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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 1997
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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, 1996
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
SILICON VALLEY BANCSHARES
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-2856336
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3003 TASMAN DRIVE 95054-1191
SANTA CLARA, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 654-7282
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (no par value) Nasdaq National Market
(Title of each class) (Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of its common stock on January 31,
1997, on the Nasdaq National Market was $344,358,035.
At January 31, 1997, 9,499,532 shares of the registrant's common stock (no
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
1997
Annual Meeting of Shareholders to be filed
within
120 days of the end of the fiscal year
ended December 31, 1996 Part III
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This report contains a total of 74 pages, including exhibits.
The Exhibit Index is on page 69.
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TABLE OF CONTENTS
PAGE
PART I ......
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ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 17
ITEM 3. LEGAL PROCEEDINGS 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 18
ITEM 6. SELECTED FINANCIAL DATA 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 64
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 65
ITEM 11. EXECUTIVE COMPENSATION 65
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 65
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 65
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 66
SIGNATURES 67
INDEX TO EXHIBITS 69
2
PART I
ITEM 1. BUSINESS
GENERAL Silicon Valley Bancshares (the "Company") is a California corporation
and bank holding company that was incorporated on April 23, 1982. The Company's
principal subsidiary is Silicon Valley Bank (the "Bank"), a wholly owned
subsidiary of the Company that was organized and incorporated as a California
banking corporation on October 17, 1983. SVB Leasing Company, a wholly owned
subsidiary of the Company, was incorporated on November 14, 1984 as a California
corporation, and has remained inactive since incorporation.
The Bank is a member of the Federal Reserve System and its deposits are
insured by the Federal Deposit Insurance Corporation (FDIC). The Bank serves
emerging growth and middle-market companies in specific targeted niches,
focusing on the technology and life sciences industries, while also identifying
and capitalizing on opportunities to serve companies in other industries whose
financial services needs are underserved.
BUSINESS OVERVIEW The Bank provides commercial lending and other financial
products and services to clients in the technology and life sciences industries,
as well as in other specifically targeted niches. These clients are served
across the nation by the Bank through branches and/or loan offices located in
Northern and Southern California, Colorado, Maryland, Massachusetts, Oregon,
Texas, and Washington, as well as through the Bank's National Division. Since
1994, the Bank has refined a niche strategy based on identifying and
capitalizing on market niches whose financial services needs are underserved. By
dedicating resources to individual practices within these niches, the Bank is
able to provide the highest level of expertise and quality service to its
clients.
TECHNOLOGY AND LIFE SCIENCES NICHE The Bank's technology and life sciences
niche focuses on commercial lending to companies within a variety of technology
and life sciences industries and markets across the nation. These companies are
generally liquid, net providers of funds to the Bank, and often have low
utilization of their credit facilities. Lending to this niche is typically
related to equipment financing, working capital lines of credit, asset
acquisition loans, and bridge financing. Many of these clients are not affected
by local economic cycles as much as they are influenced by the global market
conditions for their industry's products or services. The following is an
overview of the Bank's technology and life sciences niche practices.
The communications practice serves companies in the telecommunications,
networking and on-line industries. The telecommunications industry encompasses
the suppliers of equipment and services to companies and consumers for the
transmission of voice, data and video. The networking industry includes
companies supplying the equipment and services that facilitate distributed
enterprise networks such as local and wide area networks. Companies included in
the on-line industry supply access, content, services, and support to
individuals and businesses participating on the internet, or in other on-line
activities.
The computers and peripherals practice focuses on companies that are engaged
in the support and manufacturing of computers, electronic components and related
peripheral products. Specific markets these companies serve include personal
computers, specialty computer systems, add-in boards, printers, storage devices,
networking equipment, and contract manufacturing.
The semiconductor practice comprises 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 (CAD), and computer-aided manufacturing (CAM).
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The software practice consists largely of companies specializing in the
design of integrated computer systems, computer programming services, and the
development and marketing of commercial and industrial applications as well as
prepackaged software.
The life sciences practices serve companies in the medical devices,
biotechnology and health care services industries. The medical devices industry
encompasses companies involved in the design, manufacturing and distribution of
surgical instruments and medical equipment. The biotechnology industry includes
companies performing research and development of therapeutics and diagnostics
for the medical and pharmaceuticals industries. Companies included in the health
care services industry deal with patients, either in a primary care or secondary
care role.
In addition to the industry-related practices discussed above, the Bank's
Pacific Rim practice serves the market of Asian-owned or managed companies
located in the U.S. which meet the criteria for inclusion in any of the
industries mentioned above, while the venture capital practice provides venture
capital firms with financing and other banking products and services.
SPECIAL INDUSTRY NICHES The Bank has always served a variety of commercial
enterprises unrelated to its technology and life sciences niche. These clients
are served through several special industry niches which generally focus their
lending in specific regions throughout the U.S. The Bank's niche strategy
evolved from existing clients unrelated to the technology and life sciences
niche, and the Bank continues to follow this strategy by identifying industries
whose financial services needs are underserved. The following is a brief summary
of the special industry niches served by the Bank.
The Bank's real estate niche consists of all real estate construction and
term loans whose primary source of repayment is cash flow or sales proceeds from
real property collateral. The focus of the real estate niche consists of
construction loans for residential and retail projects, and construction and
mini-permanent loans on retail, industrial and office projects.
During 1994, the Bank began to focus on lending to premium wineries, and in
1996 opened an office in St. Helena, California in continuation of its efforts
to establish a dominant presence in this niche. The wineries within this niche
generally produce smaller, select or exclusive vintages, averaging 3,000 to
150,000 cases annually. Lending in this niche consists of both short-term
inventory loans and term loans related to vineyard acquisition and development,
equipment and cooperage.
In late 1995, the Bank established a niche to focus on serving the credit
needs of churches, temples, schools, and other religious organizations
nationwide. Products offered through this niche include term loans for
refinancing existing debt, acquiring property and for construction, remodeling
or renovation projects.
The Bank opened its entertainment niche in Beverly Hills, California in early
1996. This niche focuses on production loans for entertainment products,
including film, television and new media, as well as commercial loans to
entertainment-related companies including producers, distributors and sales
agents.
In addition to serving the niches listed above, the Bank serves a variety of
manufacturing companies and service industries through its diversified
industries practice in Northern California. This practice allows the Bank to
continue to evaluate and pursue potential niches by initially identifying and
serving a few clients in related industries or markets.
SPECIALIZED PRODUCTS AND SERVICES The Bank has several divisions that offer
specialized lending products and other financial services to clients in the
technology and life sciences niche as well as the special industry niches
discussed above, enabling the Bank to better serve its clients' broad range of
financial services needs. These divisions include: International, Cash
Management, Real Estate, Factoring, Commercial Finance, Executive Banking, and
Business Banking.
Since 1991, the International Division has provided foreign exchange, import
and export letters of credit, documentary collections, and other trade
finance-related products and services to the Bank's clients, helping them to
successfully operate
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in international markets. During 1995, the Bank was granted delegated authority
by the Export-Import Bank of the U.S. (EX-IM), enabling the Bank to provide its
clients with EX-IM guaranteed working capital loans to finance foreign
receivables and inventory intended for export.
Through the Cash Management Division, the Bank provides services to help its
customers manage cash collections and disbursements efficiently and cost
effectively. The services provided by this division include wholesale lockbox
services, electronic information reporting, controlled disbursement services,
and a variety of other services designed to meet the banking and cash management
needs of the Bank's clients.
In addition to being a special industry niche, real estate lending is also a
product offered to clients in the technology and life sciences niche, as well as
the special industry niches. This product is typically offered to finance
commercial real estate to be owned and operated by the Bank's client companies.
Both the Factoring Division and the Commercial Finance Division offer
alternative financing to client companies which do not qualify for the more
traditional financing offered through the Bank's niches. The Factoring Division
focuses on clients who need to turn their accounts receivable into cash flow,
and generally serves the Bank's emerging growth client base. The Factoring
Division purchases clients' accounts receivable at a discount, making operating
funds immediately available to the clients, and then manages the collection of
these receivables. The Commercial Finance Division, which was established by the
Bank in early 1995, assists client companies through the early and difficult
stages of their life cycles by providing credit facilities that require frequent
monitoring of the underlying collateral which generally consists of accounts
receivable and inventory. As clients of the Factoring and Commercial Finance
Divisions grow and their financial condition strengthens, they often end up
being served through the Bank's niches.
Established in 1993, the Executive Banking Division focuses on serving the
personal banking needs of senior executives and owners of the Bank's client
companies, as well as the partners of venture capital firms, attorneys,
accountants, and other professionals whose businesses are affiliated with the
Bank's niches. The Business Banking Division, which was established in 1994,
focuses on small, emerging growth companies in Northern California, offering
tailored credit and deposit products to assist these clients in their efforts to
grow.
EMPLOYEES As of December 31, 1996, 1995 and 1994, the Company and the Bank, in
the aggregate, employed 384, 348 and 312 full-time equivalent staff,
respectively, consisting of both full-time and permanent part-time employees.
Full-time equivalent is a measurement equivalent to one full-time employee
working a standard day, and is based on the number of hours worked in a given
month. The Company's and the Bank's employees are not represented by a union or
covered by a collective bargaining agreement. Management of the Company and the
Bank believes that, in general, its employee relations are satisfactory.
COMPETITION The banking and financial services business environment in
California, as well as the rest of the U.S., is highly and increasingly
competitive. The Bank competes for client loans, deposits and other financial
products and services with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies, insurance
companies, finance companies, money market and other mutual funds, credit
unions, and other non-bank financial services providers. Many of these
competitors are much larger in total assets and capitalization, have greater
access to capital markets and offer a broader array of financial services than
the Bank. The increasingly competitive environment is primarily a result of
changes in regulation, changes in technology and product delivery systems, and
the accelerating pace of consolidation among financial services providers. In
order to compete with other financial services providers, the Bank principally
relies upon promotional activities in its market areas, personal relationships
with clients,
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referral sources established by officers, directors and employees, and
specialized services tailored to meet the Bank's clients' needs. In those
instances where the Bank is unable to accommodate a client's needs, the Bank
will seek to arrange for those services to be provided by its network of
correspondents.
ECONOMIC CONDITIONS, GOVERNMENT POLICIES, LEGISLATION, AND REGULATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rates paid by the Bank on its deposits and other
borrowings and the interest rates received by the Bank on loans extended to its
clients and securities held in its investment portfolio comprise the major
portion of the Company's earnings. These rates are highly sensitive to many
factors that are beyond the control of the Company and the Bank, such as
inflation, recession and unemployment, and the impact which future changes in
domestic and foreign economic conditions might have on the Company and the Bank
cannot be predicted.
The commercial banking business is not only affected by prevailing economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
The Federal Reserve Board implements national monetary policies (with objectives
such as curbing inflation and combating recession) through its open-market
operations in U.S. Government securities by adjusting the required level of
reserves for depository institutions subject to its reserve requirements and by
varying the target federal funds and discount rates applicable to borrowings by
depository institutions. The actions of the Federal Reserve Board in these areas
influence the growth of bank loans, investments and deposits and also affect
interest rates earned on loans and investments and paid on deposits. The nature
and impact on the Company and the Bank of any future changes in monetary and
fiscal policies cannot be predicted.
From time to time, legislative acts, as well as regulations, are enacted
which have the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance between
banks and other financial services providers. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies and other financial institutions are frequently made in the U.S.
Congress, in the state legislatures and before various bank regulatory agencies.
The likelihood of any major legislative or regulatory changes and the impact
such changes might have on the Company and the Bank cannot be predicted. See
"Item 1. Business - Supervision and Regulation."
SUPERVISION AND REGULATION Bank holding companies and banks are extensively
regulated under both federal and state law. Set forth below is a summary
description of certain laws and regulations which relate to the operations of
the Company and the Bank. The description does not purport to be complete and is
qualified in its entirety by reference to the applicable laws and regulations.
The nature and impact of any future changes concerning the regulation of the
Company and the Bank cannot be predicted.
FORMAL SUPERVISORY ACTIONS During 1993, the Company and the Bank consented
to formal supervisory orders by the Federal Reserve Bank of San Francisco, and
the Bank consented to a formal supervisory order by the California State Banking
Department. These orders contained certain operating restrictions and other
limitations with respect to the conduct of the Company's and the Bank's
activities. On March 27, 1996, the orders imposed by the Federal Reserve Bank of
San Francisco were terminated, and on April 9, 1996, the order imposed by the
California State Banking Department was terminated. Neither the Company nor the
Bank is presently subject to any formal supervisory actions.
THE COMPANY The Company, as a registered bank holding company, is subject to
regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA"),
and Regulation Y which has been adopted thereunder by the Federal
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Reserve Board. The Company is required to file with the Federal Reserve Board
quarterly, semi-annual and annual reports, and such additional information as
the Federal Reserve Board may require pursuant to the BHCA and Regulation Y. The
Federal Reserve Board may conduct examinations of the Company and its
subsidiaries.
The Federal Reserve Board may require that the Company terminate an activity
or terminate control of, liquidate or divest certain subsidiaries or affiliates
when the Federal Reserve Board believes the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the financial safety,
soundness or stability of any of the Company's banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including the authority to impose interest rate ceilings
and reserve requirements on such debt.
The Company is required by the Federal Reserve Board to maintain certain
minimum levels of capital, and in addition, under certain circumstances, the
Company 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 - Capital Standards."
Under the BHCA and regulations adopted by the Federal Reserve Board, a bank
holding company and its non-banking subsidiaries are prohibited from requiring
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services.
The Company is required to obtain the prior approval of the Federal Reserve
Board for the acquisition of more than 5.0% of the outstanding shares of any
class of voting securities, or substantially all of the assets, of any bank or
bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank holding
company.
The Company is prohibited by the BHCA, except in certain instances prescribed
by statute, from acquiring direct or indirect ownership or control of more than
5.0% of the outstanding voting shares of any company that is not a bank or bank
holding company and from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or furnishing services to
its subsidiaries. However, the Company, subject to the prior approval of the
Federal Reserve Board, may engage in, or acquire voting shares of companies
engaged in, activities that are 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. In making any such determination, the Federal Reserve Board
considers whether the performance of such activities by the Company or an
affiliate can reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest, or unsound banking practices. The
Federal Reserve Board is also empowered to differentiate between activities
commenced "de novo" and activities commenced by acquisition, in whole or in
part, of a going concern.
In 1996, the Economic Growth and Regulatory Paperwork Reduction Act of 1996
(the "Budget Act") eliminated the requirement that bank holding companies seek
Federal Reserve Board approval before engaging "de novo" in permissible
non-banking activities listed in Regulation Y, provided that the holding company
and its lead depository institution are "well capitalized" and that certain
other criteria specified in the statute are met. For purposes of determining the
capital levels at which a bank holding company is considered well capitalized
under the Budget Act and Regulation Y, the Federal Reserve Board adopted, as an
interim rule, risk-based capital ratios (on a consolidated basis) that are, with
the exception of the leverage capital ratio (which is lower), the same as the
levels set for determining whether a state member bank is well capitalized under
Section 38 of the Federal Deposit Insurance Act. See "Item 1. Business -
Supervision and Regulation - Prompt Corrective Action and Other Enforcement
Mechanisms."
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Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
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. This doctrine has become known as the "source of strength"
doctrine. Although the U.S. Court of Appeals for the Fifth Circuit found the
Federal Reserve Board's source of strength doctrine invalid in 1990, stating
that the Federal Reserve Board had no authority to assert the doctrine under the
BHCA, the decision, which is not binding on federal courts outside the Fifth
Circuit, was recently reversed by the U.S. Supreme Court on procedural grounds.
The validity of the source of strength doctrine is likely to continue to be the
subject of litigation until definitively resolved by the courts or by the U.S.
Congress.
The Company is also a bank holding company within the meaning of Section 3700
of the California Financial Code. As such, the Company and its subsidiaries are
subject to examination by, and may be required to file reports with, the
California State Banking Department.
The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, including, but not limited to,
filing quarterly, annual and other current reports with the Securities and
Exchange Commission.
The Company's common stock is listed on the Nasdaq National Market, and, as
such, the Company is subject to the periodic reporting requirements of the
Nasdaq Stock Market.
THE BANK The Bank, as a California state-chartered bank and a member of the
Federal Reserve System, is subject to primary supervision, periodic examination
and regulation by the California Superintendent of Banks (the "Superintendent")
and the Federal Reserve Board. If, as a result of an examination of the Bank,
the Federal Reserve Board should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity, or other
aspects of the Bank's operations are unsatisfactory or that the Bank or its
Management is violating or has violated any law or regulation, various remedies
are available to the Federal Reserve Board. Such remedies include the power to:
enjoin "unsafe or unsound" practices, require affirmative action to correct any
conditions resulting from any violation or practice, issue an administrative
order that can be judicially enforced, direct an increase in capital, restrict
the growth of the Bank, assess civil monetary penalties, remove officers and
directors, and ultimately to terminate the Bank's deposit insurance, which for a
California state-chartered bank would result in a revocation of the Bank's
charter. The Superintendent has many of the same remedial powers. As noted
above, the Bank previously consented to formal supervisory orders by both the
Federal Reserve Bank of San Francisco and the California State Banking
Department, which orders were terminated on March 27, 1996 and April 9, 1996,
respectively.
The deposits of the Bank are insured by the FDIC in the manner and to the
extent provided by law. For this protection, the Bank pays a quarterly statutory
assessment. See "Item 1. Business - Supervision and Regulation - Premiums for
Deposit Insurance." Because the Bank's deposits are insured by the FDIC, the
Bank is also subject to certain FDIC rules and regulations.
Various requirements and restrictions imposed by state and federal laws and
regulations affect the operations of the Bank. State and federal statutes and
regulations relate to many aspects of the Bank's operations, including, but not
limited to,
8
reserves against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends, and locations of
branch offices. Further, the Bank is required to maintain certain minimum levels
of capital. See "Item 1. Business - Supervision and Regulation - Capital
Standards."
DIVIDENDS AND OTHER TRANSFERS OF FUNDS The Company is a legal entity
separate and distinct from the Bank. The Company's ability to pay cash dividends
is limited by the California Corporations Code to the greater of (a) the
Company's retained earnings, or (b) the Company's total assets (net of cash
dividends declared) less 150.0% of the Company's liabilities. In addition to the
cash dividend limitations imposed on the Company, there are statutory and
regulatory limitations on the amount of dividends which may be paid to the
Company by the Bank. California law restricts the amount available for cash
dividends by state-chartered banks to the lesser of the bank's retained earnings
or net income for its last three fiscal years (less any cash dividends to
shareholders made during such period). Notwithstanding this restriction, a bank
may, with the prior approval of the Superintendent, pay a cash dividend in an
amount not exceeding the greater of: (a) the retained earnings of the bank, (b)
the net income for such bank's last preceding fiscal year, or (c) the net income
of the bank for its current fiscal year.
As a Federal Reserve member bank, there are separate limitations imposed
under applicable Federal Reserve Board regulations with respect to the Bank's
ability to pay dividends to the Company. In particular, the prior approval of
the Federal Reserve Board is required if the total of all cash dividends
declared by a Federal Reserve member bank in any calendar year exceeds the
bank's net profits (as defined by the Federal Reserve Board) for that year
combined with its retained net profits (as defined by the Federal Reserve Board)
for the preceding two years, less any transfers to surplus or to a fund for the
retirement of preferred stock. Such approval authority may be delegated to the
local Federal Reserve Bank under certain circumstances. See "Item 8. Financial
Statements and Supplementary Data - Note 13 to the Consolidated Financial
Statements - Regulatory Matters" for further discussion on dividend
restrictions.
The Federal Reserve Board also has the authority to prohibit the Bank from
engaging in activities that, in the Federal Reserve Board's 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 the Federal Reserve Board could assert that the payment of
dividends or other payments might, under some circumstances, be an unsafe or
unsound practice. Further, the Federal Reserve Board has established guidelines
with respect to the maintenance of appropriate levels of capital by banks or
bank holding companies under its jurisdiction. Compliance with the standards set
forth in such guidelines and the restrictions that are or may be imposed under
the prompt corrective action provisions of federal law could limit the amount of
dividends which the Bank or the Company may pay. The Superintendent may impose
similar limitations on the conduct of California-chartered banks. See "Item 1.
Business - "Supervision and Regulation - Capital Standards" and "Supervision and
Regulation - Prompt Corrective Action and Other Enforcement Mechanisms," for a
discussion of these additional restrictions on capital distributions.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of, or investments in,
stock or other securities thereof, the taking of such securities as collateral
for loans, and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Company or to or in any other affiliate are limited, individually, to 10.0% of
the Bank's capital and surplus (as defined by federal regulations), and such
secured loans and investments are limited, in the aggregate, to 20.0% of the
Bank's capital and surplus (as defined by federal regulations). California law
also imposes certain restrictions with respect to transactions involving the
Company and other controlling persons of the Bank. Additional restrictions on
transactions with affiliates may be imposed on the Bank under the prompt
corrective action provisions of federal law. See "Item 1. Business - Supervision
and Regulation - Prompt Corrective Action and Other Enforcement Mechanisms."
9
CAPITAL STANDARDS 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.
A banking organization's total and Tier 1 risk-based capital ratios are
obtained by dividing its qualifying capital by its total risk-adjusted assets.
Federal banking regulators measure risk-adjusted assets, which include
off-balance sheet items, against both total qualifying capital (the sum of Tier
1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1
capital consists primarily of common stock, retained earnings, noncumulative
perpetual preferred stock (cumulative perpetual preferred stock for bank holding
companies), and minority interests in consolidated subsidiaries, less most
intangible assets. Tier 2 capital consists of a limited amount of the allowance
for loan losses, cumulative perpetual preferred stock, long-term preferred
stock, eligible term subordinated debt, and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 capital is
subject to certain other requirements and limitations of the federal banking
agencies. Federal banking regulators also require banking organizations to
maintain a minimum amount of Tier 1 capital to total quarterly average assets,
referred to as the Tier 1 leverage ratio. In addition to these uniform
risk-based capital guidelines and leverage ratio requirements that apply across
the banking industry, the federal banking regulators have the discretion to set
individual minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios. See "Item 1. Business -
Prompt Corrective Action and Other Enforcement Mechanisms" for a table listing
the capital categories and the minimum required capital ratios for those
categories.
In June 1996, the federal banking agencies adopted a joint agency policy
statement to provide guidance on managing interest rate risk. The policy
statement 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 risk management process or high levels of exposure
relative to its capital will be directed by the federal banking agencies to take
corrective action. Such actions may include recommendations or directions to
raise additional capital, strengthen management expertise, improve management
information and measurement systems, reduce levels of exposure, or some
combination thereof depending upon the individual institution's circumstances.
This policy statement augments the August 1995 regulations adopted by the
federal banking agencies which addressed risk-based capital standards for
interest rate risk.
In January 1995, the federal banking agencies issued a final rule relating to
capital standards and the risks arising from the concentration of credit and
nontraditional banking activities. 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, will be required to
set aside capital in excess of the regulatory minimums. The federal banking
agencies have not imposed any quantitative assessment for determining when these
risks are significant, but have identified these issues as important factors
they will review in assessing an individual bank's capital adequacy.
Federally supervised banks and savings associations are currently required to
report deferred tax assets in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." The federal banking
agencies issued final rules, effective April 1, 1995, which limit the amount of
deferred tax assets that are allowable in computing an institution's regulatory
capital. The standard has been in effect on an interim basis since March 1993.
Deferred tax assets that can be realized for taxes paid in prior carryback years
and from future reversals of existing taxable temporary differences are
generally not limited. Deferred tax assets that can only be realized through
future taxable earnings are limited for regulatory capital purposes to the
lesser of (i) the amount that can be realized within one year of the quarter-end
report date, or (ii) 10.0% of Tier 1 capital. The amount of any deferred tax
assets in excess of this limit would be excluded from Tier 1 capital and total
assets for purposes of regulatory risk-based capital calculations.
10
In December 1993, the federal banking agencies issued an interagency policy
statement on the allowance for loan and lease losses which, among other things,
establishes a benchmark for the allowance for loan and lease losses as a
percentage of classified assets. The benchmark set forth by such policy
statement is the sum of: (a) 100.0% of assets classified loss, (b) 50.0% of
assets classified doubtful, (c) 15.0% of assets classified substandard, and (d)
estimated credit losses on other assets over the upcoming 12 months. This amount
is neither a "floor" nor a "safe harbor" level for a bank's allowance for loan
and lease losses.
Future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such changes could affect
the ability of the Bank to grow and could restrict the amount of profits, if
any, available for the payment of dividends. See "Item 8. Financial Statements
and Supplementary Data - Note 13 to the Consolidated Financial Statements -
Regulatory Matters" for a table listing the Company's and Bank's capital ratios
as of December 31, 1996.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS Federal laws
require each federal banking agency to take prompt corrective action to resolve
the problems of insured depository institutions, including, but not limited to,
those institutions which fall below one or more of the prescribed minimum
required capital ratios. Such laws require each federal banking agency to
promulgate regulations defining the following 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.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal law.
An insured depository institution generally will be classified in the following
categories based on the capital measures indicated below:
TOTAL RISK-BASED
CAPITAL CATEGORY CAPITAL RATIO
..........................
Well capitalized 10.0 %
Adequately capitalized 8.0 %
Undercapitalized LESS THAN 8.0 %
Significantly undercapitalized LESS THAN 6.0 %
Critically undercapitalized (1) N/A
TIER 1 RISK-BASED
CAPITAL CATEGORY CAPITAL RATIO
Well capitalized 6.0 %
Adequately capitalized 4.0 %
Undercapitalized LESS THAN 4.0 %
Significantly undercapitalized LESS THAN 3.0 %
Critically undercapitalized (1) N/A
TIER 1
CAPITAL CATEGORY LEVERAGE RATIO
Well capitalized 5.0 %
Adequately capitalized 4.0 %
Undercapitalized LESS THAN 4.0 %
Significantly undercapitalized LESS THAN 3.0 %
Critically undercapitalized (1) N/A
- ----------------------------------------
(1) Tangible equity to total assets ratio of less than 2.0%.
An institution 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 depository institution is
subject to more restrictions. The federal banking agencies, however, may not
treat an institution as critically undercapitalized unless its capital ratios
actually warrant such treatment.
11
Federal law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions, if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency within 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital restoration plan unless, among other things, it determines that the
plan: (i) specifies: (a) the steps the institution will take to become
adequately capitalized, (b) the target levels of capital to be attained during
each year in which the plan will be in effect, (c) how the institution will
comply with the restrictions or requirements then in effect under Section 38 of
the Federal Deposit Insurance Act, and (d) the types and levels of activities in
which the institution will engage, (ii) is based on realistic assumptions and is
likely to succeed in restoring the institution's capital, and (iii) would not
appreciably increase the risk (including credit risk, interest rate risk and
other types of risk) to which the institution is exposed.
In addition, each company controlling an undercapitalized depository
institution must guarantee that the institution will comply with the capital
restoration plan until the depository institution has been classified as
adequately capitalized on an average basis during each of four consecutive
calendar quarters and must otherwise provide appropriate assurances of
performance. The aggregate liability of such guarantee is limited to the lesser
of (a) an amount equal to 5.0% of the depository institution's total assets at
the time the institution became undercapitalized, or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution as of the time the institution fails to comply
with its capital restoration plan. Finally, the appropriate federal banking
agency may impose any of the additional restrictions or sanctions that it may
impose on significantly undercapitalized institutions if it determines that such
action will further the purpose of the prompt corrective action provisions.
An insured depository institution that is significantly undercapitalized, or
is undercapitalized and fails to submit, or in a material respect, to implement,
an acceptable capital restoration plan, is subject to additional restrictions
and sanctions. These include, among other things: (i) a forced sale of voting
shares to raise capital, or a forced merger, (ii) if grounds exist, appointment
of a receiver or conservator, (iii) restrictions on transactions with
affiliates, (iv) further limitations on interest rates paid on deposits, (v)
further restrictions on growth or required shrinkage, (vi) modification or
termination of specified activities, (vii) replacement of directors or senior
executive officers, (viii) prohibitions on the receipt of deposits from
correspondent institutions, (ix) restrictions on capital distributions by the
holding companies of such institutions, (x) required divestiture of subsidiaries
by the institution, and (xi) other restrictions as determined by the appropriate
federal banking agency.
Although the appropriate federal banking agency has discretion to determine
which of the foregoing restrictions or sanctions it will seek to impose, it is
required to force a sale of voting shares or a merger, impose restrictions on
affiliate transactions and impose restrictions on interest rates paid on
deposits, unless it determines that such actions would not further the purpose
of the prompt corrective action provisions. In addition, without the prior
written approval of the appropriate federal banking agency, a significantly
undercapitalized institution may not pay any bonus to its senior executive
officers or provide compensation to any of them at a rate that exceeds each such
officer's average rate of base compensation during the 12 calendar months
preceding the month in which the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
12
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator, or to
an acquisition or merger as required by the federal regulators.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation, or any condition
imposed in writing by the agency or by any written agreement with the agency.
Enforcement actions may include the appointment of a conservator or receiver,
the issuance of a cease and desist order that can be judicially enforced, the
termination of deposit insurance (in the case of a depository institution), 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 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 STANDARDS In July 1995, the federal banking agencies
adopted guidelines establishing standards for safety and soundness, as required
by the Federal Deposit Insurance Corporation Improvement Act (FDICIA). In
general, the guidelines are designed to assist the federal banking agencies in
identifying and addressing potential safety and soundness concerns before
capital becomes impaired. The guidelines set forth operational and managerial
standards relating to: (i) internal controls, information systems and internal
audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset
growth, (v) earnings, and (vi) compensation, fees and benefits. Effective
October 1, 1996, the federal banking agencies finalized these safety and
soundness guidelines by adopting additional guidelines with respect to asset
quality and earnings standards. These new guidelines provide six standards for
establishing and maintaining a system to identify problem assets and prevent
those assets from deteriorating. Under these new standards, an insured
depository institution should: (i) conduct periodic asset quality reviews to
identify problem assets, (ii) estimate the inherent losses in problem assets and
establish reserves that are sufficient to absorb estimated losses, (iii) compare
problem asset totals to capital, (iv) take appropriate corrective action to
resolve problem assets, (v) consider the size and potential risks of material
asset concentrations, and (vi) provide periodic asset quality reports with
adequate information for management and the board of directors to assess the
level of asset risk. These new guidelines also set forth standards for
evaluating and monitoring earnings and for ensuring that earnings are sufficient
for the maintenance of adequate capital and reserves. If an institution fails to
comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in an
enforcement action.
PREMIUMS FOR DEPOSIT INSURANCE Federal law has established several
mechanisms to maintain funding reserves which are utilized to protect deposits
insured by the Bank Insurance Fund (BIF) administered by the FDIC. The FDIC is
authorized to borrow up to $30.0 billion from the U.S. Treasury, up to 90.0% of
the fair market value of assets of institutions acquired by the FDIC as receiver
and from depository institutions that are members of the BIF. Any borrowings not
repaid by asset sales are to be repaid through insurance premiums assessed to
member institutions. Such premiums must be sufficient to repay any borrowed
funds within 15 years and provide insurance fund reserves of $1.25 for each $100
of insured deposits. The result of these provisions is that the insurance
premium assessment rates on deposits of BIF members could increase in the
future. The FDIC also has authority to impose special assessments against
insured deposits.
13
The FDIC implemented a final risk-based deposit insurance assessment system,
as required by FDICIA, effective January 1, 1994, under which an institution's
insurance premium assessment is based on the probability that the deposit
insurance fund will incur a loss with respect to the institution, the likely
amount of any such loss and the revenue needs of the deposit insurance fund.
Under the risk-based deposit insurance assessment system, a BIF member
institution, such as the Bank, is categorized into one of the three capital
categories: well capitalized, adequately capitalized, or undercapitalized, and
one of three supervisory categories based on evaluations by its primary federal
regulator (in the Bank's case, the FDIC). The three supervisory categories are:
financially sound with only a few minor weaknesses (Group A), demonstrates
weaknesses that could result in significant deterioration (Group B), and poses a
substantial probability of loss (Group C). The capital ratios used by the FDIC
to define well capitalized, adequately capitalized, and undercapitalized are the
same as prescribed in the FDIC's prompt corrective action regulations. On
November 14, 1995, the FDIC issued regulations that establish an assessment rate
schedule for deposit insurance premiums ranging from 0 to 27 cents per $100 of
deposits effective for the assessment period beginning January 1, 1996. The BIF
assessment rates are summarized below; assessment figures are expressed in terms
of cents per $100 in deposits.
ASSESSMENT RATES EFFECTIVE JANUARY 1, 1996
................................................
CAPITAL CATEGORY GROUP A GROUP B
................................................
Well capitalized 0* 3
Adequately capitalized 3 10
Undercapitalized 10 24
CAPITAL CATEGORY GROUP C
Well capitalized 17
Adequately capitalized 24
Undercapitalized 27
- ----------------------------------------
* Subject to a statutory minimum assessment of $2,000 per year (which also
applies to all other assessment risk classifications).
At December 31, 1996, the Bank's assessment rate was equivalent to the rate
imposed on a well capitalized, Group A institution.
Legislation was signed into law on September 30, 1996 as part of the Budget
Act to recapitalize the Savings Association Insurance Fund (SAIF) administered
by the FDIC. To effect the recapitalization, all SAIF-insured institutions were
required to pay a one-time special assessment equal to 0.657% of deposits based
upon deposit levels as of March 31, 1995. The legislation further provides that,
effective January 1, 1997, SAIF members will have the same risk-based deposit
insurance assessment schedule as members of the BIF. Also effective January 1,
1997, both BIF and SAIF members will share in the cost of interest obligations
due on the Financing Corporation (FICO) bonds which were issued to help fund the
costs associated with the savings and loan crisis of the late 1980's. From
January 1, 1997 through December 31, 1999, SAIF deposits will be assessed
$0.0644 per $100 annually and BIF deposits will be assessed $0.0129 per $100
annually. From the year 2000 until the FICO bonds are repaid, all deposits will
be assessed $0.0243 per $100 annually.
INTERSTATE BANKING AND BRANCHING In September 1994, the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act")
became law. Under the Interstate Act, beginning one year after the date of
enactment, a bank holding company that is adequately capitalized and managed may
obtain approval under the BHCA to acquire an existing bank located in another
state without regard to state law. A bank holding company would not be permitted
to make such an acquisition if, upon consummation, it would control (a) more
than 10.0% of the total amount of deposits of insured depository institutions in
the U.S., or (b) 30.0% or more of the deposits of insured depository
institutions in the state in which the acquired bank is located. A state may
limit the percentage of total deposits that may be held in that state by any one
bank or bank holding company if application of such limitation does not
discriminate against out-of-state banks or bank
14
holding companies. An out-of-state bank holding company may not acquire a state
bank in existence for less than a minimum length of time that may be prescribed
by state law except that a state may not impose more than a five-year existence
requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank into branches of the resulting bank. Each state may permit such business
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state-chartered
bank to establish branches in a state other than its home state if permitted by
the laws of that state, subject to the same requirements and conditions as for a
merger transaction.
Under the Interstate Act, the extent of a commercial bank's ability to branch
into a new state will depend upon the laws of that state. In October 1995,
California adopted "opt in" legislation under the Interstate Act that permits
out-of-state banks to acquire California banks that satisfy a five-year minimum
existence requirement (subject to exceptions for supervisory transactions) by
means of merger or purchases of assets, although entry into the state through
acquisition of individual branches of California institutions and "de novo"
branching into California are not permitted. The Interstate Act and the
California opt in legislation will likely increase competition from out-of-state
banks in the markets in which the Company operates, although it is difficult to
assess the impact that such increased competition may have on the Company's
operations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS The Bank is subject
to certain fair lending requirements and reporting obligations involving home
mortgage lending operations and Community Reinvestment Act (CRA) activities. The
CRA generally requires the federal banking agencies to evaluate the record of a
financial institution in meeting the credit needs of its local communities,
including low and moderate income neighborhoods. In addition to substantial
penalties and corrective measures that may be required 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.
In March 1994, the Federal Interagency Task Force on Fair Lending issued a
policy statement on discrimination in lending. The policy statement describes
the three methods that federal agencies will use to prove discrimination: overt
evidence of discrimination, evidence of disparate treatment and evidence of
disparate impact. In May 1995, the federal banking agencies issued final
regulations which change the manner in which they measure a bank's compliance
with its CRA obligations. The final regulations adopt a performance-based
evaluation system which bases CRA ratings on an institution's actual lending
service and investment performance rather than the extent to which the
institution conducts needs assessments, documents community outreach or complies
with other procedural requirements. In January 1996, the Federal Reserve Board
rated the Bank "satisfactory" in complying with its CRA obligations.
RECENT ACCOUNTING PRONOUNCEMENTS In May 1993, the Financial Accounting
Standards Board (FASB) issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 prescribes the recognition criteria for loan
impairment and the measurement methods for certain impaired loans and loans
whose terms are modified in troubled debt restructurings. SFAS No. 114 states
that a loan is impaired when it is probable that a creditor will be unable to
collect all principal and interest amounts due according to the contracted terms
of the loan agreement. A creditor is required to measure impairment by
discounting expected future cash flows at the loan's effective interest rate, by
reference to an observable market price or by the fair value of the collateral
if the loan is collateral-dependent. SFAS No. 114 also clarifies the existing
accounting for in-substance foreclosures by stating that a collateral-dependent
real estate loan would be reported as other real estate owned only if the lender
had taken possession of the collateral.
15
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" amended SFAS No. 114 to allow a creditor to use
existing methods for recognizing interest income on an impaired loan. To
accomplish that, SFAS No. 118 eliminated the provisions in SFAS No. 114 that
described how a creditor should report income on an impaired loan. SFAS No. 118
did not change the provisions in SFAS No. 114 that require a creditor to measure
impairment based on the present value of expected future cash flows discounted
at the loan's effective interest rate, or as a practical expedient, at the
observable market price of the loan or the fair value of the collateral if the
loan is collateral-dependent. SFAS No. 118 amended the disclosure requirements
in SFAS No. 114 to require information about the recorded investments in certain
impaired loans and about how a creditor recognizes interest income related to
those impaired loans. The Company adopted SFAS No. 114 and SFAS No. 118
effective January 1, 1995. The adoption of these two statements did not have a
material impact on the Company's consolidated financial position or results of
operations.
In May 1993, the FASB issued SFAS No. 115, "Accounting For Certain
Investments in Debt and Equity Securities" addressing the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. These investments are
classified in three categories and accounted for as follows: (i) debt securities
that the entity has the ability and positive intent to hold to maturity would be
classified as "held-to-maturity" and reported at amortized cost, (ii) debt and
equity securities that are held for current resale would be classified as
trading securities and reported at fair value, with unrealized gains and losses
included in the results of operations, and (iii) debt and equity securities not
classified as either securities held-to-maturity or as trading securities would
be classified as securities "available-for-sale," and reported at fair value,
with unrealized gains and losses excluded from the results of operations and
reported as a separate component of shareholders' equity. The Company adopted
SFAS No. 115 on January 1, 1994. The cumulative effect of this change in
accounting principle is reflected in the statement of shareholders' equity
presented in the Company's consolidated financial statements. See "Item 8.
Financial Statements and Supplementary Data."
In October 1994, the FASB issued SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." This statement
addresses additional disclosure requirements for derivatives and other complex
financial instruments. The Company adopted SFAS No. 119 on December 31, 1994.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes financial accounting and reporting
standards for stock-based compensation plans, including employee stock purchase
plans, stock options and restricted stock. SFAS No. 123 encourages all entities
to adopt a fair value method of accounting for stock-based compensation plans,
whereby compensation cost is measured at the grant date based on the fair value
of the award and is realized as an expense over the service or vesting period.
However, SFAS No. 123 also allows an entity to continue to measure compensation
cost for these plans using the intrinsic value method of accounting prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the intrinsic value method, compensation cost is generally the
excess, if any, of the quoted market price of the stock at grant date or other
measurement date over the amount which must be paid to acquire the stock. The
Company adopted SFAS No. 123 effective January 1, 1996. The adoption of this
pronouncement did not have a material impact on the Company's consolidated
financial position or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. A transfer of
financial assets in which the transferor surrenders control over those assets is
accounted for as a sale to the extent that consideration other than beneficial
interests in the transferred assets is received in the exchange. This statement
requires that liabilities and derivative securities incurred or obtained by
transferors as part of a transfer of financial assets be initially valued at
fair value, if practicable. It also requires that servicing rights and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of transfer.
Furthermore, SFAS No. 125
16
requires that debtors reclassify financial assets pledged as collateral, and
that secured parties recognize those assets and their obligation to return them
in certain circumstances in which the secured party has taken control of those
assets. Finally, SFAS No. 125 requires that a liability be eliminated if either:
(a) the debtor pays the creditor and is relieved of its obligation for the
liability, or (b) the debtor is legally released from being the primary obligor
under the liability, either judicially or by the creditor. Accordingly, a
liability is not considered extinguished by an in-substance defeasance. SFAS No.
125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively, though the effective date for certain provisions has been
delayed for one year from the original effective date by SFAS No. 127, "Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125," which
was issued in December 1996. Management does not believe that the adoption of
these statements will have a material impact on the Company's consolidated
financial position or results of operations.
ITEM 2. PROPERTIES
In 1995, the Bank relocated its 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 addition to the headquarters lease in
Santa Clara, the Bank has entered into various other leases for properties that
serve as branches and/or loan offices. These properties are located in the
following locations within California: Beverly Hills, Irvine, Menlo Park, Palo
Alto, San Diego, and St. Helena, and in the following locations outside of
California: Boulder, Colorado; Rockville, Maryland; Wellesley, Massachusetts;
Beaverton, Oregon; Austin, Texas; and Bellevue, Washington. All Bank properties
are occupied under leases which expire at various dates through June 2005, and
in most instances, include options to renew or extend at market rates and terms.
The Bank also owns leasehold improvements and furniture, fixtures and equipment
at its offices, all of which are used in the banking business.
ITEM 3. LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item
pending at December 31, 1996, 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 shareholders of the Company's
common stock during the fourth quarter of 1996.
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION The Company's 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 presents the high and low sales prices for the Company's
common stock for each quarterly period during the last two years, based on the
daily closing price as reported by the Nasdaq National Market:
1996 1995
.................... ....................
QUARTER LOW HIGH LOW HIGH
..........................................
First $ 20.25 $ 22.75 $ 13.00 $ 15.00
Second $ 22.50 $ 26.50 $ 13.75 $ 18.00
Third $ 23.50 $ 28.25 $ 16.75 $ 21.50
Fourth $ 25.88 $ 32.25 $ 19.00 $ 25.00
SHAREHOLDERS The number of shareholders of record of the Company's common stock
was 687 as of January 31, 1997.
DIVIDENDS The Company declared no cash dividends in 1995 or 1996, and is
subject to certain restrictions and limitations on the payment of dividends
pursuant to existing and applicable laws and regulations. See "Item 1. Business
- -Supervision and Regulation - Dividends and Other Transfers of Funds," and "Item
8. Financial Statements and Supplementary Data - Note 13 to the Consolidated
Financial Statements - Regulatory Matters."
18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's financial statements and supplementary data as presented in Item 8 of
this report. Certain reclassifications have been made to the Company's prior
years results to conform with 1996 presentations. Such reclassifications had no
effect on the results of operations or shareholders' equity.
Years Ended December 31, 1996 1995 1994 1993 1992
.....................................................
(Dollars and numbers in thousands, except per share
amounts)
INCOME STATEMENT SUMMARY:
Net interest income $ 87,275 $ 73,952 $ 60,260 $ 50,410 $ 53,832
Provision for loan losses 10,426 8,737 3,087 9,702 35,382
Noninterest income 11,609 12,565 4,922 9,316 4,277
Noninterest expense 52,682 47,925 45,599 47,357 26,418
Income (loss) before taxes 35,776 29,855 16,496 2,667 (3,691)
Income tax expense (benefit) 14,310 11,702 7,430 1,066 (1,479)
Net income (loss) 21,466 18,153 9,066 1,601 (2,212)
COMMON SHARE SUMMARY:
Net income (loss) per share $ 2.21 $ 1.98 $ 1.06 $ 0.20 $ (0.28)
Book value per share 14.51 11.71 9.08 8.48 8.36
Cash dividends declared per share -- -- -- -- 0.03
Weighted average common shares outstanding 9,702 9,164 8,575 8,201 7,836
YEAR-END BALANCE SHEET SUMMARY:
Loans, net of unearned income $ 863,492 $ 738,405 $ 703,809 $ 564,555 $ 630,976
Assets 1,924,544 1,407,587 1,161,539 992,289 959,312
Deposits 1,774,304 1,290,060 1,075,373 914,959 888,069
Shareholders' equity 135,400 104,974 77,257 70,336 65,987
AVERAGE BALANCE SHEET SUMMARY:
Loans, net of unearned income $ 779,655 $ 681,255 $ 592,759 $ 574,372 $ 647,537
Assets 1,573,903 1,165,004 956,336 917,569 942,256
Deposits 1,441,360 1,060,333 877,787 846,298 866,084
Shareholders' equity 119,788 91,710 73,461 68,198 70,860
CAPITAL RATIOS:
Average shareholders' equity to average
assets 7.6% 7.9% 7.7% 7.4% 7.5%
Total risk-based capital ratio 11.5% 11.9% 10.1% 11.3% 10.2%
Tier 1 risk-based capital ratio 10.2% 10.6% 8.9% 10.1% 9.0%
Tier 1 leverage ratio 7.7% 8.0% 8.3% 6.9% 6.5%
SELECT FINANCIAL RATIOS:
Net interest margin 6.1% 7.1% 7.2% 6.4% 6.4%
Efficiency ratio 55.9% 60.6% 68.3% 68.9% 42.4%
Return on average assets 1.4% 1.6% 0.9% 0.2% (0.2)%
Return on average shareholders' equity 17.9% 19.8% 12.3% 2.3% (3.1)%
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's financial statements
and supplementary data as presented in Item 8 of this report. In addition to
historical information, this discussion and analysis includes certain
forward-looking statements regarding events and trends which may affect the
Company's future results. Such statements are subject to risks and uncertainties
that could cause the Company's actual results to differ materially. These risks
and uncertainties include, but are not limited to, those described in this
discussion and analysis, as well as those described in Item 1 of this report.
Certain reclassifications have been made to the Company's prior years results
to conform with 1996 presentations. Such reclassifications had no effect on the
results of operations or shareholders' equity.
RESULTS OF OPERATIONS
EARNINGS SUMMARY The Company reported net income in 1996 of $21.5 million,
or $2.21 per share, compared with net income in 1995 and 1994 of $18.2 million,
or $1.98 per share, and $9.1 million, or $1.06 per share, respectively. Return
on average equity in 1996 was 17.9%, compared with 19.8% in 1995 and 12.3% in
1994. Return on average assets in 1996 was 1.4%, compared with 1.6% in 1995 and
0.9% in 1994.
The increase in net income for 1996, as compared with 1995, was largely due
to growth in net interest income, offset by increases in both the provision for
loan losses and noninterest expense. The increase in net income for 1995, as
compared with 1994, resulted from growth in net interest income and noninterest
income, offset by increases in both the provision for loan losses and
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, 1996, 1995 and 1994, and are discussed in more detail on the following
pages.
1996 TO 1995 1995 TO 1994
INCREASE INCREASE
Years Ended December 31, 1996 1995 (DECREASE) 1994 (DECREASE)
.................................................................
(Dollars in thousands)
Net interest income $ 87,275 $ 73,952 $ 13,323 $ 60,260 $ 13,692
Provision for loan losses 10,426 8,737 1,689 3,087 5,650
Noninterest income 11,609 12,565 (956) 4,922 7,643
Noninterest expense 52,682 47,925 4,757 45,599 2,326
-----------------------------------------------------------------
Income before income taxes 35,776 29,855 5,921 16,496 13,359
Income tax expense 14,310 11,702 2,608 7,430 4,272
-----------------------------------------------------------------
Net income $ 21,466 $ 18,153 $ 3,313 $ 9,066 $ 9,087
-----------------------------------------------------------------
NET INTEREST INCOME AND MARGIN Net interest income represents the difference
between interest earned, primarily on loans and investments, and interest paid
on funding sources, primarily deposits, and is the principal source of revenue
for the Company. Net interest margin is 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
expresses interest expense as a percentage of average interest-earning assets.
20
The following table sets forth average assets, liabilities and shareholders'
equity, interest income and interest expense, average yields and rates, and the
composition of the Company's net interest margin for the years ended December
31, 1996, 1995 and 1994.
1996 1995 1994
.................................... .................................... ...........
AVERAGE AVERAGE
AVERAGE YIELD AND AVERAGE YIELD AND AVERAGE
Years Ended December 31, BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE
....................................................................
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and securities purchased under
agreement to resell(1) $ 244,408 $ 13,106 5.4% $ 188,415 $ 11,041
Investment securities:
Taxable 411,743 23,587 5.7 169,740 9,985
Non-taxable(2) 8,112 749 9.2 6,911 699
Loans:(3),(4),(5)
Commercial 658,316 75,750 11.5 587,343 70,166
Real estate construction and term(6) 81,358 8,471 10.4 70,698 7,209
Consumer and other 39,981 3,672 9.2 23,214 2,392
--------------------------------------------------------------------
Total loans 779,655 87,893 11.3 681,255 79,767
--------------------------------------------------------------------
Total interest-earning assets 1,443,918 125,335 8.7 1,046,321 101,492
--------------------------------------------------------------------
Cash and due from banks 126,830 114,431
Allowance for loan losses (30,429) (24,055)
Other real estate owned 3,582 5,752
Other assets 30,002 22,555
------------ ------------
Total assets $ 1,573,903 $ 1,165,004
------------ ------------
Funding sources:
Interest-bearing liabilities:
Money market, NOW and savings deposits $ 911,332 34,995 3.8 $ 629,023 24,944
Time deposits 69,975 2,801 4.0 65,426 2,349
Federal funds purchased 30 2 6.7 38 2
--------------------------------------------------------------------
Total interest-bearing liabilities 981,337 37,798 3.9 694,487 27,295
Portion of noninterest-bearing funding sources 462,581 351,834
--------------------------------------------------------------------
Total funding sources 1,443,918 37,798 2.6 1,046,321 27,295
--------------------------------------------------------------------
Noninterest-bearing funding sources:
Demand deposits 460,053 365,884
Other liabilities 12,725 12,923
Shareholders' equity 119,788 91,710
Portion used to fund interest-earning assets (462,581) (351,834)
------------ ------------
Total liabilities and shareholders' equity $ 1,573,903 $ 1,165,004
------------ ------------
Net interest income and margin $ 87,537 6.1% $ 74,197
----------- --- -----------
Memorandum: Total deposits $ 1,441,360 $ 1,060,333
------------ ------------
AVERAGE
YIELD AND
Years Ended December 31, INTEREST RATE
Interest-earning assets:
Federal funds sold and securities purchased under
agreement to resell(1) 5.9% $ 37,092 $ 1,397 3.8%
Investment securities:
Taxable 5.9 197,898 10,804 5.5
Non-taxable(2) 10.1 8,167 829 10.1
Loans:(3),(4),(5)
Commercial 11.9 505,196 54,588 10.8
Real estate construction and term(6) 10.2 64,149 5,609 8.7
Consumer and other 10.3 23,414 2,115 9.0
Total loans 11.7 592,759 62,312 10.5
Total interest-earning assets 9.7 835,916 75,342 9.0
Cash and due from banks 121,792
Allowance for loan losses (25,671)
Other real estate owned 9,711
Other assets 14,588
-----------
Total assets $ 956,336
-----------
Funding sources:
Interest-bearing liabilities:
Money market, NOW and savings deposits 4.0 $ 480,354 12,859 2.7
Time deposits 3.6 66,365 1,911 2.9
Federal funds purchased 5.3 498 22 4.4
Total interest-bearing liabilities 3.9 547,217 14,792 2.7
Portion of noninterest-bearing funding sources 288,699
Total funding sources 2.6 835,916 14,792 1.8
Noninterest-bearing funding sources:
Demand deposits 331,068
Other liabilities 4,590
Shareholders' equity 73,461
Portion used to fund interest-earning assets (288,699)
-----------
Total liabilities and shareholders' equity $ 956,336
-----------
Net interest income and margin 7.1% $ 60,550 7.2%
--- ----------- ---
Memorandum: Total deposits $ 877,787
-----------
- ----------------------------------------
(1) Includes average interest-bearing deposits in other financial institutions
of $345, $378 and $455 in 1996, 1995 and 1994, respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in 1996,
1995 and 1994. These adjustments were $262, $245 and $290 for the years
ended December 31, 1996, 1995 and 1994, respectively.
(3) Average loans include average nonaccrual loans of $22,897, $16,146 and
$41,362 in 1996, 1995 and 1994, respectively.
(4) Average loans are net of average unearned income of $4,169, $3,352 and
$3,965 in 1996, 1995 and 1994, respectively.
(5) Loan interest income includes loan fees of $8,176, $7,970 and $8,886 in
1996, 1995 and 1994, respectively.
(6) In accordance with Statement of Financial Accounting Standards No. 114,
in-substance foreclosure loans have been reclassified from other real estate
owned to real estate construction and term loans. The reclassified amount is
$6,767 in 1994.
21
Net interest income is affected by changes in the amount and mix of
interest-earnings assets and interest-bearing liabilities, referred to as
"volume change." Net interest income is also affected by changes in yields
earned on interest-earning assets and rates paid on interest-bearing
liabilities, referred to as "rate change." The following table sets forth
changes in interest income and interest expense for each major category of
interest-earning assets and interest-bearing liabilities. The table also
reflects the amount of change attributable to both volume and rate changes for
the years indicated. Changes relating to investments in municipal securities are
presented on a fully taxable-equivalent basis using the federal statutory rate
of 35% in 1996, 1995 and 1994.
1996 COMPARED TO 1995 1995 COMPARED TO 1994
................................. .................................
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
................................. .................................
VOLUME RATE TOTAL VOLUME RATE TOTAL
....................................................................
(Dollars in thousands)
Interest income:
Federal funds sold and securities
purchased under agreement to
resell $ 3,003 $ (938) $ 2,065 $ 8,867 $ 777 $ 9,644
Investment securities 14,097 (445) 13,652 (1,779) 830 (949)
Loans 11,093 (2,967) 8,126 10,362 7,093 17,455
--------------------------------------------------------------------
Increase (decrease) in interest
income 28,193 (4,350) 23,843 17,450 8,700 26,150
--------------------------------------------------------------------
Interest expense:
Money market, NOW and savings
deposits 10,841 (790) 10,051 5,895 6,190 12,085
Time deposits 182 270 452 (34) 472 438
Federal funds purchased (1) 1 -- (24) 4 (20)
--------------------------------------------------------------------
Increase (decrease) in interest
expense 11,022 (519) 10,503 5,837 6,666 12,503
--------------------------------------------------------------------
Increase (decrease) in net interest
income $ 17,171 $ (3,831) $ 13,340 $ 11,613 $ 2,034 $ 13,647
--------------------------------------------------------------------
Net interest income, on a fully taxable-equivalent basis, totaled $87.5
million in 1996, an increase of $13.3 million, or 18.0%, from the $74.2 million
total in 1995. The increase in net interest income was attributable to a $23.8
million, or 23.5%, increase in interest income, offset by a $10.5 million, or
38.5%, increase in interest expense over the comparable prior year period. In
1995, net interest income, on a fully taxable-equivalent basis, increased $13.6
million, or 22.5%, compared to the $60.6 million total in 1994. This increase in
net interest income was the result of a $26.2 million, or 34.7%, increase in
interest income, offset by a $12.5 million, or 84.5%, increase in interest
expense over the comparable prior year period.
The $23.8 million increase in interest income for 1996, as compared to 1995,
was due to a $28.2 million favorable volume variance, slightly offset by a $4.4
million unfavorable rate variance. The favorable volume variance was
attributable to growth in average interest-earning assets, which increased
$397.6 million, or 38.0%, from the prior year comparable period. The increase in
average interest-earning assets consisted of increases in each component of the
Company's interest-earning assets, and resulted from significant growth in the
Company's average deposits, which were up $381.0 million, or 35.9%, from the
comparable prior year period.
Average loans increased $98.4 million, or 14.4%, in 1996. This year-to-year
increase was largely related to the new special industry niches as well as the
new products developed by the Company during the past three years, and to the
new
22
loan offices opened by the Company during the past two years. Excluding the
impact of these new offices, the Company's technology and life sciences niche
experienced minimal net loan growth during 1996 as an active market for public
stock offerings, coupled with merger and acquisition activity involving the
Company's client base, resulted in the payoff or reduction of a number of credit
facilities by the Company's clients.
The increase in average investment securities during 1996 of $243.2 million,
or 137.7%, was primarily centered in notes issued by U.S. agencies as well as in
commercial paper. This significant increase resulted from the aforementioned
strong deposit growth in 1996 and was the result of Management's decision to
increase as well as further diversify the Company's portfolio of short-term
investment securities in connection with its liquidity and investment management
activities. This increase in average investment securities also reflected
Management's decision to lengthen the average life of the Company's investment
portfolio in an effort to obtain the higher yields available due to the
steepening of the yield curve during 1996. Average federal funds sold and
securities purchased under agreement to resell increased $56.0 million, or
29.7%, in 1996, and this increase was also a result of the aforementioned strong
growth in deposits. For additional discussion of the Company's liquidity and
investment management activities, see the Item 7 sections entitled
"Asset/Liability Management" and "Liquidity."
Interest income in 1996 decreased $4.4 million from 1995 due to an
unfavorable rate variance. Short-term market interest rates declined during the
latter part of 1995 and early 1996, and remained relatively unchanged for the
remainder of 1996. As a result of this decline, the Company earned lower yields
in 1996 on federal funds sold, securities purchased under agreement to resell
and its investment securities, a significant portion of which were short-term in
nature, resulting in a $1.4 million unfavorable rate variance as compared to the
prior year. The average yield earned on loans in 1996 decreased 40 basis points
from 1995, accounting for the remaining $3.0 million of the total unfavorable
rate variance. The decrease in the average loan yield was attributable to both
increased competition and a decline in the average prime rate charged by the
Company, as a substantial portion of the Company's loans are prime rate-based.
The overall decrease in the yield on average interest-earning assets of one
percent from 1995 to 1996 was due to a combination of the effect of increased
competition on loan yields, the decline in short-term market interest rates as
well as the Company's prime rate, and a shift in the composition of average
interest-earning assets towards a higher percentage of short-term,
lower-yielding investment securities, as the Company's strong growth in average
deposits during 1996 outpaced growth in average loans.
The $26.2 million increase in interest income for 1995, as compared to 1994,
was the result of a $17.5 million favorable volume variance and a $8.7 million
favorable rate variance. The $17.5 million favorable volume variance resulted
from a $210.4 million, or 25.2%, increase in average interest-earning assets
over the comparable prior year period. This increase consisted of loans, which
increased $88.5 million, and lower-yielding liquid investments in federal funds
sold and securities purchased under agreement to resell, which increased a
combined $151.3 million, and was offset by a $29.4 million decrease in
investment securities due to maturities and paydowns. Though average loans in
1995 increased from 1994 principally due to net commercial loan growth of $82.1
million, average loans were negatively impacted during 1995 by an active market
for public stock offerings, as the Company experienced a large amount of loan
payoffs in connection with a number of its clients completing public stock
offerings. The increase in average federal funds sold and securities purchased
under agreement to
23
resell resulted from significant growth in the Company's deposits, and from
Management's decision to invest excess funds in short-term, liquid investments
due to the relatively flat interest rate environment throughout the yield curve
during much of 1995.
The increase in market interest rates throughout 1994 and the early part of
1995 also contributed to the growth in interest income in 1995. Interest income
in 1995 increased $8.7 million, as compared to 1994, due to a 70 basis points
increase in the average yield on interest-earning assets. Of this increase, $7.1
million was attributable to loans, as the average yield on loans increased to
11.7% in 1995, up from 10.5% in 1994.
The increase in total interest expense for 1996 of $10.5 million, as compared
to 1995, was primarily attributable to a $11.0 million unfavorable volume
variance which resulted from a $286.9 million, or 41.3%, increase in average
interest-bearing liabilities. This increase was almost entirely related to the
Company's highest-rate paying deposit product, a bonus money market account,
which increased $259.2 million from the prior year due to the high level of
client liquidity attributable to the strong inflow of investment capital into
the venture capital community and into the public equity markets.
Changes in the rates paid on interest-bearing liabilities had a $0.5 million
favorable impact on interest expense in 1996 as compared to 1995. This slight
decrease in interest expense resulted from a reduction in the average rate paid
on the Company's bonus money market account deposit product from 5.1% in 1995 to
4.5% in 1996, offset by a shift in the composition of interest-bearing
liabilities towards the Company's aforementioned bonus money market account. The
reduction in the average rate paid on the Company's bonus money market account
deposit product was due to both the decline in short-term market interest rates
during the latter part of 1995 and early 1996, and to a reduction in the pricing
of this deposit product in early 1996.
Total interest expense in 1995 increased $12.5 million from the total in 1994
due to increases in both the volume of and rates paid on interest-bearing
liabilities. The $147.3 million, or 26.9%, increase in average interest-bearing
liabilities during 1995 was concentrated in the Company's bonus money market
account, and resulted in a $5.8 million increase in the cost of funding during
1995. Changes in the rates paid on interest-bearing liabilities also had an
unfavorable impact on interest expense in 1995 as compared to the prior year.
The rising interest rate environment during 1994 and early 1995 led to a $6.7
million increase in interest expense, as the average rate paid on
interest-bearing liabilities increased 120 basis points from 1994 to 1995.
PROVISION FOR LOAN LOSSES The provision for loan losses is based on
Management's evaluation of the adequacy of the existing allowance for loan
losses in relation to total loans, and on Management's periodic assessment of
the inherent and identified risk dynamics of the loan portfolio resulting from
reviews of selected individual loans and loan commitments.
The Company's provision for loan losses totaled $10.4 million in 1996,
compared to $8.7 million and $3.1 million in 1995 and 1994, respectively. The
$1.7 million, or 19.3%, increase in the provision for loan losses from 1995 to
1996 reflected an increase in net charge-offs of $8.4 million during 1996,
compared to 1995. The $5.6 million, or 183.0%, increase in the 1995 provision
for loan losses, compared to 1994, was related to an increase in nonperforming
loans during 1995.
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."
24
NONINTEREST INCOME The following table summarizes the components of
noninterest income for the past three years:
Years Ended December 31, 1996 1995 1994
...............................
(Dollars in thousands)
Disposition of clients warrants $ 5,389 $ 8,205 $ 2,840
Letter of credit and foreign exchange income 3,423 3,007 2,403
Deposit service charges 1,663 1,402 1,533
Investment gains (losses) 1 (768) (2,421)
Other 1,133 719 567
-------------------------------
Total noninterest income $ 11,609 $ 12,565 $ 4,922
-------------------------------
Noninterest income decreased $1.0 million, or 7.6%, in 1996 as compared to
1995. This decrease was due to a $2.8 million decline in income from the
disposition of client warrants, offset by a combined increase of $1.1 million in
the Company's components of fee income, and by a $0.8 million decrease in losses
incurred through sales of investment securities. Noninterest income increased
$7.6 million, or 155.3%, in 1995 as compared to 1994. This growth was largely
attributable to a $5.4 million increase in income from the disposition of client
warrants, and a $1.7 million decrease in losses incurred through sales of
investment securities.
The Company has historically obtained rights to acquire stock (in the form of
warrants) in certain clients as part of negotiated credit facilities. The
receipt of warrants does not change the loan covenants or other collateral
control techniques employed by the Company to mitigate the risk of a loan
becoming nonperforming. Interest rates, loan fees and collateral requirements on
loans with warrants are similar to lending arrangements where warrants are not
obtained. The timing and amount of income from the disposition of client
warrants typically depends upon factors beyond the control of the Company,
including the general condition of the public equity markets, and therefore
cannot be predicted with any degree of accuracy and is likely to vary materially
from period to period. During the years ended December 31, 1996, 1995 and 1994,
a significant portion of the income realized by the Company from the disposition
of client warrants was offset by expenses related to the Company's efforts to
build an infrastructure sufficient to support present and prospective business
activities, as well as evaluate and pursue new business opportunities, and was
also offset by the need to increase the provision for loan losses during those
years. The Company realized approximately $3.1 million in warrant-related income
during January 1997 related to one of the clients of the Bank. As opportunities
present themselves in future periods, the Company may continue to reinvest some
or all of the income realized from the disposition of client warrants in
furthering the execution of its business strategies.
Letter of credit fees, foreign exchange fees and other trade finance income
totaled $3.4 million in 1996, an increase of $0.4 million, or 13.8%, from the
$3.0 million earned in 1995, and an increase of $1.0 million, or 42.4%, from the
total earned in 1994. The growth in this category of noninterest income reflects
a concerted effort by Management to expand the penetration of trade
finance-related products and services among the Company's client base, a large
percentage of which provide products and services in international markets.
Income related to deposit service charges totaled $1.7 million, $1.4 million
and $1.5 million in 1996, 1995 and 1994, respectively. Clients compensate the
Company for depository services either through earnings credits computed on
their demand deposit balances, or via explicit payments recognized by the
Company as deposit service charges income. The increase in deposit service
charges income in 1996 was attributable to growth in the Company's client base,
combined with declining short-term market interest rates in late 1995 and early
1996 that subsequently remained relatively unchanged for the remainder of 1996.
This interest rate environment resulted in lower earnings credits for clients
during 1996, and thus
25
increased the amount of explicit deposit service charges income realized by the
Company. Conversely, as short-term market interest rates rose during 1994 and
early 1995, the earnings credits were higher in 1995 as compared to 1994,
thereby lowering the amount of explicit deposit service charges income earned in
1995 versus 1994.
The Company realized a nominal gain on sales of investment securities during
1996, compared to losses incurred through sales of investment securities
totaling $0.8 million and $2.4 million in 1995 and 1994, respectively. The
securities sold during 1995 were primarily mortgage-backed securities, while the
securities sold during 1994 included mortgage-backed securities, as well as U.S.
Treasury and U.S. agencies securities. All investment securities sold were
classified as available-for-sale, and all sales were conducted as a normal
component of the Company's asset/liability and liquidity management activities.
For additional discussion, see the Item 7 sections entitled "Asset/Liability
Management" and "Liquidity."
Other noninterest income is largely composed of service-based fee income, and
totaled $1.1 million in 1996, compared to $0.7 million and $0.6 million in 1995
and 1994, respectively. The increase in 1996 from each of the prior two years
was the result of increased fees associated with the Company's periodic
examinations of client accounts receivables which are pledged as collateral on
loans.
NONINTEREST EXPENSE Noninterest expense in 1996 totaled $52.7 million, a
$4.8 million, or 9.9%, increase from 1995. Total noninterest expense was $47.9
million in 1995, up $2.3 million, or 5.1%, from 1994. Management closely
monitors the Company's level of noninterest expense using a variety of financial
ratios, including the efficiency ratio. The efficiency ratio is calculated by
dividing the amount of noninterest expense, excluding costs associated with
other real estate owned, by adjusted revenues, defined as the total of net
interest income and noninterest income, excluding income from the disposition of
client warrants and gains or losses incurred through sales of investment
securities. This ratio reflects the level of operating expense required to
generate $1 of operating revenue. The Company's efficiency ratio improved to
55.9% in 1996, down from 60.6% in 1995 and 68.3% in 1994. The following table
presents the detail of noninterest expense and the incremental contribution of
each line item to the Company's efficiency ratio:
1996 1995
............................ ............
PERCENT OF
ADJUSTED
Years Ended December 31, AMOUNT REVENUES AMOUNT
..........................................
(Dollars in thousands)
Compensation and benefits $ 31,417 33.6% $ 27,161
Professional services 4,727 5.1 4,565
Equipment 3,239 3.5 3,235
Occupancy 3,095 3.3 3,616
Business development and travel 2,918 3.1 1,982
Postage and supplies 1,448 1.6 1,191
Telephone 1,277 1.4 1,006
Advertising and promotion 1,183 1.3 613
Corporate legal and litigation 260 0.3 595
Other 2,720 2.9 3,973
------------------------------------------
Total excluding cost of other real estate owned 52,284 55.9% 47,937
Cost of other real estate owned 398 (12)
------------------------------------------
Total noninterest expense $ 52,682 $ 47,925
------------------------------------------
1994
............................
PERCENT OF PERCENT OF
ADJUSTED ADJUSTED
Years Ended December 31, REVENUES AMOUNT REVENUES
Compensation and benefits 34.3% $ 23,249 35.9%
Professional services 5.8 4,688 7.2
Equipment 4.1 1,712 2.6
Occupancy 4.6 2,639 4.1
Business development and travel 2.5 1,125 1.7
Postage and supplies 1.5 792 1.2
Telephone 1.3 781 1.2
Advertising and promotion 0.8 485 0.8
Corporate legal and litigation 0.8 2,567 4.0
Other 5.0 6,179 9.5
Total excluding cost of other real estate owned 60.6% 44,217 68.3%
Cost of other real estate owned 1,382
Total noninterest expense $ 45,599
26
Compensation and benefits expenses totaled $31.4 million in 1996, a $4.3
million, or 15.7%, increase over the 1995 total of $27.2 million. Total
compensation and benefits expenses were $23.2 million in 1994. The number of
average full-time equivalent (FTE) staff employed by the Company during 1996 was
363 compared with 336 and 299 in 1995 and 1994, respectively. The increase in
FTE from 1994 through 1996 was attributable to the Company's efforts to develop
and support new markets through geographic expansion, as well as through the
development of new products and niches, and to its efforts in building an
infrastructure sufficient to support present and prospective business
activities. The Company's growth in FTE is likely to continue during future
years as a result of both further geographic expansion into other emerging
technology marketplaces across the U.S., and the development of additional
products and niches.
Professional services expenses totaled $4.7 million, $4.6 million and $4.7
million, in 1996, 1995 and 1994, respectively, and primarily consisted of costs
associated with legal consultation, accounting and auditing, consulting, and the
Company's directors. The level of these expenses during the past three years
reflects the extensive efforts undertaken by the Company to continue to build
and support its infrastructure, and also reflects the Company's efforts in
outsourcing several processes and functions, such as internal audit, facilities
management and credit review, where the Company believes it can achieve a
combination of cost savings and increased quality of service.
Occupancy and equipment expenses totaled $6.3 million in 1996, $6.9 million
in 1995 and $4.4 million in 1994. The higher level of occupancy and equipment
expenses in 1995 as compared to the amounts incurred in 1996 and 1994 was
primarily related to certain non-recurring costs incurred during 1995 in
connection with the Company's move into a new headquarters facility. These
non-recurring costs included both the disposal and purchase of leasehold
improvements and equipment. The move into the new facility was completed in the
fourth quarter of 1995. Occupancy and equipment expenses in both 1995 and 1996
were also impacted by investments in office space, computer equipment and other
costs associated with the Company's growth in personnel, as well as by the
Company's geographic expansion during the past two years. The Company intends to
continue its geographic expansion into other emerging technology marketplaces
across the U.S. during future years.
Business development and travel expenses totaled $2.9 million in 1996, a $0.9
million, or 47.2%, increase from the $2.0 million total in 1995. The Company
incurred $1.1 million in business development and travel expenses in 1994. The
increase in business development and travel expenses during each of the last two
years reflects the Company's continuing emphasis on business development
efforts, as well as its focus on expansion into new geographic markets and
niches which resulted in the opening of seven new loan offices during the past
two years.
Postage and supplies expenses totaled $1.4 million, $1.2 million and $0.8
million in 1996, 1995 and 1994, respectively. Total telephone expenses were $1.3
million in 1996, and $1.0 million and $0.8 million in 1995 and 1994,
respectively. The increase in postage and supplies and telephone expenses during
each of the past two years was the result of the Company's growth in FTE and
geographic expansion into new markets.
Advertising and promotion expenses totaled $1.2 million in 1996, a $0.6
million, or 93.0%, increase from the $0.6 million incurred in 1995, and a $0.7
million, or 143.9%, increase from the $0.5 million total in 1994. The increase
in advertising and promotion expenses in 1996, compared to 1995 and 1994,
reflects a concerted effort by the Company to increase its marketing efforts
nationwide, which were largely facilitated through a formal relationship with an
advertising and public relations firm.
Corporate legal and litigation expenses in 1996 totaled $0.3 million, a $0.3
million, or 56.3%, decrease from the $0.6 million incurred in 1995, and a $2.3
million, or 89.9%, decrease from the $2.6 million incurred in 1994. The decrease
in these expenses in 1996, compared to 1995, was the result of the Company
realizing a $0.4 million gain in 1996 related to
27
the net proceeds received from a legal settlement. The corporate legal and
litigation expenses incurred in 1994 by the Company included a significant
amount of expenditures associated with the defense of a shareholder class action
lawsuit filed against the Company in June 1993. This lawsuit was settled in the
third quarter of 1994.
Certain lawsuits and claims arising in the ordinary course of business have
been filed or are pending against the Company and/or the Bank. Based upon
information available to the Company, its review of such claims to date and
consultation with its 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.
Other expenses in 1996 totaled $2.7 million, down from the $4.0 million and
$6.2 million incurred in 1995 and 1994, respectively. The $1.3 million decrease
in other expenses from 1995 to 1996 was primarily related to a reduction in FDIC
deposit insurance expense, which decreased $1.2 million year-to-year. FDIC
deposit insurance expense also decreased $1.0 million from 1994 to 1995. These
lower deposit insurance premiums resulted from reductions in the Bank's
insurance premium assessment rate during both the third quarter of 1995 and the
first quarter of 1996 due to completion of the recapitalization of the Bank
Insurance Fund. The Bank's insurance premium assessment rate was further reduced
to the statutory minimum annual assessment of $2,000, effective July 1, 1996.
Other expenses further declined from 1994 to 1995 due to $0.4 million of
non-recurring data processing conversion costs in 1994, and due to an increase
during 1995 in reimbursements from clients for services provided by the Bank,
such as courier expenses.
Net costs associated with other real estate owned (OREO) totaled $0.4 million
in 1996. There were minimal net costs associated with OREO in 1995, as gains
from the sales of OREO properties slightly exceeded the costs of maintaining the
Company's OREO properties. The $0.4 million increase from 1995 to 1996 in the
net costs associated with OREO was primarily due to the write-down during 1996
of one property owned by the Company. Net costs associated with OREO decreased
$1.4 million, or 100.9%, from 1994 to 1995, as the Company's credit quality
improved and a number of OREO properties were liquidated. The Company's net
costs associated with OREO include: maintenance expenses, property taxes,
marketing costs, net operating expense or income associated with
income-producing properties, property write-downs, and gains or losses on the
sales of such properties.
INCOME TAXES The Company's effective income tax rate was 40.0% in 1996,
compared to 39.2% in 1995 and 45.0% in 1994. The reduction in the Company's 1996
and 1995 effective income tax rates, as compared to 1994, was attributable to
adjustments in the Company's estimate of its tax liabilities.
FINANCIAL CONDITION The Company's total assets were $1.9 billion at December
31, 1996, an increase of $517.0 million, or 36.7%, compared to $1.4 billion at
December 31, 1995.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO
RESELL Federal funds sold and securities purchased under agreement to resell
totaled a combined $310.3 million at December 31, 1996, an increase of $53.2
million, or 20.7%, compared to the $257.1 million outstanding at the prior year
end. This increase resulted from significant growth in the Company's deposits
during 1996, offset to a large extent by loan growth and by Management's
decision to invest a substantial portion of the deposit growth in investment
securities in connection with the Company's liquidity and investment management
activities. For additional discussion of the Company's liquidity and investment
management activities, see the Item 7 sections entitled "Asset/Liability
Management" and "Liquidity."
INVESTMENT SECURITIES The following table details the composition of
investment securities at December 31, 1996, 1995 and 1994. All investment
securities as reflected in the table on the following page were classified as
available-for-sale and reported at fair value with the exception of obligations
of state and political subdivisions, which were classified as held-to-maturity
and reported at amortized cost as of December 31, 1994. Other equity securities
as of December 31, 1996 included
28
a gross unrealized gain of $3.1 million related to common stock acquired from
the exercise of a warrant in a client of the Bank. The Company sold the common
stock, and realized approximately $3.1 million in warrant-related income, during
January 1997.
December 31, 1996 1995 1994
...............................
(Dollars in thousands)
U.S. Treasury securities $ 75,547 $ 39,898 $ 51,918
U.S. agencies and corporations:
Discount notes and bonds 298,488 163,757 13,111
Collateralized mortgage obligations 58,038 57,207 73,541
Mortgage-backed securities 8,168 -- 8,933
Commercial paper 143,086 52,523 --
Obligations of states and political subdivisions 22,787 6,581 7,786
Other debt securities 13,000 -- --
Other equity securities 5,908 1,343 1,200
-------------------------------
Total $ 625,022 $ 321,309 $ 156,489
-------------------------------
Investment securities totaled $625.0 million at December 31, 1996,
representing a $303.7 million, or 94.5%, increase over the December 31, 1995
balance of $321.3 million. The increase in investment securities was related to
significant growth in the Company's total deposits during 1996 coupled with the
Company's liquidity and investment management activities, and was primarily
centered in notes issued by U.S. agencies as well as in commercial paper. The
Company's liquidity and investment management activities involved Management's
decisions to increase as well as further diversify the Company's portfolio of
short-term investment securities, and to lengthen the average life of the
investment portfolio in an effort to obtain the higher yields available due to
the steepening of the yield curve during 1996. For additional discussion of the
Company's liquidity and investment management activities, see the Item 7
sections entitled "Asset/Liability Management" and "Liquidity."
At December 31, 1996, there were no investment securities held by the Company
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 the Company's shareholders' equity at year end.
29
The following table provides the remaining contractual principal maturities
and fully taxable-equivalent yields on investment securities held by the Company
as of December 31, 1996. 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 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. Other equity securities, consisting largely of the common
stock of client companies, were included in the table below as maturing after
ten years.
MATURING IN
..................................................................................
AFTER ONE YEAR AFTER FIVE YEARS AFTER
TOTAL ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS TEN YEARS
................... ................... ................... ................. ..................
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE
December 31, 1996 VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
........................................................................................................
(Dollars in thousands)
U.S. Treasury securities $ 75,547 6.2% $ 10,023 6.3% $ 65,524 6.2% -- -- -- --
U.S. agencies and
corporations:
Discount notes and
bonds 298,488 6.0 109,372 5.4 189,116 6.4 -- -- -- --
Collateralized
mortgage obligations 58,038 5.2 -- -- -- -- $3,311 5.6% $54,727 5.2%
Mortgage-backed
securities 8,168 6.6 -- -- -- -- -- -- 8,168 6.6
Commercial paper 143,086 5.5 143,086 5.5 -- -- -- -- -- --
Obligations of states and
political subdivisions 22,787 6.9 13,228 5.6 5,463 9.8 4,096 7.6 -- --
Other debt securities 13,000 5.4 13,000 5.4 -- -- -- -- -- --
Other equity securities 5,908 -- -- -- -- -- -- -- 5,908 --
--------------------------------------------------------------------------------------------------------
Total $625,022 5.9% $288,709 5.5% $260,103 6.4% $7,407 6.7% $68,803 5.3%
--------------------------------------------------------------------------------------------------------
Mortgage-backed securities (MBS) and collateralized mortgage obligations
(CMO) pose risks not associated with fixed maturity bonds, primarily related to
the ability of the mortgage borrower to prepay the loan without penalty. This
risk, known as prepayment risk, may cause the MBS and the CMO 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 and the CMO to
decline. Conversely, if interest rates rise, prepayments tend to decrease,
lengthening the average expected remaining maturity of the MBS and the CMO.
30
LOANS The composition of the loan portfolio, net of unearned income, for
each of the past five years is as follows:
December 31, 1996 1995 1994 1993 1992
.....................................................
(Dollars in thousands)
Commercial $ 755,699 $ 622,488 $ 613,469 $ 470,649 $ 499,609
Real estate term 44,475 56,845 58,977 49,710 44,829
Real estate construction 27,540 17,194 10,512 17,283 44,918
Consumer and other 35,778 41,878 20,851 26,913 41,620
-----------------------------------------------------
Total loans $ 863,492 $ 738,405 $ 703,809 $ 564,555 $ 630,976
-----------------------------------------------------
Total loans at December 31, 1996, net of unearned income, were $863.5
million, a $125.1 million, or 16.9%, increase compared to the $738.4 million
outstanding at December 31, 1995. The increase in loans from the 1995 year-end
total was largely related to both the new niches and products developed by the
Company during the past three years, and the new loan offices opened by the
Company during the past two years. Excluding the impact of these new offices,
the Company's technology and life sciences niche experienced minimal net loan
growth during 1996 as an active market for public stock offerings, coupled with
merger and acquisition activity involving the Company's client base, resulted in
the payoff or reduction of a number of credit facilities by the Company's
clients.
The following tables set forth the maturity distribution of the Company's
loans (reported on a gross basis) at December 31, 1996 for fixed and variable
rate commercial and real estate construction loans:
ONE YEAR
December 31, 1996 OR LESS
..............
(Dollars in
thousands)
Fixed rate loans:
Commercial $ 53,710
Real estate construction --
--------------
Total fixed rate loans $ 53,710
--------------
Variable rate loans:
Commercial $ 380,935
Real estate construction 27,617
--------------
Total variable rate loans $ 408,552
--------------
AFTER
ONE YEAR
THROUGH
December 31, 1996 FIVE YEARS
Fixed rate loans:
Commercial $ 61,070
Real estate construction 147
Total fixed rate loans $ 61,217
Variable rate loans:
Commercial $ 198,819
Real estate construction --
Total variable rate loans $ 198,819
AFTER
December 31, 1996 FIVE YEARS
Fixed rate loans:
Commercial $ 51,934
Real estate construction --
Total fixed rate loans $ 51,934
Variable rate loans:
Commercial $ 14,447
Real estate construction --
Total variable rate loans $ 14,447
December 31, 1996 TOTAL
Fixed rate loans:
Commercial $ 166,714
Real estate construction 147
Total fixed rate loans $ 166,861
Variable rate loans:
Commercial $ 594,201
Real estate construction 27,617
Total variable rate loans $ 621,818
Upon maturity, loans satisfying the Company's credit quality standards may be
eligible for renewal. Such renewals are subject to the normal underwriting and
credit administration practices associated with new loans. The Company does not
grant loans with unconditional extension terms.
A substantial percentage of the Company's loans are commercial in nature, and
such loans are generally made to emerging growth and middle-market companies in
a variety of industries. Total loans to companies in the semiconductor practice
(as identified by Standard Industrial Codes) amounted to 11.4% of the Company's
gross loans as of December 31, 1996. No other particular industry sector
represented more than 10.0% of the Company's loan portfolio as of December 31,
1996.
31
General conditions in the public equity markets, in particular those related
to public stock offerings, may have an impact on the Bank. One consequence of an
active market for public stock offerings is the payoff or reduction of a portion
of the Bank's loans by some of its clients which complete public stock
offerings. Such a reduction in outstanding loans, if significant, could
adversely affect the Company's consolidated earnings.
LOAN ADMINISTRATION Responsibility for the Company's loan policies resides
with the Company's Board of Directors. This responsibility is managed through
the approval and periodic review of the Company's loan policies. The Board of
Directors delegates authority to the Directors' Loan Committee to supervise the
loan underwriting, approval and monitoring activities of the Company. The
Directors' Loan Committee consists of outside Board of Directors members and the
Company's Chief Executive Officer, who serves as an alternate.
Under the oversight of the Directors' Loan Committee, lending authority is
delegated to the Chief Credit Officer and the Company's Internal Loan Committee
consisting of the Chief Credit Officer, niche and practice managers, and loan
administrators. Requests for new and existing credits which meet certain size
and underwriting criteria may be approved outside of the Company's Internal Loan
Committee by designated niche and practice managers jointly with a loan
administrator. New credits exceeding $10.0 million must be approved by the
Directors' Loan Committee.
The loan approval and committee system is administered by the Company's
Credit Administration Group. Loan administrators assigned to each niche or
practice report to the Chief Credit Officer, who also acts as chair of the
Internal Loan Committee. In response to the significant increase in
nonperforming assets and loan charge-offs during 1992, Management began an
extensive review of the Company's loan policies and procedures, portfolio
management practices, and credit review process during the fourth quarter of
that year. The Company also hired experienced loan administrators and loan
review officers in an effort to restore and maintain a high level of asset
quality in its loan portfolio.
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
the Bank follows underwriting and credit monitoring procedures which it believes
are appropriate in growing and managing the loan portfolio, in the event of
nonperformance by these other parties, the Bank's potential exposure to credit
losses could significantly affect the Company's consolidated financial position,
earnings and growth.
Lending money involves an inherent risk of nonpayment. Through the
administration of loan policies and monitoring of the portfolio, 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.
Management regularly reviews and monitors 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. Potential problem credits are identified and, based
upon known information, action plans are developed.
Management has 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 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 is an unallocated portion that
supplements the first two components and includes: 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
32
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 utilizes
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 Management.
An analysis of the allowance for loan losses for the past five years is as
follows:
December 31, 1996 1995 1994 1993 1992
.........................................................
(Dollars in thousands)
Beginning balance $ 29,700 $ 20,000 $ 25,000 $ 22,000 $ 11,400
Charge-offs:
Commercial (9,056) (4,248) (10,913) (5,058) (6,770)
Real estate (634) (653) (495) (5,967) (18,308)
Consumer and other (38) (57) -- -- --
---------------------------------------------------------
Total charge-offs (9,728) (4,958) (11,408) (11,025) (25,078)
---------------------------------------------------------
Recoveries:
Commercial 2,050 3,106 2,398 3,064 132
Real estate 217 2,815 923 1,259 164
Consumer and other 35 -- -- -- --
---------------------------------------------------------
Total recoveries 2,302 5,921 3,321 4,323 296
---------------------------------------------------------
Net (charge-offs) recoveries (7,426) 963 (8,087) (6,702) (24,782)
Provision for loan losses 10,426 8,737 3,087 9,702 35,382
---------------------------------------------------------
Ending balance $ 32,700 $ 29,700 $ 20,000 $ 25,000 $ 22,000
---------------------------------------------------------
Net charge-offs (recoveries) to average total
loans 1.0% (0.1)% 1.4% 1.2% 3.8%
---------------------------------------------------------
The following table displays the allocation of the allowance for loan losses
among specific classes of loans:
1995 1994
.............................. ..............................
1996 PERCENT PERCENT
.............................. OF TOTAL OF TOTAL
December 31, AMOUNT PERCENT AMOUNT LOANS AMOUNT LOANS
OF TOTAL
LOANS
..............................................................................................
(Dollars in thousands)
Commercial $18,716 87.5% $16,176 84.3% $12,748 87.2%
Real estate term 873 5.2 707 7.7 765 8.4
Real estate construction 140 3.2 87 2.4 345 1.4
Consumer and other 615 4.1 339 5.6 312 3.0
Unallocated 12,356 N/A 12,391 N/A 5,830 N/A
----------------------------------------------------------------------------------------------
Total $32,700 100.0 % $29,700 100.0 % $20,000 100.0 %
----------------------------------------------------------------------------------------------
1993 1992
.............................. ..............................
PERCENT PERCENT
OF TOTAL OF TOTAL
December 31, AMOUNT LOANS AMOUNT LOANS
Commercial $19,374 83.5% $14,019 79.3%
Real estate term 539 8.8 2,525 7.1
Real estate construction 204 3.0 1,758 7.1
Consumer and other 274 4.7 2,353 6.5
Unallocated 4,609 N/A 1,345 N/A
Total $25,000 100.0 % $22,000 100.0 %
33
The allowance for loan losses was $32.7 million at December 31, 1996, an
increase of $3.0 million, or 10.1%, compared to the $29.7 million balance at
December 31, 1995. This increase was due to the net effect of the Company
contributing $10.4 million during 1996 in additional provisions to the allowance
for loan losses, offset by net charge-offs of $7.4 million during 1996. Gross
charge-offs for 1996 were $9.7 million, and primarily resulted from five
credits, none of which were related to the Bank's technology and life sciences
niche. Gross recoveries of $2.3 million in 1996 included $0.9 million related to
one commercial credit that was partially charged off in 1994.
Net loan recoveries in 1995 of $1.0 million included $2.7 million in
recoveries from a real estate client relationship that had been charged off in
1992 and $1.1 million related to the aforementioned commercial credit that was
partially charged off in 1994. Net loan charge-offs of $8.1 million in 1994
included the partial charge-off of loans to two commercial borrowers totaling
$5.5 million. Net loan charge-offs in 1993 and 1992 and the $35.4 million
provision for loan losses during 1992 were directly influenced by certain events
in the third and fourth quarters of 1992. The Bank incurred several large
charge-offs stemming from declines in the appraised values of real estate
collateral. Construction time and delays imposed by bankruptcy and foreclosure
proceedings hampered efforts to gain control and effectively dispose of
collateral in a timely manner. These delays contributed to a reduction in market
values as the deteriorating condition of San Francisco Bay Area real estate
markets caused sales prices to decline rapidly during 1992. In addition, several
of the Bank's commercial clients filed for protection under bankruptcy laws,
contributing to an impairment of the Company's collateral and resulting in loan
charge-offs.
In general, Management believes the allowance for loan losses is adequate as
of December 31, 1996. However, future changes in circumstances, economic
conditions or other factors could cause Management to increase or decrease the
allowance for loan losses as deemed necessary.
Nonperforming assets consist of loans that are past due 90 days or more but
are still accruing interest, loans on nonaccrual status and OREO. The following
table sets forth certain relationships between nonperforming loans,
nonperforming assets and the allowance for loan losses. There was no difference
during 1996 and 1995 between the Company's nonaccrual loans and impaired loans,
which were measured for impairment based on the fair value of the underlying
collateral in accordance with Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan."
December 31, 1996 1995 1994 1993 1992
..........................................................
(Dollars in thousands)
Nonperforming assets:
Loans past due 90 days or more $ 8,556 $ 906 $ 444 $ 2,014 $ 319
Nonaccrual loans (1) 14,581 27,867 11,269 43,001 63,691
----------------------------------------------------------
Total nonperforming loans 23,137 28,773 11,713 45,015 64,010
OREO (1) 1,948 4,955 7,089 14,261 10,864
----------------------------------------------------------
Total nonperforming assets $ 25,085 $ 33,728 $ 18,802 $ 59,276 $ 74,874
----------------------------------------------------------
Nonperforming loans as a percent of total
loans 2.7% 3.9% 1.7% 8.0% 10.1%
OREO as a percent of total assets 0.1% 0.4% 0.6% 1.4% 1.1%
Nonperforming assets as a percent of total
assets 1.3% 2.4% 1.6% 6.0% 7.8%
Allowance for loan losses $ 32,700 $ 29,700 $ 20,000 $ 25,000 $ 22,000
As a percent of total loans 3.8% 4.0% 2.8% 4.4% 3.5%
As a percent of nonaccrual loans 224.3% 106.6% 177.5% 58.1% 34.5%
As a percent of nonperforming loans 141.3% 103.2% 170.8% 55.5% 34.4%
- ----------------------------------------
(1) In accordance with SFAS No. 114, in-substance foreclosure loans have been
reclassified from OREO to nonaccrual loans. The reclassified amounts are
$1,377, $13,824 and $27,339 at December 31, 1994, 1993 and 1992,
respectively.
34
The detailed composition of nonaccrual loans is presented in the following
table. There were no real estate construction loans on nonaccrual at December
31, 1996 and 1995.
December 31, 1996 1995
....................
(Dollars in
thousands)
Commercial $ 11,595 $ 26,657
Real estate term 2,546 1,210
Consumer and other 440 --
--------------------
Total nonaccrual loans $ 14,581 $ 27,867
--------------------
Nonperforming loans totaled $23.1 million at December 31, 1996, a decrease of
$5.6 million, or 19.6%, from the $28.8 million balance at December 31, 1995.
Nonperforming loans at December 31, 1996 included one credit in excess of $8.0
million that was more than 90 days past due as of December 31, 1996. The
Export-Import Bank of the U.S. (EX-IM) provided the Bank with a guarantee of
this credit facility, and the Bank's claim on this guarantee was approved for
payment by the EX-IM in early 1997. Excluding this one past due loan, the
allowance for loan losses would have been 217.1% of nonperforming loans as of
December 31, 1996.
The $17.1 million increase in nonperforming loans at December 31, 1995,
compared to year-end 1994, was concentrated in two commercial credits, one of
which was paid off during 1996. The other credit remained in nonperforming loans
as of December 31, 1996 and Management believes, based on currently known
information, that this credit is adequately secured with collateral and specific
reserves. The significant improvement in nonperforming loans during 1994 and
1993, compared to the level at the end of 1992, reflects the concerted efforts
of Management to improve the Company's credit discipline and processes and to
strengthen its Credit Administration Group staffing.
In addition to the loans disclosed in the foregoing analysis, Management has
identified three loans with principal amounts aggregating approximately $17.4
million, that, on the basis of information known by Management as of December
31, 1996, were judged to have a higher than normal risk of becoming
nonperforming. The Company is not aware of any other loans at December 31, 1996
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.
OREO totaled $1.9 million at December 31, 1996, a decrease of $3.0 million,
or 60.7%, from the $5.0 million balance at December 31, 1995. This decrease
resulted from sales of OREO properties during 1996. The Company did not transfer
any loans to OREO in 1996, and the remaining OREO balance at December 31, 1996
was composed of two properties, each consisting of multiple undeveloped lots,
and each acquired prior to June 1993.
DEPOSITS The Company's deposits are primarily obtained from emerging growth
and middle-market businesses within the technology and life sciences niche,
including both venture capital-backed and publicly financed companies, and, to a
lesser extent, from professional service firms and business executives. The
Company does not obtain deposits from conventional retail sources and does not
accept brokered deposits. The following table presents the composition of the
Company's deposits for the last five years:
December 31, 1996 1995 1994 1993 1992
.....................................................
(Dollars in thousands)
Noninterest-bearing demand deposits $ 599,257 $ 451,318 $ 401,455 $ 356,806 $ 329,281
Money market, NOW and savings deposits 1,089,834 773,292 585,171 486,700 442,158
Time deposits 85,213 65,450 88,747 71,453 116,630
-----------------------------------------------------
Total deposits $1,774,304 $1,290,060 $1,075,373 $ 914,959 $ 888,069
-----------------------------------------------------
Total deposits were $1.8 billion at December 31, 1996, an increase of $484.2
million, or 37.5%, from the prior year-end amount of $1.3 billion. A significant
portion of the increase in deposits during 1996 was concentrated in the
Company's
35
highest-rate paying deposit product, a bonus money market account, which
increased $281.0 million, or 59.3%, from December 31, 1995, due to the high
level of client liquidity attributable to the strong inflow of investment
capital into the venture capital community and into the public equity market.
Noninterest-bearing demand deposits increased $147.9 million, or 32.8%, from the
prior year end, primarily due to an increase in the Company's client base
resulting from its business development efforts.
Time certificates of deposit in amounts of $100,000 or more totaled $75.0
million at December 31, 1996. No material portion of the Company's deposits has
been obtained from a single depositor and the loss of any one depositor would
not materially affect the business of the Company.
ASSET/LIABILITY MANAGEMENT A key objective of asset/liability management is to
manage interest rate risk due to changing asset and liability cash flows and
market interest rate movements. Interest rate risk occurs when assets and
liabilities do not reprice simultaneously and in equal volumes. The
asset/liability committee of the Bank (ALCO) provides oversight to the
asset/liability management process and recommends policy guidelines for approval
by the Board of Directors. Adherence to these policies is monitored on an
ongoing basis, and decisions regarding the management of earnings exposure due
to changes in balance sheet structure and/or market interest rates are made when
appropriate and agreed to by the ALCO.
One measure of the mismatch between asset and liability repricing is the
interest rate sensitivity "gap" analysis. 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. Company policy
guidelines provide that the cumulative one-year gap as a percentage of
interest-earning assets should not exceed 20.0%. The gap analysis as of December
31, 1996 indicates that the Company was positioned within these guidelines as
the cumulative one-year gap as a percentage of interest-earning assets was 9.5%.
The table on the next page illustrates the Company's interest rate sensitivity
gap position at December 31, 1996.
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 earnings resulting from changes in market interest
rates over time. Accordingly, the ALCO combines the use of gap analysis with the
use of a simulation model which provides a dynamic assessment of interest rate
sensitivity.
The Company's asset/liability management simulation model provides the ALCO
with the ability to simulate net interest income using either one interest rate
forecast (simple simulation) or a forecast of multiple interest rate scenarios
(stochastic simulation). The simulation model captures the dynamics of the
Company's balance sheet, such as repricing and prepayment behavior, as well as
its off-balance sheet financial instruments. The simulation model also
anticipates balance sheet mix changes and trends, based upon certain assumptions
made by Management, and affords the ability to simulate pro forma balance
sheets, income statements, cash flows, and the sensitivity of these items to
changing interest rates. However, the simulation model does not take into
account future actions of the ALCO which could be undertaken to alter these
simulated results.
In order to measure, as of December 31, 1996, the sensitivity of the
Company's forecasted net interest income to changing interest rates, utilizing
the simple simulation methodology, both a rising and falling interest rate
scenario were projected and compared to a base interest rate forecast derived
from the treasury yield curve. For the rising and falling interest rate
scenarios, the base interest rate forecast was increased or decreased, as
applicable, by 200 basis points in 12 equal increments over a one-year period.
Company policy guidelines provide that the difference between a base 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, 1996 indicated the Company was well within these
policy guidelines.
36
Interest Rate Sensitivity Analysis as of December 31, 1996
AFTER
AFTER AFTER 6 MONTHS AFTER
ASSETS AND LIABILITIES 1 DAY TO 1 MONTH TO 3 MONTHS TO TO 1 1 YEAR TO AFTER 5 NOT
WHICH MATURE OR REPRICE IMMEDIATELY 1 MONTH 3 MONTHS 6 MONTHS YEAR 5 YEARS YEARS STATED TOTAL
.............................................................................................................................
(Dollars in thousands)
INTEREST-EARNING ASSETS:
Federal funds sold and
securities purchased under
agreement to resell (1) -- $ 310,341 -- -- -- -- -- -- $ 310,341
Investment securities: (2)
U.S. Treasury and agencies
obligations -- 20,720 $ 55,750 $ 32,919 $10,006 $254,640 -- -- 374,035
Collateralized mortgage
obligations and
mortgage-backed securities
(3) -- 4,675 895 1,316 2,539 21,032 $ 35,749 -- 66,206
Obligations of states and
political subdivisions -- 10,117 130 107 2,874 5,463 4,096 -- 22,787
Commercial paper and other
debt securities -- 103,276 52,810 -- -- -- -- -- 156,086
Other equity securities (4) -- -- -- -- -- -- -- $ 5,908 5,908
--------------------------------------------------------------------------------------------------
Total investment securities -- 138,788 109,585 34,342 15,419 281,135 39,845 5,908 625,022
--------------------------------------------------------------------------------------------------
Loans (5) $ 681,086 9,140 7,962 21,685 14,513 98,431 13,478 17,197 863,492
--------------------------------------------------------------------------------------------------
Total Interest-Earning Assets $ 681,086 $ 458,269 $ 117,547 $ 56,027 $29,932 $379,566 $ 53,323 $ 23,105 $1,798,855
--------------------------------------------------------------------------------------------------
FUNDING SOURCES:
Deposits:
Money market and NOW
deposits -- $1,089,834 -- -- -- -- -- -- $1,089,834
Time deposits -- 38,378 $ 29,356 $ 10,166 $ 5,093 $ 2,220 -- -- 85,213
--------------------------------------------------------------------------------------------------
Total interest-bearing
deposits -- 1,128,212 29,356 10,166 5,093 2,220 -- -- 1,175,047
Portion of noninterest-bearing
funding sources -- -- -- -- -- -- -- $623,808 623,808
--------------------------------------------------------------------------------------------------
Total Funding Sources -- $1,128,212 $ 29,356 $ 10,166 $ 5,093 $ 2,220 -- $623,808 $1,798,855
--------------------------------------------------------------------------------------------------
GAP $ 681,086 $ (669,943) $ 88,191 $ 45,861 $24,839 $377,346 $ 53,323 $(600,703) --
CUMULATIVE GAP $ 681,086 $ 11,143 $ 99,334 $ 145,195 $170,034 $547,380 $600,703 -- --
ASSETS AND LIABILITIES
WHICH MATURE OR REPRICE
..............................
INTEREST-EARNING ASSETS:
Federal funds sold and
securities purchased under
agreement to resell (1)
Investment securities: (2)
U.S. Treasury and agencies
obligations
Collateralized mortgage
obligations and
mortgage-backed securities
(3)
Obligations of states and
political subdivisions
Commercial paper and other
debt securities
Other equity securities (4)
Total investment securities
Loans (5)
Total Interest-Earning Assets
FUNDING SOURCES:
Deposits:
Money market and NOW
deposits
Time deposits
Total interest-bearing
deposits
Portion of noninterest-bearing
funding sources
Total Funding Sources
GAP
CUMULATIVE GAP
- ----------------------------------------
(1) Includes interest-bearing deposits in other financial institutions of $341
as of December 31, 1996.
(2) All securities are reported at fair value as of December 31, 1996.
(3) Principal cash flows are based on estimated principal payments as of
December 31, 1996.
(4) Not stated column consists of other equity securities and Federal Reserve
Bank stock as of December 31, 1996.
(5) Not stated column consists of nonaccrual loans of $14,581 and overdrafts of
$8,274, offset by unearned income of $5,658 as of December 31, 1996.
37
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.
The Company regularly assesses 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 Company business
activities. The ALCO provides oversight to the liquidity management process and
recommends policy guidelines, subject to Board of Directors approval, and
courses of action to address the Company's actual and projected liquidity needs.
The ability to attract a stable, low-cost base of deposits is the Company's
primary source of liquidity. Other sources of liquidity available to the Company
include short-term borrowings, which consist of federal funds purchased,
security repurchase agreements and other short-term borrowing arrangements. The
Company's liquidity requirements can also be met through the use of its
portfolio of liquid assets. Liquid assets, as defined, include 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.
Bank policy guidelines provide that liquid assets as a percentage of total
deposits should not fall below 20.0%. At December 31, 1996, the Bank's ratio of
liquid assets to total deposits was 42.1%. This ratio is well in excess of the
Bank's minimum policy guidelines and is slightly higher than the comparable
ratio of 40.9% as of December 31, 1995. In addition to monitoring the level of
liquid assets relative to total deposits, the Bank also utilizes other policy
measures in its liquidity management activities. As of December 31, 1996 and
1995, the Bank was in compliance with all of these policy measures.
In analyzing the Company's liquidity during 1996, reference is made to the
Company's consolidated statement of cash flows for the year ended December 31,
1996 (see "Item 8. Financial Statements and Supplementary Data"). The statement
of cash flows includes separate categories for operating, investing and
financing activities. Operating activities included net income of $21.5 million
for 1996, which was adjusted for certain non-cash items including the provision
for loan losses, depreciation, deferred income taxes, and an assortment of other
miscellaneous items. Investing activities consisted primarily of both proceeds
from and purchases of investment securities, which resulted in a net cash
outflow of $291.8 million, and the net change in total loans resulting from loan
originations and principal collections, which increased $136.7 million in 1996.
Financing activities reflected the net change in the Company's total deposits,
which increased $484.2 million during 1996, and included $2.5 million of cash
proceeds received during the year from the issuance of Company common stock. In
total, the transactions noted above resulted in a net cash inflow of $90.9
million for the year and total cash and cash equivalents, as defined in the
Company's consolidated statement of cash flows, of $433.2 million at December
31, 1996.
CAPITAL RESOURCES Management seeks to maintain adequate capital to support
anticipated asset growth and credit risks, and to ensure that the Company and
the Bank are in compliance with all regulatory capital guidelines. The primary
source of new capital for the Company has been the retention of earnings. Aside
from current earnings, an additional source of new capital for the Company has
been proceeds from the issuance of common stock under the Company's employee
benefit plans, including the Company's 1983 and 1989 stock option plans, the
employee stock ownership plan, and the employee stock purchase plan.
Shareholders' equity was $135.4 million at December 31, 1996, an increase of
$30.4 million, or 29.0%, from the $105.0 million balance at December 31, 1995.
This increase was due to 1996 earnings of $21.5 million, $6.3 million in net
capital generated during 1996 through employee benefit plans, and an increase in
the after-tax net unrealized gain on available-for-sale investments of $2.7
million from the prior year end. The Company does not have any material
commitments for capital expenditures as of December 31, 1996.
38
The Company paid nominal cash dividends on its common stock from 1989 to 1992
in order to qualify the common stock as an eligible investment for institutional
investors requiring a cash yield. The Board of Directors of the Company
indefinitely suspended plans to pay further cash dividends in the third quarter
of 1992 in response to the net loss and level of nonperforming assets in the
third quarter of 1992.
The following table presents the relationship between significant financial
ratios:
Years Ended December 31, 1996 1995 1994
..................................
Return on average assets 1.4% 1.6% 0.9%
DIVIDED BY
Average equity as a percentage of average assets 7.6% 7.9% 7.7%
EQUALS
Return on average equity 17.9% 19.8% 12.3%
TIMES
Earnings retained 100.0% 100.0% 100.0%
EQUALS
Internal capital growth 17.9% 19.8% 12.3%
The Company and the Bank are subject to capital adequacy guidelines issued by
the Federal Reserve Board. Under these capital guidelines, the minimum total
risk-based capital requirement is 10.0% of risk-weighted assets and certain off-
balance sheet items for a "well capitalized" depository institution. At least
6.0% of the 10.0% total risk-based capital ratio must consist of Tier 1 capital,
defined as common stock, retained earnings, noncumulative perpetual preferred
stock (cumulative perpetual preferred stock for bank holding companies), and
minority interests in consolidated subsidiaries, less most intangible assets,
and the remainder may consist of eligible term subordinated debt, cumulative
perpetual preferred stock, long-term preferred stock, a limited amount of the
allowance for loan losses, and certain other instruments with some
characteristics of equity.
The Federal Reserve Board has 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.
The Company's risk-based capital ratios were in excess of regulatory
guidelines for a well capitalized depository institution as of December 31,
1996, 1995 and 1994. Capital ratios for the Company are set forth below:
December 31, 1996 1995 1994
..................................
Total risk-based capital ratio 11.5% 11.9% 10.1%
Tier 1 risk-based capital ratio 10.2% 10.6% 8.9%
Tier 1 leverage ratio 7.7% 8.0% 8.3%
The decrease in the Company's capital ratios from December 31, 1995 to
December 31, 1996 primarily resulted from a significant increase in total assets
during 1996. The improvement in the Company's total and Tier 1 risk-based
capital ratios from December 31, 1994 to December 31, 1995 was attributable to
asset growth during 1995 primarily occurring in lower risk-weighted assets, and
also to an increase in Tier 1 capital. The increase in Tier 1 capital resulted
from 1995 net income and capital generated through the Company's employee
benefit plans. See "Item 8. Financial Statements and Supplementary Data - Note
13 to the Consolidated Financial Statements - Regulatory Matters" for the Bank's
capital ratios at December 31, 1996.
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
[SIG]
The Board of Directors and Shareholders
Silicon Valley Bancshares:
We have audited the accompanying consolidated balance sheets of Silicon
Valley Bancshares and subsidiaries (the Company) as of December 31, 1996 and
1995, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Silicon
Valley Bancshares and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, in 1994.
[PASTE UP]
KPMG Peat Marwick LLP
San Jose, California
January 27, 1997
40
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 1995
........................
(Dollars in
thousands)
ASSETS:
Cash and due from banks $ 122,836 $ 85,187
Federal funds sold and securities purchased under agreement to
resell 310,341 257,138
Investment securities, at fair value 625,022 321,309
Loans, net of unearned income 863,492 738,405
Allowance for loan losses (32,700) (29,700)
------------------------
Net loans 830,792 708,705
Premises and equipment 4,155 4,697
Other real estate owned 1,948 4,955
Accrued interest receivable and other assets 29,450 25,596
------------------------
Total assets $1,924,544 $1,407,587
------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Noninterest-bearing demand deposits $ 599,257 $ 451,318
Money market and NOW deposits 1,089,834 773,292
Time deposits 85,213 65,450
------------------------
Total deposits 1,774,304 1,290,060
Other liabilities 14,840 12,553
------------------------
Total liabilities 1,789,144 1,302,613
------------------------
Shareholders' Equity:
Preferred stock, no par value:
20,000,000 shares authorized; none outstanding
Common stock, no par value:
30,000,000 shares authorized; 9,329,993 and 8,963,662 shares
outstanding at December 31, 1996 and 1995, respectively 65,968 59,357
Retained earnings 67,321 45,855
Net unrealized gain (loss) on available-for-sale investments 2,456 (198)
Unearned compensation (345) (40)
------------------------
Total shareholders' equity 135,400 104,974
------------------------
Total liabilities and shareholders' equity $1,924,544 $1,407,587
------------------------
See notes to consolidated financial statements.
41
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
Years Ended December 31, 1996 1995 1994
...................................
(Dollars in thousands, except
per share amounts)
Interest income:
Loans $ 87,893 $ 79,767 $ 62,312
Investment securities 24,074 10,439 11,343
Federal funds sold and securities purchased under
agreement to resell 13,106 11,041 1,397
-----------------------------------
Total interest income 125,073 101,247 75,052
-----------------------------------
Interest expense:
Deposits 37,796 27,293 14,770
Other borrowings 2 2 22
-----------------------------------
Total interest expense 37,798 27,295 14,792
-----------------------------------
Net interest income 87,275 73,952 60,260
Provision for loan losses 10,426 8,737 3,087
-----------------------------------
Net interest income after provision for loan losses 76,849 65,215 57,173
-----------------------------------
Noninterest income:
Disposition of client warrants 5,389 8,205 2,840
Letter of credit and foreign exchange income 3,423 3,007 2,403
Deposit service charges 1,663 1,402 1,533
Investment gains (losses) 1 (768) (2,421)
Other 1,133 719 567
-----------------------------------
Total noninterest income 11,609 12,565 4,922
-----------------------------------
Noninterest expense:
Compensation and benefits 31,417 27,161 23,249
Professional services 4,727 4,565 4,688
Equipment 3,239 3,235 1,712
Occupancy 3,095 3,616 2,639
Business development and travel 2,918 1,982 1,125
Postage and supplies 1,448 1,191 792
Telephone 1,277 1,006 781
Advertising and promotion 1,183 613 485
Cost of other real estate owned 398 (12) 1,382
Corporate legal and litigation 260 595 2,567
Other 2,720 3,973 6,179
-----------------------------------
Total noninterest expense 52,682 47,925 45,599
-----------------------------------
Income before income tax expense 35,776 29,855 16,496
Income tax expense 14,310 11,702 7,430
-----------------------------------
Net income $ 21,466 $ 18,153 $ 9,066
-----------------------------------
Net income per common and common equivalent share $ 2.21 $ 1.98 $ 1.06
-----------------------------------
See notes to consolidated financial statements.
42
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
UNREALIZED
COMMON STOCK GAIN (LOSS)
Years Ended December 31, 1996, 1995 .................... RETAINED ON UNEARNED
and 1994 SHARES AMOUNT EARNINGS INVESTMENTS COMPENSATION TOTAL
..............................................................................
(Dollars in thousands)
Balance at December 31, 1993 8,290,994 $ 52,180 $ 18,636 -- $ (480) $ 70,336
Common stock issued under employee
benefit plans 218,200 1,888 -- -- -- 1,888
Net income -- -- 9,066 -- -- 9,066
Cumulative effect of change in
accounting principle, net -- -- -- $ 1,493 -- 1,493
Net change in unrealized gain (loss)
on available-for-sale investments -- -- -- (5,652) -- (5,652)
Amortization of unearned
compensation -- -- -- -- 126 126
------------------------------------------------------------------------------
Balance at December 31, 1994 8,509,194 54,068 27,702 (4,159) (354) 77,257
------------------------------------------------------------------------------
Common stock issued under employee
benefit plans 454,468 5,289 -- -- -- 5,289
Net income -- -- 18,153 -- -- 18,153
Net change in unrealized gain (loss)
on available-for-sale investments -- -- -- 3,961 -- 3,961
Amortization of unearned
compensation -- -- -- -- 314 314
------------------------------------------------------------------------------
Balance at December 31, 1995 8,963,662 59,357 45,855 (198) (40) 104,974
------------------------------------------------------------------------------
Common stock issued under employee
benefit plans 366,331 5,776 -- -- (410) 5,366
Income tax benefit from stock
options exercised and vesting of
restricted stock -- 835 -- -- -- 835
Net income -- -- 21,466 -- -- 21,466
Net change in unrealized gain (loss)
on available-for-sale investments -- -- -- 2,654 -- 2,654
Amortization of unearned
compensation -- -- -- -- 105 105
------------------------------------------------------------------------------
Balance at December 31, 1996 9,329,993 $ 65,968 $ 67,321 $ 2,456 $ (345) $ 135,400
------------------------------------------------------------------------------
See notes to consolidated financial statements.
43
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996 1995 1994
....................................
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 21,466 $ 18,153 $ 9,066
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 10,426 8,737 3,087
Provision for other real estate owned 550 -- 922
Depreciation and amortization 1,183 1,944 1,491
Net (gain) loss on sales of investment
securities (1) 768 2,421
Net loss on disposals of premises and equipment -- 1,117 --
Net (gain) loss on sales of other real estate
owned (416) (271) 471
Deferred income tax (benefit) provision (2,834) (3,864) 2,015
Increase (decrease) in unearned income 1,845 159 (42)
Increase in accrued interest receivable (3,586) (102) (1,926)
Other, net (576) 1,638 2,827
------------------------------------
Net cash provided by operating activities 28,057 28,279 20,332
------------------------------------
Cash flows from investing activities:
Proceeds from maturities and paydowns of
investment securities 1,000,558 201,291 133,921
Proceeds from sales of investment securities 21,277 33,463 127,037
Purchases of investment securities (1,313,637) (390,770) (164,645)
Net increase in loans (136,660) (40,121) (164,941)
Proceeds from recoveries of charged off loans 2,302 5,921 3,321
Net proceeds from sales of other real estate
owned 2,873 2,837 21,390
Purchases of premises and equipment (641) (5,561) (2,635)
------------------------------------
Net cash applied to investing activities (423,928) (192,940) (46,552)
------------------------------------
Cash flows from financing activities:
Net increase in deposits 484,244 214,687 160,413
Proceeds from issuance of common stock,
net of issuance costs 2,479 2,450 680
------------------------------------
Net cash provided by financing activities 486,723 217,137 161,093
------------------------------------
Net increase in cash and cash equivalents 90,852 52,476 134,873
Cash and cash equivalents at January 1, 342,325 289,849 154,976
------------------------------------
Cash and cash equivalents at December 31, $ 433,177 $ 342,325 $ 289,849
------------------------------------
Supplemental disclosures:
Interest paid $ 37,737 $ 27,239 $ 14,719
Income taxes paid $ 16,775 $ 14,677 $ 7,707
Non-cash investing activities:
Transfer of loans to other real estate owned $ -- $ 408 $ 1,873
Transfer of held-to-maturity investment
securities to available-for-sale $ -- $ 6,196 $ --
------------------------------------
See notes to consolidated financial statements.
44
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Silicon Valley Bancshares (the
"Company") and its subsidiaries conform with generally accepted accounting
principles and prevailing practices within the banking industry. Certain
reclassifications have been made to the Company's 1995 and 1994 consolidated
financial statements to conform to the 1996 presentations. Such
reclassifications had no effect on the results of operations or shareholders'
equity. The following is a summary of the significant accounting and reporting
policies used in preparing the consolidated financial statements.
NATURE OF OPERATIONS The Company 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 Northern and Southern California, and additionally has loan offices
in Colorado, Maryland, Massachusetts, Oregon, Texas, and Washington. The Bank
serves emerging growth and middle-market companies in specific targeted niches,
focusing on the technology and life sciences industries, while also identifying
and capitalizing on opportunities to serve companies in other industries whose
financial services needs are underserved. Substantially all of the assets,
liabilities and earnings of the Company relate to its investment in the Bank.
CONSOLIDATION The consolidated financial statements include the accounts of
the Company and those of its wholly owned subsidiaries, the Bank and SVB Leasing
Company (inactive). The revenues, expenses, assets, and liabilities of the
subsidiaries are included in the respective line items in the consolidated
financial statements after elimination of intercompany accounts and
transactions.
BASIS OF FINANCIAL STATEMENT PRESENTATION The preparation of financial
statements in conformity with generally accepted accounting principles requires
Management to make estimates and judgments that affect the reported amounts of
assets and liabilities as of the balance sheet date and the results of
operations for the period. Actual results could differ from those estimates. A
material estimate that is particularly susceptible to possible change in the
near term relates to the determination of the allowance for loan losses. An
estimate of possible changes or range of possible changes cannot be made.
CASH AND CASH EQUIVALENTS Cash and cash equivalents as reported in the
consolidated statements of cash flows includes cash on hand, cash balances due
from banks, federal funds sold, and securities purchased under agreement to
resell. The cash equivalents are readily convertible to known amounts of cash
and are so near their maturity that they present insignificant risk of changes
in value.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO
RESELL Federal funds sold and securities purchased under agreement to resell as
reported in the consolidated balance sheets includes interest-bearing deposits
in other financial institutions of $341,000 and $138,000 at December 31, 1996
and 1995, respectively.
INVESTMENT SECURITIES The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" on January 1, 1994. Under this statement, 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 investment securities are
realized when it is determined that an other than temporary decline in value has
occurred. 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 and
losses on available-for-sale securities, after applicable taxes, are excluded
from earnings and are reported as a separate component of shareholders' equity
until realized. Gains and losses realized upon the sale of investment securities
are computed on the specific identification method.
45
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
interest income over the contractual terms of the underlying loans and
commitments using the interest method or the straight-line method, if not
materially different.
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established
through a provision charged to expense. It is the Company's policy to charge off
loans which, in the judgment of Management, are deemed to have a substantial
risk of loss.
The allowance for loan losses is maintained at a level deemed adequate by the
Company, based upon various estimates and judgments, to provide for known and
inherent risks in the loan portfolio, including loan commitments. The evaluation
of the adequacy of the allowance for loan losses is based upon a continuous
review of a number of factors, including historical loss experience, a review of
specific loans, loan concentrations, prevailing and anticipated economic
conditions that may impact the borrowers' abilities to repay loans as well as
the value of underlying collateral, delinquency analysis, and an assessment of
credit risk in the loan portfolio established through an ongoing credit review
process by the Company and through periodic regulatory examinations.
NONACCRUAL LOANS The Company adopted 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" effective January 1,
1995. SFAS No. 114 requires 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. The adoption of SFAS No. 114 and SFAS No.
118 did not have a material impact on the consolidated financial position or
results of operations of the Company.
Loans are placed on nonaccrual status when they become 90 days past due as to
principal or interest payments (unless the principal and interest are well
secured and in the process of collection), when the Company has determined,
based upon currently known information, that the timely collection of principal
or interest is doubtful, or when the loans otherwise become impaired under the
provisions of SFAS No. 114.
When a loan is placed on nonaccrual status, the accrued interest is reversed
against interest income and the loan is accounted for on the cash or cost
recovery method thereafter until qualifying for return to accrual status.
Generally, a loan will be returned to accrual status when all delinquent
principal and interest become current in accordance with the terms of the loan
agreement and full collection of the principal appears probable.
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, 1996 and 1995.
OTHER REAL ESTATE OWNED Loans secured by real estate are transferred to
other real estate owned (OREO) at the time of foreclosure. OREO is carried at
the lower of the recorded investment in the loan or the fair value of the
property less estimated costs of disposal. Upon transfer of a loan to OREO, an
appraisal is obtained and any excess of the loan balance over
46
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the fair value of the property less estimated costs of disposal is charged
against the allowance for loan losses. Revenues and expenses associated with
OREO, and subsequent adjustments to the fair value of the property and to the
estimated costs of disposal, are realized and reported as a component of
noninterest expense when incurred.
FOREIGN EXCHANGE FORWARD CONTRACTS The Company enters into foreign exchange
forward contracts with customers involved in international trade finance
activities, and enters into offsetting foreign exchange forward contracts with
correspondent banks to hedge against the risk of fluctuations in foreign
currency exchange rates related to the forward contracts entered into with its
customers. The notional, or contract, amounts associated with these financial
instruments are not recorded as assets or liabilities in the consolidated
balance sheets. Fees on these 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 and the Bank file 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.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and
common equivalent share is calculated using weighted average shares, including
the dilutive effect of stock options outstanding during the period. Weighted
average shares outstanding were 9,702,489, 9,164,135 and 8,575,366 in 1996, 1995
and 1994, respectively. Fully diluted earnings per common and common equivalent
share were approximately equal to primary earnings per common and common
equivalent share in each of the years ended December 31, 1996, 1995 and 1994.
RECENT ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting
Standards Board (FASB) issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes financial accounting and reporting
standards for stock-based compensation plans, including employee stock purchase
plans, stock options and restricted stock. SFAS No. 123 encourages all entities
to adopt a fair value method of accounting for stock-based compensation plans,
whereby compensation cost is measured at the grant date based on the fair value
of the award and is realized as an expense over the service or vesting period.
However, SFAS No. 123 also allows an entity to continue to measure compensation
cost for these plans using the intrinsic value method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," which is the method currently being used by the Company.
Under the intrinsic value method, compensation cost is generally the excess, if
any, of the quoted market price of the stock at the grant date or other
measurement date over the amount which must be paid to acquire the stock.
The Company adopted SFAS No. 123 effective January 1, 1996, but continues to
account for employee and director stock-based compensation plans under the
intrinsic value accounting methodology prescribed by APB Opinion No. 25. SFAS
No. 123 requires that stock-based compensation to parties other than employees
and directors be accounted for under the fair value method. The effect of
adoption of this statement on the consolidated financial position and results of
operations of the Company was not material.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides standards for distinguishing transfers of financial assets
that are sales
47
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from transfers that are secured borrowings. A transfer of financial assets in
which the transferor surrenders control over those assets is accounted for as a
sale to the extent that consideration other than beneficial interests in the
transferred assets is received in the exchange. This statement requires that
liabilities and derivative securities incurred or obtained by transferors as
part of a transfer of financial assets be initially valued at fair value, if
practicable. It also requires that servicing rights and other retained interests
in the transferred assets be measured by allocating the previous carrying amount
between the assets sold, if any, and retained interests, if any, based on their
relative fair values at the date of transfer. Furthermore, SFAS No. 125 requires
that debtors reclassify financial assets pledged as collateral, and that secured
parties recognize those assets and their obligation to return them in certain
circumstances in which the secured party has taken control of those assets.
Finally, SFAS No. 125 requires that a liability be eliminated if either: (a) the
debtor pays the creditor and is relieved of its obligation for the liability, or
(b) the debtor is legally released from being the primary obligor under the
liability, either judicially or by the creditor. Accordingly, a liability is not
considered extinguished by an in-substance defeasance. SFAS No. 125 is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively, though the effective date for certain provisions has been delayed
for one year from the effective date by SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125," which was issued in
December 1996. Management does not believe that the adoption of these statements
will have a material impact on the Company's consolidated financial position or
results of operations.
2. 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
$46.0 million and $32.5 million at December 31, 1996 and 1995, respectively. The
average required reserve balance totaled $33.6 million in 1996 and $24.6 million
in 1995.
3. SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Securities purchased under agreement to resell outstanding at December 31,
1996 consist of U.S. agencies' and corporations' discount notes and bonds,
bankers' acceptances and commercial paper. The securities underlying the
agreement are book-entry securities in the Bank's account at a correspondent
bank. Securities purchased under agreement to resell averaged $130.5 million in
1996, and the maximum amount outstanding at any month-end during 1996 was $130.0
million.
4. INVESTMENT SECURITIES
In November 1995, the FASB issued "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities"
("special report"). Concurrent with the date of this special report, but no
later than December 31, 1995, an enterprise was permitted to reassess the
appropriateness of the classifications of all securities held at that time.
Reclassifications of securities from the held-to-maturity category that resulted
from this one-time reassessment would not call into question the ability or
positive intent of an enterprise to hold other debt securities to maturity. On
December 28, 1995, the Company reclassified its entire $6.2 million
held-to-maturity investment securities portfolio, consisting of state and local
municipal bonds, as available-for-sale, and recorded a pre-tax unrealized gain
on such securities of $0.4 million.
48
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
All investment securities were classified as available-for-sale at December
31, 1996 and 1995. The Company did not maintain a trading portfolio during 1996
or 1995. The following tables detail the major components of the Company's
investment securities at December 31, 1996 and 1995.
December 31, 1996 AMORTIZED COST GROSS UNREALIZED GAINS
.................................................
(Dollars in thousands)
Available-for-sale securities:
U.S. Treasury securities $ 75,090 $ 619
U.S. agencies and corporations:
Discount notes and bonds 298,305 909
Collateralized mortgage obligations 58,386 1
Mortgage-backed securities 8,469 --
Commercial paper 143,086 --
Obligations of states and political subdivisions 22,528 274
Other debt securities 13,000 --
Other equity securities 1,996 3,912
-------------------------------------------------
Total $ 620,860 $ 5,715
-------------------------------------------------
December 31, 1996 GROSS UNREALIZED LOSSES FAIR VALUE
Available-for-sale securities:
U.S. Treasury securities $ (162) $ 75,547
U.S. agencies and corporations:
Discount notes and bonds (726) 298,488
Collateralized mortgage obligations (349) 58,038
Mortgage-backed securities (301) 8,168
Commercial paper -- 143,086
Obligations of states and political subdivisions (15) 22,787
Other debt securities -- 13,000
Other equity securities -- 5,908
Total $ (1,553) $ 625,022
December 31, 1995 AMORTIZED COST GROSS UNREALIZED GAINS
.................................................
(Dollars in thousands)
Available-for-sale securities:
U.S. Treasury securities $ 39,097 $ 830
U.S. agencies and corporations:
Discount notes and bonds 164,420 103
Collateralized mortgage obligations 57,827 --
Commercial paper 52,847 --
Obligations of states and political subdivisions 6,196 385
Other equity securities 1,258 85
-------------------------------------------------
Total $ 321,645 $ 1,403
-------------------------------------------------
December 31, 1995 GROSS UNREALIZED LOSSES FAIR VALUE
Available-for-sale securities:
U.S. Treasury securities $ (29) $ 39,898
U.S. agencies and corporations:
Discount notes and bonds (766) 163,757
Collateralized mortgage obligations (620) 57,207
Commercial paper (324) 52,523
Obligations of states and political subdivisions -- 6,581
Other equity securities -- 1,343
Total $ (1,739) $ 321,309
Gross unrealized gains on other equity securities as of December 31, 1996
included $3.1 million related to common stock acquired from the exercise of a
warrant in a client of the Bank. The Company sold the common stock, and realized
approximately $3.1 million in warrant-related income, during January 1997.
The amortized cost and fair value of investment securities classified as
available-for-sale at December 31, 1996, categorized by remaining contractual
maturity, are shown on the following page. Expected remaining maturities of
49
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
mortgage-backed securities and collateralized mortgage obligations will
generally differ from contractual maturities because borrowers may have the
right to prepay obligations with or without penalties. Other equity securities
were included in the table below as due after ten years.
December 31, 1996 AMORTIZED COST
.....................
(Dollars in
thousands)
Due in one year or less $ 288,637
Due after one year through five years 259,301
Due after five years through ten years 7,381
Due after ten years 65,541
---------------------
Total $ 620,860
---------------------
December 31, 1996 FAIR VALUE
Due in one year or less $ 288,709
Due after one year through five years 260,103
Due after five years through ten years 7,407
Due after ten years 68,803
Total $ 625,022
Investment securities with a fair value of $46.3 million and $61.9 million at
December 31, 1996 and 1995, respectively, were pledged to secure certain public
deposits, foreign exchange activities at a correspondent bank and a line of
credit at the Federal Reserve Bank of San Francisco discount window.
In 1996, gross gains on sales of available-for-sale investment securities
totaled $1,000, and gross losses on sales of available-for-sale investment
securities were nominal. During 1995, gross gains of $6,000 and gross losses of
$774,000 were realized on sales of available-for-sale investment securities. In
1994, gross losses realized on sales of available-for-sale investment securities
totaled $2.5 million, while gross gains realized totaled $100,000.
5. LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The detailed composition of loans, net of unearned income of $5,658 and
$3,813 at December 31, 1996 and 1995, respectively, is presented in the
following table:
December 31, 1996 1995
..............................
(Dollars in thousands)
Commercial $ 755,699 $ 622,488
Real estate term 44,475 56,845
Real estate construction 27,540 17,194
Consumer and other 35,778 41,878
------------------------------
Total loans $ 863,492 $ 738,405
------------------------------
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.
A substantial percentage of the Company's loans are commercial in nature, and
such loans are generally made to emerging growth and middle-market companies in
a variety of industries. Total loans to companies in the semiconductor practice
(as identified by Standard Industrial Codes) amounted to 11.4% of the Company's
gross loans as of December 31, 1996. No other particular industry sector
represented more than 10.0% of the Company's loan portfolio as of December 31,
1996.
50
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The activity in the allowance for loan losses is summarized below:
Years Ended December 31, 1996 1995 1994
...............................
(Dollars in thousands)
Balance at January 1, $ 29,700 $ 20,000 $ 25,000
Provision for loan losses 10,426 8,737 3,087
Loans charged off (9,728) (4,958) (11,408)
Recoveries 2,302 5,921 3,321
-------------------------------
Balance at December 31, $ 32,700 $ 29,700 $ 20,000
-------------------------------
The aggregate recorded investment in loans for which impairment has been
determined in accordance with SFAS No. 114 totaled $14.6 million and $27.9
million at December 31, 1996 and 1995, respectively. Allocations of the
allowance for loan losses related to impaired loans totaled $5.2 million at
December 31, 1996 and $6.8 million at December 31, 1995. Average impaired loans
for 1996 and 1995 totaled $22.9 million and $16.1 million, respectively. If
these loans had not been impaired, $1.6 million and $1.4 million in interest
income would have been realized during the years ended December 31, 1996 and
1995, respectively. The Company realized no interest income on such impaired
loans during 1996 or 1995.
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
December 31, 1996 1995
....................
(Dollars in
thousands)
Cost:
Furniture and equipment $ 4,205 $ 3,639
Leasehold improvements 3,066 2,990
--------------------
Total cost 7,271 6,629
Accumulated depreciation and amortization (3,116) (1,932)
--------------------
Premises and equipment - net $ 4,155 $ 4,697
--------------------
51
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is obligated under a number of noncancellable operating leases
for premises which expire at various dates through June 2005, 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 noncancellable operating leases:
(Dollars in
Years Ending December 31, thousands)
1997
1998
1999
2000
2001
After 2001
Total
1997 $ 1,76
5
1998 1,70
4
1999 1,60
4
2000 1,44
9
2001 1,24
7
After 2001 3,77
4
------
- -
Total $ 11,54
3
------
- -
Rent expense for premises leased under operating leases totaled $1.9 million,
$2.0 million and $1.4 million for the years ended December 31, 1996, 1995, and
1994, respectively.
7. INCOME TAXES
The components of the Company's provision for income taxes consist of the
following:
Years Ended December 31, 1996 1995 1994
...............................
(Dollars in thousands)
Current provision:
Federal $ 12,425 $ 12,137 $ 4,224
State 4,719 3,429 1,191
Deferred (benefit) provision:
Federal (1,770) (3,383) 1,163
State (1,064) (481) 852
-------------------------------
Income tax expense $ 14,310 $ 11,702 $ 7,430
-------------------------------
A reconciliation between the federal statutory income tax rate and the
Company's effective income tax rate is shown below.
Years Ended December 31, 1996 1995 1994
......................................
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of the federal tax effect 6.6 6.4 7.5
Tax-exempt interest income (0.4) (0.5) (1.1)
Other - net (1.2) (1.7) 3.6
--------------------------------------
Effective income tax rate 40.0% 39.2% 45.0%
--------------------------------------
52
Deferred tax assets (liabilities) consist of the following:
December 31, 1996 1995
....................
(Dollars in
thousands)
Deferred tax assets:
Allowance for loan losses $ 12,955 $ 11,204
Other reserves not currently deductible 3,158 3,094
State income taxes 1,608 1,327
Depreciation and amortization 768 394
Net unrealized loss on available-for-sale investments -- 138
--------------------
Gross deferred tax assets 18,489 16,157
Deferred tax liabilities:
Other deferred tax liabilities (93) (457)
Net unrealized gain on available-for-sale investments (1,706) --
--------------------
Gross deferred tax liabilities (1,799) (457)
--------------------
Net deferred tax assets $ 16,690 $ 15,700
--------------------
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.
8. EMPLOYEE BENEFIT PLANS
Effective March 1, 1995, the Company's employee stock ownership plan (ESOP)
was merged with and into the Bank's 401(k) tax-deferred savings plan and the
merged plan was restated and renamed the Silicon Valley Bank 401(k) and Employee
Stock Ownership Plan (the "plan"). Upon adoption of the plan, all unvested
employee balances under the previous 401(k) plan became fully vested. All
employees of the Company are eligible to participate in the plan.
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. Under the current and previous plans, the Company's
matching contributions totaled $0.3 million in 1996, 1995 and 1994.
In March 1996, the Company established the Silicon Valley Bank Money Purchase
Pension Plan (the "MPP Plan"), effective January 1, 1995, for the guaranteed
5.0% quarterly contributions formerly made to the ESOP prior to 1995. All
individuals that are employed by the Company on the first and last day of a
fiscal quarter are eligible for quarterly MPP Plan contributions. On a quarterly
basis, 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 $0.8 million in both 1996 and 1995.
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
53
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's common stock, in an amount not exceeding 10.0% of the eligible
employee's base salary earned in that year, less IRC Section 401(k) and Section
125 deferrals. The ESOP contributions vest in equal annual increments over five
years. Under the current and previous plans, the Company's contributions to the
ESOP totaled $1.4 million, $1.5 million and $1.6 million for 1996, 1995 and
1994, respectively. At December 31, 1996, the ESOP owned 435,045 equivalent
shares of the Company's common stock. All shares held by the ESOP are treated as
outstanding shares in the computation of the Company's net income per common and
common equivalent share.
The Company has an employee stock purchase plan (ESPP) under which
participating employees may contribute up to 10.0% of their gross compensation
to purchase shares of the Company's common stock at 85.0% 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 and results in no expense
to the Company. For the first six-month offering period of 1996, 20,481 shares
of the Company's common stock were issued under the ESPP at $20.40 per share,
while 17,116 shares of the Company's common stock were issued at $21.89 per
share for the second six-month offering period of 1996. At December 31, 1996,
130,814 shares of the Company's common stock were reserved for future issuance
under the ESPP.
The Company's 1983 and 1989 stock option plans provide for the granting of
incentive and non-qualified stock options which entitle directors, officers and
key employees, and certain other parties to purchase shares of the Company's
common stock at a price not less than the fair market value of the common stock
on the date the option is granted. Options vest over various periods not in
excess of five years from the date of grant and expire five to ten years from
the date of grant. The following table provides information on the 1983 and 1989
stock option plans:
1996 1995
....................................... .......................................
WEIGHTED- AVERAGE WEIGHTED- AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
................................................................................
Outstanding at January 1, 1,116,202 $ 10.29 996,001 $ 8.15
Granted 143,477 24.56 372,093 14.39
Exercised (215,239) 9.07 (222,811) 7.48
Forfeited (10,085) 12.44 (29,081) 10.41
--------------------------------------------------------------------------------
Outstanding at December 31, 1,034,355 $ 12.50 1,116,202 $ 10.29
--------------------------------------------------------------------------------
Exercisable at December 31, 666,096 $ 11.14 580,358 $ 8.05
--------------------------------------------------------------------------------
1994
.......................................
WEIGHTED- AVERAGE
SHARES EXERCISE PRICE
Outstanding at January 1, 920,021 $ 7.54
Granted 228,250 10.19
Exercised (76,150) 4.30
Forfeited (76,120) 10.19
Outstanding at December 31, 996,001 $ 8.15
Exercisable at December 31, 613,345 $ 7.13
54
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding as
of December 31, 1996:
OPTIONS OUTSTANDING
......................................
WEIGHTED- AVERAGE
REMAINING
NUMBER CONTRACTUAL LIFE IN
RANGES OF EXERCISE PRICES OUTSTANDING YEARS
......................................
$ 2.15 - $ 5.98 145,084 1.61
8.25 - 9.13 194,500 1.11
9.50 - 10.38 165,128 1.83
10.87 - 13.25 54,606 1.27
13.63 - 13.63 195,060 3.06
14.13 - 23.00 148,000 3.88
24.25 - 31.25 131,977 4.40
--------------------------------------
$ 2.15 - $31.25 1,034,355 2.49
--------------------------------------
OPTIONS
...............
WEIGHTED-
AVERAGE
EXERCISE NUMBER
RANGES OF EXERCISE PRICES PRICE EXERCISABLE
$ 2.15 - $ 5.98 $ 4.53 145,084
8.25 - 9.13 8.69 182,000
9.50 - 10.38 9.84 116,832
10.87 - 13.25 11.90 48,273
13.63 - 13.63 13.63 62,730
14.13 - 23.00 16.08 10,200
24.25 - 31.25 24.79 100,977
$ 2.15 - $31.25 $ 12.50 666,096
WEIGHTED-
AVERAGE
EXERCISE
RANGES OF EXERCISE PRICES PRICE
$ 2.15 - $ 5.98 $ 4.53
8.25 - 9.13 8.71
9.50 - 10.38 9.87
10.87 - 13.25 11.83
13.63 - 13.63 13.63
14.13 - 23.00 14.13
24.25 - 31.25 24.32
$ 2.15 - $31.25 $ 11.14
At December 31, 1996, options for 20,946 shares were available for future
grant under the Company's 1989 stock option plan, and there were no shares
available for future grant under the Company's 1983 stock option plan.
The Company's 1989 stock option plan also provides for the granting of shares
to directors and employees. Shares granted to directors as compensation for
their services are fully vested on the date of grant. Shares granted to
employees may be subject to certain vesting requirements and resale restrictions
(restricted stock). For restricted stock, unearned compensation equivalent to
the market value of the common stock on the date of grant is charged to
shareholders' equity and subsequently amortized into noninterest expense over
the vesting term. In 1996, 17,500 shares of restricted stock were issued to
employees at a weighted-average fair value of $23.46 per share. There were no
restricted stock grants in 1995, and in 1994, 1,000 shares of restricted stock
were issued to employees at a weighted-average fair value of $10.25 per share.
At December 31, 1996, there were 34,167 shares of restricted stock outstanding,
and the vesting of these shares occurs at various periods through 2001.
The Company recognized $0.1 million, $0.5 million and $0.2 million in
employee stock-based compensation costs resulting from amortization of unearned
compensation related to restricted stock and other miscellaneous employee stock
awards during 1996, 1995 and 1994, respectively.
The Company adopted SFAS No. 123 effective January 1, 1996, but continues to
account for employee and director stock-based compensation plans under the
intrinsic value accounting methodology prescribed by APB Opinion No. 25. SFAS
No. 123 requires that stock-based compensation to parties other than employees
and directors be accounted for under the fair value method. Accordingly, no
compensation cost has been recognized for the Company's stock option awards to
employees and directors and for shares issued under the ESPP to employees in
1996 and 1995. The weighted-average fair values of options granted to employees,
directors and certain other parties were $10.83 per share in 1996 and $6.70 per
share in 1995. The Company reported net income and net income per common and
common equivalent share of $21.5 million and $2.21, and $18.2 million and $1.98,
for the years ended December 31, 1996 and 1995, respectively. Had compensation
cost related to the Company's stock option awards to employees and directors and
the ESPP been determined under the fair
55
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
value method prescribed under SFAS No. 123, the Company's pro forma net income
and net income per common and common equivalent share would have been $20.5
million and $2.12, and $17.2 million and $1.90, for the years ended December 31,
1996 and 1995, respectively.
The fair value of the stock option grants in 1996 and 1995, used in
determining the pro forma net income and net income per common and common
equivalent share amounts indicated above, were estimated using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of 0.0% for
both 1996 and 1995, expected life of the options of four years for both 1996 and
1995, expected volatility, over a four year period, of the Company's underlying
common stock of 47.53% and 51.08% for 1996 and 1995, respectively, and expected
risk-free interest rates, over a four year period, of 6.05% and 6.29% for 1996
and 1995, respectively. Compensation expense related to the ESPP in 1996 and
1995, used in determining the pro forma net income and net income per common and
common equivalent 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 the employees to acquire the common stock.
9. RELATED PARTIES
In 1992, the Board of Directors of the Bank adopted a policy to prohibit new
loan commitments to directors, officers or employees of the Company and the
Bank. Term loans to related parties existing at December 31, 1992 were allowed
to run their full term. When made, these related party loans consisted of terms,
including interest rates and collateral requirements, comparable to those
prevailing at that time for similar transactions with unrelated parties, and did
not involve more than the normal amount of credit risk or present other
unfavorable features. At December 31, 1996, the Company had no loans outstanding
to related parties, as the $1.5 million balance outstanding at the prior year
end was repaid during 1996.
In 1995, the Silicon Valley Bank Foundation (the "Foundation") was formed.
The Foundation is funded entirely by the Company, and was established by the
Company to maintain good corporate citizenship in its communities. The Company
contributed $0.1 million in both 1996 and 1995 to the Foundation.
10. 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.
These financial instruments include commitments to extend credit, commercial and
standby letters of credit, and foreign exchange forward contracts. 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, 1996
and 1995, the Company had $392.2 million and $256.9 million of unused loan
commitments available to customers, of which $80.2 million and $10.4 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 $952.5 million and $789.1 million at December 31,
1996 and 1995, respectively.
56
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 will experience will be lower than the contractual amount of commitments
to extend credit because a significant portion of these commitments expire
without being drawn upon. The Company evaluates each potential borrower and the
necessary collateral on an individual basis. The type of collateral varies, but
may include real property, bank deposits, or business and personal assets. The
potential credit risk associated with these commitments is considered in
Management's evaluation of the adequacy of the allowance for loan losses.
COMMERCIAL AND STANDBY LETTERS OF CREDIT Commercial and standby letters of
credit represent conditional commitments issued by the Company on behalf of a
customer to guarantee the performance of the customer to a third party when
certain specified future events have occurred. Commercial letters of credit are
issued primarily for inventory purchases by customers and are typically
short-term in nature. Standby letters of credit are typically issued as a credit
enhancement for clients' contractual obligations to third parties such as
landlords. Letters of credit have fixed expiration dates and generally require a
fee paid by the customer upon the Company issuing the commitment. Fees generated
from these letters of credit are recognized in noninterest income over the
commitment period. At December 31, 1996 and 1995, commercial and standby letters
of credit totaled $81.1 million and $72.4 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 will experience will be 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 forward
contracts entered into with its customers. These contracts are short-term in
nature, typically expiring in less than 90 days. At December 31, 1996 and 1995,
the notional amounts of these contracts totaled $28.7 million and $29.0 million,
respectively. Credit exposure for foreign exchange forward contracts is equal to
the gross unrealized gains in such contracts. Total gross unrealized gains on
these contracts with both customers and correspondent banks amounted to $0.9
million at December 31, 1996 and $0.5 million at December 31, 1995. The Company
has incurred no losses from counterparty nonperformance and anticipates
performance by all counterparties to such foreign exchange forward contracts.
11. 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
57
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 are so near their maturity that
they present insignificant risk of changes in value. For these short-term
financial instruments, the carrying amount is a reasonable estimate of fair
value.
Investment securities: For investment securities classified as
available-for-sale, fair values are based on quoted market prices or dealer
quotes.
Loans: The fair value of performing fixed and variable rate loans is
calculated by discounting contractual cash flows using discount rates that
reflect the Company's current pricing for loans with similar credit ratings and
for the same remaining maturities. Nonperforming fixed and variable rate loans
and loans classified as special mention, substandard or doubtful are valued
using assumptions as to the expected timing and extent of principal recovery
with no recovery assumed for contractual interest owed.
Deposits: The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, NOW accounts and money market deposits is
equal to the amount payable on demand at the reporting date. The fair value of
time deposits is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered by the Company for
time deposits with similar remaining maturities. The fair value of deposits does
not include the benefit that results from the low cost of funding provided by
the Company's deposits as compared to the cost of borrowing funds in the market.
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 is based on the
estimated amounts the Company would receive or pay to terminate the contracts at
the reporting date (i.e., mark-to-market value).
Limitations: The information presented herein is based on pertinent
information available to the Company as of December 31, 1996 and 1995,
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.
58
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments at December
31, 1996 and 1995 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.
1996
............................................
December 31, CARRYING AMOUNT ESTIMATED FAIR VALUE
............................................
(Dollars in thousands)
Financial Assets:
Cash and due from banks $ 122,836 $ 122,836
Federal funds sold and securities purchased under agreement to resell 310,341 310,341
Investment securities, at fair value 625,022 625,022
Gross loans 869,150 836,074
Less:
Unearned income (5,658) --
Allowance for loan losses (32,700) --
--------------------------------------------
Net loans 830,792 836,074
Financial Liabilities:
Noninterest-bearing demand deposits 599,257 599,257
Money market and NOW deposits 1,089,834 1,089,834
Time deposits 85,213 85,282
Off-Balance Sheet Financial Instruments:
Foreign exchange forward contracts - receive -- 13,445
Foreign exchange forward contracts - pay -- (13,445)
1995
............................................
December 31, CARRYING AMOUNT ESTIMATED FAIR VALUE
Financial Assets:
Cash and due from banks $ 85,187 $ 85,187
Federal funds sold and securities purchased under agreement to resell 257,138 257,138
Investment securities, at fair value 321,309 321,309
Gross loans 742,218 715,306
Less:
Unearned income (3,813) --
Allowance for loan losses (29,700) --
Net loans 708,705 715,306
Financial Liabilities:
Noninterest-bearing demand deposits 451,318 451,318
Money market and NOW deposits 773,292 773,292
Time deposits 65,450 65,626
Off-Balance Sheet Financial Instruments:
Foreign exchange forward contracts - receive -- 14,082
Foreign exchange forward contracts - pay -- (14,082)
12. LEGAL MATTERS
On June 1, 1993, a shareholder class action lawsuit was filed in the United
States District Court for the Northern District of California naming the Company
and the Bank, certain directors and officers, and others as defendants. The suit
alleged, among other things, that the defendants misrepresented or failed to
disclose material facts about the Company's operations and financial results
which the plaintiff contends affected the price of the Company's common stock
from January 9, 1991 through October 12, 1992. On September 30, 1994, the
Company entered into a settlement agreement with the plaintiff. The settlement
agreement was approved by the court effective November 28, 1994. Settlement
amounts and costs relating to this agreement were fully realized in the
operating results of the Company for the year ended December 31, 1994.
Additionally, certain lawsuits and claims arising in the ordinary course of
business have been filed or are pending against the Company and/or the Bank.
Based upon information available to the Company, its review of such claims to
date and consultation with its 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.
59
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. REGULATORY MATTERS
During 1993, the Company and the Bank consented to formal supervisory orders
by the Federal Reserve Bank of San Francisco, and the Bank consented to a formal
supervisory order by the California State Banking Department. These orders
contained certain operating restrictions and other limitations with respect to
the conduct of the Company's and the Bank's activities. On March 27, 1996, the
orders imposed by the Federal Reserve Bank of San Francisco were terminated, and
on April 9, 1996, the order imposed by the California State Banking Department
was terminated. Neither the Company nor the Bank was subject to any formal
supervisory actions as of December 31, 1996.
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 State Banking Department. At December 31, 1996, approximately $39.1
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
requirement is 10.0% of risk-weighted assets and certain off-balance sheet items
for a "well capitalized" depository institution. At least 6.0% of the 10.0%
total risk-based capital ratio must consist of Tier 1 capital, defined as common
stock, retained earnings, noncumulative perpetual preferred stock (cumulative
perpetual preferred stock for bank holding companies), and minority interests in
consolidated subsidiaries, less most intangible assets, and the remainder may
consist of eligible term subordinated debt, cumulative perpetual preferred
stock, long-term preferred stock, a limited amount of the allowance for loan
losses, and certain other instruments with some characteristics of equity.
The Federal Reserve Board has 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.
Management believes, as of December 31, 1996, that the Company and the Bank
meet all capital adequacy requirements to which they are subject. As of December
31, 1996, the most recent notifications from the Federal Reserve Board
categorized the Company and the Bank as well capitalized under the regulatory
framework for prompt corrective action.
60
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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, 1996 and 1995:
ACTUAL RATIO
............
As of December 31, 1996:
Total risk-based capital ratio
Company 11.5%
Bank 10.8%
Tier 1 risk-based capital ratio
Company 10.2%
Bank 9.6%
Tier 1 leverage ratio
Company 7.7%
Bank 7.2%
As of December 31, 1995:
Total risk-based capital ratio
Company 11.9%
Bank 11.4%
Tier 1 risk-based capital ratio
Company 10.6%
Bank 10.2%
Tier 1 leverage ratio
Company 8.0%
Bank 7.7%
As of December 31, 1996:
Total risk-based capital ratio
Company $ 149,408
Bank $ 140,308
Tier 1 risk-based capital ratio
Company $ 132,944
Bank $ 123,916
Tier 1 leverage ratio
Company $ 132,944
Bank $ 123,916
As of December 31, 1995:
Total risk-based capital ratio
Company $ 117,773
Bank $ 113,315
Tier 1 risk-based capital ratio
Company $ 105,173
Bank $ 100,710
Tier 1 leverage ratio
Company $ 105,173
Bank $ 100,710
MINIMUM RATIO
As of December 31, 1996:
Total risk-based capital ratio
Company 8.0%
Bank 8.0%
Tier 1 risk-based capital ratio
Company 4.0%
Bank 4.0%
Tier 1 leverage ratio
Company 4.0%
Bank 4.0%
As of December 31, 1995:
Total risk-based capital ratio
Company 8.0%
Bank 8.0%
Tier 1 risk-based capital ratio
Company 4.0%
Bank 4.0%
Tier 1 leverage ratio
Company 4.0%
Bank 4.0%
MINIMUM CAPITAL
REQUIREMENT
As of December 31, 1996:
Total risk-based capital ratio
Company $ 104,074
Bank $ 103,601
Tier 1 risk-based capital ratio
Company $ 52,037
Bank $ 51,801
Tier 1 leverage ratio
Company $ 69,151
Bank $ 68,814
As of December 31, 1995:
Total risk-based capital ratio
Company $ 79,272
Bank $ 79,301
Tier 1 risk-based capital ratio
Company $ 39,636
Bank $ 39,651
Tier 1 leverage ratio
Company $ 52,298
Bank $ 52,269
61
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The condensed balance sheets of Silicon Valley Bancshares (parent company
only) at December 31, 1996 and 1995, and the related condensed income statements
and condensed statements of cash flows for the years ended December 31, 1996,
1995 and 1994 are presented below. Certain reclassifications have been made to
the parent company's 1995 and 1994 financial information to conform to the 1996
presentations. Such reclassifications had no effect on the results of operations
or shareholders' equity.
CONDENSED BALANCE SHEETS
December 31, 1996 1995
....................
(Dollars in
thousands)
Assets:
Cash on deposit with subsidiary bank $ 4,225 $ 4,559
Investment securities, at fair value 9,538 86
Other assets 212 16
Investment in subsidiary bank 124,064 100,460
--------------------
Total assets $ 138,039 $ 105,121
--------------------
Liabilities $ 2,639 $ 147
Shareholders' equity 135,400 104,974
--------------------
Total liabilities and shareholders' equity $ 138,039 $ 105,121
--------------------
CONDENSED INCOME STATEMENTS
Years Ended December 31, 1996 1995 1994
...............................
(Dollars in thousands)
Interest income $ 345 $ 99 $ 98
Income from the disposition of client warrants 5,389 8,205 2,840
General and administrative expenses (175) (86) (53)
Income tax expense (2,364) (3,497) (1,227)
-------------------------------
Income before equity in net income of subsidiary 3,195 4,721 1,658
Equity in net income of subsidiary 18,271 13,432 7,408
-------------------------------
Net income $ 21,466 $ 18,153 $ 9,066
-------------------------------
62
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996 1995 1994
...............................
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 21,466 $ 18,153 $ 9,066
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in net income of subsidiary bank (18,271) (13,432) (7,408)
(Increase) decrease in other assets (196) (16) 197
Increase (decrease) in liabilities 924 217 (248)
Other, net 27 16 --
-------------------------------
Net cash provided by operating activities 3,950 4,938 1,607
-------------------------------
Cash flows from investing activities:
Net (increase) decrease in investment securities (5,626) -- 13
Investment in subsidiary bank (2,956) (5,720) (4,633)
-------------------------------
Net cash applied to investing activities (8,582) (5,720) (4,620)
-------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs 4,298 4,267 1,913
-------------------------------
Net cash provided by financing activities 4,298 4,267 1,913
-------------------------------
Net (decrease) increase in cash (334) 3,485 (1,100)
Cash on deposit with subsidiary bank at January 1, 4,559 1,074 2,174
-------------------------------
Cash on deposit with subsidiary bank at December 31, $ 4,225 $ 4,559 $ 1,074
-------------------------------
63
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. UNAUDITED QUARTERLY FINANCIAL DATA
1996 1995
.......................................... ..........................................
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.
......................................................................................
(Dollars in thousands, except per share amounts)
Net interest income $ 20,273 $ 20,866 $ 22,942 $ 23,194 $ 18,165 $ 18,367 $ 17,916 $ 19,504
Provision for loan losses 1,523 2,065 2,962 3,876 1,355 1,406 3,337 2,639
Noninterest income 1,833 3,554 2,013 4,209 977 2,482 5,098 4,008
Noninterest expense 12,788 12,960 13,207 13,727 12,068 12,416 11,911 11,530
--------------------------------------------------------------------------------------
Income before income taxes 7,795 9,395 8,786 9,800 5,719 7,027 7,766 9,343
Income tax expense 3,118 3,758 3,514 3,920 2,439 3,046 2,303 3,914
--------------------------------------------------------------------------------------
Net income $ 4,677 $ 5,637 $ 5,272 $ 5,880 $ 3,280 $ 3,981 $ 5,463 $ 5,429
--------------------------------------------------------------------------------------
Net income per common and
common equivalent share $ 0.49 $ 0.58 $ 0.54 $ 0.60 $ 0.37 $ 0.44 $ 0.59 $ 0.58
--------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
64
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 1997 Annual Meeting of Shareholders is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the sections titled "Information on
Executive Officers," "Report of the Personnel and Compensation Committee of the
Board on Executive Compensation," "Table 1 - Summary Compensation," "Table 2 -
Option Grants in Fiscal Year 1996," "Table 3 - Aggregated Option Exercises in
Fiscal Year 1996 and Fiscal Year-End Option Values," "Termination Arrangements,"
"Return to Shareholders Performance Graph," and "Director Compensation"
contained in the definitive proxy statement for the Company's 1997 Annual
Meeting of Shareholders 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 Certain Beneficial
Owners" contained in the definitive proxy statement for the Company's 1997
Annual Meeting of Shareholders 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
1997 Annual Meeting of Shareholders is incorporated herein by reference.
65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2.
The financial statements and supplementary data contained in Item 8 of this
report are filed as part of this report.
All schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included in
the financial statements or related notes.
(a) 3.
Exhibits are listed in the Index to Exhibits beginning on page 69 of this
report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1996.
66
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 20, 1997
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
................................................................................. .............................................
/s/ DANIEL J. KELLEHER Chairman of the Board of Directors and
- --------------------------------------------- Director
Daniel J. Kelleher
/s/ JOHN C. DEAN President, Chief Executive Officer and
- --------------------------------------------- Director (Principal Executive Officer)
John C. Dean
/s/ SCOTT H. RAY Executive Vice President, Chief Financial
- --------------------------------------------- Officer (Principal Financial Officer)
Scott H. Ray
/s/ CHRISTOPHER T. LUTES Senior Vice President, Controller (Principal
- --------------------------------------------- Accounting Officer)
Christopher T. Lutes
/s/ GARY K. BARR Director
- ---------------------------------------------
Gary K. Barr
SIGNATURE DATE
................................................................................. ............................
/s/ DANIEL J. KELLEHER March 20, 1997
- ---------------------------------------------
Daniel J. Kelleher
/s/ JOHN C. DEAN March 20, 1997
- ---------------------------------------------
John C. Dean
/s/ SCOTT H. RAY March 20, 1997
- ---------------------------------------------
Scott H. Ray
/s/ CHRISTOPHER T. LUTES March 20, 1997
- ---------------------------------------------
Christopher T. Lutes
/s/ GARY K. BARR March 20, 1997
- ---------------------------------------------
Gary K. Barr
67
SIGNATURE TITLE
................................................................................. .............................................
/s/ JAMES F. BURNS, JR. Director
- ---------------------------------------------
James F. Burns, Jr.
/s/ CLARENCE J. FERRARI, JR. Director
- ---------------------------------------------
Clarence J. Ferrari, Jr.
/s/ HENRY M. GAY Director
- ---------------------------------------------
Henry M. Gay
/s/ JAMES R. PORTER Director
- ---------------------------------------------
James R. Porter
/s/ MICHAEL ROSTER Director
- ---------------------------------------------
Michael Roster
/s/ ANN R. WELLS Director
- ---------------------------------------------
Ann R. Wells
/s/ DAVID DEWILDE Director
- ---------------------------------------------
David deWilde
SIGNATURE DATE
................................................................................. ............................
/s/ JAMES F. BURNS, JR. March 20, 1997
- ---------------------------------------------
James F. Burns, Jr.
/s/ CLARENCE J. FERRARI, JR. March 20, 1997
- ---------------------------------------------
Clarence J. Ferrari, Jr.
/s/ HENRY M. GAY March 20, 1997
- ---------------------------------------------
Henry M. Gay
/s/ JAMES R. PORTER March 20, 1997
- ---------------------------------------------
James R. Porter
/s/ MICHAEL ROSTER March 20, 1997
- ---------------------------------------------
Michael Roster
/s/ ANN R. WELLS March 20, 1997
- ---------------------------------------------
Ann R. Wells
/s/ DAVID DEWILDE March 20, 1997
- ---------------------------------------------
David deWilde
68
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
........... ......................................................................................................................
3.1 Articles of Incorporation of the Company, as amended (1)
3.2 By-Laws of the Company, as amended (7)
4.1 Article Three of Articles of Incorporation (included in Exhibit 3.1) (1)
10.3 Employment Agreement between Silicon Valley Bancshares and John C. Dean (10)
10.5 Silicon Valley Bancshares Incentive Savings Plan (2)
10.7 Lease Agreement between Silicon Valley Bancshares and Almaden Tower Partners, a California general partnership; Ten
Almaden Blvd., San Jose, California 95113 (5)
10.9 Lease Agreement between Silicon Valley Bank and Palo Alto Square; Two Palo Alto Square, Palo Alto, California 94306
(4)
10.9(a) Second amendment to lease outlined in Exhibit 10.9 (10)
10.10 Lease Agreement between Silicon Valley Bank and Sharon Land Company; 3000 Sand Hill Road, Menlo Park, California 94025
(1)
10.10(a) First amendment to lease outlined in Exhibit 10.10 (12)
10.10(b) Second amendment to lease outlined in Exhibit 10.10 (12)
10.15 Lease Agreement between Silicon Valley Bank and Ms. Anita McGill; 11000 S.W. Stratus Avenue, Suite 170, Beaverton,
Oregon 97005 (9)
10.16 Lease Agreement between Silicon Valley Bank and Westwood Company-Palo Alto, a California Limited Partnership; 1731
Embarcadero Road, Palo Alto, California 94303 (10)
10.17 Lease Agreement between Silicon Valley Bank and WRC Properties, Inc.; 3003 Tasman Drive, Santa Clara, CA 95054 (12)
10.18 Lease Agreement between Silicon Valley Bank and Da Rosa Family Trust, Jose G. Da Rosa, Trustee, and Sorrento Mesa
Trust, Mary Alice Gonsalves, Trustee, dba Balboa Travel Plaza; 5414 Oberlin Drive, San Diego, California, County of
San Diego (12)
10.19 Agreement not to Stand for Re-election as Director of Silicon Valley Bancshares and Silicon Valley Bank and Mutual
General Release of Claims between Dr. Allan C. Kramer and Silicon Valley Bancshares and Silicon Valley Bank (3)
10.20 Agreement not to Stand for Re-election as Director of Silicon Valley Bancshares and Silicon Valley Bank and Mutual
General Release of Claims between Barry A. Turkus and Silicon Valley Bancshares and Silicon Valley Bank (3)
10.21 Separation Agreement and General Release between Allyn C. Woodward, Jr. and Silicon Valley Bancshares and Silicon
Valley Bank (3)
10.22 Restricted Stock Bonus and Non-Compete Agreement between Allyn C. Woodward, Jr. and Silicon Valley Bancshares and
Silicon Valley Bank (3)
10.24 Lease Agreement between Norman B. Leventhal and Edwin N. Sidman, Trustees and Silicon Valley Bank; 40 William Street,
Wellesley, Massachusetts 02181 (11)
EXHIBIT SEQUENTIALLY
NO. NUMBERED PAGE
........... .................
3.1 --
3.2 --
4.1 --
10.3 --
10.5 --
10.7
--
10.9
--
10.9(a) --
10.10
--
10.10(a) --
10.10(b) --
10.15
--
10.16
--
10.17 --
10.18
--
10.19
--
10.20
--
10.21
--
10.22
--
10.24
--
69
EXHIBIT
NO. DESCRIPTION
........... ......................................................................................................................
10.25 Employment Agreement among Silicon Valley Bank, Silicon Valley Bancshares, and Roger V. Smith (11)
10.26 Mutual General Release Agreement among Silicon Valley Bank, Silicon Valley Bancshares, and Dennis G. Uyemura (11)
10.27 Consulting Agreement among Silicon Valley Bank, Silicon Valley Bancshares, and Dennis G. Uyemura (11)
10.28 Amendment and Restatement of the Silicon Valley Bancshares 1989 Stock Option Plan (7)
10.29 Silicon Valley Bank Money Purchase Pension Plan (7)
10.30 Amendment and Restatement of the Silicon Valley Bank Money Purchase Pension Plan (7)
10.31 Amendment and Restatement of the Silicon Valley Bank 401(k) and Employee Stock Ownership Plan (7)
10.32 Executive Change in Control Severance Benefits Agreement (6)
10.33 Change in Control Severance Policy For Non-executives (6)
11.1 Calculation of Earnings per Share
21.1 Subsidiaries of Silicon Valley Bancshares
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
99.1 Letter dated March 27, 1996 from the Federal Reserve Bank of San Francisco regarding termination of the April 15, 1993
Consent Order (8)
99.2 Letter dated April 9, 1996 from the California State Banking Department regarding termination of the April 20, 1993
Final Order (8)
EXHIBIT SEQUENTIALLY
NO. NUMBERED PAGE
........... .................
10.25 --
10.26 --
10.27 --
10.28 --
10.29 --
10.30 --
10.31 --
10.32 --
10.33 --
11.1 71
21.1 72
23.1 73
27.1 74
99.1
--
99.2
--
- ----------------------------------
(1) Incorporated by reference to Exhibits 3.1, 4.1 and 10.10 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1988.
(2) Incorporated by reference to Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1985.
(3) Incorporated by reference to Exhibits 10.19, 10.20, 10.21, and 10.22 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995.
(4) Incorporated by reference to Exhibit 10.9 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1987.
(5) Incorporated by reference to Exhibit 10.7 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1989.
(6) Incorporated by reference to Exhibits 10.32 and 10.33 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
(7) Incorporated by reference to Exhibits 3.2, 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.
(8) Incorporated by reference to Exhibits 99.1 and 99.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(9) Incorporated by reference to Exhibit 10.15 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991.
(10) Incorporated by reference to Exhibits 10.3, 10.9(a) and 10.16 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1993.
(11) Incorporated by reference to Exhibits 10.24, 10.25, 10.26, and 10.27 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.
(12) Incorporated by reference to Exhibits 10.10(a), 10.10(b), 10.17, and 10.18
to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
70