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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 16, 2001
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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, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 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 (Zip Code)
offices)
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)
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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,
2001, on the Nasdaq National Market was $1,602,661,840.
At January 31, 2001, 49,312,672 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 2001 Annual
Meeting of Stockholders to be filed within 120 days of the
end of the fiscal year ended December 31, 2000 Part III
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This report contains a total of 79 pages, including exhibits.
The Exhibit Index is on page 76.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS.................................................... 3
ITEM 2. PROPERTIES.................................................. 11
ITEM 3. LEGAL PROCEEDINGS........................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................ 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 14
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.... 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 73
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 73
ITEM 11. EXECUTIVE COMPENSATION...................................... 73
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 73
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 73
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 74
SIGNATURES............................................................ 75
INDEX TO EXHIBITS..................................................... 76
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PART I
ITEM 1. BUSINESS
GENERAL
Silicon Valley Bancshares is a bank holding company and a financial 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 24 offices located in Arizona,
California, Colorado, Florida, Georgia, Illinois, Massachusetts, Minnesota,
North Carolina, 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. These companies generally
keep large cash balances in their deposit accounts with us and often do not
borrow large amounts under their credit facilities, as their primary source of
funding is equity from venture capitalists. 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.
Our COMPUTERS AND PERIPHERALS practice focuses on companies that are engaged
in the support and manufacturing of computers, electronic components and related
peripheral products. The 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.
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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 healthcare 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 healthcare
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 that 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 $10.0 million for radio, television, outdoor
advertising, and cable television operators.
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 our client 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.
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In addition, our 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 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.
EQUITY SECURITIES.
We frequently obtain rights to acquire stock, in the form of warrants, in
certain clients as part of negotiated credit facilities. We also make
investments in venture capital funds as well as direct equity investments in
companies from time to time. As of December 31, 2000, we held 1,324 warrants in
1,038 companies, and had made investments in 208 venture capital funds and
direct equity investments in 60 companies.
In 2000, we formed SVB Strategic Investors, LLC, the general partner of SVB
Strategic Investors Fund, L.P. SVB Strategic Investors Fund, L.P. raised
approximately $135.3 million in committed capital, to invest as a limited
partner in top-tier venture funds, leading regional venture funds and venture
funds with a unique niche. Additionally in 2000, we formed Silicon Valley
BancVentures, Inc., the general partner of Silicon Valley BancVentures, L.P.
Silicon Valley BancVentures, L.P. raised $56.1 million in committed capital, to
make direct equity
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investments in emerging growth high technology and life sciences companies
throughout the United States. At December 31, 2000, we held an interest of
approximately 11% in each of these funds.
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 and a financial holding company Silicon is subject to the Federal
Reserve Board's supervision and examination under the Bank Holding Company Act
as revised by the Gramm-Leach-Bliley Act, as discussed below. Silicon Valley
Bank, as a California-chartered bank and a member of the Federal Reserve System,
is subject to primary supervision and examination by the Federal Reserve Board
through the Federal Reserve Bank of San Francisco 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 and the California Department of Financial Institutions, Silicon
Valley Bank's primary banking regulators. The memorandum of understanding and
its associated restrictions were terminated in June 2000. Under the memorandum
of understanding, Silicon Valley Bank had committed to maintain a Tier 1
leverage ratio (the ratio of a bank's Tier 1 capital to its total quarterly
average tangible assets) of at least 7.25%; 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 had 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. These
restrictions were also terminated in June 2000.
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 financial holding
companies to acquire many types of financial firms without the prior approval of
the Federal Reserve Board. On November 14, 2000, Silicon became a financial
holding company.
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 is limited to activities that were permissible under the BHCA as of
November 11, 1999.
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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.
The GLB Act also reformed the overall regulatory framework of the financial
services industry. In order to implement its underlying purposes, the GLB Act
pre-empted 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 13, 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. A financial company must be in compliance with these consumer
privacy requirements no later than July 1, 2001.
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
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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. 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. See
"Item 8. Consolidated 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, 2000.
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 and a financial 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, as revised by the GLB Act. Prior to becoming a financial
holding company under the GLB Act, Silicon was required to 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. As a financial holding company, the prior approval of the
Federal Reserve Board is not required to acquire ownership or control of
entities engaged in specified financial activities, although the existing
restrictions on directly or indirectly acquiring shares of a bank are still
applicable. In addition, prior to becoming a financial holding company, Silicon
was 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. As a financial holding company under the GLB Act, Silicon is permitted
to engage in a full range of financial activities, including banking, insurance
and securities activities and additional activities that the Federal Reserve
Board determines to be financial in nature, incidental to such financial
activities, or complimentary to a financial activity.
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
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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. 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" 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.
Silicon is a legal entity separate and distinct from Silicon Valley Bank.
Silicon Valley Bank is subject to various 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
$145.9 million at December 31, 2000. The Federal Reserve Board and the
Commissioner have the authority to prohibit Silicon Valley Bank from engaging in
activities that, in their opinion, 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. Consolidated 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,
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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, including restrictions on the bank's activities, operational
practices or the ability to pay dividends. The federal banking agencies,
however, may not treat an institution as critically undercapitalized unless its
capital ratios actually warrant such treatment.
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,
2000, 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, 2000,
Silicon Valley Bank's assessment rate was the statutory minimum assessment.
10
Silicon Valley Bank is also required to pay an annual assessment of
approximately 2.0 basis points per $100 of insured deposits toward the
retirement of U.S. government issued Financing Corporation bonds.
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 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 and June 2000, we finalized
amendments to the original lease associated with our corporate headquarters. The
amendments provide for the lease of two additional premises, approximating
56,000 square feet each, adjacent to the existing headquarters facility. We
began occupying the additional premises in August 1998 and December 2000,
respectively.
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; West Palm Beach, Florida; Atlanta,
Georgia; Chicago, Illinois; Boston, Massachusetts; Minneapolis, Minnesota;
Durham, North Carolina; 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
January 2006, 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, 2000, 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 2000.
11
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. The 1999 stock prices have been
restated to reflect a two-for-one stock split distributed on May 15, 2000.
2000 1999
------------------- -------------------
QUARTER LOW HIGH LOW HIGH
- ------- -------- -------- -------- --------
First............................................. $23.97 $45.00 $ 8.41 $10.50
Second............................................ $17.00 $44.44 $ 8.47 $12.38
Third............................................. $41.00 $64.06 $10.78 $14.25
Fourth............................................ $31.19 $58.50 $11.44 $26.42
STOCKHOLDERS.
The number of stockholders of record of our common stock was 770 as of
January 31, 2001.
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. Consolidated 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.
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated 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 2000 presentations. Such
reclassifications had no effect on the results of operations or stockholders'
equity. In addition, the common stock summary information has been restated to
reflect two-for-one stock splits, distributed on May 1, 1998 and May 15, 2000.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ---------- ---------- ---------- ----------
(DOLLARS AND NUMBERS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT SUMMARY:
Net interest income.......... $ 329,848 $ 205,439 $ 146,615 $ 110,824 $ 87,275
Provision for loan losses.... 54,602 52,407 37,159 10,067 10,426
Noninterest income........... 189,630 58,855 23,162 13,265 11,609
Noninterest expense.......... 198,361 125,659 83,645 66,301 52,682
Minority interest............ 460 -- -- -- --
----------- ---------- ---------- ---------- ----------
Income before taxes.......... 266,975 86,228 48,973 47,721 35,776
Income tax expense........... 107,907 34,030 20,117 20,043 14,310
----------- ---------- ---------- ---------- ----------
Net income................... $ 159,068 $ 52,198 $ 28,856 $ 27,678 $ 21,466
=========== ========== ========== ========== ==========
COMMON SHARE SUMMARY:
Basic earnings per share..... $ 3.41 $ 1.27 $ 0.71 $ 0.71 $ 0.58
Diluted earnings per share... 3.23 1.23 0.69 0.68 0.55
Book value per share......... 12.54 8.23 5.21 4.37 3.63
Weighted average shares
outstanding................ 46,656 41,258 40,536 38,740 36,852
Weighted average diluted
shares outstanding......... 49,220 42,518 41,846 40,676 38,764
YEAR-END BALANCE SHEET
SUMMARY:
Loans, net of unearned
income..................... $ 1,716,549 $1,623,005 $1,611,921 $1,174,645 $ 863,492
Assets....................... 5,626,775 4,596,398 3,545,452 2,625,123 1,924,544
Deposits..................... 4,862,259 4,109,405 3,269,753 2,432,407 1,774,304
Stockholders' equity......... 614,121 368,850 215,865 174,481 135,400
AVERAGE BALANCE SHEET
SUMMARY:
Loans, net of unearned
income..................... $ 1,580,176 $1,591,634 $1,318,826 $ 973,637 $ 779,655
Assets....................... 5,180,750 3,992,410 2,990,548 2,140,630 1,573,903
Deposits..................... 4,572,457 3,681,598 2,746,041 1,973,118 1,441,360
Stockholders' equity......... 478,018 238,085 198,675 152,118 119,788
CAPITAL RATIOS:
Total risk-based capital
ratio...................... 18.5% 15.5% 11.5% 11.5% 11.5%
Tier 1 risk-based capital
ratio...................... 17.2% 14.3% 10.3% 10.2% 10.2%
Tier 1 leverage ratio........ 12.6% 8.8% 7.6% 7.1% 7.7%
Average stockholders' equity
to average assets.......... 9.2% 6.0% 6.6% 7.1% 7.6%
SELECTED FINANCIAL RATIOS:
Return on average assets..... 3.1% 1.3% 1.0% 1.3% 1.4%
Return on average
stockholders' equity....... 33.3% 21.9% 14.5% 18.2% 17.9%
Efficiency ratio............. 45.7% 53.5% 53.6% 55.7% 55.9%
Net interest margin.......... 6.9% 5.5% 5.2% 5.6% 6.1%
OTHER DATA:
Off-balance sheet client
funds...................... $10,805,694 $5,666,278 $1,096,300 -- --
13
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 Valley Bancshares 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 2000 presentations. Such reclassifications had no effect on our
results of operations or stockholders' equity.
RESULTS OF OPERATIONS
EARNINGS SUMMARY.
We reported net income in 2000 of $159.1 million, compared with net income
in 1999 and 1998 of $52.2 million and $28.9 million, respectively. Diluted
earnings per share totaled $3.23 in 2000, compared to $1.23 and $0.69 in 1999
and 1998, respectively. Return on average equity in 2000 was 33.3%, compared
with 21.9% in 1999 and 14.5% in 1998. Return on average assets in 2000 was 3.1%
compared with 1.3% in 1999 and 1.0% in 1998.
The increase in net income for 2000, as compared to 1999, and 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 major components of net income
and changes in these components are summarized in the following table for the
years ended December 31, 2000, 1999 and 1998, and are discussed in more detail
on the following pages.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1999 TO 2000 1998 TO 1999
2000 1999 INCREASE 1998 INCREASE
--------- --------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
Net interest income........ $329,848 $205,439 $124,409 $146,615 $58,824
Provision for loan
losses................... 54,602 52,407 2,195 37,159 15,248
Noninterest income......... 189,630 58,855 130,775 23,162 35,693
Noninterest expense........ 198,361 125,659 72,702 83,645 42,014
Minority interest.......... 460 -- 460 -- --
-------- -------- -------- -------- -------
Income before income
taxes.................... 266,975 86,228 180,747 48,973 37,255
Income tax expense......... 107,907 34,030 73,877 20,117 13,913
-------- -------- -------- -------- -------
Net income................. $159,068 $ 52,198 $106,870 $ 28,856 $23,342
======== ======== ======== ======== =======
14
NET INTEREST INCOME AND MARGIN.
Net interest income is defined as the difference between interest earned on
interest-earning assets 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.
15
The following table sets forth average assets, liabilities, minority
interest 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, 2000, 1999 and 1998.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
2000 1999
--------------------------------- ---------------------------------
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)............ $1,310,971 $ 83,472 6.4% $ 618,338 $ 31,204 5.0%
Investment securities:
Taxable............... 1,769,309 107,268 6.1 1,441,081 82,193 5.7
Non-taxable (2)....... 163,152 10,704 6.6 135,549 8,460 6.2
Loans: (3), (4), (5)
Commercial............ 1,384,744 169,098 12.2 1,393,134 143,744 10.3
Real estate
construction and
term................ 121,076 12,723 10.5 138,943 13,988 10.1
Consumer and other.... 74,356 7,241 9.7 59,557 5,241 8.8
---------- -------- ---- ---------- -------- ----
Total loans............. 1,580,176 189,062 12.0 1,591,634 162,973 10.2
---------- -------- ---- ---------- -------- ----
Total interest-earning
assets.................. 4,823,608 390,506 8.1 3,786,602 284,830 7.5
---------- -------- ---- ---------- -------- ----
Cash and due from banks... 268,032 186,841
Allowance for loan
losses.................. (74,018) (59,383)
Other real estate owned... -- 181
Other assets.............. 163,128 78,169
---------- ----------
Total assets.............. $5,180,750 $3,992,410
========== ==========
Funding sources:
Interest-bearing
liabilities:
NOW deposits............ $ 55,825 770 1.4 $ 32,664 620 1.9
Regular money market
deposits.............. 386,701 7,089 1.8 357,006 8,770 2.5
Bonus money market
deposits.............. 1,275,545 25,117 2.0 1,907,517 58,510 3.1
Time deposits........... 582,354 23,936 4.1 207,108 8,530 4.1
Other borrowings........ -- -- -- -- -- --
---------- -------- ---- ---------- -------- ----
Total interest-bearing
liabilities............. 2,300,425 56,912 2.5 2,504,295 76,430 3.1
Portion of noninterest-
bearing funding
sources................. 2,523,183 1,282,307
---------- -------- ---- ---------- -------- ----
Total funding sources..... 4,823,608 56,912 1.2 3,786,602 76,430 2.0
---------- -------- ---- ---------- -------- ----
Noninterest-bearing
funding sources:
Demand deposits......... 2,272,032 1,177,303
Other liabilities....... 85,855 34,220
Trust preferred
securities (6)........ 38,559 38,507
Minority interest....... 5,861 --
Stockholders' equity.... 478,018 238,085
Portion used to fund
interest-earning
assets................ (2,523,183) (1,282,307)
---------- ----------
Total liabilities,
minority interest and
stockholders' equity.... $5,180,750 $3,992,410
========== ==========
Net interest income and
margin.................. $333,594 6.9% $208,400 5.5%
======== ==== ======== ====
Total deposits............ $4,572,457 $3,681,598
========== ==========
YEARS ENDED DECEMBER 31,
---------------------------------
1998
---------------------------------
AVERAGE
YIELD
AVERAGE AND
BALANCE INTEREST RATE
---------- --------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Federal funds sold and
securities purchased
under agreement to
resell (1)............ $ 396,488 $ 21,305 5.4%
Investment securities:
Taxable............... 1,044,918 61,515 5.9
Non-taxable (2)....... 78,234 5,034 6.4
Loans: (3), (4), (5)
Commercial............ 1,157,949 122,708 10.6
Real estate
construction and
term................ 115,743 12,364 10.7
Consumer and other.... 45,134 4,064 9.0
---------- -------- ----
Total loans............. 1,318,826 139,136 10.6
---------- -------- ----
Total interest-earning
assets.................. 2,838,466 226,990 8.0
---------- -------- ----
Cash and due from banks... 137,096
Allowance for loan
losses.................. (40,055)
Other real estate owned... 681
Other assets.............. 54,360
----------
Total assets.............. $2,990,548
==========
Funding sources:
Interest-bearing
liabilities:
NOW deposits............ $ 18,702 348 1.9
Regular money market
deposits.............. 338,585 9,189 2.7
Bonus money market
deposits.............. 1,487,240 63,155 4.3
Time deposits........... 131,530 5,917 4.5
Other borrowings........ 66 4 6.0
---------- -------- ----
Total interest-bearing
liabilities............. 1,976,123 78,613 4.0
Portion of noninterest-
bearing funding
sources................. 862,343
---------- -------- ----
Total funding sources..... 2,838,466 78,613 2.8
---------- -------- ----
Noninterest-bearing
funding sources:
Demand deposits......... 769,984
Other liabilities....... 22,146
Trust preferred
securities (6)........ 23,620
Minority interest....... --
Stockholders' equity.... 198,675
Portion used to fund
interest-earning
assets................ (862,343)
----------
Total liabilities,
minority interest and
stockholders' equity.... $2,990,548
==========
Net interest income and
margin.................. $148,377 5.2%
======== ====
Total deposits............ $2,746,107
==========
- ----------------------------------
(1) Includes average interest-bearing deposits in other financial institutions
of $501, $255 and $240 in 2000, 1999 and 1998, respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in 2000,
1999 and 1998. These adjustments were $3,746, $2,961 and $1,762 for the
years ended December 31, 2000, 1999 and 1998, respectively.
(3) Average loans include average nonaccrual loans of $24,337, $37,827 and
$26,158 in 2000, 1999 and 1998, respectively.
(4) Average loans are net of average unearned income of $9,929, $9,328 and
$8,299 in 2000, 1999 and 1998, respectively.
(5) Loan interest income includes loan fees of $26,183, $15,738 and $12,935 in
2000, 1999 and 1998, respectively.
(6) The 8.25% annual distribution to SVB Capital I is recorded as a component of
noninterest expense.
16
Net interest income is affected by changes in the amount and mix of
interest-earning 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 2000,
1999 and 1998.
2000 COMPARED TO 1999 1999 COMPARED TO 1998
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....... $ 42,369 $ 9,899 $ 52,268 $11,195 $ (1,296) $ 9,899
Investment securities....... 21,437 5,882 27,319 26,074 (1,970) 24,104
Loans....................... (1,181) 27,270 26,089 27,933 (4,096) 23,837
-------- -------- -------- ------- -------- -------
Increase (decrease) in
interest income............. 62,625 43,051 105,676 65,202 (7,362) 57,840
-------- -------- -------- ------- -------- -------
Interest expense:
NOW deposits................ 353 (203) 150 265 7 272
Regular money market
deposits.................. 684 (2,365) (1,681) 453 (872) (419)
Bonus money market
deposits.................. (16,049) (17,344) (33,393) 12,891 (17,536) (4,645)
Time deposits............... 15,423 (17) 15,406 3,113 (500) 2,613
Other borrowings............ -- -- -- (4) -- (4)
-------- -------- -------- ------- -------- -------
Increase (decrease) in
interest expense............ 411 (19,929) (19,518) 16,718 (18,901) (2,183)
-------- -------- -------- ------- -------- -------
Increase in net interest
income...................... $ 62,214 $ 62,980 $125,194 $48,484 $ 11,539 $60,023
======== ======== ======== ======= ======== =======
Net interest income, on a fully taxable-equivalent basis, totaled $333.6
million in 2000, an increase of $125.2 million, or 60.1%, from the $208.4
million total in 1999. The increase in net interest income was attributable to a
$105.7 million, or 37.1%, increase in interest income, combined with a $19.5
million, or 25.5%, decrease in interest expense over the comparable prior year
period. Net interest income, on a fully taxable-equivalent basis, totaled $208.4
million in 1999, an increase of $60.0 million, or 40.5%, compared to 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.
The $105.7 million increase in interest income for 2000, as compared to
1999, was the result of a $62.6 million favorable volume variance, combined with
a $43.1 million favorable rate variance. The $62.6 million favorable volume
variance resulted from a $1.0 billion, or 27.4%, 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 $890.9 million, or 24.2%, from 1999 to 2000. The
increase in average interest-earning assets was primarily centered in highly
liquid, federal funds sold, securities purchased under agreement to resell and
investment securities, which collectively increased $1.0 billion.
Average loans decreased $11.5 million, or 0.7%, in 2000 as compared to 1999,
resulting in a $1.2 million unfavorable volume variance. While we have continued
to increase the number
17
of client lending relationships in most of our technology and life sciences
niche practices, as well as in specialized lending products, growth in our loan
portfolio has been impacted by several different factors. First, 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
during the early part of 2000. This increase in the amount of equity raised by
our clients has mitigated their need for debt from us. Second, beginning in
1999, we began an initiative to create more granularity in our loan portfolio,
and as a result, have reduced the average loan balance outstanding from
approximately $0.8 million in 1999 to approximately $0.5 million at the end of
2000. We believe this granularity initiative is essentially complete as of 2000
year end. Lastly, we exited several "non-core" lending niches in 2000, such as
entertainment and healthcare services, reducing loan outstandings over $100.0
million by exiting these niches. This initiative is also essentially complete as
of 2000 year end. As a result of the current slow-down in the capital markets
and venture capital funding, as well as the completion of our granularity
initiative and exit of several non-core niches, we expect average loan growth
during 2001 of approximately 10% or more.
Average investment securities for 2000 increased $355.8 million, or 22.6%,
as compared to 1999, resulting in a $21.4 million favorable volume variance. The
aforementioned strong growth in average deposits combined with fairly consistent
average loans during 2000, generated excess funds that were largely invested in
U.S. agency securities, obligations of states and political subdivisions, and
money market mutual funds. 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 2000 increased a combined $692.6 million, or 112.0%, over the prior
year, resulting in a $42.4 million favorable volume variance. This increase was
largely due to the aforementioned strong growth in average deposits during 2000
and our actions to continue to further diversify our portfolio of short-term
investments, as well as our need to maintain a satisfactory level of liquidity.
Favorable rate variances associated with each component of interest-earning
assets combined to increase interest income by $43.1 million in 2000, as
compared to the prior year. Short-term market interest rates have increased on
an overall basis during the past year. As a result, we earned higher yields
during 2000 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 combined $15.8 million favorable rate variance as
compared to the prior year. The average yield on loans in 2000 also increased
180 basis points from the prior year, accounting for the remaining $27.3 million
of the total favorable rate variance. This increase was primarily attributable
to a 124 basis points increase in our weighted average prime rate in 2000 as
compared to the similar prior year period. Approximately 77.5% of our loans were
prime rate-based at the end of 2000.
The yield on average interest-earning assets increased 60 basis points in
2000 from the comparable prior year period. This increase primarily resulted
from a rise in the average yield on loans, largely due to an increase in our
average prime rate, as well as an increase in short-term market rates, which
resulted in higher yields on federal funds sold, securities purchased under
agreement to resell. In 2001, we expect the yield on our average
interest-earning assets to decrease due to an expected decrease in short-term
market rates and our prime rate.
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.
18
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 declined
on an overall basis during 1999. 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.
Total interest expense in 2000 decreased $19.5 million from 1999. This
decrease was due to a favorable rate variance of $19.9 million, offset by an
unfavorable volume variance of $0.4 million. The favorable rate variance largely
resulted from a reduction in the average rate paid on our bonus money market
deposit product, from 3.1% in 1999 to 2.0% in 2000. We took this action during
the last half of 1999 in order to lower total deposits and total assets and
thereby increase our Tier 1 leverage capital ratio. See "Item 7 section entitled
"Capital Resources." As a result, the average bonus money market account balance
decreased over $600.0 million from 1999 to 2000. However, this decrease was
partially offset by an increase in average time deposits, which was related to
cash securing letters of credit issued on behalf of our clients.
The average cost of funds paid on average interest-bearing liabilities
decreased 60 basis points from 1999 to 2000. This decrease in the average cost
of funds was largely due to a decrease of 110 basis points in the average rate
paid on our bonus money market deposit product, as discussed above.
19
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 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.
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 $54.6 million in 2000 compared to
$52.4 million and $37.2 million in 1999 and 1998, respectively. The increase in
our provision for loan losses in 2000 was in response to an increasing trend in
net charge-offs. We incurred net charge-offs of $52.6 million in 2000, compared
to $26.6 million in 1999 and $28.9 million in 1998. 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."
NONINTEREST INCOME.
The following table summarizes the components of noninterest income for the
past three years:
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
--------- -------- --------
(DOLLARS IN THOUSANDS)
Disposition of client warrants........................ $ 86,322 $33,003 $ 6,657
Investment gains...................................... 37,065 1,056 5,240
Client investment fees................................ 35,831 4,529 473
Letter of credit and foreign exchange income.......... 18,586 14,027 7,397
Deposit service charges............................... 3,336 2,764 1,730
Other................................................. 8,490 3,476 1,665
-------- ------- -------
Total noninterest income.............................. $189,630 $58,855 $23,162
======== ======= =======
Noninterest income increased $130.8 million, or 222.2%, in 2000 as compared
to 1999. This increase was largely due to a $53.3 million increase in income
from the disposition of client warrants, coupled with a $36.0 million increase
in investment gains and a $31.3 million increase in client investment fees.
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
20
investment fees. This increase was partially offset by a decrease of
$4.2 million in investment gains.
Income from the disposition of client warrants totaled $86.3 million,
$33.0 million and $6.7 million in 2000, 1999 and 1998, 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 employ to mitigate the risk of a loan becoming nonperforming. The
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 vary
materially from period to period. During the years ended December 31, 2000, 1999
and 1998, 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.
We realized $37.1 million in gains on sales of investment securities during
2000, compared to $1.1 and $5.2 million in gains on sales of investment
securities during 1999 and 1998, respectively. The 2000 gains primarily related
to a gain of $26.2 million realized on the sale of a venture capital fund
investment, which completed its initial public offering in 1999. 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 sales of available-for-sale investment securities were
conducted as a normal component of our asset/liability and liquidity management
activities.
Client investment fees totaled $35.8 million in 2000 compared to
$4.5 million and $0.5 million in 1999 and 1998, 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 fees
ranging from 35 to 50 basis points on the average balance in these products. At
December 31, 2000, $10.8 billion in client funds were invested off-balance
sheet, including $7.1 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.
Letter of credit fees, foreign exchange fees and other trade finance income
totaled $18.6 million in 2000, an increase of $4.6 million, or 32.5%, from the
$14.0 million total in 1999, and an increase of $11.2 million, or 151.3%, from
the $7.4 million total in 1998. This increase reflects our client base growth
and 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.
Income related to deposit service charges totaled $3.3 million,
$2.8 million and $1.7 million in 2000, 1999 and 1998, 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 2000
was due to growth in our client deposit base.
Other noninterest income largely consisted of service-based fee income, and
totaled $8.5 million in 2000, compared to $3.5 million in 1999 and $1.7 million
in 1998, respectively. The increase in 2000, as compared to 1999 and 1998, was
primarily due to corporate finance fees of $1.8 million and a higher volume of
cash management and loan documentation services related to our growing client
base.
21
NONINTEREST EXPENSE.
Noninterest expense in 2000 totaled $198.4 million, a $72.7 million, or
57.9%, increase from 1999. Total noninterest expense was $125.7 million in 1999,
up $42.0 million, or 50.2%, from 1998. 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 retention and warrant
incentive plans and 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 45.7% for
2000, compared to 53.5% and 53.6% in 1999 and 1998, 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,
-----------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF
ADJUSTED ADJUSTED ADJUSTED
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
--------- ---------- --------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Compensation and benefits.... $106,385 26.9% $ 73,794 32.0% $44,022 27.9%
Professional services........ 20,832 5.3 11,766 5.1 9,876 6.3
Furniture and equipment...... 11,999 3.0 6,178 2.7 6,667 4.2
Business development and
travel..................... 11,188 2.8 6,644 2.9 6,025 3.8
Net occupancy................ 9,363 2.4 6,689 2.9 5,195 3.3
Postage and supplies......... 3,500 0.9 2,582 1.1 2,225 1.4
Advertising and promotion.... 3,445 0.9 2,285 1.0 2,215 1.4
Trust preferred securities
distributions.............. 3,300 0.8 3,300 1.4 2,012 1.3
Telephone.................... 2,815 0.7 1,846 0.8 2,157 1.3
Other........................ 8,223 2.0 8,205 3.6 4,255 2.7
-------- ---- -------- ---- ------- ----
Total, excluding cost of
other real estate owned.... 181,050 45.7% 123,289 53.5% 84,649 53.6%
==== ==== ====
Retention and warrant
incentive plans............ 17,311 2,102 210
Cost of other real estate
owned...................... -- 268 (1,214)
-------- -------- -------
Total noninterest expense.... $198,361 $125,659 $83,645
======== ======== =======
Compensation and benefits expenses totaled $106.4 million in 2000, a
$32.6 million, or 44.2%, increase over the $73.8 million incurred in 1999. 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 645 in 1999
to 830 in 2000. Compensation and benefits expenses totaled $73.8 million in
1999, a $29.8 million, or 67.6%, increase over the $44.0 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. The increase in FTE personnel from 1998 through 2000 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. Further growth in our FTE personnel is likely
to occur during future years as a result of the continued expansion of our
business activities.
22
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 $20.8 million in 2000,
a $9.1 million, or 77.1%, increase from the $11.8 million total in 1999. We
incurred $9.9 million in professional services expenses in 1998. The increase in
professional services expense in 2000, as compared to 1999, 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 1999, as compared
to 1998, 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.
Retention and warrant incentive plans expense totaled $17.3 million in 2000,
$2.1 million in 1999 and $0.2 million 1998. Under the provisions of the
retention and warrant incentive plans, employees are compensated with a fixed
percentage of gains realized on warrant and certain venture capital fund and
direct equity investments. The increase in retention and warrant plans expense
was directly related to the increase in warrant, venture capital fund and direct
equity investment gains over the comparable 1999 and 1998 periods.
Occupancy, furniture and equipment expenses totaled $21.4 million in 2000,
$12.9 million in 1999 and $11.9 million in 1998. The increase in occupancy,
furniture and equipment expenses in 2000, as compared to 1999, was primarily
attributable to certain non-recurring costs in connection with the expansion of
our existing headquarters facility during the fourth quarter of 2000, the
addition of new regional offices, and an increase in recurring expenses
associated with our additional office space. 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.
Business development and travel expenses totaled $11.2 million in 2000, an
increase of $4.5 million, or 68.4%, compared to the $6.6 million total in 1999.
We incurred $6.0 million in business development and travel expenses in 1998.
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.
Postage and supplies expenses totaled $3.5 million, $2.6 million and
$2.2 million in 2000, 1999 and 1998, respectively. Total telephone expenses were
$2.8 million in 2000, $1.9 million in 1999 and $2.2 million in 1998. The
increase in postage and supplies expense during each of the past two years and
the increase in telephone expense between 1999 and 2000 resulted from 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 $3.5 million, $2.3 million and
$2.2 million in 2000, 1999 and 1998, respectively. The increase in advertising
and promotion expenses during each of the last two years reflects a concerted
effort to increase our marketing nationwide.
Trust preferred securities distributions totaled $3.3 million in 2000 and
1999 and $2.0 million in 1998. These amounts 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.
Other noninterest expenses totaled $8.2 million in 2000 and 1999 and
$4.3 million in 1998, 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.
23
In 1999, we incurred minimal net costs associated with OREO. Additionally,
the 1998 OREO net gain of $1.2 million primarily resulted from a $1.3 million
gain realized in connection with the sale of an OREO property that consisted of
multiple undeveloped lots.
INCOME TAXES.
Our effective income tax rate was 40.4% in 2000, compared to 39.5% in 1999
and 41.1% in 1998. The change in our effective income tax rate over the past
three years was principally attributable to changes in our multi-state income
tax rate.
FINANCIAL CONDITION
Assets totaled $5.6 billion at December 31, 2000, an increase of
$1.0 billion, or 22.4%, compared to $4.6 billion at December 31, 1999.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL.
Federal funds sold and securities purchased under agreement to resell
totaled a combined $1.4 billion at December 31, 2000, an increase of
$491.7 million, or 54.8%, compared to the $898.0 million outstanding at the
prior year end. This increase was attributable to our investing excess funds,
resulting from continued deposit growth during 2000, in these types of
short-term liquid investments.
INVESTMENT SECURITIES.
The following table details the composition of investment securities, which
were classified as available-for-sale and reported at fair value, except for
non-marketable venture capital fund investments, other private equity
investments and Federal Reserve Bank stock and tax credit funds, which were
reported on a cost basis less any identified impairment, at December 31, 2000,
1999 and 1998.
DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Available-for-sale securities:
U.S. Treasury securities.................... $ 25,011 $ 29,798 $ 41,049
U.S. agencies and corporations:
Discount notes and bonds.................. 1,027,531 855,570 498,016
Mortgage-backed securities................ 166,409 161,822 125,059
Collateralized mortgage obligations....... 209,585 221,952 155,149
Obligations of states and political
subdivisions.............................. 401,047 196,396 515,770
Commercial paper and other debt
securities................................ 53,900 117,084 48,464
Money market mutual funds................... 155,254 27,103 --
Warrant securities.......................... 7,033 68,358 670
Venture capital fund investments............ -- 42,750 --
Other equity investments.................... 23 2,356 --
---------- ---------- ----------
Total available-for-sale securities........... 2,045,793 1,723,189 1,384,177
---------- ---------- ----------
Non-marketable securities:
Federal Reserve Bank stock and tax credit
funds..................................... 15,538 12,336 7,397
Venture capital fund investments............ 30,519 9,811 5,359
Other private equity investments............ 15,740 2,072 569
---------- ---------- ----------
Total non-marketable securities............... 61,797 24,219 13,325
---------- ---------- ----------
Total investment securities................... $2,107,590 $1,747,408 $1,397,502
========== ========== ==========
24
Investment securities totaled $2.1 billion at December 31, 2000, an increase
of $360.2 million, or 20.6%, over the December 31, 1999 balance of
$1.7 billion. This increase resulted from excess funds that were generated by
strong growth in our deposits outpacing the growth in loans during 2000, and
primarily consisted of U.S. agency securities, obligations of states and
political subdivisions, and money market mutual funds. The decrease in
commercial paper and other debt securities was primarily due to maturities. The
decrease in venture capital fund investments of $22.0 million between 1999 and
2000, was primarily due to the sale of a venture capital fund investment in 2000
which had a fair value of $42.8 million at December 31, 1999. 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.
Based on December 31, 2000 market valuations, we had potential pre-tax
warrant gains totaling $6.8 million related to 34 companies. We are restricted
from exercising many of these warrants until later in 2001. As of December 31,
2000, we held 1,324 warrants in 1,038 companies, and had made investments in 208
venture capital funds and direct equity investments in 60 companies. Many of
these companies are non-public. Thus, for those companies for which a readily
determinable market value cannot be obtained, we value those equity instruments
at cost less any identified impairment. Additionally, we are 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 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. Furthermore, we may
reinvest some or all of the income realized from the disposition of these equity
instruments in pursuing our business strategies.
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.
At December 31, 2000, 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.
25
The following table provides the remaining contractual principal maturities
and fully taxable-equivalent yields on investment securities as of December 31,
2000. 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. Certain obligations of states and
political subdivision, which are auction-based, will also have expected
remaining maturities that differ from their contractual maturities. 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, 2000
------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
ONE YEAR YEAR TO YEARS TO
TOTAL OR LESS FIVE YEARS TEN YEARS
--------------------- ------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
---------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
U.S. Treasury
securities........ $ 25,011 5.64% $ 25,011 5.64% -- -- -- --
U.S. agencies and
corporations:
Discount notes and
bonds............. 1,027,531 5.99 224,299 5.58 $803,232 6.10% -- --
Mortgage-backed
securities........ 166,409 6.37 -- -- -- -- $ 4,040 6.06%
Collateralized
mortgage
obligations....... 209,585 6.40 -- -- 7,548 6.26 22,811 6.41
Obligations of
states and
political
subdivisions...... 401,047 6.68 9,617 6.67 47,904 6.54 106,776 6.75
Commercial paper and
other debt
securities........ 53,900 6.94 53,900 6.94 -- -- -- --
Money market mutual
funds............. 155,254 6.34 155,254 6.34 -- -- -- --
Warrant
securities........ 7,033 -- -- -- -- -- -- --
Venture capital fund
investments....... 30,519 -- -- -- -- -- -- --
Other private equity
investments....... 15,763 -- -- -- -- -- -- --
Federal Reserve Bank
stock and tax
credit funds...... 15,538 -- -- -- -- -- -- --
---------- ---- -------- ---- -------- ---- -------- ----
Total............... $2,107,590 6.25% $468,081 6.02% $858,684 6.13% $133,627 6.67%
========== ==== ======== ==== ======== ==== ======== ====
DECEMBER 31, 2000
-------------------
AFTER
TEN YEARS
-------------------
WEIGHTED-
CARRYING AVERAGE
VALUE YIELD
-------- ---------
(DOLLARS IN THOUSANDS)
U.S. Treasury
securities........ -- --
U.S. agencies and
corporations:
Discount notes and
bonds............. -- --
Mortgage-backed
securities........ $162,369 6.38%
Collateralized
mortgage
obligations....... 179,226 6.41
Obligations of
states and
political
subdivisions...... 236,750 6.68
Commercial paper and
other debt
securities........ -- --
Money market mutual
funds............. -- --
Warrant
securities........ 7,033 --
Venture capital fund
investments....... 30,519 --
Other private equity
investments....... 15,763 --
Federal Reserve Bank
stock and tax
credit funds...... 15,538 --
-------- ----
Total............... $647,198 6.51%
======== ====
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.
26
LOANS.
The composition of the loan portfolio, net of unearned income, for each of
the past five years is as follows:
DECEMBER 31, 2000
-------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
Commercial.............. $1,531,468 $1,414,728 $1,429,980 $1,051,218 $755,699
Real estate
construction.......... 62,253 76,209 74,023 53,583 27,540
Real estate term........ 38,380 67,738 60,841 33,395 44,475
Consumer and other...... 84,448 64,330 47,077 36,449 35,778
---------- ---------- ---------- ---------- --------
Total loans............. $1,716,549 $1,623,005 $1,611,921 $1,174,645 $863,492
========== ========== ========== ========== ========
Average loans decreased $11.5 million, or 0.7%, in 2000 as compared to 1999,
resulting in a $1.2 million unfavorable volume variance. While we have continued
to increase the number of client lending relationships in most of our technology
and life sciences niche practices, as well as in specialized lending products,
growth in our loan portfolio has been impacted by several different factors.
First, 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 during the early part of 2000. This increase in the amount of
equity raised by our clients has mitigated their need for debt from us. Second,
beginning in 1999, we began an initiative to create more granularity in our loan
portfolio, and as a result, have reduced the average loan balance outstanding
from approximately $0.8 million in 1999 to approximately $0.5 million at the end
of 2000. We believe this granularity initiative is essentially complete as of
2000 year end. Lastly, we exited several "non-core" lending niches in 2000, such
as entertainment and healthcare services, reducing loan outstandings over $100.0
million by exiting these niches. This initiative is also essentially complete as
of 2000 year end. As a result of the current slow-down in the capital markets
and venture capital funding, as well as the completion of our granularity
initiative and exit of several non-core niches, we expect average loan growth
during 2001 of approximately 10% or more.
The following table sets forth the remaining contractual maturity
distribution of our loans (reported on a gross basis) at December 31, 2000 for
fixed and variable rate loans:
DECEMBER 31, 2000
----------------------------------------------------
AFTER ONE YEAR
ONE YEAR AND THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
--------- -------------- ---------- ----------
(DOLLARS IN THOUSANDS)
Fixed rate loans:
Commercial........................... $ 21,617 $296,179 $44,204 $ 362,000
Real estate construction............. 87 3,362 3,543 6,992
Real estate term..................... 1,314 1,530 10,519 13,363
Consumer and other................... 334 4,266 500 5,100
-------- -------- ------- ----------
Total fixed rate loans............... $ 23,352 $305,337 $58,766 $ 387,455
======== ======== ======= ==========
Variable rate loans:
Commercial........................... $725,692 $395,739 $55,781 $1,177,212
Real estate construction............. 50,171 1,525 3,942 55,638
Real estate term..................... 13,381 9,488 2,385 25,254
Consumer and other................... 48,543 3,323 27,524 79,390
-------- -------- ------- ----------
Total variable rate loans............ $837,787 $410,075 $89,632 $1,337,494
======== ======== ======= ==========
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.
27
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, 2000, 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.
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.
28
An analysis of the allowance for loan losses for the past five years is as
follows:
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at January 1,............... $71,800 $46,000 $37,700 $32,700 $29,700
Charge-offs:
Commercial........................ (63,177) (34,312) (31,123) (9,236) (9,056)
Real estate....................... -- -- -- -- (634)
Consumer and other................ (203) (196) -- -- (38)
------- ------- ------- ------- -------
Total charge-offs................. (63,380) (34,508) (31,123) (9,236) (9,728)
------- ------- ------- ------- -------
Recoveries:
Commercial........................ 10,507 7,849 1,897 3,170 2,050
Real estate....................... 47 34 366 986 217
Consumer and other................ 224 18 1 13 35
------- ------- ------- ------- -------
Total recoveries.................... 10,778 7,901 2,264 4,169 2,302
------- ------- ------- ------- -------
Net charge-offs..................... (52,602) (26,607) (28,859) (5,067) (7,426)
Provision for loan losses........... 54,602 52,407 37,159 10,067 10,426
------- ------- ------- ------- -------
Balance at December 31,............. $73,800 $71,800 $46,000 $37,700 $32,700
======= ======= ======= ======= =======
Net charge-offs to average
total loans....................... 3.3% 1.7% 2.2% 0.5% 1.0%
======= ======= ======= ======= =======
The following table displays the allocation of the allowance for loan losses
among specific classes of loans:
DECEMBER 31,
--------------------------------------------------------------------------
2000 1999 1998 1997
------------------- ------------------- ------------------- --------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Commercial..................... $54,300 92.7% $49,985 95.5% $28,417 95.8% $30,394
Real estate term............... 806 1.4 795 1.5 438 1.4 426
Real estate construction....... 1,141 1.9 792 1.5 374 1.3 274
Consumer and other............. 2,350 4.0 757 1.5 434 1.5 386
Unallocated.................... 15,203 N/A 19,471 N/A 16,337 N/A 6,220
------- ----- ------- ----- ------- ----- -------
Total.......................... $73,800 100.0% $71,800 100.0% $46,000 100.0% $37,700
======= ===== ======= ===== ======= ===== =======
DECEMBER 31,
------------------------------
1997 1996
-------- -------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
LOANS AMOUNT LOANS
-------- -------- --------
(DOLLARS IN THOUSANDS)
Commercial..................... 89.5% $18,716 87.5%
Real estate term............... 2.8 873 5.2
Real estate construction....... 4.6 140 3.2
Consumer and other............. 3.1 615 4.1
Unallocated.................... N/A 12,356 N/A
----- ------- -----
Total.......................... 100.0% $32,700 100.0%
===== ======= =====
The allowance for loan losses totaled $73.8 million at December 31, 2000, an
increase of $2.0 million, or 2.8%, compared to $71.8 million at December 31,
1999. This increase was due to $54.6 million in additional provisions to the
allowance for loan losses, offset by net charge-offs of $52.6 million during
2000. The 2000 net charge-off amount was composed of $63.4 million in gross
charge-offs and $10.8 million in gross recoveries. The 2000 gross charge-offs
included three entertainment credits totaling $23.1 million and two commercial
credits totaling $12.0 million in our healthcare services niche. Of the total
2000 gross charge-offs, $13.4 million were classified as nonperforming loans at
the end of 1999.
The unallocated component of the allowance for loan losses as of December
31, 2000 decreased $4.3 million from the prior year end. The decrease in the
unallocated reserve reflects our decision to increase macro allocations due to
the economic uncertainty surrounding many of our markets in 2001.
Gross charge-offs in 1999 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.
29
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.
We have continued to evaluate both U.S. and international economic events
during 2000 and the forecasts for the U.S. economy for 2001 in an effort to
monitor the markets we serve. The outlook for the U.S. economy in 2001 is
uncertain, 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 believe our allowance for
loan losses is adequate as of December 31, 2000. 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 2000, 1999 and 1998, 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
30
expected cash flows in accordance with Statement of Financial Accounting
Standard (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan."
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Nonperforming assets:
Loans past due 90 days or more......... $ 98 $ 911 $ 441 $ 1,016 $ 8,556
Nonaccrual loans....................... 18,287 27,552 19,444 24,476 14,581
------- ------- ------- ------- -------
Total nonperforming loans.............. 18,385 28,463 19,885 25,492 23,137
OREO and other foreclosed assets....... -- -- 1,800 1,858 1,948
------- ------- ------- ------- -------
Total nonperforming assets........... $18,385 $28,463 $21,685 $27,350 $25,085
======= ======= ======= ======= =======
Nonperforming loans as a percent of
total loans.......................... 1.1% 1.7% 1.2% 2.2% 2.7%
Nonperforming assets as a percent of
total assets......................... 0.3% 0.6% 0.6% 1.0% 1.3%
Allowance for loan losses.............. $73,800 $71,800 $46,000 $37,700 $32,700
As a percent of total loans.......... 4.3% 4.4% 2.8% 3.2% 3.8%
As a percent of nonaccrual loans..... 403.6% 260.6% 236.6% 154.0% 224.3%
As a percent of nonperforming
loans.............................. 401.4% 252.3% 231.3% 147.9% 141.3%
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, 2000 and 1999.
DECEMBER 31,
----------------------
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Commercial.................................................. $18,003 $27,358
Consumer and other.......................................... 284 194
------- -------
Total nonaccrual loans...................................... $18,287 $27,552
======= =======
Nonperforming loans totaled $18.4 million at December 31, 2000, a decrease
of $10.1 million, or 35.4%, from the $28.5 million total at December 31, 1999.
Of the total nonperforming loans at year-end 1999, $13.4 million were charged
off, $1.1 million remained on nonperforming status and $14.0 million were repaid
during 2000. Additionally, $17.3 million in loans were placed on nonperforming
status during 2000 and still classified as nonperforming loans at the end of
2000.
Nonperforming loans at the end of 2000 included one commercial credit
totaling $6.8 million in our healthcare services (non-technology) niche. This
credit has been classified as nonperforming since the first quarter of 2000. 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 $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 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 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
31
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 three loans with principal amounts aggregating approximately $8.8
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, 2000 and 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 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,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Noninterest-bearing
demand.............. $2,448,758 $1,928,100 $ 921,790 $ 788,442 $ 599,257
NOW................... 57,857 43,643 19,978 21,348 8,443
Regular money market.. 354,939 363,920 350,110 351,921 326,661
Bonus money market.... 1,164,624 1,481,457 1,835,249 1,146,075 754,730
Time.................. 836,081 292,285 142,626 124,621 85,213
---------- ---------- ---------- ---------- ----------
Total deposits........ $4,862,259 $4,109,405 $3,269,753 $2,432,407 $1,774,304
========== ========== ========== ========== ==========
Total deposits were $4.9 billion at December 31, 2000, an increase of $752.9
million, or 18.3%, from the prior year-end total of $4.1 billion. A significant
portion of the increase in deposits during 2000 was concentrated in our
noninterest-bearing demand deposits, which increased $520.7 million, or 27.0%,
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 2000. Time deposits also increased $543.8 million, primarily
due to clients having to cash secure letters of credit that we have issued on
their behalf to third parties.
Client deposits in our bonus money market product totaled $1.2 billion at
December 31, 2000, a $316.8 million, or 21.4%, decrease from the $1.5 billion
prior year-end balance. Despite the high levels of client liquidity, our money
market deposits at December 31, 2000 decreased
32
$325.8 million from the prior year end. The decrease in money market deposits
was the result of our lowering bonus money market deposit rates during 1999 and
marketing higher-yielding off-balance sheet private label mutual fund products
to clients. We did this to lower our total deposits and total assets, thereby
increasing our Tier 1 leverage ratio.
The aggregate amount of time deposit accounts individually exceeding
$100,000 totaled $773.5 million and $258.1 million at December 31, 2000 and
1999, respectively. At December 31, 2000, substantially 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.
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 permit the limited use of off-balance sheet derivative instruments in
managing interest rate risk.
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. The gap analysis as of December 31, 2000 indicates that the
cumulative one-year gap as a percentage of interest-earning assets was a
positive 21.1%.
The following table illustrates our interest rate sensitivity gap positions
at December 31, 2000.
33
INTEREST RATE SENSITIVITY ANALYSIS AS OF
DECEMBER 31, 2000
ASSETS AND LIABILITIES WHICH MATURE OR REPRICE
----------------------------------------------------------------
AFTER AFTER AFTER
1 DAY 1 MONTH 3 MONTHS 6 MONTHS
TO TO TO TO
IMMEDIATELY 1 MONTH 3 MONTHS 6 MONTHS 1 YEAR
------------ ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING
ASSETS:
Federal funds sold
and securities
purchased under
agreement to resell
(1)................ -- $1,389,734 -- -- --
---------- ---------- ---------- ---------- ----------
Investment
securities:
U.S. Treasury and
agencies
obligations
(2).............. -- -- $ 69,742 $ 84,597 $ 94,596
Collateralized
mortgage
obligations and
mortgage-backed
securities (2)... -- 1,531 3,090 4,708 9,676
Obligations of
states and
political
subdivisions..... -- 237,294 487 5,523 3,609
Commercial paper
and other debt
securities....... -- 53,900 -- -- --
Other equity
securities (3)... -- 155,254 -- -- --
---------- ---------- ---------- ---------- ----------
Total investment
securities......... -- 447,979 73,319 94,828 107,881
---------- ---------- ---------- ---------- ----------
Loans (4), (5)....... $1,232,121 27,585 50,257 25,845 51,383
---------- ---------- ---------- ---------- ----------
Total
interest-earning
assets............. $1,232,121 $1,865,298 $ 123,576 $ 120,673 $ 159,264
========== ========== ========== ========== ==========
FUNDING SOURCES:
Money market and
NOW deposits..... -- $1,577,420 -- -- --
Time deposits...... -- 49,022 $ 533,672 $ 71,981 $ 170,579
---------- ---------- ---------- ---------- ----------
Total
interest-bearing
deposits........... -- 1,626,442 533,672 71,981 170,579
Trust preferred
securities......... -- -- -- -- --
Portion of
noninterest-bearing
funding sources.... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total funding
sources............ -- $1,626,442 $ 533,672 $ 71,981 $ 170,579
========== ========== ========== ========== ==========
GAP.................. $1,232,121 $ 238,856 $ (410,096) $ 48,692 $ (11,315)
Cumulative Gap....... $1,232,121 $1,470,977 $1,060,881 $1,109,573 $1,098,258
ASSETS AND LIABILITIES WHICH MATURE OR REPRICE
-------------------------------------------------
AFTER
1 YEAR
TO AFTER 5 NOT
5 YEARS YEARS STATED TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING
ASSETS:
Federal funds sold
and securities
purchased under
agreement to resell
(1)................ -- -- -- $1,389,734
---------- ---------- ---------- ----------
Investment
securities:
U.S. Treasury and
agencies
obligations
(2).............. $ 803,607 -- -- 1,052,542
Collateralized
mortgage
obligations and
mortgage-backed
securities (2)... 83,599 $ 273,390 -- 375,994
Obligations of
states and
political
subdivisions..... 48,000 106,134 -- 401,047
Commercial paper
and other debt
securities....... -- -- -- 53,900
Other equity
securities (3)... -- -- $ 68,853 224,107
---------- ---------- ---------- ----------
Total investment
securities......... 935,206 379,524 68,853 2,107,590
---------- ---------- ---------- ----------
Loans (4), (5)....... 264,459 17,078 47,821 1,716,549
---------- ---------- ---------- ----------
Total
interest-earning
assets............. $1,199,665 $ 396,602 $ 116,674 $5,213,873
========== ========== ========== ==========
FUNDING SOURCES:
Money market and
NOW deposits..... -- -- -- $1,577,420
Time deposits...... $ 10,827 -- -- 836,081
---------- ---------- ---------- ----------
Total
interest-bearing
deposits........... 10,827 -- -- 2,413,501
Trust preferred
securities......... -- $ 38,589 -- 38,589
Portion of
noninterest-bearing
funding sources.... -- -- 2,761,783 2,761,783
---------- ---------- ---------- ----------
Total funding
sources............ $ 10,827 $ 38,589 $2,761,783 $5,213,873
========== ========== ========== ==========
GAP.................. $1,188,838 $ 358,013 $2,642,109 --
Cumulative Gap....... $2,287,096 $2,645,109 -- --
- ----------------------------------
(1) Includes interest-bearing deposits in other financial institutions of $549
as of December 31, 2000.
(2) Principal cash flows are based on estimated principal payments as of
December 31, 2000.
(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, 2000.
(4) Not stated column consists of nonaccrual loans of $18,287 and overdrafts of
$37,934, offset by unearned income of $8,400 as of December 31, 2000.
(5) Maturity/repricing columns for fixed rate loans are based upon the amount
and timing of related principal payments as of December 31, 2000.
34
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, 2000, our MVPE exposure related to the aforementioned changes in
market interest rates was within policy guidelines.
The following table presents our MVPE exposure at December 31, 2000 and
December 31, 1999 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, 2000:
+200 $946,674 $ 3,112 0.3%
+100 942,950 (612) (0.1)
-- 943,562
(100) 947,086 3,524 0.4
(200) 952,820 9,258 1.0
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)
The preceding table indicates that at December 31, 2000, in the event of an
instantaneous and sustained increase or decrease in market interest rates, our
MVPE would be expected to increase 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.
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, 2000, 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
35
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, 2000 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, 2000, our ratio of liquid
assets to total deposits was 65.2%. This ratio is well in excess of our minimum
policy guideline and is higher than the comparable ratio of 55.7% as of December
31, 1999. 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, 2000 and 1999, we were in compliance with all of
these policy measures.
In analyzing our liquidity during 2000, reference is made to our
consolidated statement of cash flows for the year ended December 31, 2000 (see
"Item 8. Consolidated 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 $159.1
million for 2000, which was adjusted for certain non-cash items including the
provision for loan losses, depreciation, deferred tax assets, 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 $296.5 million, and the net change in total loans resulting from
loan originations and principal collections, which resulted in a net
36
cash outflow of $156.8 million in 2000. Financing activities reflected the net
change in our total deposits, which increased $752.9 million during 2000, and
net cash proceeds received during the year from the issuance of common stock
totaling $115.6 million. In total, the transactions noted above resulted in a
net cash inflow of $415.2 million for 2000 and total cash and cash equivalents,
as defined in our consolidated statement of cash flows, of $1.7 billion at
December 31, 2000.
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 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. Consolidated Financial Statements and Supplementary Data--Note 9 to the
Consolidated Financial Statements--Trust Preferred Securities."
In December 1999, we issued 2.8 million shares of common stock at $21.00 per
share. In January 2000, we issued an additional 0.4 million shares at $21.00 per
share in relation to the exercise of an over-allotment option by the
underwriters for that offering. Proceeds from the sale of these securities in
December 1999 and January 2000 totaled $63.3 million, net of underwriting
commissions and other offering expenses. In August 2000, we issued an additional
2.3 million shares of common stock at $42.19 per share. We received proceeds of
$91.0 million related to the sale of these securities, net of underwriting
commissions and other offering expenses.
Stockholders' equity totaled $614.1 million at December 31, 2000, an
increase of $245.3 million, or 66.5%, from the $368.9 million balance at
December 31, 1999. This increase was primarily due to 2000 net income of $159.1
million, net proceeds from the issuance of common stock of $115.6 million,
offset by a decrease in after-tax net unrealized gains on available-for-sale
securities of $39.1 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, 2000.
The table below presents the relationship between the following significant
financial ratios:
YEARS ENDED DECEMBER
31,
------------------------------
2000 1999 1998
-------- -------- --------
Return on average assets.................................... 3.1% 1.3% 1.0%
DIVIDED BY
Average equity as a percentage of average assets............ 9.2% 6.0% 6.6%
EQUALS
Return on average equity.................................... 33.3% 21.9% 14.5%
TIMES
Earnings retained........................................... 100.0% 100.0% 100.0%
EQUALS
Internal capital growth..................................... 33.3% 21.9% 14.5%
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
37
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, 2000, 1999, and 1998. Capital ratios for Silicon and Silicon Valley
Bank are set forth below:
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Silicon Valley Bancshares:
Total risk-based capital ratio.............................. 18.5% 15.5% 11.5%
Tier 1 risk-based capital ratio............................. 17.2% 14.3% 10.3%
Tier 1 leverage ratio....................................... 12.6% 8.8% 7.6%
Silicon Valley Bank:
Total risk-based capital ratio.............................. 13.8% 14.0% 10.2%
Tier 1 risk-based capital ratio............................. 12.5% 12.7% 9.0%
Tier 1 leverage ratio....................................... 9.1% 7.9% 6.6%
The increase in our total risk-based capital ratio and the Tier 1 risk-based
capital ratio at the end of 2000 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 2000, which generated net proceeds of $115.6
million, and internally generated capital, primarily net income of $159.1
million. The Tier 1 leverage ratio also improved as of December 31, 2000 when
compared to December 31, 1999, as an increase in Tier 1 capital was partially
offset by an increase in quarterly average total assets. Quarterly average total
assets increased due to the strong growth in deposits during 2000.
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.
38
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:
- $18.4 million, or 1.1% of total loans, at December 31, 2000
- $28.5 million, or 1.7% of total loans, at December 31, 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
- $25.5 million, or 2.2% of total loans, at December 31, 1997
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
$8.3 million for the three months ended December 31, 2000 and $54.6 million for
the year ended December 31, 2000, as compared to $12.1 million and $52.4
million, respectively, for the comparable 1999 periods.
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
39
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. Recently, the stock prices of many technology companies have
declined significantly, and the capital markets have been less receptive to
initial public offerings. These reduced capital markets valuations could reduce
the amount of capital available to start-up and emerging growth companies,
including companies within our technology and life sciences niche.
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.
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 or financial 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 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.
ANY EXISTING UNREALIZED WARRANT, VENTURE CAPITAL FUND, AND DIRECT EQUITY
INVESTMENT 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 as well as direct equity
investments in companies from time to time. Many of the companies in our
portfolio are non-public. We may not be able to realize gains from warrants in
future periods, or our realized gains may be materially less than the current
level of unrealized gains disclosed in this filing, due to changes in investor
demand for initial public offerings and fluctuations in the market prices of the
underlying common stock of these companies. In addition, our investments in
venture capital funds and direct equity investments could lose value or become
worthless which would reduce our net income or could cause a net loss in any
period. The timing and amount of income, if any, from the disposition of client
warrants and venture capital fund and direct equity 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 and direct equity 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.
40
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 ONLY EXPERIENCED LOAN GROWTH OF 5.8% IN 2000, 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, 2000, were $1.7 billion, an increase of
$93.5 million 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 impeded average loan growth during 2000.
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 and early 2000, 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 late 2000, our average deposits declined slightly,
from $4.8 billion at September 30, 2000 to $4.7 billion at December 31, 2000, as
a result of slowing venture capital inflows into our clients. In the future, we
may be required to increase our deposit rates to attract deposits. Any material
decline would have a material adverse effect on our business and profitability.
Further, we expect our interest rate spread to decrease in 2001 as a result of
an expected decrease in short-term market interest rates, as well as our prime
rate.
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 many 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.
41
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.
THE PRICE OF OUR COMMON STOCK MAY DECREASE RAPIDLY AND SIGNIFICANTLY.
The market price of our common stock could decrease in price rapidly and
significantly at any time. The market price of our common stock has fluctuated
in recent years. Since January 1, 1999, the market price of our common stock has
ranged from a low of $8.41 per share to a high of $64.06 per share. Fluctuations
may occur, among other reasons, in response to:
- our operating results;
- the perceived value of our warrants, venture capital investments and
direct equity investments;
- trends in our nonperforming assets or the nonperforming assets of other
banks;
- announcements by our 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 Silicon 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.
42
ITEM 8. CONSOLIDATED 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, 2000 and
1999, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
San Francisco, California
January 17, 2001
43
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PAR VALUE)
ASSETS
Cash and due from banks.................................... $ 332,632 $ 278,061
Federal funds sold and securities purchased under agreement
to resell................................................ 1,389,734 898,041
Investment securities...................................... 2,107,590 1,747,408
Loans, net of unearned income.............................. 1,716,549 1,623,005
Allowance for loan losses.................................. (73,800) (71,800)
---------- ----------
Net loans.................................................. 1,642,749 1,551,205
Premises and equipment..................................... 18,493 10,742
Accrued interest receivable and other assets............... 135,577 110,941
---------- ----------
Total assets............................................... $5,626,775 $4,596,398
========== ==========
LIABILITIES, MINORITY INTEREST, AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand............................... $2,448,758 $1,928,100
NOW...................................................... 57,857 43,643
Money market............................................. 1,519,563 1,845,377
Time..................................................... 836,081 292,285
---------- ----------
Total deposits............................................. 4,862,259 4,109,405
Other liabilities.......................................... 81,138 79,606
---------- ----------
Total liabilities.......................................... 4,943,397 4,189,011
---------- ----------
Company obligated mandatorily redeemable trust preferred
securities of subsidiary trust holding solely junior
subordinated debentures (trust preferred securities)..... 38,589 38,537
Minority interest.......................................... 30,668 --
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; 48,977,906 and 44,800,736 shares outstanding
at December 31, 2000 and 1999, respectively.............. 49 45
Additional paid-in capital................................. 280,008 153,440
Retained earnings.......................................... 335,098 176,030
Unearned compensation...................................... (3,634) (2,327)
Accumulated other comprehensive income:
Net unrealized gains on available-for-sale investments... 2,600 41,662
---------- ----------
Total stockholders' equity................................. 614,121 368,850
---------- ----------
Total liabilities, minority interest, and stockholders'
equity................................................... $5,626,775 $4,596,398
========== ==========
See notes to consolidated financial statements.
44
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Interest income:
Loans............................................ $189,062 $162,973 $139,136
Investment securities............................ 114,226 87,692 64,787
Federal funds sold and securities purchased under
agreement to resell............................ 83,472 31,204 21,305
-------- -------- --------
Total interest income.............................. 386,760 281,869 225,228
-------- -------- --------
Interest expense:
Deposits......................................... 56,912 76,430 78,609
Other borrowings................................. -- -- 4
-------- -------- --------
Total interest expense............................. 56,912 76,430 78,613
-------- -------- --------
Net interest income................................ 329,848 205,439 146,615
Provision for loan losses.......................... 54,602 52,407 37,159
-------- -------- --------
Net interest income after provision for loan
losses........................................... 275,246 153,032 109,456
-------- -------- --------
Noninterest income:
Disposition of client warrants................... 86,322 33,003 6,657
Investment gains................................. 37,065 1,056 5,240
Client investment fees........................... 35,831 4,529 473
Letter of credit and foreign exchange income..... 18,586 14,027 7,397
Deposit service charges.......................... 3,336 2,764 1,730
Other............................................ 8,490 3,476 1,665
-------- -------- --------
Total noninterest income........................... 189,630 58,855 23,162
-------- -------- --------
Noninterest expense:
Compensation and benefits........................ 106,385 73,794 44,022
Professional services............................ 20,832 11,766 9,876
Retention and warrant incentive plans............ 17,311 2,102 210
Furniture and equipment.......................... 11,999 6,178 6,667
Business development and travel.................. 11,188 6,644 6,025
Net occupancy.................................... 9,363 6,689 5,195
Postage and supplies............................. 3,500 2,582 2,225
Advertising and promotion........................ 3,445 2,285 2,215
Trust preferred securities distributions......... 3,300 3,300 2,012
Telephone........................................ 2,815 1,846 2,157
Cost of other real estate owned.................. -- 268 (1,214)
Other............................................ 8,223 8,205 4,255
-------- -------- --------
Total noninterest expense.......................... 198,361 125,659 83,645
Minority interest.................................. 460 -- --
-------- -------- --------
Income before income tax expense................... 266,975 86,228 48,973
Income tax expense................................. 107,907 34,030 20,117
-------- -------- --------
Net income......................................... $159,068 $ 52,198 $ 28,856
======== ======== ========
Basic earnings per share........................... $ 3.41 $ 1.27 $ 0.71
Diluted earnings per share......................... $ 3.23 $ 1.23 $ 0.69
See notes to consolidated financial statements.
45
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
--------- -------- --------
(DOLLARS IN THOUSANDS)
Net income........................................... $159,068 $ 52,198 $28,856
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on
available-for-sale investments:
Unrealized holding gains......................... 34,452 60,196 6,672
Less: Reclassification adjustment for gains
included in net income......................... (73,514) (20,606) (7,019)
-------- -------- -------
Other comprehensive (loss) income.................... (39,062) 39,590 (347)
-------- -------- -------
Comprehensive income................................. $120,006 $ 91,788 $28,509
======== ======== =======
See notes to consolidated financial statements.
46
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31,
2000, 1999 AND 1998
---------------------------------------------------------------------------------
ACCUM-
ULATED
OTHER
COMMON STOCK ADDITIONAL UNEARNED COMPRE-
--------------------- PAID-IN RETAINED COMPEN- HENSIVE
SHARES AMOUNT CAPITAL EARNINGS SATION INCOME TOTAL
---------- -------- ---------- --------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Balance at December 31, 1997........ 19,940,474 $20 $ 82,989 $ 94,999 $(5,946) $ 2,419 $174,481
2 for 1 stock split in the form of a
stock dividend (Note 1)........... 19,940,474 20 -- (20) -- -- --
---------- --- -------- -------- ------- ------- --------
Balance at December 31, 1997, as
restated.......................... 39,880,948 40 82,989 94,979 (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)
2 for 1 stock split in the form of a
stock dividend (Note 1)........... 771,441 1 -- (1) -- -- --
---------- --- -------- -------- ------- ------- --------
Balance at December 31, 1998, as
restated.......................... 41,423,830 42 94,108 123,834 (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
2 for 1 stock split in the form of a
stock dividend (Note 1)........... 1,688,453 2 -- (2) -- -- --
---------- --- -------- -------- ------- ------- --------
Balance at December 31, 1999, as
restated.......................... 44,800,736 45 153,440 176,030 (2,327) 41,662 368,850
---------- --- -------- -------- ------- ------- --------
Issuance of common stock, net of
offering costs of $6.2 million.... 2,510,000 3 99,079 -- -- -- 99,082
Common stock issued under employee
benefit plans..................... 1,013,985 1 9,202 -- (3,274) -- 5,929
Income tax benefit from stock
options exercised and vesting of
restricted stock.................. -- -- 18,287 -- -- -- 18,287
Net income.......................... -- -- -- 159,068 -- -- 159,068
Amortization of unearned
compensation...................... -- -- -- -- 1,967 -- 1,967
Other comprehensive income:
Net change in unrealized gains/
(losses) on available-for-sale
investments..................... -- -- -- -- -- (39,062) (39,062)
2 for 1 stock split in the form of
a stock dividend (Note 1)....... 653,185 -- -- -- -- -- --
---------- --- -------- -------- ------- ------- --------
Balance at December 31, 2000........ 48,977,906 $49 $280,008 $335,098 $(3,634) $ 2,600 $614,121
========== === ======== ======== ======= ======= ========
See notes to consolidated financial statements.
47
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income.................................. $ 159,068 $ 52,198 $ 28,856
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses................. 54,602 52,407 37,159
Minority interest......................... (460) -- --
Depreciation and amortization............. 4,016 3,266 1,837
Net gain on sales of investment
securities.............................. (37,065) (1,056) (5,240)
Net gains on disposition of client
warrants................................ (86,322) (33,003) (6,657)
Net gain on sale of other real estate
owned................................... -- -- (1,298)
Increase in accrued interest receivable... (4,331) (12,474) (1,570)
Deferred income tax benefits.............. (5,127) (11,989) (5,346)
Increase in inventory..................... (5,991) (12,520) --
Increase in prepaid expenses.............. (1,128) (351) (1,013)
(Decrease) increase in unearned income.... (167) (1,436) 1,993
Increase (decrease) in retention, warrant
and other incentive plan payable........ 19,285 12,914 (2,503)
Other, net................................ 4,591 30,066 15,197
---------- ---------- ----------
Net cash provided by operating activities..... 100,971 78,022 61,415
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from maturities and paydowns of
investment securities..................... 914,238 1,130,975 1,810,770
Proceeds from sales of investment
securities................................ 224,015 577,773 850,879
Purchases of investment securities.......... (1,434,770) (1,992,948) (3,033,517)
Net increase in loans....................... (156,757) (44,156) (470,392)
Proceeds from recoveries of charged off
loans..................................... 10,778 7,901 2,264
Net proceeds from sales of other real estate
owned..................................... -- 400 1,323
Purchases of premises and equipment......... (11,767) (2,654) (8,909)
---------- ---------- ----------
Net cash used in investing activities......... (454,263) (322,709) (847,582)
---------- ---------- ----------
Cash flows from financing activities:
Net increase in deposits.................... 752,854 839,652 837,347
Proceeds from issuance of common stock, net
of issuance costs......................... 115,574 58,934 5,706
Proceeds from issuance of trust preferred
securities, net of issuance costs......... -- -- 38,485
Capital contributions from minority interest
participants.............................. 31,128 -- --
---------- ---------- ----------
Net cash provided by financing activities..... 899,556 898,586 881,538
---------- ---------- ----------
Net increase in cash and cash equivalents..... 546,264 653,899 95,371
Cash and cash equivalents at January 1,....... 1,176,102 522,203 426,832
---------- ---------- ----------
Cash and cash equivalents at December 31,..... $1,722,366 $1,176,102 $ 522,203
========== ========== ==========
Supplemental disclosures:
Interest paid............................... $ 55,789 $ 76,250 $ 78,445
Income taxes paid........................... $ 105,709 $ 54,760 $ 16,900
See notes to consolidated financial statements.
48
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 1999 and 1998 consolidated
financial statements to conform to the 2000 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,
Florida, Georgia, Illinois, Massachusetts, Minnesota, North Carolina, 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 addressing other specific industries in
which it can provide a higher level of service and better manage credit through
specialization and focus. 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 Strategic
Investors, LLC, Silicon Valley BancVentures, Inc., SVB Capital I and SVB Leasing
Company (inactive). Intercompany accounts and transactions have been eliminated
in consolidation. SVB Strategic Investors, LLC and Silicon Valley
BancVentures, Inc., as general partners, are considered to have significant
influence over the operating and financing policies of SVB Strategic Investors
Fund, L.P. and Silicon Valley BancVentures, L.P., respectively. Therefore, SVB
Strategic Investors Fund, L.P. and Silicon Valley BancVentures, L.P. are
included in the Company's consolidated financial statements. Minority interest
represents the minority participants' share of the equity of SVB Strategic
Investors Fund, L.P., and Silicon Valley BancVentures, L.P.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The preparation of consolidated 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.
49
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 include interest-bearing deposits in
other financial institutions of $549,000 and $291,000 at December 31, 2000 and
1999, respectively.
INVESTMENT SECURITIES
Investment securities are classified as either "available-for-sale,"
"held-to-maturity," "trading," or "non-marketable" 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. Unrealized gains or losses on warrant securities,
venture capital fund investments or other private equity investments are
recorded 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.
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.
The Company records non-marketable warrant securities, venture capital fund
investments and other private equity investments, on a cost basis less any
identified impairment. The asset value of non-marketable equity securities is
reduced when declines in value are considered to be other than temporary. Any
estimated loss is recorded in noninterest income as a loss from equity
securities along with income recognized on similar assets, if any. Venture
capital fund limited partner investment interests are reported under the cost
method as the Company's interests are considered so minor that it has no
influence over the related venture capital fund's operating and financial
policies. The Company's basis in these venture capital fund investments is
reduced by distributions until fully depleted. Distributions in excess of the
venture capital fund limited partner investment cost basis are recognized as
investment gains in noninterest income.
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 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.
50
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and interest appears probable.
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, 2000 and 1999.
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
51
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations, in accounting for its employee stock options rather than the
alternative fair value accounting allowed by SFAS No. 123, "Accounting for
Stock-Based Compensation." APB No. 25 provides that the compensation expense
relative to the Company's employee stock options is measured based on the
intrinsic value of the stock option. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide a pro forma disclosure of the impact of
applying the fair value method of SFAS No. 123. The Company accounts for stock
issued to non-employees in accordance with the provisions of SFAS No. 123 and
Financial Accounting Standards Board Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation."
EARNINGS PER SHARE
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
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
52
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 adopted this
statement on January 1, 2001. The adoption did not have a material effect on the
Company's financial statements.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of SFAS No. 125." Provisions of SFAS No. 140, primarily relating to
transfers of financial assets and securitizations that differ from provisions of
SFAS No. 125, are effective for transfers taking place after March 31, 2001.
SFAS No. 140 also provides revised guidance for an entity to be considered a
qualifying special purpose entity (QSPE). It is not expected that there will be
a material effect on the consolidated financial statements relating to a change
in consolidation status for existing QSPEs. SFAS No. 140 also amends the
accounting for collateral and requires new disclosures for collateral,
securitizations and retained interests in securitizations. These provisions are
effective for financial statements for fiscal years ending after December 15,
2000. This change in accounting for collateral did not have a material effect on
the Company's consolidated financial statements.
COMMON STOCK SPLIT
In March 2000, the Board of Directors approved a two-for-one stock split, in
the form of a stock dividend of the Company's common stock. Holders of the
Company's $0.001 par value common stock as of the record date, April 21, 2000
received one additional share of $0.001 par value for every one share of common
stock they owned as of the record date. Shares and per share amounts for all
periods presented in the accompanying consolidated financial statements have
been adjusted to give retroactive recognition to a two-for-one stock split
distributed on May 15, 2000.
53
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, 2000, 1999 and 1998:
YEARS ENDED DECEMBER 31,
2000, 1999 AND 1998
---------------------------------
PER SHARE
NET INCOME SHARES AMOUNT
---------- -------- ---------
(DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
2000:
Basic EPS:
Income available to common stockholders............... $159,068 46,656 $3.41
Effect of Dilutive Securities:
Stock options and restricted stock.................... -- 2,564 --
-------- ------ -----
Diluted EPS:
Income available to common stockholders plus assumed
conversions......................................... $159,068 49,220 $3.23
======== ====== =====
1999:
Basic EPS:
Income available to common stockholders............... $ 52,198 41,258 $1.27
Effect of Dilutive Securities:
Stock options and restricted stock.................... -- 1,260 --
-------- ------ -----
Diluted EPS:
Income available to common stockholders plus assumed
conversions......................................... $ 52,198 42,518 $1.23
======== ====== =====
1998:
Basic EPS:
Income available to common stockholders $ 28,856 40,536 $0.71
Effect of Dilutive Securities:
Stock options and restricted stock.................... -- 1,311 --
-------- ------ -----
Diluted EPS:
Income available to common stockholders plus assumed
conversions......................................... $ 28,856 41,847 $0.69
======== ====== =====
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
$33.3 million and $16.0 million at December 31, 2000 and 1999, respectively. The
average required reserve balance totaled $22.8 million in 2000 and $7.0 million
in 1999
4. SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Securities purchased under agreement to resell outstanding at December 31,
2000 consisted of U.S. agency 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 $519.2 million at
December 31, 2000, averaged $608.3 million in 2000, and the maximum amount
outstanding at any month-end during 2000 was $707.0 million.
54
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENT SECURITIES
The Company did not maintain a trading portfolio during 2000 or 1999. The
following tables detail the major components of the Company's investment
securities portfolio at December 31, 2000 and 1999.
DECEMBER 31, 2000
-------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Available-for-sale securities:
U.S. Treasury securities............ $ 25,000 $ 11 -- $ 25,011
U.S. agencies and corporations:
Discount notes and bonds.......... 1,027,663 3,160 $(3,292) 1,027,531
Mortgage-backed securities........ 166,613 1,176 (1,380) 166,409
Collateralized mortgage
obligations..................... 212,582 601 (3,598) 209,585
Obligations of states and political
subdivisions...................... 400,127 1,620 (700) 401,047
Commercial paper and other debt
securities........................ 53,900 -- -- 53,900
Money market mutual funds........... 155,254 -- -- 155,254
Warrant securities.................. 224 6,809 -- 7,033
Other equity investments............ 50 -- (27) 23
---------- ------- ------- ----------
Total available-for-sale securities... $2,041,413 $13,377 $(8,997) 2,045,793
========== ======= ======= ----------
Non-marketable securities at cost:
Federal Reserve Bank stock and tax credit funds........................... 15,538
Venture capital fund investments.......................................... 30,519
Other private equity investments.......................................... 15,740
----------
Total non-marketable securities............................................. 61,797
----------
Total investment securities................................................. $2,107,590
==========
55
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENT SECURITIES (CONTINUED)
DECEMBER 31, 1999
-------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES 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.... 250 42,500 -- 42,750
Other equity investments............ 50 2,306 -- 2,356
---------- -------- -------- ----------
Total available-for-sale securities... $1,654,664 $112,983 $(44,458) 1,723,189
========== ======== ======== ----------
Non-marketable securities at cost:
Federal Reserve Bank stock and tax credit funds........................... 12,336
Venture capital fund investments.......................................... 9,811
Other private equity investments.......................................... 2,072
----------
Total non-marketable securities............................................. 24,219
----------
Total investment securities................................................. $1,747,408
==========
The amortized cost and fair value of investment securities classified as
available-for-sale at December 31, 2000, 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, 2000
-----------------------
AMORTIZED CARRYING
COST VALUE
---------- ----------
(DOLLARS IN THOUSANDS)
Due in one year or less.................................... $ 468,491 $ 468,081
Due after one year through five years...................... 858,356 858,684
Due after five years through ten years..................... 133,073 133,627
Due after ten years........................................ 643,290 647,198
---------- ----------
Total...................................................... $2,103,210 $2,107,590
========== ==========
Investment securities with a fair value of $45.2 million and $36.8 million
at December 31, 2000 and 1999, 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 excluding warrant gains
resulted in the Company realizing gross gains of $37.2 million, $2.0 million and
$5.3 million, and gross losses of $0.2 million, $1.0 million and $0.1 million in
2000, 1999 and 1998, respectively. Warrant gains totaled $86.3 million, $33.0
million, and $6.7 million in 2000, 1999, and 1998, respectively.
56
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The detailed composition of loans, net of unearned income of $8.4 million
and $8.6 million at December 31, 2000 and 1999, respectively, is presented in
the following table:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Commercial................................................. $1,531,468 $1,414,728
Real estate construction................................... 62,253 76,209
Real estate term........................................... 38,380 67,738
Consumer and other......................................... 84,448 64,330
---------- ----------
Total loans................................................ $1,716,549 $1,623,005
========== ==========
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.
As of December 31, 2000, 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,
------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at January 1,.................................. $71,800 $46,000 $37,700
Provision for loan losses.............................. 54,602 52,407 37,159
Loans charged off...................................... (63,380) (34,508) (31,123)
Recoveries............................................. 10,778 7,901 2,264
------- ------- -------
Balance at December 31,................................ $73,800 $71,800 $46,000
======= ======= =======
The aggregate recorded investment in loans for which impairment has been
determined in accordance with SFAS No. 114 totaled $18.3 million and $27.6
million at December 31, 2000 and 1999, respectively. During 2000 and 1999,
nonaccrual loans represented all impaired loans. Allocations of the allowance
for loan losses related to impaired loans totaled $8.0 million at December 31,
2000 and $14.9 million at December 31, 1999. Average impaired loans for 2000 and
1999 totaled $24.3 million and $37.8 million, respectively. If these loans had
not been impaired, $1.4 million in interest income would have been realized
during the years ended December 31, 2000 and 1999, respectively. The Company
realized no interest income on such impaired loans during 2000 or 1999.
57
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
DECEMBER 31,
-----------------------
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Cost:
Furniture and equipment................................... $17,568 $11,067
Leasehold improvements.................................... 12,648 7,626
------- -------
Total cost.................................................. 30,216 18,693
Accumulated depreciation and amortization................... (11,723) (7,951)
------- -------
Premises and equipment-net.................................. $18,493 $10,742
======= =======
The Company is obligated under a number of noncancelable operating leases
for premises that expire at various dates through January 2006, and in most
instances, include options to renew or extend at market 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, 2000:
YEARS ENDING DECEMBER 31,
- -------------------------
(DOLLARS IN THOUSANDS)
2001........................................................ $ 9,017
2002........................................................ 9,046
2003........................................................ 8,757
2004........................................................ 8,550
2005........................................................ 4,765
After 2005.................................................. 1,442
-------
Total....................................................... $41,577
=======
Rent expense for premises leased under operating leases totaled $5.4
million, $3.8 million and $3.0 million for the years ended December 31, 2000,
1999 and 1998, respectively.
8. DEPOSITS
The aggregate amount of time deposit accounts individually exceeding
$100,000 totaled $773.5 million and $258.1 million at December 31, 2000 and
1999, respectively. At December 31, 2000, time deposit accounts, individually
exceeding $100,000, totaling $768.2 million 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 were paid for each of the years ended December 31, 2000 and 1999 and
$2.0 million for the year ended December 31, 1998. The obligations of the trust
are fully and unconditionally guaranteed, on a subordinated basis, by the
Company.
58
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. TRUST PREFERRED SECURITIES (CONTINUED)
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.
Based on the Nasdaq closing price, the fair value of the trust preferred
securities totaled $32.8 million and $29.6 million as of December 31, 2000 and
1999, respectively.
10. INCOME TAXES
The components of the Company's provision for income taxes consist of the
following:
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
--------- -------- --------
(DOLLARS IN THOUSANDS)
Current provision:
Federal............................................. $ 89,415 $36,089 $19,649
State............................................... 23,619 9,930 5,814
Deferred expense (benefit):
Federal............................................. (6,205) (10,198) (4,629)
State............................................... 1,078 (1,791) (717)
-------- ------- -------
Income tax expense.................................... $107,907 $34,030 $20,117
======== ======= =======
A reconciliation between the federal statutory income tax rate and the
Company's effective income tax rate is shown below.
YEARS ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Federal statutory income tax rate........................... 35.0% 35.0% 35.0%
State income taxes, net of the federal tax effect........... 6.0 6.1 6.8
Tax-exempt interest income.................................. (0.9) (2.0) (2.0)
Other-net................................................... 0.3 0.4 1.3
---- ---- ----
Effective income tax rate................................... 40.4% 39.5% 41.1%
==== ==== ====
59
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,
-----------------------
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Allowance for loan losses................................. $28,000 $28,138
Other accruals not currently deductible................... 8,196 3,661
State income taxes........................................ 7,480 3,522
Depreciation and amortization............................. -- 1,891
------- -------
Deferred tax assets......................................... 43,676 37,212
Less: Valuation allowance................................... -- --
------- -------
Deferred tax assets, net of valuation allowance............. 43,676 37,212
------- -------
Deferred tax liabilities:
Depreciation and amortization............................. (1,333) --
Other deferred tax liabilities............................ (127) (123)
Net unrealized gain on available-for-sale securities...... (1,781) (26,861)
------- -------
Deferred tax liabilities.................................... (3,241) (26,984)
------- -------
Net deferred tax assets..................................... $40,435 $10,228
======= =======
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,
-------------------------------
2000 1999 1998
--------- -------- --------
(DOLLARS IN THOUSANDS)
Change in unrealized gains/(losses) on
available-for-sale investments:
Unrealized holding gains arising during the
period.......................................... $ 57,824 $99,498 $ 11,310
Related income tax expense........................ (23,372) (39,302) (4,638)
Less: Reclassification adjustment for gains
included in net income.......................... (123,387) (34,059) (11,897)
Related income tax benefit........................ 49,873 13,453 4,878
--------- ------- --------
Other comprehensive (loss)/income................... $ (39,062) $39,590 $ (347)
========= ======= ========
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.
60
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
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
$0.7 million in 2000, $0.6 million in 1999 and $0.5 million in 1998.
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 $2.4 million in 2000,
$1.7 million in 1999 and $1.1 million in 1998.
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 $4.5 million in 2000 and
$3.1 million in 1999. 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, 2000, the ESOP owned 1,531,799 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 common 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
2000, 84,789 shares of the Company's common stock were issued at $21.04 per
share, while 61,261 shares of the Company's common stock were issued at $29.38
per share for the second six-month offering period of 2000. At December 31,
2000, a total of 1,841,392 shares of the Company's common stock were reserved
for future issuance under the ESPP Plan.
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
61
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
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:
2000 1999 1998
---------------------- --------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- --------- --------- ---------- ---------
Outstanding at
January 1,............. 3,803,258 $ 9.25 3,154,174 $ 8.78 3,810,216 $ 5.84
Granted................ 2,069,100 28.43 1,060,000 9.32 762,180 14.56
Exercised.............. (1,066,534) 7.45 (311,986) 4.15 (1,233,262) 3.44
Forfeited.............. (226,250) 16.89 (98,930) 11.01 (184,960) 8.06
---------- ------ --------- ------ ---------- ------
Outstanding at
December 31,........... 4,579,574 $17.93 3,803,258 $ 9.25 3,154,174 $ 8.78
========== ====== ========= ====== ========== ======
Exercisable at
December 31,........... 1,278,475 $ 9.10 1,611,108 $ 7.37 1,341,974 $ 6.06
========== ====== ========= ====== ========== ======
The following table summarizes information about stock options outstanding
as of December 31, 2000:
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
- --------------------- ----------- ------------- -------------- ----------- --------------
$3.41-$6.53 257,692 0.56 $ 5.50 257,692 $ 5.67
7.88-8.25 824,032 6.08 8.24 592,032 8.24
8.94 735,102 8.06 8.94 150,103 8.94
9.16-15.03 686,648 7.56 13.68 237,648 13.66
15.63-21.28 235,000 8.59 16.81 37,000 16.47
23.69 1,138,500 9.30 23.69 4,000 23.69
26.03-40.00 470,100 9.75 32.96 -- --
40.38-49.50 129,000 9.69 48.55 -- --
51.69 98,500 9.72 51.69 -- --
58.25 5,000 9.75 58.25 -- --
--------- ---- ------- --------- ------
$3.41-$58.25 4,579,574 7.79 $ 17.93 1,278,475 $ 9.10
========= ==== ======= ========= ======
At December 31, 2000, options for 433,016 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 2000, 129,776 shares of restricted stock were issued to employees at a
weighted-average fair value of $29.48 per share. In 1999, 51,400 shares of
restricted stock were issued to employees at a weighted-average fair value of
$10.34 per share. In 1998, 54,000 shares of restricted stock were issued to
employees at a weighted-average fair value of $15.00 per share. At December
62
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
31, 2000, there were 460,609 shares of restricted stock outstanding, and the
vesting of these shares occurs at various periods through the year 2003.
The Company recognized $2.2 million, $1.8 million and $2.0 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 2000, 1999 and 1998, respectively.
The weighted-average fair values of options granted to employees, directors
and certain other parties were $22.40, $4.76 and $6.20 per share in 2000, 1999
and 1998, respectively. Had compensation cost related to both the Company's
stock option 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,
----------------------------------
2000 1999 1998
---------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Net income:
As reported......................................... $159,068 $52,198 $28,856
Pro forma........................................... 148,897 48,149 26,344
Basic earnings per share:
As reported......................................... $ 3.41 $ 1.27 $ 0.71
Pro forma........................................... 3.19 1.17 0.65
Diluted earnings per share:
As reported......................................... 3.23 $ 1.23 $ 0.69
Pro forma........................................... 3.07 1.15 0.63
The fair value of the stock option grants in 2000, 1999 and 1998 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,
------------------------------
2000 1999 1998
-------- -------- --------
Dividend yield.............................................. --% --% --%
Expected life of options in years........................... 5 5 5
Expected volatility of the Company's underlying common
stock..................................................... 105.1% 49.7% 39.5%
Expected risk-free interest rate............................ 5.0% 6.3% 5.3%
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 2000, 1999 and 1998, 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.
63
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, 2000 and 1999. 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,
-------------------------
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Balance at January 1,....................................... $1,685 $ 955
Loan proceeds disbursed..................................... 633 1,100
Loan repayments............................................. (205) (370)
------ ------
Balance at December 31,..................................... $2,113 $1,685
====== ======
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 a contribution from
the Company totaling $2.1 million in 1999.
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, 2000 and 1999, the Company
had $1.3 billion and $1.2 billion of unused loan commitments available to
customers, of which $282.3 million and $132.3 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 loan commitment agreements
totaled $2.3 billion and $1.6 billion at December 31, 2000 and 1999,
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.
64
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
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 and are often cash secured by the
clients. 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, 2000 and 1999, commercial and standby letters
of credit totaled a combined $919.7 million and $289.9 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, 2000 and 1999, the
notional amounts of these contracts totaled $102.6 million and $32.4 million,
respectively. The maximum credit exposure for counterparty nonperformance for
foreign exchange forward contracts with both customers and correspondent banks
amounted to $3.6 million at December 31, 2000 and $0.2 million at December 31,
1999. The Company has incurred no losses from counterparty nonperformance and
anticipates performance by all counterparties to such foreign exchange forward
contracts.
COMMITMENTS TO INVEST IN VENTURE CAPITAL FUNDS
As of December 31, 2000, the Company committed $49.5 million to 208 limited
partnership interests in venture capital funds, of which $26.2 million has been
funded. Approximately $6.1 million in distributions were used to reduce the
Company's cost basis in these investments. Additionally, as of December 31,
2000, the Company committed $15.0 million and $6.0 million to SVB Strategic
Investors Fund, L.P., to invest in top-tier venture capital funds, and Silicon
Valley BancVentures, L.P., to make direct equity investments in emerging growth
high technology and life sciences companies, respectively. Of these commitment
amounts $3.0 million and $0.9 million have been funded, respectively.
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. The face value of the
interest rate swap at December 31, 1999 was $150.0 million. This agreement
involved the exchange of variable rate payments for fixed rate payments without
the exchange of the underlying face value. Under this agreement, the Company
65
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
received fixed interest payments at a rate of 7.765% and paid 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 were 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 was Bank of America National
Trust and Savings Association. The Company was not a party to any swap
agreements at December 31, 2000.
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 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 marketable investment securities classified as
available-for-sale, fair values are based on quoted market prices or dealer
quotes. The Company records non-marketable venture capital fund investments and
other private equity investments, on a cost basis less any identified
impairment.
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
66
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
interest rate sensitivity of the individual deposit accounts was taken into
account in determining the fair value.
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, 2000 and 1999,
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.
The estimated fair values of the Company's financial instruments at December
31, 2000 and 1999 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,
-------------------------------------------------
2000 1999
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Financial Assets:
Cash and due from banks......... $ 332,632 $ 332,632 $ 278,061 $ 278,061
Federal funds sold and
securities purchased under
agreement to resell........... 1,389,734 1,389,734 898,041 898,041
Investment securities, at fair
value......................... 2,045,793 2,045,793 1,723,189 1,723,189
Non-marketable securities, at
cost.......................... 61,797 61,797 24,219 24,219
Net loans....................... 1,642,749 1,636,748 1,551,205 1,555,729
Financial Liabilities:
Noninterest-bearing demand
deposits...................... 2,448,758 2,229,068 1,928,100 1,671,647
NOW deposits.................... 57,857 42,238 43,643 39,245
Money market deposits........... 1,519,563 1,469,534 1,845,377 1,735,982
Time deposits................... 836,081 784,523 292,285 291,412
Off-Balance Sheet Financial
Instruments:
Foreign exchange forward
contracts--receive............ -- 49,180 -- 16,238
Foreign exchange forward
contracts--pay................ -- (49,180) -- (16,238)
Interest rate swap agreement.... -- -- -- (211)
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
67
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. LEGAL MATTERS (CONTINUED)
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, 2000,
approximately $145.9 million of the Bank's retained earnings were available for
dividend declaration to the Company without prior regulatory approval.
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.
68
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, 2000 and 1999:
MINIMUM
ACTUAL ACTUAL MINIMUM CAPITAL
RATIO AMOUNT RATIO REQUIREMENT
-------- --------- -------- -----------
(DOLLARS IN THOUSANDS)
As of December 31, 2000:
Total risk-based capital ratio
Company................................. 18.5% $730,453 8.0% $315,993
Bank.................................... 13.8% $523,816 8.0% $304,539
Tier 1 risk-based capital ratio
Company................................. 17.2% $680,778 4.0% $157,997
Bank.................................... 12.5% $475,908 4.0% $152,270
Tier 1 leverage ratio
Company................................. 12.6% $680,778 4.0% $216,576
Bank.................................... 9.1% $475,908 4.0% $210,210
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
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 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
69
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. STOCKHOLDERS' RIGHTS PLAN (CONTINUED)
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, 2000 and 1999, and the related condensed statements of
income and condensed statements of cash flows for the years ended December 31,
2000, 1999 and 1998 are presented below. Certain reclassifications have been
made to the parent company's 1999 and 1998 financial information to conform to
the 2000 presentations. Such reclassifications had no effect on the results of
operations or stockholders' equity.
CONDENSED BALANCE SHEETS
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Assets:
Cash on deposit with bank subsidiary...................... $ 37,552 $ 1,313
Securities purchased under agreement to resell............ -- 17,750
Investment securities, at fair value...................... 127,275 134,346
Loans to related parties 2,113 1,685
Other assets.............................................. 18,577 2,133
Investment in subsidiaries:
Bank subsidiary......................................... 474,478 295,395
Nonbank subsidiaries.................................... 5,706 1,237
-------- --------
Total assets................................................ $665,701 $453,859
======== ========
Short-term liabilities...................................... $ 8,858 $ 813
Deferred tax liability...................................... 2,754 44,281
Indebtedness to nonbank subsidiary.......................... 41,379 41,379
Deferred issuance costs..................................... (1,411) (1,464)
-------- --------
Indebtedness to nonbank subsidiary, net of deferred issuance
costs..................................................... 39,968 39,915
-------- --------
Stockholders' equity........................................ 614,121 368,850
-------- --------
Total liabilities and stockholders' equity.................. $665,701 $453,859
======== ========
70
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
--------- -------- --------
(DOLLARS IN THOUSANDS)
Interest income....................................... $ 3,518 $ 972 $ 1,050
Interest expense...................................... (3,402) (3,402) (2,070)
Income from the disposition of client warrants........ 86,322 33,003 6,657
Investment gains...................................... 37,065 1,510 --
General and administrative expenses................... (1,153) (562) (285)
Income tax expense.................................... (49,664) (12,932) (2,248)
-------- ------- -------
Income before equity in net income of subsidiaries.... 72,686 18,589 3,104
Equity in net loss of nonbank subsidiaries............ (139) -- --
Equity in net income of bank subsidiary............... 86,521 33,609 25,752
-------- ------- -------
Net income............................................ $159,068 $52,198 $28,856
======== ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
--------- -------- --------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income.......................................... $159,068 $52,198 $28,856
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Net gains on dispositions of client warrants...... (86,322) (33,003) (6,657)
Net gains on sale of investment securities........ (37,065) (1,510) --
Equity in net income of bank subsidiary........... (86,521) (33,609) (25,752)
Equity in net loss of nonbank subsidiaries........ 139 -- --
(Increase) decrease in other assets............... (16,444) (1,814) 192
Increase (decrease) in short-term and other
liabilities..................................... 8,045 (172) 467
Other, net 493 33,042 6,658
-------- ------- -------
Net cash (used in) provided by operating activities... (58,607) 15,132 3,764
-------- ------- -------
Cash flows from investing activities:
Net (increase) decrease in investment securities.... 24,281 12,034 (29,377)
Net increase in loans to related parties............ (428) (730) (705)
Investment in bank subsidiary....................... (57,723) (69,200) (26,039)
Investment in nonbank subsidiaries.................. (4,608) -- (1,237)
-------- ------- -------
Net cash used in investing activities................. (38,478) (57,896) (57,358)
-------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs.................................... 115,574 59,331 7,642
Proceeds from borrowings from nonbank subsidiary,
net of costs...................................... -- -- 39,864
-------- ------- -------
Net cash provided by financing activities............. 115,574 59,331 47,506
-------- ------- -------
Net increase (decrease) in cash....................... 18,489 16,567 (6,088)
Cash and cash equivalents at January 1,............... 19,063 2,496 8,584
-------- ------- -------
Cash and cash equivalents at December 31,............. $ 37,552 $19,063 $ 2,496
======== ======= =======
71
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. UNAUDITED QUARTERLY FINANCIAL DATA
2000 1999
----------------------------------------- -----------------------------------------
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....... $71,500 $81,898 $87,766 $88,684 $41,402 $46,772 $54,389 $62,876
Provision for loan
losses.................. 12,572 11,058 22,679 8,293 7,968 10,802 21,563 12,074
Noninterest income........ 81,134 34,595 43,058 30,843 5,252 6,458 13,414 33,731
Noninterest expense....... 47,519 49,000 50,024 51,818 25,537 27,797 29,716 42,609
Minority interest......... -- -- 209 251 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes................... 92,543 56,435 58,330 59,667 13,149 14,631 16,524 41,924
Income tax expense........ 37,888 22,700 23,391 23,928 5,313 5,678 6,015 17,024
------- ------- ------- ------- ------- ------- ------- -------
Net income................ $54,655 $33,735 $34,939 $35,739 $ 7,836 $ 8,953 $10,509 $24,900
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per
share................... $ 1.21 $ 0.74 $ 0.74 $ 0.74 $ 0.19 $ 0.22 $ 0.26 $ 0.60
Diluted earnings per
share................... $ 1.15 $ 0.70 $ 0.69 $ 0.70 $ 0.19 $ 0.21 $ 0.25 $ 0.57
72
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 2001 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 2001 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 2001
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
2001 Annual Meeting of Stockholders is incorporated herein by reference.
73
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2.
The consolidated 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 consolidated
financial statements or related notes.
(a) 3.
Exhibits are listed in the Index to Exhibits beginning on page 76 of this
report.
(B) REPORTS ON FORM 8-K.
1. A report on Form 8-K was filed on June 16, 2000, whereby the Company
announced that the Federal Reserve Bank of San Francisco and the
California Department of Financial Institutions have removed the
memorandum of understanding the Bank had been under since September 1999.
2. A report on Form 8-K was filed on June 16, 2000, whereby the Company
announced financial highlights for the two-months ended May 31, 2000.
3. A report on Form 8-K was filed on July 24, 2000, whereby the Company
announced financial results for the three and six months ended June 30,
2000.
4. On July 25, 2000, the Company filed a report on Form 8-K to announce its
investment in the Nippon Credit Bank and partnering of the Company with
the Softbank in connection with the investment in the Nippon Credit Bank.
Also, the Company announced that SVB Strategic Investors Fund, L.P.,
completed its first close of $64.5 million on June 21, 2000.
74
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 16, 2001
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 Directors March 16, 2001
Daniel J. Kelleher and Director
/s/ JOHN C. DEAN President, Chief Executive Officer
---------------------------- and Director March 16, 2001
John C. Dean (Principal Executive Officer)
/s/ KENNETH P. WILCOX
---------------------------- Executive Vice President and March 16, 2001
Kenneth P. Wilcox Director
/s/ CHRISTOPHER T. LUTES
---------------------------- Chief Financial Officer March 16, 2001
Christopher T. Lutes (Principal Financial Officer)
/s/ DONAL D. DELANEY
---------------------------- Controller March 16, 2001
Donal D. Delaney (Principal Accounting Officer)
/s/ GARY K. BARR
---------------------------- Director March 16, 2001
Gary K. Barr
/s/ JAMES F. BURNS, JR.
---------------------------- Director March 16, 2001
James F. Burns, Jr.
/s/ DAVID M. DEWILDE
---------------------------- Director March 16, 2001
David M. deWilde
/s/ STEPHEN E. JACKSON
---------------------------- Director March 16, 2001
Stephen E. Jackson
/s/ JAMES R. PORTER
---------------------------- Director March 16, 2001
James R. Porter
75
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)........................................ --
10.36 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)....................... --
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)............................................. --
10.43 Preferred Shares Rights Agreement, as of October 22,
1998 (12)................................................. --
10.44 1999 Employee Stock Purchase Plan (14)...................... --
76
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- --------------------- ------------------------------------------------------------ -------------
10.45 Silicon Valley Bancshares 1997 Equity Incentive Plan,
amended as of July 20, 2000 (15).......................... --
10.46 Change in Control Severance Benefits Policy, effective
August 18, 2000 (15)...................................... --
21.1 Subsidiaries of Silicon Valley Bancshares................... 78
23.1 Consent of Independent Auditors............................. 79
- ------------------------
(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 Exhibit 10.33 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
(6) Incorporated by reference to Exhibit 10.17(a) 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.
(11) Incorporated by reference to Exhibits 10.40 and 10.41 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.
(14) Incorporated by reference to Exhibit 10.44 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999.
(15) Incorporated by reference to Exhibits 10.45 and 10.46 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
77