of 1940 will also be eliminated.
Separately, effective November 12, 2000, or such later date as adopted in
implementing standards required to be enacted by May 12, 2000, the GLB Act
imposes customer privacy requirements on any company engaged in financial
activities. Under these requirements, a financial company is required to protect
the security and confidentiality of customer nonpublic personal information.
Also, for customers that obtain a financial product such as a loan for personal,
family or household purposes, a financial company is required to disclose its
privacy policy to the customer at the time the relationship is established and
annually thereafter including its policies concerning the sharing of the
customer's nonpublic personal information with affiliates and third parties. If
an exemption is not available, a financial company must provide consumers with a
notice of its information sharing practices that allows the consumer to reject
the disclosure of its nonpublic personal information to third parties. Third
parties that receive such information are subject to the same restrictions as
the financial company on the reuse of the information. Finally, a financial
company is prohibited from disclosing an account number or similar item to a
third party for use in telemarketing, direct mail marketing or other marketing
through electronic mail.
CAPITAL STANDARDS APPLICABLE TO SILICON AND SILICON VALLEY BANK.
SILICON
The Federal Reserve Board has adopted minimum risk-based capital guidelines
intended to provide a measure of capital that reflects the degree of risk
associated with a banking organization's operations for both transactions
reported on the balance sheet as assets, and transactions, such as commitments,
letters of credit and recourse arrangements, which are recorded as off-balance
sheet items. Under these guidelines, dollar amounts of assets and credit
equivalent amounts of off-balance sheet items are adjusted by one of several
conversion factors and/or risk adjustment percentages. The Federal Reserve Board
requires bank holding companies generally to maintain a minimum ratio of
qualifying total capital to risk-adjusted assets of 8% (10% to be
well-capitalized) and a minimum ratio of Tier 1 capital to risk-adjusted assets
of 4% (6% to be well-capitalized). The Federal Reserve Board also requires
Silicon to maintain a minimum amount of Tier 1 capital to total quarterly
average assets, referred to as the Tier 1 leverage ratio. For a bank holding
company in the highest of the five categories used by regulators to rate banking
organizations, the minimum Tier 1 leverage ratio must be 3%; for all other
institutions the ratio is 4% (5% to be well-capitalized). In addition to these
requirements, the Federal Reserve Board may set individual minimum capital
requirements for specific institutions at rates significantly above the minimum
guidelines and ratios. In addition, under certain circumstances, Silicon must
file written notice with, and obtain approval from, the Federal Reserve Board
prior to purchasing or redeeming its equity securities. See "Item 1.
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Business--Supervision and Regulation--Prompt Corrective Action and Other
Enforcement Mechanisms" for additional discussion of capital ratios.
SILICON VALLEY BANK
The federal banking agencies require a minimum ratio of qualifying total
capital to risk-adjusted assets of 8% (10% to be well-capitalized) and a minimum
ratio of Tier 1 capital to risk-adjusted assets of 4% (6% to be well
capitalized). In addition to the risk-based guidelines, federal banking
regulators also require banking organizations to maintain a minimum Tier 1
leverage ratio. For a banking organization rated in the highest of the five
categories used by regulators to rate banking organizations, the minimum Tier 1
leverage ratio must be 3%; for all other institutions the ratio is 4% (5% to be
well-capitalized). In addition to these uniform risk-based capital guidelines
and leverage ratio requirements that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
Under Silicon Valley Bank's memorandum of understanding with the Federal Reserve
Board and the Commissioner of the California Department of Financial
Institutions, Silicon Valley Bank is currently required to maintain a minimum
Tier 1 leverage ratio of 7.25%. See "Item 1. Business--Supervision and
Regulation--Memorandum of Understanding." See "Item 8. Financial Statements and
Supplementary Data--Note 17 to the Consolidated Financial Statements--Regulatory
Matters" for Silicon's and Silicon Valley Bank's capital ratios as of December
31, 1999.
The federal banking agencies have also adopted a joint agency policy
statement which provides that the adequacy and effectiveness of a bank's
interest rate risk management process and the level of its interest rate
exposures are critical factors in the evaluation of the bank's capital adequacy.
A bank with material weaknesses in its interest rate risk management process or
high levels of interest rate exposure relative to its capital will be directed
by the federal banking agencies to take corrective actions. Financial
institutions which have significant amounts of their assets concentrated in high
risk loans or nontraditional banking activities, and who fail to adequately
manage these risks, may be required to set aside capital in excess of the
regulatory minimums.
BANK HOLDING COMPANY REGULATION OF SILICON.
As a registered bank holding company, Silicon and its subsidiaries are
subject to the Federal Reserve Board's supervision, regulation, examination, and
reporting requirements under the Bank Holding Company Act. Until Silicon
qualifies to be treated as a financial holding company under the GLB Act as
discussed above, Silicon must seek the prior approval of the Federal Reserve
Board before acquiring ownership or control of more than 5% of the outstanding
shares of any class of voting securities, or substantially all of the assets, of
any company, including a bank or bank holding company. While financial holding
companies will be permitted to acquire ownership or control of entities engaged
in specified financial activities without prior approval, the existing
restrictions on directly or indirectly acquiring shares of a bank were not
changed by the GLB Act. In addition, until Silicon qualifies as a financial
holding company, it will be generally allowed to engage, directly or indirectly,
only in banking and other activities that were deemed by the Federal Reserve
Board to be so closely related to banking or managing or controlling banks as to
be a proper incident thereto.
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The Federal Reserve Board requires Silicon to maintain minimum capital
ratios that are discussed above. Under Federal Reserve Board regulations, a bank
holding company is also required to serve as a source of financial and
managerial strength to its subsidiary banks and may not conduct its operations
in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's
policy that in serving as a source of strength to its subsidiary banks, a bank
holding company should stand ready to use available resources to provide
adequate capital funds to its subsidiary banks during periods of financial
stress or adversity and should maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its obligations to
serve as a source of strength to its subsidiary banks or to observe established
guidelines with respect to the payment of dividends by bank holding companies
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board's
regulations or both.
Silicon's ability to pay cash dividends is limited by generally applicable
Delaware corporation law limits. Silicon is also currently required to seek
prior approval from the Federal Reserve Board before paying dividends. In
addition, there are statutory and regulatory limitations on the amount of
dividends which may be paid to Silicon by Silicon Valley Bank. See "Item 1.
Business--Supervision and Regulation--Restrictions on Dividends" and "Memorandum
of Understanding" for further discussion of current limitations on the ability
of Silicon Valley Bank to pay dividends to Silicon.
Silicon is also treated as a bank holding company under the California
Financial Code. As such, Silicon and its subsidiaries are subject to periodic
examination by, and may be required to file reports with, the California
Department of Financial Institutions.
REGULATION OF SILICON VALLEY BANK.
Silicon Valley Bank is a California-chartered bank and a member of the
Federal Reserve System. It is subject to primary supervision, periodic
examination and regulation by the Commissioner of the California Department of
Financial Institutions, or the Commissioner, the Federal Reserve Board and the
Federal Deposit Insurance Corporation. The Federal Reserve Board and the
Commissioner require Silicon Valley Bank to maintain minimum capital levels that
are discussed above. Both the Federal Reserve Board and the Commissioner also
have broad powers and remedies available if they determine that the financial
condition, capital resources, asset quality, management, earnings prospects,
liquidity, sensitivity to market risk, or other aspects of Silicon Valley Bank's
operations are unsatisfactory, or that Silicon Valley Bank is violating or has
violated any law or regulation.
RESTRICTIONS ON DIVIDENDS.
As discussed above, Silicon is currently required to seek approval from the
Federal Reserve Board before paying dividends. Silicon is a legal entity
separate and distinct from Silicon Valley Bank. Silicon Valley Bank is subject
to various [California] statutory and regulatory restrictions on its ability to
pay dividends to Silicon. Under such restrictions, the amount available for
payment of dividends to Silicon by Silicon Valley Bank totaled $83.6 million at
December 31, 1999. Under the memorandum of understanding with the Federal
Reserve Board and the Commissioner, Silicon Valley Bank has committed to obtain
these regulators' consent prior to the payment of dividends. The Federal Reserve
Board and the Commissioner have the authority to prohibit Silicon Valley Bank
from engaging in activities that, in their opinion,
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constitute unsafe or unsound practices in conducting its business. It is
possible, depending upon the financial condition of the bank in question and
other factors, that they could assert that the payment of dividends or other
payments might, under some circumstances, be an unsafe or unsound practice.
Further, if Silicon Valley Bank fails to comply with its minimum capital
requirements, its regulators could restrict its ability to pay dividends using
prompt corrective action or other enforcement powers. The Commissioner may
impose similar limitations on the conduct of California-chartered banks. See
"Item 8. Financial Statements and Supplementary Data--Note 17 to the
Consolidated Financial Statements--Regulatory Matters" for further discussion on
dividend restrictions.
TRANSACTIONS WITH AFFILIATES.
Silicon Valley Bank is subject to restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, Silicon or other affiliates, the purchase of, or investments in,
stock or other securities of Silicon or other affiliates, the taking of such
securities as collateral for loans, and the purchase of assets of Silicon or
other affiliates. These restrictions prevent Silicon and such other affiliates
from borrowing from Silicon Valley Bank unless the loans are secured by
specified amounts of collateral. Any such secured loans and investments by
Silicon Valley Bank to, or in, Silicon or to, or in, any other affiliate are
limited, individually, to 10% of Silicon Valley Bank's capital and surplus (as
defined by federal regulations), and such secured loans and investments are
limited, in the aggregate, to 20% of Silicon Valley Bank's capital and surplus
(as defined by federal regulations). California law also imposes restrictions on
transactions involving Silicon and other controlling persons of Silicon Valley
Bank. Additional restrictions on transactions with affiliates may be imposed on
Silicon Valley Bank under the prompt corrective action provisions of federal
law. See "Item 1. Business--Supervision and Regulation--Prompt Corrective Action
and Other Enforcement Mechanisms" for related discussion regarding restrictions
on transactions with affiliates.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS.
Federal banking agencies possess broad powers to take corrective and other
supervisory action on an insured bank and its holding company. Federal laws
require each federal banking agency to take prompt corrective action to resolve
the problems of insured banks. Each federal banking agency has issued
regulations defining five categories in which an insured depository institution
will be placed, based on the level of its capital ratios: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized.
A bank that, based upon its capital levels, is classified as well
capitalized, adequately capitalized or undercapitalized may be treated as though
it were in the next lower capital category if the appropriate federal banking
agency, after notice and opportunity for hearing, determines that an unsafe or
unsound condition, or an unsafe or unsound practice, warrants such treatment. At
each successive lower capital category, an insured bank is subject to more
restrictions. The federal banking agencies, however, may not treat an
institution as critically undercapitalized unless its capital ratios actually
warrant such treatment.
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In addition to measures taken under the prompt corrective action provisions,
bank holding companies and insured banks may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in conducting
their businesses, or for violation of any law, rule, regulation, condition
imposed in writing by the agency, or term of a written agreement with the
agency. Enforcement actions may include the appointment of a conservator or
receiver for the bank, the issuance of a cease and desist order that can be
judicially enforced, the termination of the bank's deposit insurance, the
imposition of civil monetary penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against officers, directors and other institution-
affiliated parties, and the enforcement of such actions through injunctions or
restraining orders based upon a judicial determination that the agency would be
harmed if such equitable relief was not granted.
SAFETY AND SOUNDNESS GUIDELINES.
The federal banking agencies have adopted guidelines to assist in
identifying and addressing potential safety and soundness concerns before
capital becomes impaired. The guidelines establish operational and managerial
standards relating to: (i) internal controls, information systems and internal
audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset
growth, and (v) compensation, fees and benefits. In addition, the federal
banking agencies have adopted safety and soundness guidelines for asset quality
and for evaluating and monitoring earnings to ensure that earnings are
sufficient for the maintenance of adequate capital and reserves.
PREMIUMS FOR DEPOSIT INSURANCE.
Silicon Valley Bank's deposit accounts are insured by the Bank Insurance
Fund, as administered by the Federal Deposit Insurance Corporation, up to the
maximum permitted by law. The Federal Deposit Insurance Corporation's annual
assessment for the insurance of Bank Insurance Fund deposits as of December 31,
1999, ranged from 0 to 27 basis points per $100 of insured deposits. The amount
charged is based on the regulatory capital of an institution and on a
supervisory assessment of its operational risk profile. At December 31, 1999,
Silicon Valley Bank's assessment rate was 3 basis points per $100 of insured
deposits.
Silicon Valley Bank is also required to pay an annual assessment of
approximately 1.2 basis points per $100 of insured deposits toward the
retirement of U.S. government issued Financing Corporation bonds. By contrast,
depository institutions such as thrifts whose deposits are insured by the
Savings Association Insurance Fund have paid an annual assessment approximately
five times greater than that of institutions with Bank Insurance Fund deposits.
However, as of January 1, 2000, the assessment rate paid on the Financing
Corporation bonds will be equal for all institutions. Silicon Valley Bank's
assessment rate will increase to 2.1 basis points per $100 of insured deposits
because of this change.
INTERSTATE BANKING AND BRANCHING.
Bank holding companies from any state may generally acquire banks and bank
holding companies located in any other state, subject in some cases to
nationwide and state-imposed deposit concentration limits and limits on the
acquisition of recently established banks. Banks also have the ability, subject
to specific restrictions, to acquire by acquisition or merger branches located
outside their home state. The
12
establishment of new interstate branches is also possible in those states with
laws that expressly permit it. Interstate branches are subject to many of the
laws of the states in which they are located.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING.
Silicon Valley Bank is subject to a variety of fair lending laws and
reporting obligations involving home mortgage lending operations and Community
Reinvestment Act, or CRA, activities. The CRA generally requires the federal
banking agencies to evaluate the record of a bank in meeting the credit needs of
its local communities, including low-and moderate-income neighborhoods. A bank
can also become subject to substantial penalties and corrective measures for a
violation of certain fair lending laws. The federal banking agencies may take
compliance with such laws and CRA obligations into account when regulating and
supervising other activities or assessing whether to approve certain
applications. In April 1999, the Federal Reserve Board rated Silicon Valley Bank
"satisfactory" in complying with its CRA obligations.
ITEM 2. PROPERTIES
In 1995, we relocated our corporate headquarters and main branch and entered
into a 10-year lease on a two-story office building located at 3003 Tasman
Drive, Santa Clara, California. In July 1997, we finalized an amendment to the
original lease associated with our corporate headquarters. The amendment
provides for the lease of additional premises, approximating 56,000 square feet,
adjacent to the existing headquarters facility. We began occupying the
additional premises in August 1998.
We operate offices throughout the Silicon Valley: Santa Clara, Palo Alto and
Sand Hill, the center of the venture capital community in California. Other
regional offices within California include Irvine, Los Angeles, Napa, San Diego,
San Francisco, Santa Barbara, and Sonoma. Office locations outside of California
include: Phoenix, Arizona; Boulder, Colorado; Atlanta, Georgia; Chicago,
Illinois; Boston, Massachusetts; Minneapolis, Minnesota; Northern Virginia;
Portland, Oregon; Philadelphia, Pennsylvania; Austin, Texas; Dallas, Texas; and
Seattle, Washington. All of our properties are occupied under leases, which
expire at various dates through May 2005, and in most instances, include options
to renew or extend at market rates and terms. We also own leasehold
improvements, equipment and furniture and fixtures at our offices, all of which
are used in our business activities.
ITEM 3. LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item
pending at December 31, 1999, or at the date of this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote by the stockholders of Silicon's common
stock during the fourth quarter of 1999.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Our common stock is traded over the counter on the National Association of
Securities Dealers Automated Quotation (Nasdaq) National Market under the symbol
"SIVB."
The following table shows the high and low sales prices for our common stock
for each quarterly period during the last two years, based on the daily closing
price as reported by the Nasdaq National Market.
1999 1998
------------------- -------------------
Quarter Low High Low High
- ------- -------- -------- -------- --------
First....................................................... $16.81 $21.00 $25.19 $31.94
Second...................................................... $16.94 $24.75 $30.47 $36.00
Third....................................................... $21.56 $28.50 $14.81 $38.50
Fourth...................................................... $22.88 $52.84 $12.50 $26.63
STOCKHOLDERS
The number of stockholders of record of our common stock was 600 as of
January 31, 2000.
DIVIDENDS
We have not paid cash dividends on our common stock since 1992 and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Our ability to pay cash dividends is limited by generally applicable
corporate and banking laws and regulations. See "Item 1. Business--Supervision
and Regulation--Restrictions on Dividends," and "Item 8. Financial Statements
and Supplementary Data--Note 17 to the Consolidated Financial
Statements--Regulatory Matters" for additional discussion on restrictions and
limitations on the payment of dividends. In addition, our memorandum of
understanding with our regulators requires us to seek regulatory consent before
paying dividends. See "Item 1. Business--Supervision and Regulation--Memorandum
of Understanding."
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
financial statements and supplementary data as presented in Item 8 of this
report. Certain reclassifications have been made to our prior years results to
conform with 1999 presentations. Such reclassifications had no effect on the
results of operations or stockholders' equity. In addition, the common stock
summary information for years prior to 1998 have been restated to reflect a
two-for-one stock split, distributed on May 1, 1998. Such reclassifications had
no effect on the results of operations or stockholders' equity.
Years Ended December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(Dollars and numbers in thousands, except per share amounts)
Income Statement Summary:
Net interest income................................ $ 205,439 $ 146,615 $ 110,824 $ 87,275 $ 73,952
Provision for loan losses.......................... 52,407 37,159 10,067 10,426 8,737
Noninterest income................................. 58,855 23,162 13,265 11,609 12,565
Noninterest expense................................ 125,659 83,645 66,301 52,682 47,925
---------- ---------- ---------- ---------- ----------
Income before taxes................................ 86,228 48,973 47,721 35,776 29,855
Income tax expense................................. 34,030 20,117 20,043 14,310 11,702
---------- ---------- ---------- ---------- ----------
Net income......................................... $ 52,198 $ 28,856 $ 27,678 $ 21,466 $ 18,153
========== ========== ========== ========== ==========
Common Share Summary:
Basic earnings per share........................... $ 2.53 $ 1.42 $ 1.43 $ 1.17 $ 1.04
Diluted earnings per share......................... 2.46 1.38 1.36 1.11 0.99
Book value per share............................... 16.47 10.42 8.75 7.26 5.86
Weighted average shares outstanding................ 20,629 20,268 19,370 18,426 17,494
Weighted average diluted shares outstanding........ 21,259 20,923 20,338 19,382 18,288
Year-End Balance Sheet Summary:
Loans, net of unearned income...................... $1,623,005 $1,611,921 $1,174,645 $ 863,492 $ 738,405
Assets............................................. 4,596,398 3,545,452 2,625,123 1,924,544 1,407,587
Deposits........................................... 4,109,405 3,269,753 2,432,407 1,774,304 1,290,060
Stockholders' equity............................... 368,850 215,865 174,481 135,400 104,974
Average Balance Sheet Summary:
Loans, net of unearned income...................... $1,591,634 $1,318,826 $ 973,637 $ 779,655 $ 681,255
Assets............................................. 3,992,410 2,990,548 2,140,630 1,573,903 1,165,004
Deposits........................................... 3,681,598 2,746,041 1,973,118 1,441,360 1,060,333
Stockholders' equity............................... 238,085 198,675 152,118 119,788 91,710
Capital Ratios:
Total risk-based capital ratio..................... 15.5% 11.5% 11.5% 11.5% 11.9%
Tier 1 risk-based capital ratio.................... 14.3% 10.3% 10.2% 10.2% 10.6%
Tier 1 leverage ratio.............................. 8.8% 7.6% 7.1% 7.7% 8.0%
Average stockholders' equity to average assets..... 6.0% 6.6% 7.1% 7.6% 7.9%
Selected Financial Ratios:
Return on average assets........................... 1.3% 1.0% 1.3% 1.4% 1.6%
Return on average stockholders' equity............. 21.9% 14.5% 18.2% 17.9% 19.8%
Efficiency ratio................................... 54.5% 53.8% 55.9% 55.9% 60.6%
Net interest margin................................ 5.5% 5.2% 5.6% 6.1% 7.1%
Other Data:
Off-balance sheet client funds..................... $5,666,278 $1,096,300 N/A N/A N/A
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis of financial condition
and results of operations in conjunction with our consolidated financial
statements and supplementary data as presented in Item 8 of this report. This
discussion and analysis includes "forward-looking statements" as that term is
used in the securities laws. All statements regarding our expected financial
position, business and strategies are forward-looking statements. In addition,
in this discussion and analysis the words "anticipates," "believes,"
"estimates," "seeks," "expects," "plans," "intends" and similar expressions, as
they relate to Silicon or our management, are intended to identify
forward-looking statements. Although we believe that the expectations reflected
in these forward-looking statements are reasonable, and have based these
expectations on our beliefs as well as our assumptions, such expectations may
prove to be incorrect.
For information with respect to factors that could cause actual results to
differ from the expectations stated in the forward-looking statements, see the
text under the caption "Risk Factors" included at the end of this section. We
urge investors to consider these factors carefully in evaluating the
forward-looking statements contained in this discussion and analysis. All
subsequent written or oral forward-looking statements attributable to our
company or persons acting on our behalf are expressly qualified in their
entirety by these cautionary statements. The forward-looking statements included
in this filing are made only as of the date of this filing. We do not intend,
and undertake no obligation, to update these forward-looking statements.
Certain reclassifications have been made to our prior years results to
conform with 1999 presentations. Such reclassifications had no effect on our
results of operations or stockholders' equity.
Results of Operations
EARNINGS SUMMARY
We reported net income in 1999 of $52.2 million, compared with net income in
1998 and 1997 of $28.9 million and $27.7 million, respectively. Diluted earnings
per share totaled $2.46 in 1999, compared to $1.38 and $1.36 in 1998 and 1997,
respectively. Return on average equity in 1999 was 21.9%, compared with 14.5% in
1998 and 18.2% in 1997. Return on average assets in 1999 was 1.3%, compared with
1.0% in 1998 and 1.3% in 1997.
The increase in net income for 1999, as compared to 1998, was primarily
attributable to growth in both net interest income and noninterest income,
partially offset by increases in the provision for loan losses and in
noninterest expense. The slight increase in net income for 1998, as compared to
1997, was primarily attributable to growth in both net interest income and
noninterest income, and was almost entirely offset by a significant increase in
the provision for loan losses and an increase in noninterest expense. The major
components of net income and changes in these components are summarized in the
following table
16
for the years ended December 31, 1999, 1998 and 1997, and are discussed in more
detail on the following pages.
Years Ended December 31,
----------------------------------------------------------
1999 to 1998 to
1998 1997
1999 1998 Increase 1997 Increase
---------- ---------- -------- ---------- --------
(Dollars in thousands)
Net interest income..................................... $205,439 $146,615 $58,824 $110,824 $35,791
Provision for loan losses............................... 52,407 37,159 15,248 10,067 27,092
Noninterest income...................................... 58,855 23,162 35,693 13,265 9,897
Noninterest expense..................................... 125,659 83,645 42,014 66,301 17,344
-------- -------- ------- -------- -------
Income before income taxes.............................. 86,228 48,973 37,255 47,721 1,252
Income tax expense...................................... 34,030 20,117 13,913 20,043 74
-------- -------- ------- -------- -------
Net income.............................................. $ 52,198 $ 28,856 $23,342 $ 27,678 $ 1,178
======== ======== ======= ======== =======
NET INTEREST INCOME AND MARGIN
Net interest income is defined as the difference between interest earned,
primarily on loans and investments, and interest paid on funding sources,
primarily deposits. Net interest income is our principal source of revenue. Net
interest margin is defined as the amount of net interest income, on a fully
taxable-equivalent basis, expressed as a percentage of average interest-earning
assets. The average yield earned on interest-earning assets is the amount of
taxable-equivalent interest income expressed as a percentage of average
interest-earning assets. The average rate paid on funding sources is defined as
interest expense as a percentage of average interest-earning assets.
17
The following table sets forth average assets, liabilities and stockholders'
equity, interest income and interest expense, average yields and rates, and the
composition of our net interest margin for the years ended December 31, 1999,
1998 and 1997.
Years Ended December 31,
---------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
Average Average
Yield Yield
Average and Average and
Balance Interest Rate Balance Interest Rate
------------ ---------- -------- ------------ ---------- --------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and securities purchased
under agreement to resell (1)................. $ 618,338 $ 31,204 5.0% $ 396,488 $ 21,305 5.4%
Investment securities:
Taxable....................................... 1,441,081 82,193 5.7 1,044,918 61,515 5.9
Non-taxable (2)............................... 135,549 8,460 6.2 78,234 5,034 6.4
Loans: (3), (4), (5)
Commercial.................................... 1,393,134 143,744 10.3 1,157,949 122,708 10.6
Real estate construction and term............. 138,943 13,988 10.1 115,743 12,364 10.7
Consumer and other............................ 59,557 5,241 8.8 45,134 4,064 9.0
---------- -------- ---- ---------- -------- ----
Total loans..................................... 1,591,634 162,973 10.2 1,318,826 139,136 10.6
---------- -------- ---- ---------- -------- ----
Total interest-earning assets..................... 3,786,602 284,830 7.5 2,838,466 226,990 8.0
---------- -------- ---- ---------- -------- ----
Cash and due from banks........................... 186,841 137,096
Allowance for loan losses......................... (59,383) (40,055)
Other real estate owned........................... 181 681
Other assets...................................... 78,169 54,360
---------- ----------
Total assets...................................... $3,992,410 $2,990,548
========== ==========
Funding sources:
Interest-bearing liabilities:
NOW deposits.................................... $ 32,664 620 1.9 $ 18,702 348 1.9
Regular money market deposits................... 357,006 8,770 2.5 338,585 9,189 2.7
Bonus money market deposits..................... 1,907,517 58,510 3.1 1,487,240 63,155 4.3
Time deposits................................... 207,108 8,530 4.1 131,530 5,917 4.5
Other borrowings................................ -- -- -- 66 4 6.0
---------- -------- ---- ---------- -------- ----
Total interest-bearing liabilities................ 2,504,295 76,430 3.1 1,976,123 78,613 4.0
Portion of noninterest-bearing
funding sources................................. 1,282,307 862,343
---------- -------- ---- ---------- -------- ----
Total funding sources............................. 3,786,602 76,430 2.0 2,838,466 78,613 2.8
---------- -------- ---- ---------- -------- ----
Noninterest-bearing funding sources:
Demand deposits................................. 1,177,303 769,984
Other liabilities............................... 34,220 22,146
Trust preferred securities (6).................. 38,507 23,620
Stockholders' equity............................ 238,085 198,675
Portion used to fund interest-
earning assets................................ (1,282,307) (862,343)
---------- ----------
Total liabilities and stockholders' equity........ $3,992,410 $2,990,548
========== ==========
Net interest income and margin.................... $208,400 5.5% $148,377 5.2%
======== ==== ======== ====
Total deposits.................................... $3,681,598 $2,746,041
========== ==========
Years Ended December 31,
------------------------------------
1997
------------------------------------
Average
Yield
Average and
Balance Interest Rate
------------ ---------- --------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and securities purchased
under agreement to resell (1)................. $ 312,398 $ 17,264 5.5%
Investment securities:
Taxable....................................... 671,390 40,360 6.0
Non-taxable (2)............................... 33,801 2,320 6.9
Loans: (3), (4), (5)
Commercial.................................... 858,459 95,304 11.1
Real estate construction and term............. 78,311 8,063 10.3
Consumer and other............................ 36,867 3,473 9.4
---------- -------- ----
Total loans..................................... 973,637 106,840 11.0
---------- -------- ----
Total interest-earning assets..................... 1,991,226 166,784 8.4
---------- -------- ----
Cash and due from banks........................... 148,044
Allowance for loan losses......................... (37,568)
Other real estate owned........................... 1,192
Other assets...................................... 37,736
----------
Total assets...................................... $2,140,630
==========
Funding sources:
Interest-bearing liabilities:
NOW deposits.................................... $ 15,814 308 1.9
Regular money market deposits................... 345,828 9,368 2.7
Bonus money market deposits..................... 895,259 40,885 4.6
Time deposits................................... 107,742 4,587 4.3
Other borrowings................................ 5 -- 5.0
---------- -------- ----
Total interest-bearing liabilities................ 1,364,648 55,148 4.0
Portion of noninterest-bearing
funding sources................................. 626,578
---------- -------- ----
Total funding sources............................. 1,991,226 55,148 2.8
---------- -------- ----
Noninterest-bearing funding sources:
Demand deposits................................. 608,475
Other liabilities............................... 15,389
Trust preferred securities (6).................. --
Stockholders' equity............................ 152,118
Portion used to fund interest-
earning assets................................ (626,578)
----------
Total liabilities and stockholders' equity........ $2,140,630
==========
Net interest income and margin.................... $111,636 5.6%
======== ====
Total deposits.................................... $1,973,118
==========
- ----------------------------------------
(1) Includes average interest-bearing deposits in other financial institutions
of $255, $240 and $306 in 1999, 1998 and 1997, respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in 1999,
1998 and 1997. These adjustments were $2,961, $1,762 and $812 for the years
ended December 31, 1999, 1998 and 1997, respectively.
(3) Average loans include average nonaccrual loans of $37,827, $26,158 and
$19,681 in 1999, 1998 and 1997, respectively.
(4) Average loans are net of average unearned income of $9,328, $8,299 and
$6,922 in 1999, 1998 and 1997, respectively.
(5) Loan interest income includes loan fees of $15,738, $12,935 and $10,567 in
1999, 1998 and 1997, respectively.
(6) The 8.25% annual distribution to SVB Capital I is recorded as a component of
noninterest expense.
18
Net interest income is affected by changes in the amount and mix of
interest-earnings assets and interest-bearing liabilities, referred to as
"volume change." Net interest income is also affected by changes in yields
earned on interest-earning assets and rates paid on interest-bearing
liabilities, referred to as "rate change." The following table sets forth
changes in interest income and interest expense for each major category of
interest-earning assets and interest-bearing liabilities. The table also
reflects the amount of change attributable to both volume and rate changes for
the years indicated. Changes relating to investments in non-taxable municipal
securities are presented on a fully taxable-equivalent basis using the federal
statutory rate of 35% in 1999, 1998 and 1997.
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
------------------------------- ------------------------------
Volume Rate Total Volume Rate Total
-------- --------- -------- -------- -------- --------
(Dollars in thousands)
Interest income:
Federal funds sold and securities purchased
under agreement to resell.................... $11,195 $ (1,296) $ 9,899 $ 4,518 $ (477) $ 4,041
Investment securities.......................... 26,074 (1,970) 24,104 24,765 (896) 23,869
Loans.......................................... 27,933 (4,096) 23,837 36,418 (4,122) 32,296
------- -------- ------- ------- ------- -------
Increase (decrease) in interest income........... 65,202 (7,362) 57,840 65,701 (5,495) 60,206
------- -------- ------- ------- ------- -------
Interest expense:
NOW deposits................................... 265 7 272 54 (14) 40
Regular money market deposits.................. 453 (872) (419) (197) 18 (179)
Bonus money market deposits.................... 12,891 (17,536) (4,645) 25,138 (2,868) 22,270
Time deposits.................................. 3,113 (500) 2,613 1,070 260 1,330
Other borrowings............................... (4) -- (4) 4 -- 4
------- -------- ------- ------- ------- -------
Increase (decrease) in interest expense.......... 16,718 (18,901) (2,183) 26,069 (2,604) 23,465
------- -------- ------- ------- ------- -------
Increase (decrease) in net interest income....... $48,484 $ 11,539 $60,023 $39,632 $(2,891) $36,741
======= ======== ======= ======= ======= =======
Net interest income, on a fully taxable-equivalent basis, totaled $208.4
million in 1999, an increase of $60.0 million, or 40.5%, from the $148.4 million
total in 1998. The increase in net interest income was attributable to a $57.8
million, or 25.5%, increase in interest income, combined with a $2.2 million, or
2.8%, decrease in interest expense over the comparable prior year period. Net
interest income, on a fully taxable-equivalent basis, totaled $148.4 million in
1998, an increase of $36.7 million, or 32.9%, compared to the $111.6 million
total in 1997. This increase in net interest income was attributable to a $60.2
million, or 36.1%, increase in interest income, offset by a $23.5 million, or
42.5%, increase in interest expense over the comparable prior year period.
19
The $57.8 million increase in interest income for 1999, as compared to 1998,
was the result of a $65.2 million favorable volume variance, slightly offset by
a $7.4 million unfavorable rate variance. The $65.2 million favorable volume
variance resulted from a $948.1 million, or 33.4%, increase in average
interest-earning assets over the comparable prior year period. The increase in
average interest-earning assets resulted from strong growth in our average
deposits, which increased $935.6 million, or 34.1%, from 1998 to 1999. The
increase in average interest-earning assets consisted of loans, which increased
$272.8 million, plus a combination of highly liquid, lower-yielding federal
funds sold, securities purchased under agreement to resell and investment
securities, which collectively increased $675.3 million, accounting for 71.2% of
the total increase in average interest-earning assets.
Average loans increased $272.8 million, or 20.7%, in 1999 as compared to
1998, resulting in a $27.9 million favorable volume variance. This growth was
widely distributed throughout the loan portfolio, as reflected by increased
average loan balances in most of our technology, life sciences and special
industry niche practices, in specialized lending products, and throughout our
loan offices located across the nation.
Average investment securities for 1999 increased $453.5 million, or 40.4%,
as compared to 1998, resulting in a $26.1 million favorable volume variance. The
aforementioned strong growth in average deposits exceeded the growth in average
loans during 1999, and generated excess funds that were largely invested in U.S.
agency securities, mortgage-backed securities, collateralized mortgage
obligations, and commercial paper. The growth in the investment portfolio
reflected our actions to continue to increase, as well as further diversify our
portfolio of short-term investments in response to the continuing increase in
liquidity.
Average federal funds sold and securities purchased under agreement to
resell in 1999 increased a combined $221.9 million, or 56.0%, over the prior
year, resulting in an $11.2 million favorable volume variance. This increase was
largely due to the aforementioned strong growth in average deposits during 1999
and our actions to continue to further diversify our portfolio of short-term
investments.
Unfavorable rate variances associated with each component of
interest-earning assets combined to decrease interest income by $7.4 million in
1999, as compared to the prior year. Short-term market interest rates have
declined on an overall basis during the past year. As a result of this decline,
we earned lower yields during 1999 on federal funds sold, securities purchased
under agreements to resell and our investment securities, a significant portion
of which were short-term in nature, resulting in a $3.3 million unfavorable rate
variance as compared to the prior year. The average yield on loans in 1999 also
decreased 40 basis points from the respective prior year, accounting for the
remaining $4.1 million of the total unfavorable rate variance. This decrease was
primarily attributable to a 36 basis points decline in our weighted average
prime rate in 1999 as compared to the similar prior year period. Approximately
77.5% of our loans were prime rate-based at the end of 1999.
The yield on average interest-earning assets decreased 50 basis points in
1999 from the comparable prior year period. This decrease resulted from a slight
decline in the average yield on loans, largely due to a decline in our average
prime rate, as well as to a continuing shift in the composition of
interest-earning assets towards a higher percentage of highly liquid,
lower-yielding federal funds sold, securities purchased under agreement to
resell and investment securities. This shift in the composition of average
interest-earning assets resulted from the aforementioned strong growth in
deposits continuing to outpace the growth in loans.
20
The $60.2 million increase in interest income for 1998, as compared to 1997,
was the result of a $65.7 million favorable volume variance, slightly offset by
a $5.5 million unfavorable rate variance. The $65.7 million favorable volume
variance resulted from a $847.2 million, or 42.5%, increase in average
interest-earning assets over the comparable prior year period. The increase in
average interest-earning assets resulted from strong growth in our average
deposits, which increased $772.9 million, or 39.2%, from 1997 to 1998.
Average loans increased $345.2 million, or 35.5%, in 1998 as compared to
1997, resulting in a $36.4 million favorable volume variance. This growth was
widely distributed throughout the loan portfolio, as reflected by increased loan
balances in all of our technology, life sciences and special industry niche
practices, in specialized lending products, and throughout our loan offices
located across the nation.
Average investment securities for 1998 increased $418.0 million, or 59.3%,
as compared to 1997, resulting in a $24.8 million favorable volume variance. The
aforementioned strong growth in average deposits exceeded the growth in average
loans during 1998, and generated excess funds that were largely invested in U.S.
agency securities, collateralized mortgage obligations and municipal securities.
Average federal funds sold and securities purchased under agreement to
resell in 1998 increased a combined $84.1 million, or 26.9%, over the prior
year, resulting in a $4.5 million favorable volume variance. This increase was
largely due to the aforementioned strong growth in average deposits during 1998
coupled with our actions to further diversify our portfolio of short-term
investments.
Unfavorable rate variances associated with each component of
interest-earning assets in 1998 resulted in a decrease in interest income of
$5.5 million as compared to the prior year. Short-term market interest rates
declined during the second half of 1998. As a result of this decline, we earned
lower yields in 1998 on federal funds sold, securities purchased under agreement
to resell and investment securities, a significant portion of which were
short-term in nature, resulting in a $1.4 million unfavorable rate variance as
compared to the prior year. The average yield on loans in 1998 decreased 40
basis points from 1997, accounting for the remaining $4.1 million of the total
unfavorable rate variance. This decrease was primarily attributable to both
increased competition and a decline in the average prime rate we charged during
the second half of 1998, as a substantial portion of our loans are prime
rate-based.
The total yield on average interest-earning assets decreased 40 basis points
in 1998 from the comparable prior year period. This decrease resulted from a
decline in the average yield on loans, largely due to both increased competition
and a decline in our prime rate, as well as to a continuing shift in the
composition of interest-earning assets towards a higher percentage of highly
liquid, lower yielding federal funds sold, securities purchased under agreement
to resell and investment securities. This shift in the composition of average
interest-earning assets resulted from the aforementioned strong growth in
deposits continuing to outpace the growth in our average loans during 1998.
Interest expense in 1999 decreased $2.2 million from 1998. This decrease was
due to a favorable rate variance of $18.9 million, largely offset by an
unfavorable volume variance of $16.7 million. The favorable rate variance
largely resulted from a reduction in the average rate paid on our bonus money
market deposit product, from 4.3% in 1998 to 3.1% in 1999. The reduction during
1999 in the average rate paid on our bonus money market deposit product was
primarily attributable to a decline in short-term market interest
21
rates during the second half of 1998 and to our lowering the rates paid on bonus
money market deposits by an additional 163 basis points during 1999.
The unfavorable volume variance of $16.7 million resulted from a $528.2
million, or 26.7%, increase in average interest-bearing liabilities in 1999 as
compared to 1998. This increase was largely concentrated in our bonus money
market deposit product, which increased $420.3 million, or 28.3%, and was
explained by high levels of client liquidity attributable to a strong inflow of
investment capital into the venture capital community during the past year, and
by growth in the number of clients we serve.
The average cost of funds paid on average interest-bearing liabilities
decreased 90 basis points from 1998 to 1999. This decrease in the average cost
of funds was largely due to a decrease of 120 basis points in the average rate
paid on our bonus money market deposit product.
Interest expense in 1998 increased $23.5 million from 1997. This increase
was due to an unfavorable volume variance of $26.1 million, partially offset by
a favorable rate variance of $2.6 million. The unfavorable volume variance
resulted from a $611.5 million, or 44.8%, increase in average interest-bearing
liabilities in 1998 as compared to 1997. This increase was largely concentrated
in our bonus money market deposit product, which increased $592.0 million, or
66.1%, and was explained by high levels of client liquidity attributable to a
strong inflow of investment capital into the venture capital community during
1998, and by growth in the number of clients we serve.
Changes in the average rates paid on interest-bearing liabilities had a $2.6
million favorable impact on interest expense in 1998 as compared to 1997. This
decrease in interest expense largely resulted from a reduction in the average
rate paid on our bonus money market deposit product from 4.6% in 1997 to 4.3% in
1998. The reduction during 1998 in the average rate paid on our bonus money
market deposit product was largely attributable to a decline in short-term
market interest rates during the second half of 1998.
The average cost of funds paid in 1998 of 2.8% was flat with the prior year.
Although the average rate paid on our bonus money market deposit product
decreased during 1998 as compared to 1997, this was offset by a continuing shift
in the composition of average interest-bearing liabilities towards a higher
percentage of deposits in that product.
PROVISION FOR LOAN LOSSES
The provision for loan losses is based on our evaluation of the adequacy of
the existing allowance for loan losses in relation to total loans, and on our
periodic assessment of the inherent and identified risk dynamics of the loan
portfolio resulting from reviews of selected individual loans and loan
commitments.
Our provision for loan losses totaled $52.4 million in 1999 compared to
$37.2 million and $10.1 million in 1998 and 1997, respectively. The increase in
our provision for loan losses in 1999 was in response to an increasing trend in
net charge-offs. We incurred net charge-offs of $26.6 million in 1999 and $28.9
million in 1998, compared to $5.1 million in 1997. For a more detailed
discussion of credit quality and the allowance for loan losses, see the Item 7
section entitled "Financial Condition-Credit Quality and the Allowance for Loan
Losses."
22
NONINTEREST INCOME
The following table summarizes the components of noninterest income for the
past three years:
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Disposition of client warrants.............................. $33,003 $ 6,657 $ 5,480
Letter of credit and foreign exchange income................ 14,027 7,397 4,512
Client investment fees...................................... 4,529 473 299
Deposit service charges..................................... 2,764 1,730 1,772
Investment gains............................................ 1,056 5,240 90
Other....................................................... 3,476 1,665 1,112
------- ------- -------
Total noninterest income.................................... $58,855 $23,162 $13,265
======= ======= =======
Noninterest income increased $35.7 million, or 154.1%, in 1999 as compared
to 1998. This increase was largely due to a $26.3 million increase in income
from the disposition of client warrants, coupled with a $6.6 million increase in
letter of credit fees, foreign exchange fees and other trade finance income and
a $4.1 million increase in client investment fees. This increase was partially
offset by a decrease of $4.2 million in investment gains. Noninterest income
increased $9.9 million, or 74.6%, in 1998 as compared to 1997. This increase was
largely due to a $5.2 million increase in investment gains, a $2.9 million
increase in letter of credit fees, foreign exchange fees and other trade finance
income and a $1.2 million increase in income from the disposition of client
warrants.
Income from the disposition of client warrants totaled $33.0 million, $6.7
million and $5.5 million in 1999, 1998 and 1997, respectively. We have
historically obtained rights to acquire stock, in the form of warrants, in
certain clients primarily as part of negotiated credit facilities. The receipt
of warrants does not change the loan covenants or other collateral control
techniques we employee to mitigate the risk of a loan becoming nonperforming,
and collateral requirements on loans with warrants are similar to lending
arrangements where warrants are not obtained. The timing and amount of income
from the disposition of client warrants typically depends upon factors beyond
our control, including the general condition of the public equity markets as
well as the merger and acquisition environment. We therefore cannot predict the
timing and amount of income with any degree of accuracy and it is likely to very
materially from period to period. During the years ended December 31, 1999, 1998
and 1997, a significant portion of the income from the disposition of client
warrants was offset by expenses related to our efforts to build an
infrastructure sufficient to support present and prospective business
activities, and was also offset by increases to the provision for loan losses in
those same years.
Based on December 31, 1999 market valuations, we had potential pre-tax
warrant gains totaling $68.2 million, of which $40.9 million related to two
clients. We are restricted from exercising many of these warrants until the
first three quarters of 2000. As of December 31, 1999, we held 853 warrants in
companies, many of which are non-public companies, thus we are currently unable
to value most of these warrants. Further, based on December 31, 1999 market
valuations, we had a potential pre-tax gain on a venture capital fund investment
of $42.3 million. We are restricted from selling this publicly-traded equity
instrument until the first quarter of 2000. Additionally, we are typically
precluded from using any type of
23
derivative instrument to secure the current unrealized gains associated with
many of these equity instruments. Hence, the amount of income we realize from
these equity instruments in future periods may vary materially from the current
unrealized amount due to fluctuations in the market prices of the underlying
common stock of these companies. Further, we may reinvest some or all of the
income realized from the disposition of these equity instruments in furthering
our business strategies.
Letter of credit fees, foreign exchange fees and other trade finance income
totaled $14.0 million in 1999, an increase of $6.6 million, or 89.6%, from the
$7.4 million total in 1998, and an increase of $9.5 million, or 210.9%, from the
$4.5 million total in 1997. This growth reflects a concerted effort by our
management to expand the penetration of trade finance-related products and
services among our growing client base, a large percentage of which provide
products and services in international markets.
Client investment fees totaled $4.5 million in 1999 compared to $0.5 million
and $0.3 million in 1998 and 1997, respectively. Prior to June 1999, we only
earned client investment fees on off-balance sheet funds that were invested by
clients in investment securities such as U.S. Treasuries, U.S. agencies and
commercial paper. Off-balance sheet client funds totaled $1.1 billion at
December 31, 1998. Beginning in June 1999, we began offering off-balance sheet
private label mutual fund products to clients. We earn approximately 35 basis
points on the average balance in these products. At December 31, 1999, $5.7
billion in client funds were invested off-balance sheet, including $3.7 billion
in the mutual fund products. The significant growth in the amount of off-balance
sheet client funds was explained by high levels of client liquidity attributable
to a strong inflow of investment capital into the venture capital community
during the past year, by growth in the number of clients we serve, and by
increased marketing of off-balance sheet private label mutual fund products.
Income related to deposit service charges totaled $2.8 million, $1.7 million
and $1.8 million in 1999, 1998 and 1997, respectively. Clients compensate us for
depository services either through earnings credits computed on their demand
deposit balances, or via explicit payments recognized as deposit service charges
income. The increase in deposit service charges income in 1999 was due to both a
reduction in earnings credits resulting from a decrease in short-term market
rates during 1998 and growth in our client base.
We realized $1.1 million in gains on sales of investment securities during
1999, compared to $5.2 million in gains on sales of investment securities during
1998, and a nominal gain on sales of investment securities during 1997. The 1999
gains primarily related to distributions received from venture capital fund
investments. The 1998 gains primarily related to sales of U.S. Treasury
securities, U.S. agency securities, mortgage-backed securities, and
collateralized mortgage obligations, with an aggregate book value of $433.3
million. All investment securities sold were classified as available-for-sale,
and all sales were conducted as a normal component of our asset/liability and
liquidity management activities.
Other noninterest income largely consisted of service-based fee income, and
totaled $3.5 million in 1999, compared to $1.7 million in 1998 and $1.1 million
in 1997, respectively. The increase in 1999, as compared to 1998 and 1997, was
primarily due to a higher volume of cash management and loan documentation
services related to our growing client base.
24
NONINTEREST EXPENSE
Noninterest expense in 1999 totaled $125.7 million, a $42.0 million, or
50.2%, increase from 1998. Total noninterest expense was $83.6 million in 1998,
up $17.3 million, or 26.2%, from 1997. We closely monitor our level of
noninterest expense using a variety of financial ratios, including the
efficiency ratio. The efficiency ratio is calculated by dividing the amount of
noninterest expense, excluding costs associated with other real estate owned, by
adjusted revenues, defined as the total of net interest income and noninterest
income, excluding income from the disposition of client warrants and gains or
losses related to sales of investment securities. This ratio reflects the level
of operating expense required to generate $1 of operating revenue. Our
efficiency ratio was 54.5% for 1999, compared to 53.8% and 55.9% in 1998 and
1997, respectively. The following table presents the detail of noninterest
expense and the incremental contribution of each expense line item to our
efficiency ratio:
Years Ended December 31,
-----------------------------------------------------------------------
1999 1998 1997
----------------------- --------------------- ---------------------
Percent of Percent of Percent of
Adjusted Adjusted Adjusted
Amount Revenues Amount Revenues Amount Revenues
---------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
Compensation and benefits..................... $ 75,896 33.0% $44,232 28.0% $40,084 33.8%
Professional services......................... 11,766 5.1 9,876 6.3 6,710 5.7
Net occupancy expense......................... 6,689 2.9 5,195 3.3 3,410 2.9
Business development and travel............... 6,644 2.9 6,025 3.8 4,514 3.8
Furniture and equipment....................... 6,178 2.7 6,667 4.2 3,620 3.1
Trust preferred securities distributions...... 3,300 1.4 2,012 1.3 -- --
Postage and supplies.......................... 2,582 1.1 2,225 1.4 1,600 1.3
Advertising and promotion..................... 2,285 1.0 2,215 1.4 1,448 1.2
Telephone..................................... 1,846 0.8 2,157 1.4 1,444 1.2
Other......................................... 8,205 3.6 4,255 2.7 3,395 2.9
-------- ---- ------- ---- ------- ----
Total, excluding cost of other real estate
owned....................................... 125,391 54.5% 84,859 53.8% 66,225 55.9%
==== ==== ====
Cost of other real estate owned............... 268 (1,214) 76
-------- ------- -------
Total noninterest expense..................... $125,659 $83,645 $66,301
======== ======= =======
Compensation and benefits expenses totaled $75.9 million in 1999, a $31.7
million, or 71.6%, increase over the $44.2 million incurred in 1998. This
increase was largely the result of an increase in the number of average
full-time equivalent personnel (FTE) we employ, combined with an increase in
performance-based compensation associated with our incentive bonuses and
employee stock ownership plan. Average FTE personnel increased from 521 in 1998
to 645 in 1999. Compensation and benefits expenses in 1998 increased $4.1
million, or 10.4%, from the $40.1 million total in 1997. The increase in
compensation and benefits expenses in 1998 was primarily the result of an
increase in the number of average FTE personnel we employ, partially offset by a
decrease in performance-based compensation due to lower than expected net
income. Average FTE personnel totaled 521 in 1998 compared with 417 in 1997. The
increase in FTE personnel from 1997 through 1999 was primarily due to a
combination of our efforts to develop and support new markets through geographic
expansion, to develop and expand products, services and niches, and to build an
infrastructure sufficient to support present and prospective business
activities.
25
Further growth in our FTE personnel is likely to occur during future years as a
result of the continued expansion of our business activities.
Professional services expenses, which consist of costs associated with
corporate legal services, litigation settlements, accounting and auditing
services, consulting, and our board of directors, totaled $11.8 million in 1999,
a $1.9 million, or 19.1%, increase from the $9.9 million total in 1998. We
incurred $6.7 million in professional services expenses in 1997. The increase in
professional services expense in 1999, as compared to 1998, primarily related to
an increase in consulting fees associated with several business initiatives.
Further, the increase in professional services expenses during the past three
years reflects the extensive efforts we have undertaken to continue to build and
support our infrastructure, as well as evaluate and pursue new business
opportunities. It also reflects our efforts in outsourcing several corporate
functions, such as internal audit, facilities management and credit review,
where we believe we can achieve a combination of cost savings and increased
quality of service. The increase in professional services in 1998, as compared
to 1997, primarily related to an increase in both consulting fees associated
with several business initiatives, including the year 2000 remediation project,
and legal fees primarily related to loan consultations and the workout of
various commercial credits.
Occupancy, furniture and equipment expenses totaled $12.9 million in 1999,
$11.9 million in 1998 and $7.0 million in 1997. The increase in occupancy,
furniture and equipment expenses in 1999, as compared to 1998, was primarily the
result of our continued geographic expansion to develop and support new markets.
The increase in occupancy, furniture and equipment expenses in 1998, as compared
to 1997, was largely attributable to certain non-recurring costs in connection
with the expansion of our existing headquarters facility during the second
quarter of 1998 and an increase in recurring expenses associated with that
additional office space.
Business development and travel expenses totaled $6.6 million in 1999, an
increase of $0.6 million, or 10.3%, compared to the $6.0 million total in 1998.
We incurred $4.5 million in business development and travel expenses in 1997.
The increase in business development and travel expenses during each of the last
two years was largely attributable to overall growth in our business, including
both an increase in the number of FTE personnel and expansion into new
geographic markets.
Trust preferred securities distributions totaled $3.3 million in 1999, an
increase of $1.3 million, or 64.0%, compared to $2.0 million for 1998. These
distributions resulted from the issuance of $40.0 million in cumulative trust
preferred securities during the second quarter of 1998. The trust preferred
securities pay a fixed rate quarterly distribution of 8.25% and have a maximum
maturity of 30 years.
Postage and supplies expenses totaled $2.6 million, $2.2 million and $1.6
million in 1999, 1998 and 1997, respectively. Total telephone expenses were $1.9
million in 1999, $2.2 million in 1998 and $1.4 million in 1997. The increase in
postage and supplies during each of the past two years was largely the result of
overall growth in our business, including both an increase in the number of FTE
personnel and expansion into new geographic markets. The decrease in telephone
expense in 1999, as compared to 1998 relates primarily to our efforts to
negotiate lower telecommunications rates.
Advertising and promotion expenses totaled $2.3 million, $2.2 million and
$1.4 million in 1999, 1998 and 1997, respectively. The increase in advertising
and promotion expenses during each of the last two years reflects a concerted
effort to increase our marketing nationwide.
26
Other noninterest expenses totaled $8.2 million, $4.3 million and $3.4
million in 1999, 1998 and 1997, respectively. The increase in other noninterest
expenses in 1999 of $4.0 million, as compared to 1998, was primarily due to $2.1
million in charitable contributions made to the Silicon Valley Bank Foundation
and increased data processing costs. The $0.9 million increase in other
noninterest expenses from 1997 to 1998 was largely due to an increase in data
processing costs related to both growth in our business and several new business
initiatives commenced in 1998.
In 1999 and 1997, we incurred minimal net costs associated with OREO.
Additionally, during 1998, we realized a net gain of $1.3 million in connection
with the sale of an OREO property that consisted of multiple undeveloped lots.
INCOME TAXES
Our effective income tax rate was 39.5% in 1999, compared to 41.1% in 1998
and 42.0% in 1997. The decrease in our effective income tax rate was principally
attributable to an increase in the amount of tax-exempt interest income we
received, as well as to a change in our multi-state income tax rate.
Financial Condition
Assets totaled $4.6 billion at December 31, 1999, an increase of $1.1
billion, or 29.6%, compared to $3.5 billion at December 31, 1998.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell
totaled a combined $898.0 million at December 31, 1999, an increase of $498.8
million, or 125.0%, compared to the $399.2 million outstanding at the prior year
end. This increase was attributable to our desire to maintain a high level of
liquidity at year end in anticipation of the century date change.
27
INVESTMENT SECURITIES
The following table details the composition of investment securities, all of
which were classified as available-for-sale and reported at fair value, at
December 31, 1999, 1998 and 1997.
December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(Dollars in thousands)
U.S. Treasury securities.................................... $ 29,798 $ 41,049 $ 217,685
U.S. agencies and corporations:
Discount notes and bonds.................................. 855,570 498,016 462,405
Mortgage-backed securities................................ 161,822 125,059 144,437
Collateralized mortgage obligations....................... 221,952 155,149 41,051
Obligations of states and political subdivisions............ 196,396 515,770 60,436
Commercial paper and other debt securities.................. 117,084 48,464 66,836
Money market mutual funds................................... 27,103 -- --
Bankers' acceptances........................................ -- -- 16,140
Warrant securities.......................................... 68,358 670 897
Venture capital fund investments............................ 52,561 5,359 2,368
Other private equity investments............................ 4,428 569 168
Federal Reserve Bank stock and tax credit funds............. 12,336 7,397 1,481
---------- ---------- ----------
Total....................................................... $1,747,408 $1,397,502 $1,013,904
========== ========== ==========
Investment securities totaled $1.7 billion at December 31, 1999, an increase
of $349.9 million, or 25.0%, over the December 31, 1998 balance of $1.4 billion.
This increase resulted from excess funds that were generated by strong growth in
our deposits outpacing the growth in loans during 1999, and primarily consisted
of U.S. agency securities, mortgage-backed securities, collateralized mortgage
obligations, and commercial paper. The decrease in U.S. Treasury securities and
obligations of states and political subdivisions was primarily due to
maturities. The overall growth in the investment portfolio reflected our actions
to increase as well as to further diversify our investment portfolio in response
to a continued significant increase in liquidity.
The increase in short-term market interest rates during 1999 resulted in a
pre-tax unrealized loss on our available-for-sale fixed income securities
investment portfolio of $44.5 million as of December 31, 1999. This unrealized
loss was offset by a pre-tax unrealized gain of $113.0 million associated with
corporate equity securities, which includes our warrant securities, venture
capital fund investments and other private equity investments. Because of the
level of liquidity we maintain, we do not anticipate having to sell fixed income
investment securities and incurring material losses on sales in future periods
for liquidity purposes. Additionally, we are restricted from selling many of the
corporate equity securities until the first three quarters of 2000. We are also
typically precluded from using any type of derivative instrument to secure the
current unrealized gains associated with many of these equity instruments.
Hence, the amount of income we recognize in future periods from the disposition
of these equity instruments may vary materially from the current unrealized
amount due to fluctuations in the market prices of the underlying common stock
of these companies.
Investment securities totaled $1.4 billion at December 31, 1998, a $383.6
million, or 37.8%, increase over the December 31, 1997 balance of $1.0 billion.
This increase resulted from excess funds
28
that were generated by strong growth in our deposits outpacing the growth in
loans during 1998, and primarily consisted of U.S. agency securities,
collateralized mortgage obligations and municipal securities. The significant
increase in municipal securities was composed of both taxable and non-taxable
municipal obligations, and was largely attributable to our obtaining slightly
higher yields on these investments as compared to U.S. agency discount notes and
bonds and other short-term securities. The decreases in U.S. Treasury
securities, mortgage-backed securities and commercial paper was primarily due to
sales and maturities. The overall growth in the investment portfolio reflected
our actions to increase as well as to further diversify our portfolio of
short-term investments in response to a continued significant increase in
liquidity.
At December 31, 1999, there were no investment securities held by us which
were issued by a single party, excluding securities issued by the U.S.
Government or by U.S. Government agencies and corporations, and which exceeded
10.0% of our stockholders' equity at year end.
The following table provides the remaining contractual principal maturities
and fully taxable-equivalent yields on investment securities as of December 31,
1999. The weighted-average yield is computed using the amortized cost of
available-for-sale securities, which are reported at fair value. Expected
remaining maturities of certain U.S. agency securities, mortgage-backed
securities and collateralized mortgage obligations will generally differ from
their contractual maturities because borrowers may have the right to prepay
obligations with or without penalties. Warrant securities, venture capital fund
investments, other private equity investments, Federal Reserve Bank stock, and
tax credit funds, were included in the table below as maturing after 10 years.
December 31, 1999
------------------------------------------------------------------
After One
One Year Year to
Total or Less Five Years
---------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Fair Average Fair Average Fair Average
Value Yield Value Yield Value Yield
----------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
U.S. Treasury securities......... $ 29,798 5.6% $ 5,006 5.6% $ 24,792 5.6%
U.S. agencies and corporations:
Discount notes and bonds....... 855,570 5.8 66,928 5.8 788,642 5.8
Mortgage-backed securities..... 161,822 6.4 -- -- -- --
Collateralized mortgage
obligations.................. 221,952 6.4 -- -- 9,613 6.3
Obligations of states and
political subdivisions......... 196,396 6.4 9,323 6.2 30,302 6.2
Commercial paper and other debt
securities..................... 117,084 7.1 117,084 7.1 -- --
Money market mutual funds........ 27,103 5.5 27,103 5.5 -- --
Warrant securities............... 68,358 -- -- -- -- --
Venture capital fund
investments.................... 52,561 -- -- -- -- --
Other private equity
investments.................... 4,428 -- -- -- -- --
Federal Reserve Bank stock and
tax credit funds............... 12,336 -- -- -- -- --
---------- --- -------- --- -------- ---
Total............................ $1,747,408 6.0% $225,444 6.4% $853,349 5.8%
========== === ======== === ======== ===
December 31, 1999
-------------------------------------------
After Five
Years to After
Ten Years Ten Years
--------------------- ---------------------
Weighted- Weighted-
Fair Average Fair Average
Value Yield Value Yield
---------- ---------- ---------- ----------
(Dollars in thousands)
U.S. Treasury securities......... -- -- -- --
U.S. agencies and corporations:
Discount notes and bonds....... -- -- -- --
Mortgage-backed securities..... $ 5,084 6.1% $156,738 6.4%
Collateralized mortgage
obligations.................. 22,558 6.4 189,781 6.4
Obligations of states and
political subdivisions......... 91,271 6.4 65,500 6.5
Commercial paper and other debt
securities..................... -- -- -- --
Money market mutual funds........ -- -- -- --
Warrant securities............... -- -- 68,358 --
Venture capital fund
investments.................... -- -- 52,561 --
Other private equity
investments.................... -- -- 4,428 --
Federal Reserve Bank stock and
tax credit funds............... -- -- 12,336 --
-------- --- -------- ---
Total............................ $118,913 6.4% $549,702 6.0%
======== === ======== ===
29
Mortgage-backed securities (MBS), collateralized mortgage obligations (CMO)
and callable U.S. agency securities (Agencies) pose risks not associated with
fixed maturity bonds, primarily related to the ability of the borrower to call
or prepay the debt with or without penalty. This risk, known as prepayment risk,
may cause the MBS, the CMO and the Agencies to remain outstanding for a period
of time different than that assumed at the time of purchase. When interest rates
decline, prepayments generally tend to increase, causing the average expected
remaining maturity of the MBS, the CMO and the Agencies to decline. Conversely,
if interest rates rise, prepayments tend to decrease, lengthening the average
expected remaining maturity of the MBS, the CMO and the Agencies.
LOANS
The composition of the loan portfolio, net of unearned income, for each of
the past five years is as follows:
December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ---------- ----------
(Dollars in thousands)
Commercial...................................... $1,414,728 $1,429,980 $1,051,218 $755,699 $622,488
Real estate construction........................ 76,209 74,023 53,583 27,540 17,194
Real estate term................................ 67,738 60,841 33,395 44,475 56,845
Consumer and other.............................. 64,330 47,077 36,449 35,778 41,878
---------- ---------- ---------- -------- --------
Total loans..................................... $1,623,005 $1,611,921 $1,174,645 $863,492 $738,405
========== ========== ========== ======== ========
While we continue to generate new loans in most of our technology and life
sciences and special industry niche practices, as well as in specialized lending
products, many of our clients, primarily in the technology and life sciences
niche, have received significant cash inflows from the capital markets and
venture capital community. Consequently, we have experienced higher than normal
paydowns and loan payoffs, which has caused total loans to remain relatively
unchanged from the end of 1998 to December 31, 1999.
30
The following table sets forth the remaining contractual maturity
distribution of our loans (reported on a gross basis) at December 31, 1999 for
fixed and variable rate loans:
December 31, 1999
------------------------------------------------------
After One Year
One Year and Through After Five
or Less Five Years Years Total
---------- -------------- ---------- -----------
(Dollars in thousands)
Fixed rate loans:
Commercial.................................................. $ 34,035 $205,096 $100,870 $ 340,001
Real estate construction.................................... 10 3,513 -- 3,523
Real estate term............................................ 4,613 12,372 1,690 18,675
Consumer and other.......................................... 280 3,573 271 4,124
-------- -------- -------- ----------
Total fixed rate loans...................................... $ 38,938 $224,554 $102,831 $ 366,323
======== ======== ======== ==========
Variable rate loans:
Commercial.................................................. $634,590 $384,728 $ 63,267 $1,082,585
Real estate construction.................................... 50,953 8,054 14,081 73,088
Real estate term............................................ 16,592 30,469 2,261 49,322
Consumer and other.......................................... 40,834 7,480 11,940 60,254
-------- -------- -------- ----------
Total variable rate loans................................... $742,969 $430,731 $ 91,549 $1,265,249
======== ======== ======== ==========
Upon maturity, loans satisfying our credit quality standards may be eligible
for renewal. Such renewals are subject to the normal underwriting and credit
administration practices associated with new loans. We do not grant loans with
unconditional extension terms.
A substantial percentage of our loans are commercial in nature, and such
loans are generally made to emerging growth and middle-market companies in a
variety of industries. As of December 31, 1999, no single industry sector (as
identified by Standard Industrial Codes) represented more than 10.0% of our loan
portfolio.
LOAN ADMINISTRATION
Authority over our loan policies resides with our board of directors. This
authority is managed through the approval and periodic review of our loan
policies. The board of directors delegates authority to the directors' loan
committee to supervise our loan underwriting, approval and monitoring
activities. The directors' loan committee consists of outside board of directors
members and our chief executive officer, who serves as an alternate.
Subject to the oversight of the directors' loan committee, lending authority
is delegated to the chief credit officer and our internal loan committee which
consists of the chief credit officer, the chief executive officer of Silicon
Valley Bank and other senior members of our lending management. Requests for new
and existing credits which meet certain size and underwriting criteria may be
approved outside of our internal loan committee by designated senior lenders or
jointly with a senior credit officer.
31
CREDIT QUALITY AND THE ALLOWANCE FOR LOAN LOSSES
Credit risk is defined as the possibility of sustaining a loss because other
parties to the financial instrument fail to perform in accordance with the terms
of the contract. While we follow underwriting and credit monitoring procedures
which we believe are appropriate in growing and managing the loan portfolio, in
the event of nonperformance by these other parties, our potential exposure to
credit losses could significantly affect our consolidated financial position and
earnings.
Lending money involves an inherent risk of nonpayment. Through the
administration of loan policies and monitoring of the loan portfolio, our
management seeks to reduce such risks. The allowance for loan losses is an
estimate to provide a financial buffer for losses, both identified and
unidentified, in the loan portfolio.
We regularly review and monitor the loan portfolio to determine the risk
profile of each credit, and to identify credits whose risk profiles have
changed. This review includes, but is not limited to, such factors as payment
status, the financial condition of the borrower, borrower compliance with loan
covenants, underlying collateral values, potential loan concentrations, and
general economic conditions. We identify potential problem credits and, based
upon known information, we develop action plans.
We have established an evaluation process designed to determine the adequacy
of the allowance for loan losses. This process attempts to assess the risk of
losses inherent in the loan portfolio by segregating the allowance for loan
losses into three components: "specific," "loss migration," and "general." The
specific component is established by allocating a portion of the allowance for
loan losses to individual classified credits on the basis of specific
circumstances and assessments. The loss migration component is calculated as a
function of the historical loss migration experience of the internal loan credit
risk rating categories. The general component, composed of allocated and
unallocated portions that supplement the first two components, includes: our
management's judgment of the effect of current and forecasted economic
conditions on the borrowers' abilities to repay, an evaluation of the allowance
for loan losses in relation to the size of the overall loan portfolio, an
evaluation of the composition of, and growth trends within, the loan portfolio,
consideration of the relationship of the allowance for loan losses to
nonperforming loans, net charge-off trends, and other factors. While this
evaluation process uses historical and other objective information, the
classification of loans and the establishment of the allowance for loan losses,
relies, to a great extent, on the judgment and experience of our management.
32
An analysis of the allowance for loan losses for the past five years is as
follows:
December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- -------- -------- --------
(Dollars in thousands)
Balance at January 1,..................................... $ 46,000 $ 37,700 $32,700 $29,700 $20,000
Charge-offs:
Commercial.............................................. (34,312) (31,123) (9,236) (9,056) (4,248)
Real estate............................................. -- -- -- (634) (653)
Consumer and other...................................... (196) -- -- (38) (57)
-------- -------- ------- ------- -------
Total charge-offs......................................... (34,508) (31,123) (9,236) (9,728) (4,958)
-------- -------- ------- ------- -------
Recoveries:
Commercial.............................................. 7,849 1,897 3,170 2,050 3,106
Real estate............................................. 34 366 986 217 2,815
Consumer and other...................................... 18 1 13 35 --
-------- -------- ------- ------- -------
Total recoveries.......................................... 7,901 2,264 4,169 2,302 5,921
-------- -------- ------- ------- -------
Net (charge-offs) recoveries.............................. (26,607) (28,859) (5,067) (7,426) 963
Provision for loan losses................................. 52,407 37,159 10,067 10,426 8,737
-------- -------- ------- ------- -------
Balance at December 31,................................... $ 71,800 $ 46,000 $37,700 $32,700 $29,700
======== ======== ======= ======= =======
Net charge-offs (recoveries) to average total loans....... 1.7% 2.2% 0.5% 1.0% (0.1)%
======== ======== ======= ======= =======
The following table displays the allocation of the allowance for loan losses
among specific classes of loans:
December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996
------------------- ------------------- ------------------- --------
Percent Percent Percent
of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Commercial................. $49,985 95.5% $28,417 95.8% $30,394 89.5% $18,716
Real estate term........... 795 1.5 438 1.4 426 2.8 873
Real estate construction... 792 1.5 374 1.3 274 4.6 140
Consumer and other......... 757 1.5 434 1.5 386 3.1 615
Unallocated................ 19,471 N/A 16,337 N/A 6,220 N/A 12,356
------- ----- ------- ----- ------- ----- -------
Total...................... $71,800 100.0% $46,000 100.0% $37,700 100.0% $32,700
======= ===== ======= ===== ======= ===== =======
December 31,
------------------------------
1996 1995
-------- -------------------
Percent Percent
of Total of Total
Loans Amount Loans
-------- -------- --------
(Dollars in thousands)
Commercial................. 87.5% $16,176 84.3%
Real estate term........... 5.2 707 7.7
Real estate construction... 3.2 87 2.4
Consumer and other......... 4.1 339 5.6
Unallocated................ N/A 12,391 N/A
----- ------- -----
Total...................... 100.0% $29,700 100.0%
===== ======= =====
The allowance for loan losses totaled $71.8 million at December 31, 1999, an
increase of $25.8 million, or 56.1%, compared to $46.0 million at December 31,
1998. This increase was due to $52.4 million in additional provisions to the
allowance for loan losses, offset by net charge-offs of $26.6 million during
1999. The 1999 net charge-off amount was composed of $34.5 million in gross
charge-offs and $7.9 million in gross recoveries. The 1999 gross charge-offs
included a $7.4 million commercial credit in our financial services
(non-technology) niche and a $5.7 million commercial credit in our computers and
peripherals niche. Of the total 1999 gross charge-offs, $6.0 million were
classified as nonperforming loans at the end of 1998.
33
The unallocated component of the allowance for loan losses as of December
31, 1999 increased $3.1 million, or 19.2%, from the prior year end. This
increase reflects our decision to further bolster the allowance for loan losses
and maintain strong coverage ratios based on the economic uncertainty
surrounding many of our markets in 1999 and the higher than normal gross
charge-offs experienced throughout 1999.
The 1998 gross charge-off total included $17.4 million and $7.2 million in
charge-offs that were incurred during the third and fourth quarters of 1998,
respectively. Gross charge-offs for the third quarter of 1998, the largest of
which was $7.0 million, were primarily related to five commercial credits and
were not concentrated in any particular niche or industry. Of the total 1998
third quarter gross charge-offs, $8.1 million were classified as nonperforming
loans at the end of 1997.
We incurred $7.2 million in gross charge-offs during the fourth quarter of
1998, primarily centered in our QuickStart and bridge portfolios. Gross
charge-offs in the fourth quarter of 1998 included three bridge loans and four
QuickStart loans totaling $2.5 million and $1.9 million, respectively. Our
QuickStart product was based in large part on an analysis that indicates that
almost all venture capital-backed clients that receive a first round of equity
infusion from a venture capitalist will receive a second round. The analysis
indicated that the second round typically occurred 18 months after the first
round. Hence, proceeds from the second round could be used to pay off the
18-month term loan offered under the QuickStart product. However, the second
round has been occurring much sooner than expected and the additional cash
infusion has occasionally been depleted before 18 months. The likelihood of a
third round occurring is not as great as a second round and thus this resulted
in higher than anticipated charge-offs related to this product during the fourth
quarter of 1998.
Gross charge-offs for 1997 were $9.2 million, and included charge-offs
totaling $6.5 million related to two commercial credits, one in our technology
and life sciences niche and the other in one of our special industry niches.
Gross recoveries of $4.2 million in 1997 included $1.1 million related to a
commercial credit in one of our special industry niches that was partially
charged off in 1996. Gross charge-offs for 1996 were $9.7 million, and primarily
resulted from five credits, none of which were related to the Bank's technology
and life sciences niche. Gross recoveries of $2.3 million in 1996 included $0.9
million related to one commercial credit that was partially charged off in 1994.
Net loan recoveries in 1995 of $1.0 million included $2.7 million in recoveries
from a real estate client relationship that had been charged off in 1992 and
$1.1 million in recoveries related to a commercial credit that was partially
charged off in 1994.
Pursuant to a memorandum of understanding with our primary regulators,
Silicon Valley Bank has committed to further enhance its credit monitoring and
review policies and submit reports to the regulators regarding credit quality.
We have continued to evaluate both U.S. and international economic events
during 1999 and the forecasts for the U.S. economy for 2000, in an effort to
monitor the markets we serve. The outlook for the U.S. economy in 2000 is
uncertain and although no significant current or forecasted negative impact has
been identified with respect to our loan growth, credit quality, overall
financial condition, and results of operations, we have decided to bolster the
allowance for loan losses. Future events and circumstances surrounding the
economic conditions in the U.S. and elsewhere cannot be predicted, nor can the
impact of these future events and circumstances on our loan growth, credit
quality, overall financial condition, and results of operations be determined at
the present time.
34
We believe our allowance for loan losses is adequate as of December 31,
1999. However, future changes in circumstances, economic conditions or other
factors could cause us to increase or decrease the allowance for loan losses as
deemed necessary. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review our allowance for loan losses.
Such agencies may require us to make adjustments to the allowance for loan
losses based on their judgment of information available to them at the time of
their examination.
Nonperforming assets consist of loans that are past due 90 days or more
which are still accruing interest, loans on nonaccrual status and OREO and other
foreclosed assets. The table below sets forth certain data and ratios between
nonperforming loans, nonperforming assets and the allowance for loan losses.
During 1999, 1998 and 1997, our nonaccrual loans represented all impaired loans.
We measure all loans placed on nonaccrual status for impairment based on the
fair value of the underlying collateral or the net present value of the expected
cash flows in accordance with SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan."
December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands)
Nonperforming assets:
Loans past due 90 days or more.............................. $ 911 $ 441 $ 1,016 $ 8,556 $ 906
Nonaccrual loans............................................ 27,552 19,444 24,476 14,581 27,867
------- ------- ------- ------- -------
Total nonperforming loans................................... 28,463 19,885 25,492 23,137 28,773
OREO and other foreclosed assets............................ -- 1,800 1,858 1,948 4,955
------- ------- ------- ------- -------
Total nonperforming assets.................................. $28,463 $21,685 $27,350 $25,085 $33,728
======= ======= ======= ======= =======
Nonperforming loans as a percent of total loans............. 1.7% 1.2% 2.2% 2.7% 3.9%
Nonperforming assets as a percent of total assets........... 0.6% 0.6% 1.0% 1.3% 2.4%
Allowance for loan losses................................... $71,800 $46,000 $37,700 $32,700 $29,700
As a percent of total loans............................... 4.4% 2.8% 3.2% 3.8% 4.0%
As a percent of nonaccrual loans.......................... 260.6% 236.6% 154.0% 224.3% 106.6%
As a percent of nonperforming loans....................... 252.3% 231.3% 147.9% 141.3% 103.2%
The detailed composition of nonaccrual loans is presented in the following
table. There were no real estate construction or real estate term loans on
nonaccrual status at December 31, 1999 and 1998.
December 31,
-------------------
1999 1998
-------- --------
Commercial.................................................. $27,358 $18,979
Consumer and other.......................................... 194 465
------- -------
Total nonaccrual loans...................................... $27,552 $19,444
======= =======
Nonperforming loans totaled $28.5 million at December 31, 1999, an increase
of $8.6 million, or 43.1%, from the $19.9 million total at December 31, 1998. Of
the total nonperforming loans at year-end 1998, $6.0 million were charged off,
$0.2 million were placed on performing status and $13.2 million
35
were repaid during 1999. Additionally, $28.0 million in loans were placed on
nonperforming status during 1999 and still classified as nonperforming loans at
the end of 1999.
Nonperforming loans at the end of the 1999 fourth quarter included one
commercial credit totaling $7.4 million in our financial services
(non-technology) niche, which has been partially charged off, as described
above. This credit has been classified as nonperforming since March 31, 1999.
Our management believes this credit is adequately secured with collateral and
reserves, and that any future charge-offs associated with this loan will not
have a material impact on our future net income.
Nonperforming loans totaled $19.9 million at December 31, 1998, a decrease
of $5.6 million, or 22.0%, from the $25.5 million total at December 31, 1997. Of
the total nonperforming loans at year-end 1997, $10.0 million were charged off,
$7.4 million were placed on performing status and $4.8 million were repaid
during 1998. An additional $16.6 million in loans were placed on nonperforming
status during 1998 and still classified as nonperforming at December 31, 1998.
Nonperforming loans at December 31, 1997 totaled $25.5 million, an increase of
$2.4 million, or 10.2%, from the $23.1 million total at December 31, 1996, as a
$9.9 million net increase in nonaccrual loans during 1997 was largely offset by
the payoff during the first quarter of 1997 of one credit in excess of $8.0
million that was more than 90 days past due, and still accruing interest, as of
December 31, 1996. The increase in nonaccrual loans at December 31, 1997, from
the prior year end, was primarily due to two commercial credits totaling
approximately $14.1 million which were placed on nonaccrual status during the
last half of 1997, one of which was returned to performing status in the first
quarter of 1998 and the other was partially charged off in 1998, with the
remaining balance still in nonperforming. Nonperforming loans at December 31,
1996 included the aforementioned credit in excess of $8.0 million that was more
than 90 days past due, and still accruing interest, as of December 31, 1996. The
Export-Import Bank of the U.S. (EX-IM) provided us with a guarantee of this
credit facility, and we received the guarantee payment related to this credit
from the EX-IM in the first quarter of 1997.
In addition to the loans disclosed in the foregoing analysis, we have
identified four loans with principal amounts aggregating approximately $16.5
million, that, on the basis of information known to us, were judged to have a
higher than normal risk of becoming nonperforming. We are not aware of any other
loans where known information about possible problems of the borrower casts
serious doubts about the ability of the borrower to comply with the loan
repayment terms.
We held no OREO or other foreclosed assets at December 31, 1999. OREO or
other foreclosed assets totaled a combined $1.8 million at December 31, 1998.
The OREO and other foreclosed assets balance at December 31, 1998 consisted of
one OREO property and one other asset which was acquired through foreclosure,
both of which were sold during 1999. The OREO property consisted of multiple
undeveloped lots and was acquired by us prior to June 1993. The one other asset
acquired through foreclosure, which totaled $1.1 million at December 31, 1998,
consisted of a favorable leasehold right under a master lease which we acquired
upon foreclosure of a loan during 1997.
DEPOSITS
Our deposits are largely obtained from clients within our technology and
life sciences niche, and, to a lesser extent, from businesses within our special
industry niches and from individuals served by our
36
executive banking division. We do not obtain deposits from conventional retail
sources and do not accept brokered deposits. The following table presents the
composition of our deposits for the last five years:
December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Noninterest-bearing demand................... $1,928,100 $ 921,790 $ 788,442 $ 599,257 $ 451,318
NOW.......................................... 43,643 19,978 21,348 8,443 10,956
Regular money market......................... 363,920 350,110 351,921 326,661 288,619
Bonus money market........................... 1,481,457 1,835,249 1,146,075 754,730 473,717
Time......................................... 292,285 142,626 124,621 85,213 65,450
---------- ---------- ---------- ---------- ----------
Total deposits............................... $4,109,405 $3,269,753 $2,432,407 $1,774,304 $1,290,060
========== ========== ========== ========== ==========
Total deposits were $4.1 billion at December 31, 1999, an increase of $839.7
million, or 25.7%, from the prior year-end total of $3.3 billion. A significant
portion of the increase in deposits during 1999 was concentrated in our
noninterest-bearing demand deposits, which increased $1.0 billion, or 109.2%,
from the prior year end. This increase was explained by high levels of client
liquidity attributable to a strong inflow of investment capital into the venture
capital community and the equity markets, and by growth in the number of clients
served by us during 1999.
Client deposits in our bonus money market product totaled $1.5 billion at
December 31, 1999, a $353.8 million, or 19.3%, decrease from the $1.8 billion
prior year-end balance. Despite the high levels of client liquidity, our money
market deposits at December 31, 1999 decreased $340.0 million from the prior
year end. The decrease in money market deposits was the result of our lowering
bonus money market deposit rates 163 basis points during 1999 and marketing
higher-yielding off-balance sheet private label mutual fund products to clients.
We took this action in order to lower total assets and thereby increase our Tier
1 leverage capital ratio. See "Item 8. Financial Statements and Supplementary
Data--Note 17 to the Consolidated Financial Statements--Regulatory Matters."
The aggregate amount of time deposit accounts individually exceeding
$100,000 totaled $258.1 million and $122.8 million at December 31, 1999 and
1998, respectively. At December 31, 1999, all time deposit accounts exceeding
$100,000 were scheduled to mature within one year. No material portion of our
deposits has been obtained from a single depositor and the loss of any one
depositor would not materially affect our business.
Interest Rate Risk Management
A key objective of asset/liability management is to manage interest rate
risk associated with changing asset and liability cash flows and market interest
rate movements. Interest rate risk occurs when interest rate sensitive assets
and liabilities do not reprice simultaneously and in equal volumes. Our
asset/liability committee (ALCO) provides oversight to our interest rate risk
management process and recommends policy guidelines regarding exposure to
interest rates for approval by our board of directors. Adherence to these
policies is monitored on an ongoing basis, and decisions related to the
management of interest rate exposure are made when appropriate and agreed to by
our ALCO.
37
We manage interest rate risk principally through strategies involving our
investment securities portfolio, including adjusting both the maturity structure
of the portfolio and the amount of interest rate sensitive securities. Our
policies also permit the limited use of off-balance sheet derivative instruments
in managing interest rate risk. At December 31, 1999, we held one such
off-balance sheet derivative security in the form of an interest rate swap for a
notional principal amount of $150 million scheduled to mature on March 13, 2000.
This transaction was entered into as part of our normal interest rate risk
management process. See "Item 8. Financial Statements and Supplementary
Data--Note 14 to the Consolidated Financial Statements--Financial Instruments
With Off-Balance Sheet Risk" for additional related discussion.
Our monitoring activities related to managing interest rate risk include
both interest rate sensitivity "gap" analysis and the use of a simulation model.
While traditional gap analysis provides a simple picture of the interest rate
risk embedded in the balance sheet, it provides only a static view of interest
rate sensitivity at a specific point in time and does not measure the potential
volatility in forecasted results relating to changes in market interest rates
over time. Accordingly, we combine the use of gap analysis with use of a
simulation model which provides a dynamic assessment of interest rate
sensitivity.
The interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets anticipated to reprice within a specific time
period and the amount of funding sources anticipated to reprice within that same
time period. A gap is considered positive when the amount of interest rate
sensitive assets repricing within a specific time period exceeds the amount of
funding sources repricing within that same time period. Positive cumulative gaps
in early time periods suggest that earnings will increase when interest rates
rise. Negative cumulative gaps suggest that earnings will increase when interest
rates fall. Our policy guidelines provide that the cumulative one-year gap as a
percentage of interest-earning assets should not exceed 20.0%. The gap analysis
as of December 31, 1999 indicates that we were positioned within these
guidelines as the cumulative one-year gap as a percentage of interest-earning
assets was 8.6%. The following table illustrates our interest rate sensitivity
gap positions at December 31, 1999.
38
Interest Rate Sensitivity Analysis as of December 31, 1999
Assets and liabilities which mature or reprice
------------------------------------------------------------------
After 1 After 3 After 6
Immedi- 1 Day to 1 Month to Months to Months to
ately Month 3 Months 6 Months 1 Year
------------ ------------ ---------- ---------- ----------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
Federal funds sold and securities
purchased under agreement to
resell (1)........................ -- $ 898,041 -- -- --
---------- ---------- -------- -------- --------
Investment securities:
U.S. Treasury and agencies
obligations (2)................. -- 1 $ 34,216 $ 31,276 $ 4,825
Collateralized mortgage
obligations and mortgage-backed
securities (2).................. -- 2,544 5,208 8,086 17,024
Obligations of states and
political subdivisions.......... -- 63,860 544 1,506 7,019
Commercial paper and other debt
securities...................... -- 117,084 -- -- --
Other equity securities (3)....... -- 27,103 -- -- --
---------- ---------- -------- -------- --------
Total investment securities......... -- 210,592 39,968 40,868 28,868
---------- ---------- -------- -------- --------
Loans (4), (5)...................... $1,192,994 23,636 48,268 20,862 43,488
---------- ---------- -------- -------- --------
Total interest-earning assets....... $1,192,994 $1,132,269 $ 88,236 $ 61,730 $ 72,356
========== ========== ======== ======== ========
FUNDING SOURCES:
Money market and NOW deposits..... -- $1,889,020 -- -- --
Time deposits..................... -- 204,781 $ 39,399 $ 19,214 $ 28,884
---------- ---------- -------- -------- --------
Total interest-bearing deposits..... -- 2,093,801 39,399 19,214 28,884
Trust preferred securities.......... -- -- -- -- --
Portion of noninterest-bearing
funding sources................... -- -- -- -- --
---------- ---------- -------- -------- --------
Total funding sources............... -- $2,093,801 $ 39,399 $ 19,214 $ 28,884
========== ========== ======== ======== ========
OFF-BALANCE SHEET ITEMS:
Interest rate swap................ $ (150,000) -- $150,000 -- --
========== ========== ======== ======== ========
GAP................................. $1,042,994 $ (961,532) $198,837 $ 42,516 $ 43,472
Cumulative Gap...................... $1,042,994 $ 81,462 $280,299 $322,815 $366,287
Assets and liabilities which mature or reprice
----------------------------------------------------------
After 1 Year
to 5 Years After 5 Years Not Stated Total
------------ ------------- ------------ ------------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
Federal funds sold and securities
purchased under agreement to
resell (1)........................ -- -- -- $ 898,041
---------- ---------- ----------- ----------
Investment securities:
U.S. Treasury and agencies
obligations (2)................. $ 815,050 -- -- 885,368
Collateralized mortgage
obligations and mortgage-backed
securities (2).................. 128,000 222,912 -- 383,774
Obligations of states and
political subdivisions.......... 30,059 93,408 -- 196,396
Commercial paper and other debt
securities...................... -- -- -- 117,084
Other equity securities (3)....... -- -- $ 137,683 164,786
---------- ---------- ----------- ----------
Total investment securities......... 973,109 316,320 137,683 1,747,408
---------- ---------- ----------- ----------
Loans (4), (5)...................... 267,200 -- 26,557 1,623,005
---------- ---------- ----------- ----------
Total interest-earning assets....... $1,240,309 $ 316,320 $ 164,240 $4,268,454
========== ========== =========== ==========
FUNDING SOURCES:
Money market and NOW deposits..... -- -- -- $1,889,020
Time deposits..................... $ 7 -- -- 292,285
---------- ---------- ----------- ----------
Total interest-bearing deposits..... 7 -- -- 2,181,305
Trust preferred securities.......... -- $ 38,537 -- 38,537
Portion of noninterest-bearing
funding sources................... -- -- $ 2,048,612 2,048,612
---------- ---------- ----------- ----------
Total funding sources............... $ 7 $ 38,537 $ 2,048,612 $4,268,454
========== ========== =========== ==========
OFF-BALANCE SHEET ITEMS:
Interest rate swap................ -- -- -- --
========== ========== =========== ==========
GAP................................. $1,240,302 $ 277,783 $(1,884,372) --
Cumulative Gap...................... $1,606,589 $1,884,372 -- --
- ----------------------------------------
(1) Includes interest-bearing deposits in other financial institutions of $291
as of December 31, 1999.
(2) Principal cash flows are based on estimated principal payments as of
December 31, 1999.
(3) Not stated column consists of investments in equity securities, tax credit
funds, venture capital funds, and Federal Reserve Bank stock as of December
31, 1999.
(4) Not stated column consists of nonaccrual loans of $27,552 and overdrafts of
$7,571, offset by unearned income of $8,566 as of December 31, 1999.
(5) Maturity/repricing columns for fixed rate loans are based upon the amount
and timing of related principal payments as of December 31, 1999.
One application of the aforementioned simulation model involves measurement
of the impact of market interest rate changes on the net present value of
estimated cash flows from our assets, liabilities and off-balance sheet items,
defined as our market value of portfolio equity (MVPE). This analysis assesses
the changes in market values of interest rate sensitive financial instruments,
which would occur in response to an instantaneous and sustained increase or
decrease in market interest rates of 100 and 200 basis points, and the resulting
effect on our MVPE. Policy guidelines establish maximum variances in our MVPE of
20.0% and 30.0% in the event of an instantaneous and sustained increase or
decrease in market interest rates of 100 and 200 basis points, respectively. At
December 31, 1999, our MVPE exposure related to the aforementioned changes in
market interest rates was within policy guidelines.
39
The following table presents our MVPE exposure at December 31, 1999 and
December 31, 1998 related to an instantaneous and sustained increase or decrease
in market interest rates of 100 and 200 basis points, respectively.
Estimated Increase/
(Decrease) in MVPE
Change in Interest Estimated --------------------------
Rates (Basis Points) MVPE Amount Percent
- -------------------- ---------- --------- --------
(Dollars in thousands)
December 31, 1999:
+200 $736,488 $ (8,426) (1.1)%
+100 738,983 (5,931) (0.8)
-- 744,914 -- --
-100 744,983 69 --
-200 725,329 (19,585) (2.6)
December 31, 1998:
+200 $211,016 $(26,635) (11.2)%
+100 223,368 (14,283) (6.0)
-- 237,651 -- --
-100 249,595 11,944 5.0
-200 260,655 23,004 9.7
The preceding table indicates that at December 31, 1999, in the event of an
instantaneous and sustained increase or decrease in market interest rates, our
MVPE would be expected to decrease slightly or remain unchanged.
The market value calculations supporting the results in the preceding table
are based on the present value of estimated cash flows utilizing both market
interest rates provided by independent broker/dealers and other publicly
available sources which we deem reliable. These calculations do not contemplate
any changes that our ALCO could make to reduce our MVPE exposure in response to
a change in market interest rates.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the preceding table. For
example, although certain of our assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. In addition, the interest rates on certain of
our asset and liability categories may precede, or lag behind, changes in market
interest rates. Also, the actual rates of prepayments on loans and investments
could vary significantly from the assumptions utilized in deriving the results
as presented in the preceding table. Further, a change in U.S. Treasury rates
accompanied by a change in the shape of the treasury yield curve could result in
different MVPE estimations from those presented herein. Accordingly, the results
in the preceding table should not be relied upon as indicative of actual results
in the event of changing market interest rates. Additionally, the resulting MVPE
estimates are not intended to represent, and should not be construed to
represent, the underlying value.
40
The simulation model also provides the ALCO with the ability to simulate our
net interest income using an interest rate forecast (simple simulation). In
order to measure, as of December 31, 1999, the sensitivity of our forecasted net
interest income to changing interest rates, utilizing the simple simulation
methodology, both a rising and falling interest rate scenario were projected and
compared to a base market interest rate forecast derived from the treasury yield
curve. For the rising and falling interest rate scenarios, the base market
interest rate forecast was increased or decreased, as applicable, by 200 basis
points in 12 equal increments over a one-year period. Our policy guidelines
provide that the difference between a base market interest rate forecast
scenario over the succeeding one-year period compared with the aforementioned
rising and falling interest rate scenarios over the same time period should not
result in net interest income sensitivity exceeding 20.0%. Simulations as of
December 31, 1999 indicated that we were well within these policy guidelines.
Interest rate risk is the most significant market risk impacting us. Other
types of market risk affecting us in the normal course of our business
activities include foreign currency exchange risk and equity price risk. The
impact on us, resulting from these latter two market risks, is deemed immaterial
and no separate quantitative information concerning market rate and price
exposure is presented herein. We do not maintain a portfolio of trading
securities and do not intend to engage in such activities in the immediate
future.
LIQUIDITY
Another important objective of asset/liability management is to manage
liquidity. The objective of liquidity management is to ensure that funds are
available in a timely manner to meet loan demand and depositors' needs, and to
service other liabilities as they come due, without causing an undue amount of
cost or risk, and without causing a disruption to normal operating conditions.
We regularly assess the amount and likelihood of projected funding
requirements through a review of factors such as historical deposit volatility
and funding patterns, present and forecasted market and economic conditions,
individual client funding needs, and existing and planned business activities.
Our ALCO provides oversight to the liquidity management process and recommends
policy guidelines, subject to board of directors approval, and courses of action
to address our actual and projected liquidity needs.
The ability to attract a stable, low-cost base of deposits is our primary
source of liquidity. Other sources of liquidity available to us include
short-term borrowings, which consist of federal funds purchased, security
repurchase agreements and other short-term borrowing arrangements. Our liquidity
requirements can also be met through the use of our portfolio of liquid assets.
Our definition of liquid assets includes cash and cash equivalents in excess of
the minimum levels necessary to carry out normal business operations, federal
funds sold, securities purchased under resale agreements, investment securities
maturing within six months, investment securities eligible and available for
pledging purposes with a maturity in excess of six months, and anticipated near
term cash flows from investments.
Our policy guidelines provide that liquid assets as a percentage of total
deposits should not fall below 20.0%. At December 31, 1999, our ratio of liquid
assets to total deposits was 55.7%. This ratio is well in excess of our minimum
policy guideline and is higher than the comparable ratio of 52.5% as of December
31, 1998. In addition to monitoring the level of liquid assets relative to total
deposits, we also utilize other policy measures in our liquidity management
activities. As of December 31, 1999 and 1998, we were in compliance with all of
these policy measures.
41
In analyzing our liquidity during 1999, reference is made to our
consolidated statement of cash flows for the year ended December 31, 1999 (see
"Item 8. Financial Statements and Supplementary Data"). The statement of cash
flows includes separate categories for operating, investing and financing
activities. Operating activities included net income of $52.2 million for 1999,
which was adjusted for certain non-cash items including the provision for loan
losses, depreciation, deferred income taxes, and an assortment of other
miscellaneous items. Investing activities consisted primarily of both proceeds
from and purchases of investment securities, which resulted in a net cash
outflow of $284.2 million, and the net change in total loans resulting from loan
originations and principal collections, which resulted in a net cash outflow of
$44.2 million in 1999. Financing activities reflected the net change in our
total deposits, which increased $839.7 million during 1999, and net cash
proceeds received during the year from the issuance of common stock totaling
$58.9 million. In total, the transactions noted above resulted in a net cash
inflow of $653.9 million for 1999 and total cash and cash equivalents, as
defined in our consolidated statement of cash flows, of $1.2 billion at December
31, 1999.
Capital Resources
Our management seeks to maintain adequate capital to support anticipated
asset growth and credit risks, and to ensure that Silicon and Silicon Valley
Bank are in compliance with all regulatory capital guidelines. Our primary
sources of new capital include the issuance of trust preferred securities and
common stock, as well as retained earnings.
In the fourth quarter of 1999, we issued 1.4 million shares of common stock
at $42.00 per share. We received proceeds of $55.1 million related to the sale
of these securities, net of underwriting commissions and other offering
expenses. In addition, in 1998 we issued $40.0 million in cumulative trust
preferred securities through a newly formed special-purpose trust, SVB Capital
I. The securities had an offering price (liquidation amount) of $25 per security
and distributions at a fixed rate of 8.25% are paid quarterly. The securities
have a maximum maturity of 30 years and qualify as Tier 1 capital under the
capital guidelines of the Federal Reserve Board. We received proceeds of $38.5
million related to the sale of these securities, net of underwriting commissions
and other offering expenses. The trust preferred securities are presented as a
separate line item in the consolidated balance sheet under the caption "Company
obligated mandatorily redeemable trust preferred securities of subsidiary trust
holding solely junior subordinated debentures." For additional related
discussion, see "Item 8. Financial Statements and Supplementary Data--Note 9 to
the Consolidated Financial Statements--Trust Preferred Securities."
Stockholders' equity totaled $368.9 million at December 31, 1999, an
increase of $153.0 million, or 70.9%, from the $215.9 million balance at
December 31, 1998. This increase was primarily due to 1999 net income of $52.2
million, net proceeds from the common stock issuance of $55.1 million and an
increase in after-tax net unrealized gains on available-for-sale securities of
$39.6 million. We have not paid a cash dividend on our common stock since 1992,
and we do not have any material commitments for capital expenditures as of
December 31, 1999.
42
The table below presents the relationship between the following significant
financial ratios:
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
Return on average assets.................................... 1.3% 1.0% 1.3%
DIVIDED BY
Average equity as a percentage of average assets............ 6.0% 6.6% 7.1%
EQUALS
Return on average equity.................................... 21.9% 14.5% 18.2%
TIMES
Earnings retained........................................... 100.0% 100.0% 100.0%
EQUALS
Internal capital growth..................................... 21.9% 14.5% 18.2%
Both Silicon and Silicon Valley Bank are subject to capital adequacy
guidelines issued by the Federal Reserve Board. Under these capital guidelines,
the minimum total risk-based capital ratio and Tier 1 risk-based capital ratio
requirements are 10.0% and 6.0%, respectively, of risk-weighted assets and
certain off-balance sheet items for a well capitalized depository institution.
The Federal Reserve Board has also established minimum capital leverage
ratio guidelines for state member banks. The ratio is determined using Tier 1
capital divided by quarterly average total assets. The guidelines require a
minimum of 5.0% for a well capitalized depository institution.
Both Silicon's and Silicon Valley Bank's capital ratios were in excess of
regulatory guidelines for a well capitalized depository institution as of
December 31, 1999, 1998, and 1997. Capital ratios for Silicon and Silicon Valley
Bank are set forth below:
December 31,
------------------------------
1999 1998 1997
-------- -------- --------
Silicon Valley Bancshares:
Total risk-based capital ratio.............................. 15.5% 11.5% 11.5%
Tier 1 risk-based capital ratio............................. 14.3% 10.3% 10.2%
Tier 1 leverage ratio....................................... 8.8% 7.6% 7.1%
Silicon Valley Bank:
Total risk-based capital ratio.............................. 14.0% 10.2% 10.8%
Tier 1 risk-based capital ratio............................. 12.7% 9.0% 9.6%
Tier 1 leverage ratio....................................... 7.9% 6.6% 6.6%
The increase in the total risk-based capital ratio and the Tier 1 risk-based
capital ratio at the end of 1999 from the prior year end was primarily
attributable to an increase in Tier 1 capital. This increase was due to both the
issuance of common stock during 1999, which generated net proceeds of $55.1
million, and internally generated capital, primarily net income of $52.2
million. The Tier 1 leverage ratio also improved as of December 31, 1999 when
compared to December 31, 1998, although not as significantly as the risk-based
capital ratios, due to an increase in quarterly average total assets partially
offsetting the increase in Tier 1 capital. Quarterly average total assets
increased due to the strong growth in deposits during 1999.
43
In an informal arrangement with Silicon Valley Bank's primary banking
regulators, pursuant to a memorandum of understanding entered into in late
September 1999, Silicon Valley Bank has agreed to maintain a Tier 1 leverage
ratio of at least 7.25%. As of December 31, 1999, we were in compliance with
this term of the memorandum of understanding
Silicon's total risk-based capital ratio at the end of 1998 was unchanged
from the prior year end and Tier 1 risk-based capital ratio was slightly higher
than the prior year end, as growth in Tier 1 capital was offset by an increase
in total assets. This increase in total assets was largely in lower
risk-weighted categories and resulted from our strong deposit growth exceeding
our loan growth during 1998. Our Tier 1 leverage ratio increased to 7.6% from
7.1% at December 31, 1997. This increase was partially achieved through the
issuance of $40.0 million in cumulative trust preferred securities during 1998
through SVB Capital I.
44
Risk Factors
OUR BUSINESS IS SUBJECT TO A NUMBER OF RISKS, INCLUDING THOSE DESCRIBED
BELOW.
If a significant number of clients fail to perform under their loans, our
business, profitability and financial condition would be adversely affected.
As a lender, the largest risk we face is the possibility that a significant
number of our client borrowers will fail to pay their loans when due. If
borrower defaults cause losses in excess of our allowance for loan losses, it
could have an adverse affect on our business, profitability and financial
condition. We have established an evaluation process designed to determine the
adequacy of the allowance for loan losses. While this evaluation process uses
historical and other objective information, the classification of loans and the
establishment of loan losses is dependent to a great extent on our experience
and judgment. We cannot assure you that our loan loss reserves will be
sufficient to absorb future loan losses or prevent a material adverse effect on
our business, profitability or financial condition.
Because of the credit profile of our loan portfolio, our levels of nonperforming
assets and charge-offs can be volatile, and we may need to make material
provisions for loan losses in any period, which could cause reduced net income
or net losses in that period.
Our loan portfolio has a credit profile different from that of most other
banking companies. Many of our loans are made to companies in the early stages
of development with negative cash flow and no established record of profitable
operations. In some cases, repayment of the loan is dependent upon receipt of
additional equity financing from venture capitalists or others. Collateral for
many of the loans often includes intellectual property, which is difficult to
value and may not be readily salable in the case of a default. Because of the
intense competition and rapid technological change which characterizes the
companies in our technology and life sciences niche, a borrower's financial
position can deteriorate rapidly. We also make loans which are larger relative
to the revenues of the borrower than those made by traditional small business
lenders, so the impact of any single borrower default may be more significant to
us.
Because of these characteristics, our level of nonperforming loans and loan
charge-offs can be volatile and can vary materially from period to period. For
example, our nonperforming loans totaled:
- $28.5 million, or 1.7% of total loans, at December 31, 1999
- $35.5 million, or 2.1% of total loans, at September 30, 1999
- $47.4 million, or 3.0% of total loans, at June 30, 1999
- $51.7 million, or 3.2% of total loans, at March 31, 1999
- $19.9 million, or 1.2% of total loans, at December 31, 1998
Changes in our level of nonperforming loans may require us to make material
provisions for loan losses in any period, which could reduce our net income or
cause net losses in that period. For example, our provision for loan losses was
$12.1 million for the three months ended December 31, 1999 and $52.4 million for
the year ended December 31, 1999, as compared to $17.1 million and $37.2
million, respectively, for the comparable 1998 periods.
45
If the amount of capital available to start-up and emerging growth companies
decreases, it could adversely affect our business, profitability and growth
prospects.
Our strategy has focused on providing banking products and services to
start-up and emerging growth companies receiving financial support from
sophisticated investors, including venture capital, "angel" and corporate
investors. In some cases, our lending credit decision is based on our analysis
of the likelihood that our venture capital or "angel"-backed client will receive
a second or third round of equity infusion from investors. If the amount of
capital available to start-up and emerging growth companies decreases, it is
likely that the number of our new clients and the financial support investors
provide to our existing borrowers would decrease which could have an adverse
effect on our business, profitability and growth prospects. Among the factors
that could affect the amount of capital available to start-up and emerging
growth companies is the receptivity of the capital markets to initial public
offerings or mergers and acquisitions of companies within our technology and
life sciences niche, the availability and return on alternative investments and
general economic conditions in the technology and life sciences industries.
We are subject to extensive regulation that could limit or restrict our
activities and impose financial requirements or limitations on the conduct of
our business. We are currently party to a memorandum of understanding with our
primary banking regulators which requires us to increase capital and restricts
our ability to declare dividends and take other actions without regulatory
consent.
Silicon and Silicon Valley Bank are extensively regulated under both federal
and state law. This regulation is intended primarily for the protection of
depositors and the deposit insurance fund and not for the benefit of
stockholders or security holders. Federal laws and regulations limit the
activities in which Silicon may engage as a bank holding company. In addition,
both Silicon and Silicon Valley Bank are required to maintain certain minimum
levels of capital. Federal and state banking regulators possess broad powers to
take supervisory action as they deem appropriate with respect to Silicon Valley
Bank and Silicon. Supervisory actions (such as the memorandum of understanding
described in the next paragraph) can result in higher capital requirements,
higher insurance premiums and limitations on the activities of Silicon or
Silicon Valley Bank which could have a material adverse effect on our business
and profitability.
Silicon Valley Bank is currently addressing issues raised by the Federal
Reserve Bank of San Francisco and the California Department of Financial
Institutions. In an informal arrangement with these regulators pursuant to a
memorandum of understanding entered into in September 1999, Silicon Valley Bank
has agreed to maintain a Tier 1 leverage ratio of at least 7.25%. Silicon Valley
Bank's Tier 1 leverage ratio was 7.9% at December 31, 1999. Silicon Valley Bank
has also committed to further enhance its credit review and monitoring
procedures and submit regular reports to the regulators regarding credit
quality. We will continue to pursue various strategies to comply with the
memorandum of understanding, including emphasizing off-balance sheet private
label mutual fund products to slow growth in deposits and restraining growth in
our average assets. However, if we fail to comply with our understanding with
the regulators, we could be subject to additional regulatory action which could
have an adverse effect on our growth and profitability.
As part of the memorandum of understanding, Silicon Valley Bank has agreed
to seek regulatory approval before making dividend payments to Silicon. Silicon
has also been directed to seek regulatory approval before declaring cash
dividends or dividends in kind, or repurchasing outstanding stock. We have not
paid dividends on our common stock since 1992 and do not anticipate paying
dividends on, or
46
repurchasing, our common stock in the foreseeable future. We received regulatory
approval to make the March 15, 2000 quarterly distribution on our 8.25%
cumulative trust preferred securities from cash which was available at Silicon.
If we do not receive approval to make future distributions on these securities,
we will be required to defer payment in accordance with the terms of these
securities. While the terms of the cumulative trust preferred securities allow
us to defer distributions for up to 20 consecutive quarters without triggering
any event of default, we cannot predict what effect any deferral would have on
our future ability to raise funds in the fixed income securities markets.
Silicon will also need regulatory approval before incurring debt, which could
reduce our financial flexibility, and before entering into agreements to acquire
entities or portfolios. This latter restriction could reduce our operational
flexibility in the few cases where we are not already legally required to seek
prior regulatory approval for acquisitions.
Our currently existing unrealized warrant and venture capital fund portfolio
gains may never be realized.
We have historically obtained rights to acquire stock, in the form of
warrants, in certain clients as part of negotiated credit facilities. We also
have made investments in venture capital funds from time to time. We may not be
able to realize gains from these equity instruments in future periods, or our
realized gains may be materially less than the current level of unrealized gains
disclosed in this filing, due to fluctuations in the market prices of the
underlying common stock of these companies. The timing and amount of income, if
any, from the disposition of client warrants and venture capital fund
investments typically depend upon factors beyond our control, including the
general condition of the public equity markets, levels of mergers and
acquisitions activity, and legal and contractual restrictions on our ability to
sell the underlying securities. Therefore, we cannot predict future gains with
any degree of accuracy and any gains are likely to vary materially from period
to period. In addition, a significant portion of the income we realize from the
disposition of client warrants and venture capital fund investments may be
offset by expenses related to our efforts to build an infrastructure sufficient
to support our present and future business activities, as well as by expenses
incurred in evaluating and pursuing new business opportunities, or by increases
to our provision for loan losses.
Public offerings and mergers and acquisitions involving our clients can cause
loans to be paid off early, which could adversely affect our business and
profitability. We experienced only modest loan growth in 1999, primarily as a
result of this phenomenon.
While an active market for public equity offerings and mergers and
acquisitions generally has positive implications for our business, one negative
consequence is that our clients may pay off or reduce their loans with us if
they complete a public equity offering or are acquired or merge with another
company. Any significant reduction in our outstanding loans could have a
material adverse effect on our business and profitability. Our total loans, net
of unearned income, at December 31, 1999, were $1.6 billion, relatively
unchanged from the prior year end. While we continue to generate new loans in
most of our technology and life sciences and special industry niche practices,
as well as in specialized lending products, many of our clients, primarily in
the technology and life sciences niche practice, have received significant cash
inflows from the capital markets and venture capital community. Consequently, we
have experienced higher than normal loan paydowns and payoffs, which has caused
our total loans to remain relatively unchanged during 1999.
47
Our current level of interest rate spread may decline in the future. Any
material reduction in our interest spread could have a material impact on our
business and profitability.
A major portion of our net income comes from our interest rate spread, which
is the difference between the interest rates paid by us on interest-bearing
liabilities, such as deposits and other borrowings, and the interest rates we
receive on interest-earning assets, such as loans extended to our clients and
securities held in our investment portfolio. Interest rates are highly sensitive
to many factors that are beyond our control, such as inflation, recession,
global economic disruptions, and unemployment. In late 1999, we reduced the
interest rates which we pay on deposits, despite a generally increasing trend in
domestic interest rates, and our rates are now lower than those of some of our
competitors. We reduced our rates as part of our balance sheet management
efforts. In the future, we may be required to increase our deposit rates to
attract deposits. We cannot assure you that our current level of interest rate
spread will not decline in the future. Any material decline would have a
material adverse effect on our business and profitability.
Adverse changes in domestic or global economic conditions, especially in the
technology sector, could have a material adverse effect on our business, growth
and profitability.
If conditions worsen in the domestic or global economy, especially in the
technology sector, our business, growth and profitability are likely to be
materially adversely affected. Our technology clients would be harmed by any
global economic slowdown, as their businesses are often dependent upon
international suppliers and international sales. They would also be harmed if
the U.S. economy were to decline, as most of their sales generally are made
domestically. They may be particularly sensitive to any disruption in the growth
of the technology sector of the U.S. economy. To the extent that our clients'
underlying business is harmed, they are more likely to default on their loans.
If we fail to retain our key employees, our growth and profitability could be
adversely affected.
We rely on experienced client relationship managers and on officers and
employees with strong relationships with the venture capital community to
generate new business. If a significant number of these employees were to leave
us, our growth and profitability could be adversely affected. We believe that
our employees frequently have opportunities for alternative employment with
competing financial institutions and with our clients.
We cannot assure you that we will be able to maintain our historical levels of
profitability in the face of sustained competitive pressures.
We cannot assure you that we will be able to maintain our historical levels
of profitability in the face of sustained competitive pressures. Other banks and
specialty and diversified financial services companies, many of which are larger
and better capitalized than we are, offer lending, leasing and other financial
products to our customer base. In some cases, our competitors focus their
marketing on our niche practice areas and seek to increase their lending and
other financial relationships with technology companies, early stage growth
companies or special industries such as wineries or real estate. In other cases,
our competitors may offer a financial product which provides an alternative to
one of the products we offer to all our customers. When new competitors seek to
enter one of our markets, or when existing market participants seek to increase
their market share, they sometimes undercut the pricing and/or credit terms
prevalent in that market. Our pricing and credit terms could deteriorate if we
act to meet these competitive challenges.
48
The price of our common stock may decrease rapidly.
The market price of our common stock could decrease in price rapidly at any
time. The market price of our common stock has fluctuated in recent years. Since
January 1, 1998, the market price of our common stock has ranged from a low of
$10.31 per share to a high of $55.22 per share. Fluctuations may occur, among
other reasons, in response to:
- operating results;
- announcements by competitors;
- economic changes;
- general market conditions; and
- legislative and regulatory changes.
The trading price of our common stock may continue to be subject to wide
fluctuations in response to the factors set forth above and other factors, many
of which are beyond our control. The stock market in recent years has
experienced extreme price and trading volume fluctuations that often have been
unrelated or disproportionate to the operating performance of individual
companies. We believe that investors should consider the likelihood of these
market fluctuations before investing in our common stock.
Litigation could have a material adverse effect on our business, growth and
profitability.
Certain lawsuits and claims arising in the ordinary course of business have
been filed or are pending against us and/or Silicon Valley Bank. Based upon
information available to us, our review of such claims to date and consultation
with our legal counsel, we believe the liability relating to these actions, if
any, will not have a material adverse effect on our liquidity, consolidated
financial position or results of operations. However, future legal claims could
have a material adverse effect on our business and profitability.
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
[LOGO]
The Board of Directors and Stockholders
Silicon Valley Bancshares:
We have audited the accompanying consolidated balance sheets of Silicon
Valley Bancshares and subsidiaries (the Company) as of December 31, 1999 and
1998, and the related consolidated statements of income, comprehensive income,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Silicon
Valley Bancshares and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Mountain View, California
January 20, 2000
50
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------
1999 1998
----------- -----------
(Dollars in thousands,
except par value)
Assets
Cash and due from banks..................................... $ 278,061 $ 123,001
Federal funds sold and securities purchased under agreement
to resell................................................. 898,041 399,202
Investment securities, at fair value........................ 1,747,408 1,397,502
Loans, net of unearned income............................... 1,623,005 1,611,921
Allowance for loan losses................................... (71,800) (46,000)
---------- ----------
Net loans................................................... 1,551,205 1,565,921
Premises and equipment...................................... 10,742 11,354
Other real estate owned..................................... -- 664
Accrued interest receivable and other assets................ 110,941 47,808
---------- ----------
Total assets................................................ $4,596,398 $3,545,452
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand................................ $1,928,100 $ 921,790
NOW....................................................... 43,643 19,978
Money market.............................................. 1,845,377 2,185,359
Time...................................................... 292,285 142,626
---------- ----------
Total deposits.............................................. 4,109,405 3,269,753
Other liabilities........................................... 79,606 21,349
---------- ----------
Total liabilities........................................... 4,189,011 3,291,102
---------- ----------
Company obligated mandatorily redeemable trust preferred
securities of subsidiary trust holding solely junior
subordinated debentures (trust preferred securities)...... 38,537 38,485
Stockholders' equity:
Preferred stock, $0.001 par value, 20,000,000 shares
authorized; none outstanding
Common stock, $0.001 par value, 60,000,000 shares
authorized; 22,400,368 and 20,711,915 shares outstanding
at December 31, 1999 and 1998, respectively............... 22 21
Additional paid-in capital.................................. 153,440 94,108
Retained earnings........................................... 176,053 123,855
Unearned compensation....................................... (2,327) (4,191)
Accumulated other comprehensive income:
Net unrealized gains on available-for-sale investments.... 41,662 2,072
---------- ----------
Total stockholders' equity.................................. 368,850 215,865
---------- ----------
Total liabilities and stockholders' equity.................. $4,596,398 $3,545,452
========== ==========
See notes to consolidated financial statements.
51
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in thousands,
except per share amounts)
Interest income:
Loans..................................................... $162,973 $139,136 $106,840
Investment securities..................................... 87,692 64,787 41,868
Federal funds sold and securities purchased under
agreement to resell..................................... 31,204 21,305 17,264
-------- -------- --------
Total interest income....................................... 281,869 225,228 165,972
-------- -------- --------
Interest expense:
Deposits.................................................. 76,430 78,609 55,148
Other borrowings.......................................... -- 4 --
-------- -------- --------
Total interest expense...................................... 76,430 78,613 55,148
-------- -------- --------
Net interest income......................................... 205,439 146,615 110,824
Provision for loan losses................................... 52,407 37,159 10,067
-------- -------- --------
Net interest income after provision for loan losses......... 153,032 109,456 100,757
-------- -------- --------
Noninterest income:
Disposition of client warrants............................ 33,003 6,657 5,480
Letter of credit and foreign exchange income.............. 14,027 7,397 4,512
Client investment fees.................................... 4,529 473 299
Deposit service charges................................... 2,764 1,730 1,772
Investment gains.......................................... 1,056 5,240 90
Other..................................................... 3,476 1,665 1,112
-------- -------- --------
Total noninterest income.................................... 58,855 23,162 13,265
-------- -------- --------
Noninterest expense:
Compensation and benefits................................. 75,896 44,232 40,084
Professional services..................................... 11,766 9,876 6,710
Net occupancy expense..................................... 6,689 5,195 3,410
Business development and travel........................... 6,644 6,025 4,514
Furniture and equipment................................... 6,178 6,667 3,620
Trust preferred securities distributions.................. 3,300 2,012 --
Postage and supplies...................................... 2,582 2,225 1,600
Advertising and promotion................................. 2,285 2,215 1,448
Telephone................................................. 1,846 2,157 1,444
Cost of other real estate owned........................... 268 (1,214) 76
Other..................................................... 8,205 4,255 3,395
-------- -------- --------
Total noninterest expense................................... 125,659 83,645 66,301
-------- -------- --------
Income before income tax expense............................ 86,228 48,973 47,721
Income tax expense.......................................... 34,030 20,117 20,043
-------- -------- --------
Net income.................................................. $ 52,198 $ 28,856 $ 27,678
======== ======== ========
Basic earnings per share.................................... $ 2.53 $ 1.42 $ 1.43
Diluted earnings per share.................................. $ 2.46 $ 1.38 $ 1.36
======== ======== ========
See notes to consolidated financial statements.
52
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in thousands)
Net income.................................................. $ 52,198 $ 28,856 $ 27,678
Other comprehensive income/(loss), net of tax:
Change in unrealized gains/(losses) on available-for-sale
investments:
Unrealized holding gains arising during the period...... 60,196 6,672 3,194
Less: Reclassification adjustment for gains included in
net income............................................ (20,606) (7,019) (3,231)
-------- -------- --------
Other comprehensive income/(loss)........................... 39,590 (347) (37)
-------- -------- --------
Comprehensive income........................................ $ 91,788 $ 28,509 $ 27,641
======== ======== ========
See notes to consolidated financial statements.
53
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998, and 1997
--------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other
---------------------- Paid-in Retained Unearned Comprehensive
Shares Amount Capital Earnings Compensation Income Total
----------- -------- ---------- ---------- ------------ ------------- ----------
(Dollars in thousands)
Balance at December 31, 1996....... 18,659,986 $19 $ 65,949 $ 67,321 $ (345) $ 2,456 $135,400
Common stock issued under employee
benefit plans.................... 1,280,488 1 12,890 -- (6,416) -- 6,475
Income tax benefit from stock
options exercised and vesting of
restricted stock................. -- -- 4,150 -- -- -- 4,150
Net income......................... -- -- -- 27,678 -- -- 27,678
Amortization of unearned
compensation..................... -- -- -- -- 815 -- 815
Other comprehensive income:
Net change in unrealized gains/
(losses) on available-for-sale
investments.................... -- -- -- -- -- (37) (37)
---------- --- -------- -------- ------- ------- --------
Balance at December 31, 1997....... 19,940,474 20 82,989 94,999 (5,946) 2,419 174,481
---------- --- -------- -------- ------- ------- --------
Common stock issued under employee
benefit plans.................... 771,441 1 7,953 -- (207) -- 7,747
Income tax benefit from stock
options exercised and vesting of
restricted stock................. -- -- 3,166 -- -- -- 3,166
Net income......................... -- -- -- 28,856 -- -- 28,856
Amortization of unearned
compensation..................... -- -- -- -- 1,962 -- 1,962
Other comprehensive income:
Net change in unrealized gains/
(losses) on available-for-sale
investments.................... -- -- -- -- -- (347) (347)
---------- --- -------- -------- ------- ------- --------
Balance at December 31, 1998....... 20,711,915 21 94,108 123,855 (4,191) 2,072 215,865
---------- --- -------- -------- ------- ------- --------
Issuance of common stock, net of
offering costs of $3.7 million... 1,400,000 1 55,071 -- -- -- 55,072
Common stock issued under employee
benefit plans.................... 288,453 -- 3,512 -- 97 -- 3,609
Income tax benefit from stock
options exercised and vesting of
restricted stock................. -- -- 749 -- -- -- 749
Net income......................... -- -- -- 52,198 -- -- 52,198
Amortization of unearned
compensation..................... -- -- -- -- 1,767 -- 1,767
Other comprehensive income:
Net change in unrealized gains/
(losses) on available-for-sale
investments.................... -- -- -- -- -- 39,590 39,590
---------- --- -------- -------- ------- ------- --------
Balance at December 31, 1999....... 22,400,368 $22 $153,440 $176,053 $(2,327) $41,662 $368,850
========== === ======== ======== ======= ======= ========
See notes to consolidated financial statements.
54
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
(Dollars in thousands)
Cash flows from operating activities:
Net income................................................ $ 52,198 $ 28,856 $ 27,678
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................... 52,407 37,159 10,067
Depreciation and amortization........................... 3,266 1,837 1,334
Net gain on sales of investment securities.............. (1,056) (5,240) (90)
Net gain on sales of other real estate owned............ -- (1,298) (45)
Increase in accrued interest receivable................. (12,474) (1,570) (7,519)
Deferred income tax benefit............................. (11,989) (5,346) (1,358)
Increase (decrease) in unearned income.................. (1,436) 1,993 2,351
Other, net.............................................. (2,894) 5,024 965
----------- ----------- -----------
Net cash provided by operating activities................... 78,022 61,415 33,383
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities and paydowns of investment
securities.............................................. 1,130,975 1,810,770 1,149,471
Proceeds from sales of investment securities.............. 577,773 850,879 139,451
Purchases of investment securities........................ (1,992,948) (3,033,517) (1,671,449)
Net increase in loans..................................... (44,156) (470,392) (323,909)
Proceeds from recoveries of charged off loans............. 7,901 2,264 4,169
Net proceeds from sales of other real estate owned........ 400 1,323 1,304
Purchases of premises and equipment....................... (2,654) (8,909) (1,691)
----------- ----------- -----------
Net cash applied to investing activities.................... (322,709) (847,582) (702,654)
----------- ----------- -----------
Cash flows from financing activities:
Net increase in deposits.................................. 839,652 837,347 658,103
Proceeds from issuance of common stock, net of issuance
costs................................................... 58,934 5,706 4,823
Proceeds from issuance of trust preferred securities, net
of issuance costs....................................... -- 38,485 --
----------- ----------- -----------
Net cash provided by financing activities................... 898,586 881,538 662,926
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........ 653,899 95,371 (6,345)
Cash and cash equivalents at January 1,..................... 522,203 426,832 433,177
----------- ----------- -----------
Cash and cash equivalents at December 31,................... $ 1,176,102 $ 522,203 $ 426,832
=========== =========== ===========
Supplemental disclosures:
Interest paid............................................. $ 76,250 $ 78,445 $ 54,891
Income taxes paid......................................... $ 54,760 $ 16,900 $ 19,772
Non-cash investing activities:
Transfer of loans to other real estate owned and other
foreclosed assets....................................... $ -- $ -- $ 1,169
=========== =========== ===========
See notes to consolidated financial statements.
55
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Silicon Valley Bancshares and its
subsidiaries (the "Company") conform with generally accepted accounting
principles and prevailing practices within the banking industry. Certain
reclassifications have been made to the Company's 1998 and 1997 consolidated
financial statements to conform to the 1999 presentations. Such
reclassifications had no effect on the results of operations or stockholders'
equity. The following is a summary of the significant accounting and reporting
policies used in preparing the consolidated financial statements.
NATURE OF OPERATIONS
Silicon Valley Bancshares is a bank holding company whose principal
subsidiary is Silicon Valley Bank (the "Bank"), a California-chartered bank with
headquarters in Santa Clara, California. The Bank maintains regional banking
offices in California, and additionally has loan offices in Arizona, Colorado,
Georgia, Illinois, Massachusetts, Minnesota, Oregon, Pennsylvania, Texas,
Virginia, and Washington. The Bank serves emerging growth and middle-market
companies in targeted niches, focusing on the technology and life sciences
industries, while also identifying and capitalizing on opportunities to serve
companies in other industries whose financial services needs are underserved.
Substantially all of the assets, liabilities and earnings of the Company relate
to its investment in the Bank.
CONSOLIDATION
The consolidated financial statements include the accounts of Silicon Valley
Bancshares and those of its wholly owned subsidiaries, the Bank, SVB Capital I
and SVB Leasing Company (inactive). Intercompany accounts and transactions have
been eliminated.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
judgments that affect the reported amounts of assets and liabilities as of the
balance sheet date and the results of operations for the period. Actual results
could differ from those estimates. A material estimate that is particularly
susceptible to possible change in the near term relates to the determination of
the allowance for loan losses. An estimate of possible changes or range of
possible changes cannot be made.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents as reported in the consolidated statements of cash
flows includes cash on hand, cash balances due from banks, federal funds sold,
and securities purchased under agreement to resell. The cash equivalents are
readily convertible to known amounts of cash and present insignificant risk of
changes in value due to maturity dates of 90 days or less.
56
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell as
reported in the consolidated balance sheets includes interest-bearing deposits
in other financial institutions of $291,000 and $202,000 at December 31, 1999
and 1998, respectively.
INVESTMENT SECURITIES
Investment securities are classified as either "available-for-sale,"
"held-to-maturity" or "trading" upon acquisition.
Securities that are held to meet investment objectives such as interest rate
risk and liquidity management, but which may be sold by the Company as needed to
implement management strategies, are classified as available-for-sale and are
accounted for at fair value. The Company records unrealized gains or losses on
warrant, equity and venture capital fund investments upon the establishment of a
readily determinable fair value of the underlying security. Unrealized gains and
losses on available-for-sale securities, after applicable taxes, are excluded
from earnings and are reported as a separate component of stockholders' equity
until realized. Currently, all securities held by the Company are classified as
available-for-sale.
Securities acquired with the ability and positive intent to hold to maturity
are classified as held-to-maturity and are accounted for at historical cost,
adjusted for the amortization of premiums or the accretion of discounts to
maturity, where appropriate. Unrealized losses on held-to-maturity securities
are realized and charged against earnings when it is determined that an other
than temporary decline in value has occurred.
Securities acquired and held principally for the purpose of sale in the near
term are classified as trading and are accounted for at fair value. Unrealized
gains and losses resulting from fair value adjustments on trading securities, as
well as gains and losses realized upon the sale of investment securities, are
included in noninterest income.
The amortization of premiums and the accretion of discounts are included in
interest income over the contractual terms of the underlying investment
securities using the interest method or the straight-line method, if not
materially different. Gains and losses realized upon the sale of investment
securities are computed on the specific identification method.
LOANS
Loans are reported at the principal amount outstanding, net of unearned
income. Unearned income includes both deferred loan origination and commitment
fees and costs. The net amount of unearned
57
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
income is amortized into loan interest income over the contractual terms of the
underlying loans and commitments using the interest method or the straight-line
method, if not materially different.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision charged to
expense. It is the Company's policy to charge off loans which, in the judgment
of management, are deemed to have a substantial risk of loss.
The allowance for loan losses is maintained at a level deemed adequate by
the Company, based upon various estimates and judgments, to provide for known
and inherent risks in the loan portfolio, including loan commitments. The
evaluation of the adequacy of the allowance for loan losses is based upon a
continuous review of a number of factors, including historical loss experience,
a review of specific loans, loan concentrations, prevailing and anticipated
economic conditions that may impact the borrowers' abilities to repay loans as
well as the value of underlying collateral, delinquency analysis, and an
assessment of credit risk in the loan portfolio established through an ongoing
credit review process by the Company and through periodic regulatory
examinations.
NONACCRUAL LOANS
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures" require the Company
to measure impairment of a loan based upon the present value of expected future
cash flows discounted at the loan's effective interest rate, except that as a
practical expedient, the Company may measure impairment based on the loan's
observable market price or the fair value of the collateral if the loan is
collateral-dependent. A loan is considered impaired when, based upon currently
known information, it is deemed probable that the Company will be unable to
collect all amounts due according to the contractual terms of the agreement.
Loans are placed on nonaccrual status when they become 90 days past due as
to principal or interest payments (unless the principal and interest are well
secured and in the process of collection), when the Company has determined,
based upon currently known information, that the timely collection of principal
or interest is doubtful, or when the loans otherwise become impaired under the
provisions of SFAS No. 114.
When a loan is placed on nonaccrual status, the accrued interest is reversed
against interest income and the loan is accounted for on the cash or cost
recovery method thereafter until qualifying for return to accrual status.
Generally, a loan will be returned to accrual status when all delinquent
principal and interest become current in accordance with the terms of the loan
agreement and full collection of the principal appears probable.
58
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
PREMISES AND EQUIPMENT
Premises and equipment are reported at cost, less accumulated depreciation
and amortization computed using the straight-line method over the estimated
useful lives of the assets or the terms of the related leases, whichever is
shorter. This time period may range from one to 10 years. The Company had no
capitalized lease obligations at December 31, 1999 and 1998.
OTHER REAL ESTATE OWNED
Loans secured by real estate are transferred to OREO at the time of
foreclosure. OREO is carried on the Company's balance sheet at the lower of the
recorded investment in the loan or the fair value of the property foreclosed
upon less estimated costs of disposal. Upon transfer of a loan to OREO, an
appraisal is obtained and any excess of the loan balance over the fair value of
the property less estimated costs of disposal is charged against the allowance
for loan losses. Revenues and expenses associated with OREO, and subsequent
adjustments to the fair value of the property and to the estimated costs of
disposal, are realized and reported as a component of noninterest expense when
incurred.
FOREIGN EXCHANGE FORWARD CONTRACTS
The Company enters into foreign exchange forward contracts with customers
involved in international trade finance activities, and enters into offsetting
foreign exchange forward contracts with correspondent banks to hedge against the
risk of fluctuations in foreign currency exchange rates related to the forward
contracts entered into with its customers. The notional, or contract, amounts
associated with these financial instruments are not recorded as assets or
liabilities in the Company's consolidated balance sheets. Fees on these foreign
exchange forward contracts are included in noninterest income when the contracts
are settled. Cash flows resulting from these financial instruments are
classified in the same category as the cash flows resulting from the items being
hedged. The Company is an end-user of these derivative financial instruments and
does not conduct trading activities for such instruments.
INCOME TAXES
The Company files a consolidated federal income tax return, and consolidated
or combined state income tax returns as appropriate. The Company's federal and
state income tax provisions are based upon taxes payable for the current year as
well as current year changes in deferred taxes related to temporary differences
between the tax basis and financial statement balances of assets and
liabilities. Deferred tax assets and liabilities are included in the
consolidated financial statements at currently enacted income tax rates
applicable to the period in which the deferred tax assets and liabilities are
expected to be realized. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for income taxes.
59
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123
establishes financial accounting and reporting standards for stock-based
compensation plans, including employee stock purchase plans, stock options and
restricted stock. SFAS No. 123 encourages all entities to adopt a fair value
method of accounting for stock-based compensation plans, whereby compensation
cost is measured at the grant date based on the fair value of the award and is
realized as an expense over the service or vesting period. However, SFAS No. 123
also allows an entity to continue to measure compensation cost for these plans
using the intrinsic value method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees," which is the method currently being
used by the Company. Under the intrinsic value method, compensation cost is
generally the excess, if any, of the quoted market price of the stock at the
grant date or other measurement date over the amount which must be paid to
acquire the stock.
The Company adopted SFAS No. 123 effective January 1, 1996, but continues to
account for employee and director stock-based compensation plans under the
intrinsic value accounting methodology prescribed by APB Opinion No. 25. SFAS
No. 123 requires that stock-based compensation to parties other than employees
and directors be accounted for under the fair value method.
COMMON STOCK SPLIT
On March 19, 1998, the Company's Board of Directors approved a two-for-one
stock split to stockholders of record at the close of business April 17, 1998,
effective May 1, 1998. All per share and shares outstanding data in the
accompanying consolidated financial statements have been restated to reflect the
stock split.
EARNINGS PER SHARE
The Company computes net income per share in accordance with SFAS No. 128,
"Earnings per Share." Under the provisions of SFAS No. 128, basic earnings per
share (EPS) excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
financial instruments or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
SEGMENT REPORTING
Management views the Company as one operating segment, therefore, separate
reporting of financial segment information is not considered necessary.
Management approaches the Company's principal subsidiary, the Bank, as one
business enterprise which operates in a single economic environment, since the
60
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
products and services, types of customers and regulatory environment all have
similar economic characteristics.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued and was effective for all fiscal years beginning
after June 15, 1999. SFAS No. 133 was subsequently amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
Effective Date of FASB Statement No. 133" and will now be effective for fiscal
years beginning after June 15, 2000, with early adoption permitted. SFAS No.
133, as amended, requires the Company to recognize all derivatives as either
assets or liabilities and measure those instruments at fair value. It further
provides criteria for derivative instruments to be designated as fair value,
cash flow and foreign currency hedges and establishes respective accounting
standards for reporting changes in the fair value of the derivative instruments.
Upon adoption, the Company will be required to adjust hedging instruments to
fair value in the balance sheet and recognize the offsetting gains or losses as
adjustments to be reported in net income or other comprehensive income, as
appropriate. The Company has not completed its assessment of the impact of SFAS
No. 133, as amended, on its consolidated financial position or results of
operations. The Company expects to adopt this statement on January 1, 2001.
REINCORPORATION
At the Annual Meeting of Shareholders, held on April 15, 1999, the
shareholders of a majority of the Company's outstanding common stock approved a
change in the Company's state of incorporation from California to Delaware. The
reincorporation was effective April 23, 1999 and provided for 60,000,000
authorized shares of common stock with a $0.001 par value per share and for
20,000,000 authorized shares of preferred stock with a $0.001 par value per
share. The accompanying consolidated financial statements have been
retroactively restated to give effect to the reincorporation. Such
reclassifications had no effect on the results of operations or stockholders'
equity.
61
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. EARNINGS PER SHARE
The following is a reconciliation of basic EPS to diluted EPS for the years
ended December 31, 1999, 1998 and 1997:
Years Ended December 31,
1999, 1998 and 1997
---------------------------------
Per Share
Net Income Shares Amount
---------- -------- ---------
(Dollars and shares in thousands,
except per share amounts)
1999:
Basic EPS:
Income available to common stockholders..................... $52,198 20,629 $2.53
Effect of Dilutive Securities:
Stock options and restricted stock.......................... -- 630 --
------- ------ -----
Diluted EPS:
Income available to common stockholders plus assumed
conversions............................................... $52,198 21,259 $2.46
======= ====== =====
1998:
Basic EPS:
Income available to common stockholders..................... $28,856 20,268 $1.42
Effect of Dilutive Securities:
Stock options and restricted stock.......................... -- 655 --
------- ------ -----
Diluted EPS:
Income available to common stockholders plus assumed
conversions............................................... $28,856 20,923 $1.38
======= ====== =====
1997:
Basic EPS:
Income available to common stockholders..................... $27,678 19,370 $1.43
Effect of Dilutive Securities:
Stock options and restricted stock.......................... -- 968 --
------- ------ -----
Diluted EPS:
Income available to common stockholders plus assumed
conversions............................................... $27,678 20,338 $1.36
======= ====== =====
3. RESTRICTIONS ON CASH BALANCES
The Bank is required to maintain reserves against customer deposits by
keeping balances with the Federal Reserve Bank of San Francisco in a
noninterest-bearing cash account. The minimum required reserve amounts were
$16.0 million and $4.7 million at December 31, 1999 and 1998, respectively. The
average required reserve balance totaled $7.0 million in 1999 and $4.2 million
in 1998
4. SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Securities purchased under agreement to resell outstanding at December 31,
1999 consisted of U.S. agency securities. At other times during the year, these
securities also consisted of U.S. Treasury securities. The securities underlying
the agreement are book-entry securities in the Bank's account at a correspondent
bank. Securities purchased under agreement to resell totaled $817.8 million at
December 31, 1999, averaged $335.2 million in 1999, and the maximum amount
outstanding at any month-end during 1999 was $817.8 million.
62
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. INVESTMENT SECURITIES
All investment securities were classified as available-for-sale at December
31, 1999 and 1998. The Company did not maintain a trading portfolio during 1999
or 1998. The following tables detail the major components of the Company's
investment securities portfolio at December 31, 1999 and 1998.
December 31, 1999
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
(Dollars in thousands)
Available-for-sale securities:
U.S. Treasury securities.................................... $ 30,001 -- $ (203) $ 29,798
U.S. agencies and corporations:
Discount notes and bonds.................................. 875,682 -- (20,112) 855,570
Mortgage-backed securities................................ 168,318 -- (6,496) 161,822
Collateralized mortgage obligations....................... 234,538 -- (12,586) 221,952
Obligations of states and political subdivisions............ 201,434 $ 23 (5,061) 196,396
Commercial paper and other debt securities.................. 117,084 -- -- 117,084
Money market mutual funds................................... 27,103 -- -- 27,103
Warrant securities.......................................... 204 68,154 -- 68,358
Venture capital fund investments............................ 10,061 42,500 -- 52,561
Other private equity investments............................ 2,122 2,306 -- 4,428
Federal Reserve Bank stock and tax credit funds............. 12,336 -- -- 12,336
---------- -------- -------- ----------
Total....................................................... $1,678,883 $112,983 $(44,458) $1,747,408
========== ======== ======== ==========
December 31, 1998
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
(Dollars in thousands)
Available-for-sale securities:
U.S. Treasury securities.................................... $ 40,977 $ 80 $ (8) $ 41,049
U.S. agencies and corporations:
Discount notes and bonds.................................. 497,046 970 -- 498,016
Mortgage-backed securities................................ 124,759 691 (391) 125,059
Collateralized mortgage obligations....................... 154,990 415 (256) 155,149
Obligations of states and political subdivisions............ 514,508 1,339 (77) 515,770
Commercial paper and other debt securities.................. 48,383 87 (6) 48,464
Warrant securities.......................................... 1 669 -- 670
Venture capital fund investments............................ 5,359 -- -- 5,359
Other private equity investments............................ 569 -- -- 569
Federal Reserve Bank stock and tax credit funds............. 7,397 -- -- 7,397
---------- -------- -------- ----------
Total....................................................... $1,393,989 $ 4,251 $ (738) $1,397,502
========== ======== ======== ==========
63
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. INVESTMENT SECURITIES (Continued)
The amortized cost and fair value of investment securities classified as
available-for-sale at December 31, 1999, categorized by remaining contractual
maturity, are shown below. Expected remaining maturities of mortgage-backed
securities, collateralized mortgage obligations and callable U.S. agency
securities will generally differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without penalties.
Warrant securities, venture capital fund investments, other private equity
investments, Federal Reserve Bank stock, and tax credit funds were included in
the table below as due after ten years.
December 31, 1999
-------------------------
Amortized
Cost Fair Value
----------- -----------
(Dollars in thousands)
Due in one year or less..................................... $ 225,590 $ 225,444
Due after one year though five years........................ 874,370 853,349
Due after five years through ten years...................... 124,250 118,913
Due after ten years......................................... 454,673 549,702
---------- ----------
Total....................................................... $1,678,883 $1,747,408
========== ==========
Investment securities with a fair value of $36.8 million and $42.2 million
at December 31, 1999 and 1998, respectively, were pledged to secure certain
public deposits and a line of credit at the Federal Reserve Bank of San
Francisco discount window.
Sales of available-for-sale investment securities resulted in the Company
realizing gross gains of $2.0 million, $5.3 million and $0.2 million, and gross
losses of $1.0 million, $0.1 million and $0.1 million in 1999, 1998 and 1997,
respectively.
6. LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The detailed composition of loans, net of unearned income of $8.6 million
and $10.0 million at December 31, 1999 and 1998, respectively, is presented in
the following table:
December 31,
-------------------------
1999 1998
----------- -----------
(Dollars in thousands)
Commercial.................................................. $1,414,728 $1,429,980
Real estate construction.................................... 76,209 74,023
Real estate term............................................ 67,738 60,841
Consumer and other.......................................... 64,330 47,077
---------- ----------
Total loans................................................. $1,623,005 $1,611,921
========== ==========
The Company's loan classifications for financial reporting purposes differ
from those for regulatory reporting purposes. Loans are classified for financial
reporting purposes based upon the purpose and primary source of repayment of the
loans. Loans are classified for regulatory reporting purposes based upon the
type of collateral securing the loans.
64
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Loans and the Allowance for Loan Losses (Continued)
As of December 31, 1999, there was no single industry sector (as identified
by Standard Industrial Codes) which represented more than 10% of the Company's
loan portfolio.
The activity in the allowance for loan losses is summarized below:
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Balance at January 1,....................................... $46,000 $37,700 $32,700
Provision for loan losses................................... 52,407 37,159 10,067
Loans charged off........................................... (34,508) (31,123) (9,236)
Recoveries.................................................. 7,901 2,264 4,169
------- ------- -------
Balance at December 31,..................................... $71,800 $46,000 $37,700
======= ======= =======
The aggregate recorded investment in loans for which impairment has been
determined in accordance with SFAS No. 114 totaled $27.6 million and $19.4
million at December 31, 1999 and 1998, respectively. Allocations of the
allowance for loan losses related to impaired loans totaled $14.9 million at
December 31, 1999 and $4.4 million at December 31, 1998. Average impaired loans
for 1999 and 1998 totaled $37.8 million and $26.2 million, respectively. If
these loans had not been impaired, $1.4 million and $2.5 million in interest
income would have been realized during the years ended December 31, 1999 and
1998, respectively. The Company realized no interest income on such impaired
loans during 1999 or 1998.
7. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
December 31,
-----------------------
1999 1998
---------- ----------
(Dollars in thousands)
Cost:
Furniture and equipment................................... $11,067 $ 9,716
Leasehold improvements.................................... 7,626 6,962
------- -------
Total cost.................................................. 18,693 16,678
Accumulated depreciation and amortization................... (7,951) (5,324)
------- -------
Premises and equipment-net.................................. $10,742 $11,354
======= =======
The Company is obligated under a number of noncancelable operating leases
for premises that expire at various dates through May 2005, and in most
instances, include options to renew or extend at market
65
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. PREMISES AND EQUIPMENT (Continued)
rates and terms. Such leases may provide for periodic adjustments of rentals
during the term of the lease based on changes in various economic indicators.
The following table presents minimum payments under noncancelable operating
leases as of December 31, 1999:
Years Ended December 31,
- ------------------------
(Dollars in thousands)
2000........................................................ $ 4,251
2001........................................................ 4,315
2002........................................................ 4,325
2003........................................................ 3,882
2004........................................................ 3,444
After 2004.................................................. 1,297
-------
Total....................................................... $21,514
=======
Rent expense for premises leased under operating leases totaled $3.8
million, $3.0 million and $2.0 million for the years ended December 31, 1999,
1998 and 1997, respectively.
8. DEPOSITS
The aggregate amount of time deposit accounts individually exceeding
$100,000 totaled $258.1 million and $122.8 million at December 31, 1999 and
1998, respectively. At December 31, 1999, all time deposit accounts exceeding
$100,000 were scheduled to mature within one year.
9. TRUST PREFERRED SECURITIES
In May 1998, the Company issued $40.0 million in cumulative trust preferred
securities through a newly formed special-purpose trust, SVB Capital I. The
trust is a wholly owned consolidated subsidiary of the Company and its sole
assets are the junior subordinated deferrable interest debentures. Distributions
are cumulative and are payable quarterly at a rate of 8.25% per annum of the
stated liquidation amount of $25 per preferred security. Distributions of $3.3
million and $2.0 million were paid for the years ended December 31, 1999 and
1998, respectively. The obligations of the trust are fully and unconditionally
guaranteed, on a subordinated basis, by the Company.
The trust preferred securities are mandatorily redeemable upon the maturity
of the debentures on June 15, 2028, or to the extent of any earlier redemption
of any debentures by the Company, and are callable beginning June 15, 2003.
Issuance costs of $1.6 million related to the trust preferred securities
were deferred and are being amortized over the period until mandatory redemption
of the securities in June 2028.
66
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. TRUST PREFERRED SECURITIES (Continued)
Based on the Nasdaq closing price, the fair value of the trust preferred
securities totaled $29.6 million and $36.4 million as of December 31, 1999 and
1998, respectively.
10. INCOME TAXES
The components of the Company's provision for income taxes consist of the
following:
Years Ended December 31,
-------------------------------
1999 1998 1997
--------- -------- --------
(Dollars in thousands)
Current provision:
Federal................................................... $ 36,089 $19,649 $16,287
State..................................................... 9,930 5,814 5,114
Deferred benefit:
Federal................................................... (10,198) (4,629) (1,328)
State..................................................... (1,791) (717) (30)
-------- ------- -------
Income tax expense.......................................... $ 34,030 $20,117 $20,043
======== ======= =======
A reconciliation between the federal statutory income tax rate and the
Company's effective income tax rate is shown below.
Years Ended
December 31,
------------------------------
1999 1998 1997
-------- -------- --------
Federal statutory income tax rate........................... 35.0% 35.0% 35.0%
State income taxes, net of the federal tax effect........... 6.1 6.8 6.9
Tax-exempt interest income.................................. (2.0) (2.0) (1.1)
Other-net................................................... 0.4 1.3 1.2
----- ----- -----
Effective income tax rate................................... 39.5% 41.1% 42.0%
===== ===== =====
67
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. INCOME TAXES (Continued)
Deferred tax assets (liabilities) consist of the following:
December 31,
-----------------------
1999 1998
---------- ----------
(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses................................. $28,138 $17,893
Other reserves not currently deductible................... 3,661 3,651
State income taxes........................................ 3,522 1,733
Depreciation and amortization............................. 1,891 1,884
------- -------
Gross deferred tax assets................................... 37,212 25,161
Less: Valuation allowance................................... -- --
------- -------
Gross deferred tax assets, net of valuation allowance....... 37,212 25,161
------- -------
Deferred tax liabilities:
Other deferred tax liabilities............................ (123) (61)
Net unrealized gain on available-for-sale securities...... (26,861) (1,441)
------- -------
Gross deferred tax liabilities.............................. (26,984) (1,502)
------- -------
Net deferred tax assets..................................... $10,228 $23,659
======= =======
The Company believes a valuation allowance is not needed to reduce the net
deferred tax assets as it is more likely than not that the net deferred tax
assets will be realized through recovery of taxes previously paid and/or future
taxable income. The amount of the total gross deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward periods are reduced.
11. COMPREHENSIVE INCOME
Components of other comprehensive income/(loss) and the related income tax
expense or benefit, consists of the following:
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Change in unrealized gains/(losses) on available-for-sale
investments:
Unrealized holding gains arising during the period........ $99,498 $11,310 $ 5,507
Related income tax expense................................ (39,302) (4,638) (2,313)
Less: Reclassification adjustment for gains included in
net income.............................................. (34,059) (11,897) (5,570)
Related income tax benefit................................ 13,453 4,878 2,339
------- ------- -------
Other comprehensive income/(loss)........................... $39,590 $ (347) $ (37)
======= ======= =======
68
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. EMPLOYEE BENEFIT PLANS
The Silicon Valley Bank 401(k) and Employee Stock Ownership Plan (the "Plan")
is a combined 401(k) tax-deferred savings plan and employee stock ownership plan
(ESOP) in which all employees of the Company are eligible to participate.
Employees participating in the 401(k) component of the Plan may elect to
have a portion of their salary deferred and contributed to the Plan. The amount
of salary deferred is not subject to federal or state income taxes at the time
of deferral. The Company matches up to $1,000 of an employee's contributions in
any plan year, with the Company's matching contribution vesting in equal annual
increments over five years. The Company's matching 401(k) contributions totaled
$0.6 million in 1999, $0.5 million in 1998 and $0.4 million in 1997.
The Silicon Valley Bank Money Purchase Pension Plan (the "MPP Plan")
guarantees a 5.0% quarterly contribution to all individuals that are employed by
the Company on the first and last day of a fiscal quarter. The Company
contributes cash in an amount equal to 5.0% of an eligible employee's quarterly
base salary, less Internal Revenue Code (IRC) Section 401(k) and Section 125
deferrals. The MPP Plan contributions vest in equal annual increments over five
years. The Company's contributions to the MPP Plan totaled $1.7 million in 1999,
$1.1 million in 1998 and $0.9 million in 1997.
Discretionary ESOP contributions, based on the Company's net income, are
made by the Company to all eligible individuals employed by the Company on the
last day of the fiscal year. The Company may elect to contribute cash, or the
Company's common stock, in an amount not exceeding 10.0% of the eligible
employee's base salary earned in the fiscal year, less IRC Section 401(k) and
Section 125 deferrals. The ESOP contributions vest in equal annual increments
over five years. The Company's contributions to the ESOP totaled $3.1 million in
1999 and $1.7 million in 1997. In 1998, the Company did not make a discretionary
ESOP contribution as net income for the year ended December 31, 1998 did not
meet the thresholds set by the Company's Board of Directors at the beginning of
1998. At December 31, 1999, the ESOP owned 768,135 equivalent shares of the
Company's common stock. All shares held by the ESOP are treated as outstanding
shares in both the Company's basic and diluted earnings per share computations.
The Company maintains an employee stock purchase plan (ESPP) under which
participating employees may annually contribute up to 10.0% of their gross
compensation to purchase shares of the Company's company stock at 85% of its
fair market value at either the beginning or end of each six-month offering
period, whichever price is less. All employees of the Company are eligible to
participate in the ESPP. The ESPP is noncompensatory to the employees and
results in no expense to the Company. For the first six-month offering period of
1999, 65,217 shares of the Company's common stock were issued at $14.48 per
share, while 43,540 shares of the Company's common stock were issued at $21.04
per share for the second six-month offering period of 1999. At December 31,
1999, a total of 993,721 shares of the Company's common stock were reserved for
future issuance under the ESPP Plan.
69
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. EMPLOYEE BENEFIT PLANS (Continued)
The Company's 1997 Equity Incentive Plan (the "1997 Plan"), along with the
Company's 1983 and 1989 stock option plans, provides for the granting of
incentive and non-qualified stock options which entitle directors, employees and
certain other parties to purchase shares of the Company's common stock at a
price not less than 100% and 85% of the fair market value of the common stock on
the date the option is granted for incentive and non-qualified stock options,
respectively. Options may vest over various periods not in excess of five years
from the date of grant and expire five to ten years from the date of grant. The
following table provides stock option information related to the 1983 and 1989
stock option plans and the 1997 Plan:
1999 1998 1997
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- --------- ---------- ---------
Outstanding at January 1,................. 1,577,087 $17.56 1,905,108 $11.68 2,068,710 $ 6.25
Granted................................. 530,000 18.64 381,090 29.12 828,000 17.08
Exercised............................... (155,993) 8.31 (616,631) 6.88 (918,712) 4.33
Forfeited............................... (49,465) 22.02 (92,480) 16.13 (72,890) 11.86
--------- ------ --------- ------ --------- ------
Outstanding at December 31,............... 1,901,629 $18.50 1,577,087 $17.56 1,905,108 $11.68
========= ====== ========= ====== ========= ======
Exercisable at December 31,............... 805,554 $14.74 670,987 $12.13 841,918 $ 8.07
========= ====== ========= ====== ========= ======
The following table summarizes information about stock options outstanding
as of December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Ranges of Number Contractual Average Number Average
Exercise Prices Outstanding Life in Years Exercise Price Exercisable Exercise Price
- --------------------- ----------- ------------- -------------- ----------- --------------
$6.82-$11.50 148,548 0.67 $ 7.70 148,548 $ 7.70
12.13-12.13 201,320 1.30 12.13 201,320 12.13
12.88-15.75 73,169 3.37 13.76 61,544 13.38
16.50-16.50 551,342 7.02 16.50 295,342 16.50
17.88-17.88 431,000 9.06 17.88 7,500 17.88
18.31-29.94 190,250 8.20 23.20 48,050 23.13
30.06-30.06 243,500 8.59 30.06 24,000 30.06
31.25-33.00 53,500 8.40 31.96 17,500 31.93
37.06-37.06 7,000 8.54 37.06 1,750 37.06
42.56-42.56 2,000 9.94 42.56 -- --
--------- ---- ------ ------- ------
$6.82-$42.56 1,901,629 6.61 $18.50 805,554 $14.74
========= ==== ====== ======= ======
70
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. EMPLOYEE BENEFIT PLANS (Continued)
At December 31, 1999, options for 88,571 shares were available for future
grant under the Company's 1997 plan. There were no shares available for future
grant under the Company's 1983 and 1989 stock option plans.
The Company's 1989 stock option plan and 1997 Plan also provide for the
granting of shares of the Company's common stock to directors, employees and
certain other parties. Shares granted to employees under these plans may be
subject to certain vesting requirements and resale restrictions (restricted
stock). For restricted stock, unearned compensation equivalent to the market
value of the Company's common stock on the date of grant is charged to
stockholders' equity and amortized into noninterest expense over the vesting
term. In 1999, 25,700 shares of restricted stock were issued to employees at a
weighted-average fair value of $20.68 per share. In 1998, 27,000 shares of
restricted stock were issued to employees at a weighted-average fair value of
$30.01 per share. In 1997, 220,600 shares of restricted stock were issued to
employees at a weighted-average fair value of $27.95 per share. At December 31,
1999, there were 232,057 shares of restricted stock outstanding, and the vesting
of these shares occurs at various periods through the year 2003.
The Company recognized $1.8 million, $2.0 million and $0.8 million in
employee stock-based compensation costs resulting from the amortization of
unearned compensation related to restricted stock, stock options and other
miscellaneous employee stock awards during 1999, 1998 and 1997, respectively.
The Company adopted SFAS No. 123 effective January 1, 1996, but continues to
account for employee and director stock-based compensation plans under the
intrinsic value accounting methodology prescribed by APB Opinion No. 25. SFAS
No. 123 requires that stock-based compensation to parties other than employees
and directors be accounted for under the fair value method. Accordingly, no
compensation cost has been recognized for the Company's stock option awards to
employees and directors and for shares issued under the ESPP to employees in
1999, 1998 and 1997. The weighted-average fair values of options granted to
employees, directors and certain other parties were $9.52, $12.39 and $8.16 per
share in 1999, 1998 and 1997, respectively. Had compensation cost related to
both the Company's stock option
71
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. EMPLOYEE BENEFIT PLANS (Continued)
awards to employees and directors and to the ESPP been determined under the fair
value method prescribed under SFAS No. 123, the Company's net income, basic
earnings per share and diluted earnings per share would have been the pro forma
amounts indicated below.
Years Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(Dollars in thousands, except per share
amounts)
Net income:
As reported............................................... $52,198 $28,856 $27,678
Pro forma................................................. 48,149 26,344 24,892
Basic earnings per share:
As reported............................................... $2.53 $1.42 $1.43
Pro forma................................................. 2.33 1.30 1.29
Diluted earnings per share:
As reported............................................... $2.46 $1.38 $1.36
Pro forma................................................. 2.30 1.27 1.23
The fair value of the stock option grants in 1999, 1998 and 1997 used in
determining the pro forma net income and the basic and diluted earnings per
share amounts indicated above were estimated using the Black-Scholes
option-pricing model with the following assumptions:
Years Ended December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Dividend yield.............................................. --% --% --%
Expected life of options in years........................... 5 5 5
Expected volatility of the Company's underlying common
stock..................................................... 49.7% 39.5% 44.7%
Expected risk-free interest rate............................ 6.3% 5.3% 6.3%
The expected volatility of the Company's underlying common stock and the
expected risk-free interest rate were calculated using a term commensurate with
the expected life of the options.
Compensation expense related to the ESPP in 1999, 1998 and 1997, used in
determining the pro forma net income and basic and diluted earnings per share
amounts indicated above, was equal to the difference between the fair value of
the Company's common stock when issued under the ESPP and the actual price paid
by employees to acquire the common stock.
72
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. RELATED PARTIES
Certain directors and employees have loan balances outstanding with the
Company at December 31, 1999 and 1998. These loans have primarily been granted
by the Company for the purpose of assisting employee relocations, and typically
include terms more favorable than those prevailing at the time for comparable
transactions with other borrowers.
Years Ended
December 31,
-------------------
1999 1998
-------- --------
(Dollars in
thousands)
Balance at January 1,....................................... $ 955 $ 250
Loan proceeds disbursed..................................... 1,100 1,005
Loan repayments............................................. (370) (300)
------ ------
Balance at December 31,..................................... $1,685 $ 955
====== ======
The Silicon Valley Bank Foundation (the "Foundation") was established by the
Company in 1995 to maintain good corporate citizenship in its communities. The
Foundation is funded entirely by the Company, and received contributions from
the Company totaling $2.1 million in 1999 and $0.1 million 1998 and 1997,
respectively.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company uses financial instruments
with off-balance sheet risk to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in foreign currency exchange rates and
market interest rates. These financial instruments include commitments to extend
credit, commercial and standby letters of credit, foreign exchange forward
contracts, and interest rate swap agreements. These instruments involve, to
varying degrees, elements of credit risk. Credit risk is defined as the
possibility of sustaining a loss because other parties to the financial
instrument fail to perform in accordance with the terms of the contract.
COMMITMENTS TO EXTEND CREDIT
A commitment to extend credit is a formal agreement to lend funds to a
customer as long as there is no violation of any condition established in the
agreement. Such commitments generally have fixed expiration dates, or other
termination clauses, and usually require a fee paid by the customer upon the
Company issuing the commitment. As of December 31, 1999 and 1998, the Company
had $1.2 billion and $859.2 million of unused loan commitments available to
customers, of which $132.3 million and $126.2 million had a fixed interest rate,
respectively. The Company's exposure arising from interest rate risk associated
with fixed rate loan commitments is not considered material. Commitments which
are unavailable for funding due to customers not meeting all collateral,
compliance and financial covenants required under
73
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (Continued)
loan commitment agreements totaled $1.6 billion and $1.7 billion at December 31,
1999 and 1998, respectively. The Company's potential exposure to credit loss, in
the event of nonperformance by the other party to the financial instrument, is
the contractual amount of the available unused loan commitment. The Company uses
the same credit approval and monitoring process in extending loan commitments as
it does in making loans. The actual liquidity needs or the credit risk that the
Company has experienced have historically been lower than the contractual amount
of commitments to extend credit because a significant portion of these
commitments expire without being drawn upon. The Company evaluates each
potential borrower and the necessary collateral on an individual basis. The type
of collateral varies, but may include real property, bank deposits, or business
and personal assets. The potential credit risk associated with these commitments
is considered in management's evaluation of the adequacy of the allowance for
loan losses.
COMMERCIAL AND STANDBY LETTERS OF CREDIT
Commercial and standby letters of credit represent conditional commitments
issued by the Company on behalf of a customer to guarantee the performance of
the customer to a third party when certain specified future events have
occurred. Commercial letters of credit are issued primarily for inventory
purchases by customers and are typically short-term in nature. Standby letters
of credit are typically issued as a credit enhancement for clients' contractual
obligations to third parties such as landlords. Letters of credit have fixed
expiration dates and generally require a fee paid by the customer upon the
Company issuing the commitment. Fees generated from these letters of credit are
recognized in noninterest income over the commitment period. At December 31,
1999 and 1998, commercial and standby letters of credit totaled a combined
$289.9 million and $151.3 million, respectively.
The credit risk involved in issuing letters of credit is essentially the
same as that involved with extending loan commitments to customers, and
accordingly, the Company uses a credit evaluation process and collateral
requirements similar to those for loan commitments. The actual liquidity needs
or the credit risk that the Company has experienced have historically been lower
than the contractual amount of letters of credit issued because a significant
portion of these conditional commitments expire without being drawn upon.
FOREIGN EXCHANGE FORWARD CONTRACTS
The Company enters into foreign exchange forward contracts with customers
involved in international trade finance activities, either as the purchaser or
seller of foreign currency at a future date, depending upon the customer need.
The Company enters into offsetting foreign exchange forward contracts with
correspondent banks to hedge against the risk of fluctuations in foreign
currency exchange rates related to the foreign exchange forward contracts
entered into with its customers. These contracts are short-term in nature,
typically expiring in less than 90 days. At December 31, 1999 and 1998, the
notional amounts of these contracts totaled $32.4 million and $77.1 million,
respectively. The maximum credit exposure for
74
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (Continued)
counterparty nonperformance for foreign exchange forward contracts with both
customers and correspondent banks amounted to $0.2 million at December 31, 1999
and $2.1 million at December 31, 1998. The Company has incurred no losses from
counterparty nonperformance and anticipates performance by all counterparties to
such foreign exchange forward contracts.
INTEREST RATE SWAP AGREEMENTS
During the fourth quarter of 1998, the Company entered into an interest rate
swap agreement with a maturity of one year in order to manage its exposure to
market interest rate movements by effectively converting a portion of its
interest-earning assets from variable rate to fixed rate. In the first quarter
of 1999, this agreement was amended to extend the maturity to March 13, 2000.
The face value of the interest rate swap at December 31, 1999 was $150.0
million. This agreement involves the exchange of variable rate payments for
fixed rate payments without the exchange of the underlying face value. Under
this agreement, the Company will receive fixed interest payments at a rate of
7.765% and will pay variable rate interest payments, based on the average
three-month U.S. Prime Rate. The U.S. Prime Rate at December 31, 1999 was 8.50%.
Interest rate differentials paid or received under this agreement are recognized
as an adjustment to interest income. The notional amount does not represent the
amount exchanged by the parties, and thus is not a measure of exposure of the
Company. The amounts exchanged are based on the notional amount and other terms
of the swap. The average variable rates are subject to change over time as the
U.S. Prime Rate fluctuates. The counterparty to the swap agreement is Bank of
America National Trust and Savings Association. The Company is exposed to credit
losses from counterparty nonperformance, but does not anticipate any losses from
this agreement. The Company does not hold interest rate swap agreements for
trading purposes.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair values for its financial
instruments. Fair value estimates, methods and assumptions, set forth below for
the Company's financial instruments, are made solely to comply with the
requirements of SFAS No. 107 and should be read in conjunction with the
Company's consolidated financial statements and related notes.
Fair values are based on estimates or calculations at the transaction level
using present value techniques in instances where quoted market prices are not
available. Because broadly traded markets do not exist for most of the Company's
financial instruments, the fair value calculations attempt to incorporate the
effect of current market conditions at a specific time. Fair valuations are
management's estimates of the values, and they are often calculated based on
current pricing policies, the economic and competitive environment, the
characteristics of the financial instruments, expected losses, and other such
factors. These calculations are subjective in nature, involve uncertainties and
matters of significant judgment, and
75
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
do not include tax ramifications; therefore, the results cannot be determined
with precision, substantiated by comparison to independent markets, and may not
be realized in an actual sale or immediate settlement of the instruments. There
may be inherent weaknesses in any calculation technique, and changes in the
underlying assumptions used, including discount rates and estimates of future
cash flows, could significantly affect the results. For all of these reasons,
the aggregation of the fair value calculations presented herein does not
represent, and should not be construed to represent, the underlying value of the
Company.
The following methods and assumptions have been used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate the value.
Cash and cash equivalents: This category includes cash and due from banks,
interest-bearing deposits in other financial institutions, federal funds sold,
and securities purchased under agreement to resell. The cash equivalents are
readily convertible to known amounts of cash and present insignificant risk of
changes in value due to maturity dates of 90 days or less. For these short-term
financial instruments, the carrying amount is a reasonable estimate of fair
value.
Investment securities: For investment securities classified as
available-for-sale, fair values are based on quoted market prices or dealer
quotes.
Loans: The fair value of fixed and variable rate loans is calculated by
discounting contractual cash flows using discount rates that reflect the
Company's current pricing for loans and the forward yield curve.
Deposits: The fair value of deposits is calculated by discounting the
deposit balances using the Company's cost of borrowing funds in the market and
the forward yield curve. The deposit portfolio was segregated by core and
non-core deposits. In addition, the duration and interest rate sensitivity of
the individual deposit accounts was taken into account in determining the fair
value. The December 31, 1998 estimated fair values were restated to reflect a
similar valuation.
Off-balance sheet financial instruments: The Company has not estimated the
fair value of off-balance sheet commitments to extend credit, commercial letters
of credit and standby letters of credit. Because of the uncertainty involved in
attempting to assess the likelihood and timing of a commitment being drawn upon,
coupled with the lack of an established market for these financial instruments,
management does not believe it is meaningful or practicable to provide an
estimate of fair value. The fair value of foreign exchange forward contracts and
interest rate swaps are based on the estimated amounts the Company would receive
or pay to terminate the contracts at the reporting date.
Limitations: The information presented herein is based on pertinent
information available to the Company as of December 31, 1999 and 1998,
respectively. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued since the most recent year end and the estimated
fair values of these financial instruments may have changed significantly since
that point in time.
76
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Company's financial instruments at December
31, 1999 and 1998 are presented below. Bracketed amounts in the estimated fair
value columns represent estimated cash outflows required to settle the
obligations at market rates as of the respective reporting dates.
December 31,
-----------------------------------------------------
1999 1998
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
(Dollars in thousands)
Financial Assets:
Cash and due from banks.................................. $ 278,061 $ 278,061 $ 123,001 $ 123,001
Federal funds sold and securities purchased under
agreement to resell.................................... 898,041 898,041 399,202 399,202
Investment securities, at fair value..................... 1,747,408 1,747,408 1,397,502 1,397,502
Net loans................................................ 1,551,205 1,555,729 1,565,921 1,598,052
Financial Liabilities:
Noninterest-bearing demand deposits...................... 1,928,100 1,671,647 921,790 829,553
NOW deposits............................................. 43,643 39,245 19,978 18,647
Money market deposits.................................... 1,845,377 1,735,982 2,185,359 2,124,151
Time deposits............................................ 292,285 291,412 142,626 142,806
Off-Balance Sheet Financial Instruments:
Foreign exchange forward contracts-receive............... -- 16,238 -- 40,193
Foreign exchange forward contracts-pay................... -- (16,238) -- (40,193)
Interest rate swap agreement............................. -- (211) -- 19
16. LEGAL MATTERS
Certain lawsuits and claims arising in the ordinary course of business have
been filed or are pending against the Company and/or the Bank. Based upon
information available to the Company, its review of such claims to date and
consultation with its legal counsel, management believes the liability relating
to these actions, if any, will not have a material adverse effect on the
Company's liquidity, consolidated financial position or results of operations.
17. REGULATORY MATTERS
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without the prior approval of the Federal Reserve Board and the
California Department of Financial Institutions. At December 31, 1999,
approximately $83.6 million of the Bank's retained earnings were available for
dividend declaration to the Company with prior regulatory approval.
77
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. REGULATORY MATTERS (Continued)
The Company and the Bank are subject to capital adequacy guidelines issued
by the Federal Reserve Board. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a material impact on the Company's
and/or the Bank's financial condition and results of operations. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's balance sheet items, as
well as certain off-balance sheet items, as calculated under regulatory
accounting practices. The Company's and the Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Under these capital guidelines, the minimum total risk-based capital ratio
and Tier 1 risk-based capital ratio requirements are 10.0% and 6.0%,
respectively, of risk-weighted assets and certain off-balance sheet items for a
well capitalized depository institution.
The Federal Reserve Board has also established minimum capital leverage
ratio guidelines for state member banks. The ratio is determined using Tier 1
capital divided by quarterly average total assets. The guidelines require a
minimum of 5.0% for a well capitalized depository institution.
In late September 1999, the Bank entered into an informal arrangement with
the Federal Reserve Bank of San Francisco and the California Department of
Financial Institutions, the Bank's primary banking regulators. Under the
informal arrangement (pursuant to a memorandum of understanding), the Bank has
committed to maintain a Tier 1 leverage ratio of at least 7.25%; obtain the
regulators' consent prior to payment of dividends; further enhance its credit
monitoring and review policies and submit reports to the regulators regarding
credit quality. The Federal Reserve Bank of San Francisco has directed the
Company to obtain its approval before incurring debt, paying dividends,
repurchasing capital stock, or entering into agreements to acquire any entities
or portfolios.
Management believes, as of December 31, 1999, that the Company and the Bank
meet all capital adequacy requirements to which they are subject and are in
compliance with the terms of the Bank's memorandum of understanding with its
primary regulators. As of December 31, 1999, the most recent notifications from
the Federal Reserve Board categorized the Company and the Bank as well
capitalized under the regulatory framework for prompt corrective action.
78
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. REGULATORY MATTERS (Continued)
The following table presents the capital ratios for the Company and the
Bank, compared to the minimum regulatory capital requirements for an adequately
capitalized depository institution, as of December 31, 1999 and 1998:
Minimum
Actual Actual Minimum Capital
Ratio Amount Ratio Requirement
-------- ---------- -------- -----------
(Dollars in thousands)
As of December 31, 1999:
Total risk-based capital ratio
Company................................................... 15.5% $398,268 8.0% $205,145
Bank...................................................... 14.0% $354,599 8.0% $202,824
Tier 1 risk-based capital ratio
Company................................................... 14.3% $365,724 4.0% $102,573
Bank...................................................... 12.7% $322,413 4.0% $101,412
Tier 1 leverage ratio
Company................................................... 8.8% $365,724 4.0% $165,901
Bank...................................................... 7.9% $322,413 4.0% $162,397
As of December 31, 1998:
Total risk-based capital ratio
Company................................................... 11.5% $283,159 8.0% $196,423
Bank...................................................... 10.2% $247,832 8.0% $193,896
Tier 1 risk-based capital ratio
Company................................................... 10.3% $252,279 4.0% $ 98,212
Bank...................................................... 9.0% $217,342 4.0% $ 96,948
Tier 1 leverage ratio
Company................................................... 7.6% $252,279 4.0% $133,128
Bank...................................................... 6.6% $217,342 4.0% $131,664
18. STOCKHOLDERS' RIGHTS PLAN
On October 22, 1998, the Company's Board of Directors adopted a stockholders
rights plan (the "Rights Plan") designed to protect the Company's stockholders
from various abusive takeover tactics, including attempts to acquire control of
the Company without offering a fair price to all stockholders. Under the Rights
Plan, each stockholder received a dividend of one right for each outstanding
share of common stock of the Company. The rights are attached to, and presently
only traded with, the common stock and are currently not exercisable. Except as
specified below, upon becoming exercisable, all rights holders will be entitled
to purchase from the Company 1/1000th of a share of the Company's preferred
stock at a price of $120.00
The rights become exercisable and will begin to trade separately from the
common stock of the Company upon the earlier of (i) the tenth day after a person
or group has acquired beneficial ownership of
79
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. STOCKHOLDERS' RIGHTS PLAN (Continued)
10% or more of the outstanding common stock of the Company or (ii) the tenth
business day after a person or group announces a tender or exchange offer, the
consummation of which would result in ownership by a person or group of 10% or
more of the Company's common stock. Each right will entitle the holder to
purchase common stock of the Company having a current market value of twice the
exercise price of the right. If the Company is acquired through a merger or
other business combination transaction or there is a sale of more than 50% of
the Company's assets or earning power, each right will entitle the holder (other
than rights held by the acquiring person) to purchase, at the exercise price,
common stock of the acquiring entity having a value of twice the exercise price
at the time.
The Company's Board of Directors has the option any time after a person or
group becomes a 10% holder of the outstanding common stock of the Company to
exchange all or part of the rights (other than rights held by the acquiring
person) for shares of common stock of the Company provided that the Company may
not make such an exchange after the person becomes the beneficial owner of 50%
or more of the Company's outstanding common stock.
The Company may redeem the rights for $0.001 each at any time on, or prior
to, public announcement that a person has acquired beneficial ownership of 10%
or more of the Company's common stock. The rights will expire on October 22,
2008, unless earlier redeemed or exchanged. The rights will not have any voting
rights, but will have the benefit of certain customary anti-dilution provisions.
The dividend distribution of the rights was not taxable to the Company or its
stockholders.
19. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The condensed balance sheets of Silicon Valley Bancshares (parent company
only) at December 31, 1999 and 1998, and the related condensed statements of
income and condensed statements of cash flows for the years ended December 31,
1999, 1998 and 1997 are presented below. Certain reclassifications have been
made to the parent company's 1998 and 1997 financial information to conform to
the 1999 presentations. Such reclassifications had no effect on the results of
operations or stockholders' equity.
80
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED BALANCE SHEETS
December 31,
-----------------------
1999 1998
---------- ----------
(Dollars in thousands)
Assets:
Cash on deposit with bank subsidiary...................... $ 1,313 $ 2,496
Securities purchased under agreement to resell............ 17,750 --
Investment securities, at fair value...................... 134,346 32,598
Loans to related parties.................................. 1,685 955
Other assets.............................................. 2,133 324
Investment in subsidiaries:
Bank subsidiary......................................... 295,395 219,019
Nonbank subsidiary...................................... 1,237 1,237
-------- --------
Total assets................................................ $453,859 $256,629
======== ========
Short-term liabilities...................................... $ 813 $ 626
Deferred tax liability...................................... 44,281 274
Indebtedness to nonbank subsidiary.......................... 41,379 41,379
Deferred issuance costs..................................... (1,464) (1,515)
-------- --------
Indebtedness to nonbank Subsidiary, net of deferred issuance
costs..................................................... 39,915 39,864
-------- --------
Stockholders' equity........................................ 368,850 215,865
-------- --------
Total liabilities and stockholders' equity.................. $453,859 $256,629
======== ========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in thousands)
Interest income............................................. $ 972 $ 1,050 $ 630
Interest expense............................................ (3,402) (2,070) --
Income from the disposition of client warrants.............. 33,003 6,657 5,480
Gains from venture capital fund distributions............... 1,510 -- --
General and administrative expenses......................... (562) (285) (229)
Income tax expense.......................................... (12,932) (2,248) (2,470)
-------- -------- --------
Income before equity in net income of bank subsidiary....... 18,589 3,104 3,411
Equity in net income of bank subsidiary..................... 33,609 25,752 24,267
-------- -------- --------
Net income.................................................. $ 52,198 $ 28,856 $ 27,678
======== ======== ========
81
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in thousands)
Cash flows from operating activities:
Net income................................................ $ 52,198 $ 28,856 $ 27,678
Adjustments to reconcile net income to net cash provided
by operating activities:
Gains from venture capital fund distributions........... (1,510) -- --
Equity in net income of bank subsidiary................. (33,609) (25,752) (24,267)
(Increase) decrease in other assets..................... (1,814) 192 (304)
Increase (decrease) in short-term and other
liabilities........................................... (172) 467 (876)
Other, net.............................................. 39 1 14
-------- -------- --------
Net cash provided by operating activities................... 15,132 3,764 2,245
-------- -------- --------
Cash flows from investing activities:
Net (increase) decrease in investment securities.......... 12,034 (29,377) 3,074
Net increase in loans to related parties.................. (730) (705) (250)
Investment in bank subsidiary............................. (69,200) (26,039) (7,115)
Investment in nonbank subsidiary.......................... -- (1,237) --
-------- -------- --------
Net cash applied to investing activities.................... (57,896) (57,358) (4,291)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance
costs................................................... 59,331 7,642 6,405
Proceeds from borrowings from nonbank subsidiary, net of
costs................................................... -- 39,864 --
-------- -------- --------
Net cash provided by financing activities................... 59,331 47,506 6,405
-------- -------- --------
Net increase (decrease) in cash............................. 16,567 (6,088) 4,359
Cash and cash equivalents at January 1,..................... 2,496 8,584 4,225
-------- -------- --------
Cash and cash equivalents at December 31,................... $ 1,313 $ 2,496 $ 8,584
======== ======== ========
82
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20. UNAUDITED QUARTERLY FINANCIAL DATA
1999 1998
----------------------------------------- -----------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)
Net interest income........ $41,402 $46,772 $54,389 $62,876 $31,937 $35,399 $38,456 $40,823
Provision for loan
losses................... 7,968 10,802 21,563 12,074 5,480 4,024 10,557 17,098
Noninterest income......... 5,252 6,458 13,414 33,731 5,391 4,435 7,716 5,620
Noninterest expense........ 25,537 27,797 29,716 42,609 18,904 21,773 21,063 21,905
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................... 13,149 14,631 16,524 41,924 12,944 14,037 14,552 7,440
Income tax expense......... 5,313 5,678 6,015 17,024 5,365 5,836 6,002 2,914
------- ------- ------- ------- ------- ------- ------- -------
Net income................. $ 7,836 $ 8,953 $10,509 $24,900 $ 7,579 $ 8,201 $ 8,550 $ 4,526
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share... $ 0.38 $ 0.44 $ 0.51 $ 1.19 $ 0.38 $ 0.40 $ 0.42 $ 0.22
Diluted earnings per
share.................... $ 0.38 $ 0.43 $ 0.50 $ 1.14 $ 0.36 $ 0.39 $ 0.41 $ 0.22
======= ======= ======= ======= ======= ======= ======= =======
83
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the sections titled "Proposal No. 1 Election
of Directors," "Information on Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" contained in the definitive proxy statement for
the Company's 2000 Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the sections titled "Information on
Executive Officers," "Report of the Executive Committee of the Board on
Executive Compensation," "Table 1--Summary Compensation Table," "Table 2--Option
Grants in Last Fiscal Year," "Table 3--Aggregated Option Exercises in Last
Fiscal Year and Fiscal Year-End Option Values," "Termination Arrangements,"
"Return to Stockholders Performance Graph," and "Director Compensation"
contained in the definitive proxy statement for the Company's 2000 Annual
Meeting of Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the sections titled "Security Ownership of
Directors and Executive Officers" and "Security Ownership of Principal
Stockholders" contained in the definitive proxy statement for the Company's 2000
Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the section titled "Certain Relationships
and Related Transactions" in the definitive proxy statement for the Company's
2000 Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2.
The financial statements and supplementary data contained in Item 8 of
this report are filed as part of this report. All schedules are omitted
because of the absence of the conditions under which they are required or
because the required information is included in the financial statements or
related notes.
(a) 3.
Exhibits are listed in the Index to Exhibits beginning on page 87 of
this report.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K on November 18, 1999.
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SILICON VALLEY BANCSHARES
By: /s/ JOHN C. DEAN
-----------------------------------------
John C. Dean
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: March 17, 2000
85
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
Signature Title Date
--------- ----- ----
/s/ DANIEL J. KELLEHER
------------------------------------------- Chairman of the Board of March 17, 2000
Daniel J. Kelleher Directors and Director
President, Chief Executive
/s/ JOHN C. DEAN Officer and Director
------------------------------------------- (Principal Executive March 17, 2000
John C. Dean Officer)
/s/ CHRISTOPHER T. LUTES
------------------------------------------- Executive Vice President, March 17, 2000
Christopher T. Lutes Chief Financial Officer
/s/ DONAL D. DELANEY
------------------------------------------- Senior Vice President, March 17, 2000
Donal D. Delaney Controller
/s/ GARY K. BARR
------------------------------------------- Director March 17, 2000
Gary K. Barr
/s/ JAMES F. BURNS, JR.
------------------------------------------- Director March 17, 2000
James F. Burns, Jr.
/s/ DAVID M. DEWILDE
------------------------------------------- Director March 17, 2000
David M. deWilde
/s/ STEPHEN E. JACKSON
------------------------------------------- Director March 17, 2000
Stephen E. Jackson
/s/ JAMES R. PORTER
------------------------------------------- Director March 17, 2000
James R. Porter
/s/ ANN R. WELLS
------------------------------------------- Director March 17, 2000
Ann R. Wells
86
INDEX TO EXHIBITS
Exhibit Sequentially
No. Description Numbered Page
- --------------------- ------------------------------------------------------------ -------------
3.1 Articles of Incorporation of the Company, as amended (9).... --
3.1a Certificate of Incorporation, as filed with the Delaware
Secretary of State on March 22, 1999 (13)................... --
3.2 Bylaws of the Company, amended and restated effective as of
August 21, 1997 (7)......................................... --
3.3 Certificate of Amendment of Bylaws of Silicon Valley
Bancshares as of October 22, 1998 (12)...................... --
3.4 Bylaws (13)................................................. --
4.1 Article Three of Articles of Incorporation (included in
Exhibit 3.1) (1)............................................ --
4.2 Form of Subordinated Indenture (10)......................... --
4.3 Form of Junior Subordinated Debenture (10).................. --
4.6 Form of Amended and Restated Trust Agreement of SVB Capital
I (10)...................................................... --
4.7 Form of Trust Preferred Certificate of SVB Capital I
(included as an exhibit to Exhibit 4.6) (10)................ --
4.8 Form of Guarantee Agreement (10)............................ --
4.9 Form of Agreement as to Expenses and Liabilities (included
as an exhibit to Exhibit 4.6) (10).......................... --
4.10 Form of Common Securities Certificate of SVB Capital I
(included as an exhibit to Exhibit 4.6) (10)................ --
4.11 Form of Officers' Certificate and Company Order (10)........ --
10.3 Employment Agreement between Silicon Valley Bancshares and
John C. Dean (2)............................................ --
10.17 Lease Agreement between Silicon Valley Bank and WRC
Properties, Inc.; 3003 Tasman Drive, Santa Clara, CA 95054
(3)......................................................... --
10.17a First amendment to lease outlined in Exhibit 10.17 (6)...... --
10.28 Amendment and Restatement of the Silicon Valley Bancshares
1989 Stock Option Plan (4).................................. --
10.29 Silicon Valley Bank Money Purchase Pension Plan (4)......... --
10.30 Amendment and Restatement of the Silicon Valley Bank Money
Purchase Pension Plan (4)................................... --
10.31 Amendment and Restatement of the Silicon Valley Bank 401(k)
and Employee Stock Ownership Plan (4)....................... --
10.32 Executive Change in Control Severance Benefits Agreement
(5)......................................................... --
10.33 Change in Control Severance Policy for Non-executives (5)... --
10.34 Silicon Valley Bancshares 1997 Equity Incentive Plan (6).... --
10.36 Relocation Agreement between Silicon Valley Bancshares and
Kenneth P. Wilcox and Ruth Wilcox, as of December 18, 1997
(8)......................................................... --
10.37 Bonus Agreement between Silicon Valley Bank and Kenneth P.
Wilcox, as of December 18, 1997 (8)......................... --
87
Exhibit Sequentially
No. Description Numbered Page
- --------------------- ------------------------------------------------------------ -------------
10.38 Promissory Note between Silicon Valley Bancshares and
Christopher T. Lutes, as of June 10, 1998 (10).............. --
10.39 The 1998 Venture Capital Retention Program, Amended June,
18, 1998 (10)............................................... --
10.40 Severance Agreement between Silicon Valley Bancshares and
John C. Dean related to garage.com-TM- as of August 12, 1998
(11)........................................................ --
10.41 Severance Agreement between Silicon Valley Bancshares and
Harry W. Kellogg related to garage.com-TM- as of August 12,
1998 (11)................................................... --
10.42 Form of Executive Change in Control Severance Benefits, as
of August 12, 1998 (11)..................................... --
10.43 Preferred Shares Rights Agreement, as of October 22, 1998
(12)........................................................ --
10.44 1999 Employee Stock Purchase Plan........................... 90
21.1 Subsidiaries of Silicon Valley Bancshares................... 99
23.1 Independent Auditors' Consent............................... 100
27.1 Financial Data Schedule..................................... 101
- ------------------------
(1) Incorporated by reference to Exhibit 4.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988.
(2) Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.
(3) Incorporated by reference to Exhibit 10.17 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994.
(4) Incorporated by reference to Exhibits 10.28, 10.29, 10.30, and 10.31 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.
(5) Incorporated by reference to Exhibits 10.32 and 10.33 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
(6) Incorporated by reference to Exhibits 10.17(a) and 10.34 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(7) Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997.
(8) Incorporated by reference to Exhibits 10.36 and 10.37 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
(9) Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998.
(10) Incorporated by reference to Exhibits 4.2, 4.3, 4.6, 4.7, 4.8, 4.9, 4.10,
4.11, 10.38, and 10.39 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998.
88
(11) Incorporated by reference to Exhibits 10.40, 10.41 and 10.42 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
(12) Incorporated by reference to Exhibits 3.3 and 10.43 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
(13) Incorporated by reference to Exhibits 3.1a and 3.4 of the Company's Report
on Form 8-K filed on April 26, 1999.
89