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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1998
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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, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 33-41102
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SILICON VALLEY BANCSHARES
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2856336
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or organization) Number)
3003 TASMAN DRIVE
SANTA CLARA, CALIFORNIA 95054-1191
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (408) 654-7282
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (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,
1998, on the Nasdaq National Market was $558,358,755.
At January 31, 1998, 10,128,957 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 1998 Annual Meeting
of Shareholders to be filed within 120 days of the end of the
fiscal year ended December 31, 1997 Part III
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This report contains a total of 80 pages, including exhibits.
The Exhibit Index is on page 70.
TABLE OF CONTENTS
PAGE
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PART I
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ITEM 1. BUSINESS.......................................................................................... 3
ITEM 2. PROPERTIES........................................................................................ 15
ITEM 3. LEGAL PROCEEDINGS................................................................................. 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................... 15
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................... 16
ITEM 6. SELECTED FINANCIAL DATA........................................................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................... 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. 67
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................ 67
ITEM 11. EXECUTIVE COMPENSATION............................................................................ 67
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................... 67
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................... 67
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................. 67
SIGNATURES................................................................................................. 68
INDEX TO EXHIBITS.......................................................................................... 70
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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 Arizona,
California, Colorado, Georgia, Illinois, Maryland, Massachusetts, Oregon, Texas,
and Washington. 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 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 serving 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 working capital lines of credit, equipment
financing, asset acquisition loans, and bridge financing. The following is an
overview of the Bank's technology and life sciences niche practices.
The Communications and Online Services practice serves companies in the
networking, telecommunications and online services industries. The networking
industry includes companies supplying the equipment and services that facilitate
distributed enterprise networks such as local and wide area networks. The
telecommunications industry encompasses the suppliers of equipment and services
to companies and consumers for the transmission of voice, data and video.
Companies included in the online services industry supply access, content,
services, and support to individuals and businesses participating on the
Internet, or in other online 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 Semiconductors practice serves companies involved in the design,
manufacturing and marketing of integrated circuits. This includes companies
involved in the manufacturing of semiconductor production equipment and
semiconductors, testing and related services, electronic parts wholesaling,
computer-aided design, and computer-aided manufacturing.
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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 biotechnology, medical
devices and health care services industries. The biotechnology industry includes
companies involved in research and development of therapeutics and diagnostics
for the medical and pharmaceuticals industries. The medical devices industry
encompasses companies involved in the design, manufacturing and distribution of
surgical instruments and medical equipment. Companies included in the health
care services industry deal with patients, either in a primary care or secondary
care role.
In addition to the industry-related practices discussed above, the Bank has
three other practices that provide commercial lending and other financial
products and services to clients associated with the technology and life
sciences industries. The 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 specialized products and
services. Lastly, the Emerging Technologies practice, which was established in
1997, primarily targets non-venture-backed technology financial relationships in
Northern California, with a primary focus on the software industry.
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 niche practices which generally focus their lending in specific
regions throughout the U.S. The Bank's niche strategy evolved from 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 Bank's special industry
niche practices.
The Real Estate practice is composed of 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 practice consists of
construction loans for residential and commercial projects, and construction and
mini-permanent loans on retail, industrial and office projects.
The Premium Wineries practice focuses on wineries which produce select or
exclusive vintages of up 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 financing and cooperage.
The Religious Financial Resources practice serves the credit needs of
churches, temples, their affiliated schools, and other religious organizations
nationwide. Products offered to this niche include term loans for refinancing
existing debt, acquiring property and for construction, remodeling or renovation
projects.
The Entertainment practice serves the independent sector of the
entertainment industry. This practice provides production loans, lines of credit
and term loans for library and other acquisitions.
In addition to serving the niches listed above, the Bank serves a broad
array of industries through its Diversified Industries practice in Northern
California. This practice allows the Bank to continue to evaluate 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 products and 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' wide range of financial services needs.
These
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divisions include: International, Cash Management, Treasury, Real Estate,
Factoring, Commercial Finance, and Executive Banking.
The International Division provides foreign exchange, import and export
letters of credit, documentary collections, and a number of other trade finance
products and services to the Bank's clients, helping them to successfully
operate in international markets. The Bank has been granted delegated authority
by the Export-Import Bank of the U.S. (EX-IM) and the California Export Finance
Office (CEFO), enabling the Bank to provide its clients with EX-IM and CEFO
guaranteed working capital loans to finance foreign receivables and inventory
intended for export, as well as provide purchase order financing.
The Cash Management Division provides services to help the Bank's customers
manage cash collections and disbursements efficiently and cost effectively.
Services provided 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.
Through the Treasury Division, the Bank provides investment services to
assist its clients with managing short-term investments. Investment securities
purchased on behalf of clients include U.S. Treasury securities, U.S. agency
securities, commercial paper, Eurodollar deposits, and bankers' acceptances.
In addition to being a special industry niche, real estate lending is also a
product offered to the Bank's clients. This product is typically offered to
finance commercial real estate 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 niche practices. The Factoring
Division generally serves the Bank's emerging growth client base by purchasing
clients' accounts receivable at a discount, making operating funds immediately
available to the clients, and then managing the collection of these receivables.
The Commercial Finance Division assists client companies during periods when
profit performance has been interrupted or where greater flexibility is required
by providing credit facilities that involve frequent monitoring of the
underlying collateral, which generally consists of accounts receivable,
inventory and equipment. 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 niche practices.
The Executive Banking Division focuses on serving the personal banking needs
of senior executives and owners of the Bank's client companies, partners and
senior executives of venture capital firms, attorneys, accountants, and other
professionals whose businesses are affiliated with the Bank's niches.
EMPLOYEES
As of December 31, 1997, 1996 and 1995, the Company and the Bank, in the
aggregate, employed 454, 384 and 348 full-time equivalent personnel,
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 any unions
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
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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
products and 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 and industry knowledge
in its market areas, personal relationships with clients and other service
providers, 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 and other service providers.
ECONOMIC CONDITIONS, GOVERNMENT POLICIES, LEGISLATION, AND REGULATION
The Company's profitability, like most other financial institutions, is
primarily dependent on interest rate differentials. In general, the difference
between the interest rates paid by the Bank on interest-bearing liabilities,
such as deposits and other borrowings, and the interest rates received by the
Bank on interest-earning assets, such as 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 that future changes in domestic and foreign
economic conditions might have on the Company and the Bank cannot be predicted.
The Company's business 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 interest-earning assets and
paid on interest-bearing liabilities. 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 by various bank regulatory agencies. The
likelihood of any 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" for additional discussion on legislative
and regulatory changes.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. This regulation is intended primarily for the protection
of depositors and the deposit insurance fund and not for the benefit of
shareholders of the Company. 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.
In recent years, significant legislative proposals and reforms affecting the
financial services industry have been discussed and evaluated by the U.S.
Congress. Such proposals include, but are not limited to,
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legislation to revise the Glass-Steagall Act and the Bank Holding Company Act of
1956, as amended (the "BHCA"), and to expand permissible activities for banks,
principally to facilitate the convergence of commercial and investment banking.
Certain proposals also have sought to expand insurance activities of banks. It
is unclear whether any of these proposals, or any form of them, will be
introduced in the current U.S. Congress and become law. Consequently, it is not
possible to determine what effect, if any, these and other legislative proposals
may have on the Company and the Bank.
THE COMPANY
The Company, as a registered bank holding company, is subject to regulation
under the BHCA and Regulation Y, which has been adopted thereunder by the
Federal 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" and "Item 1.
Business--Supervision and Regulation--Prompt Corrective Action and Other
Enforcement Mechanisms" for further discussion related to minimum capital
guidelines.
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.
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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 as listed in Regulation Y, provided that the bank holding
company and its lead depository institution are "well capitalized" and that
certain other criteria specified in the Budget Act are met. Similar changes were
made to Regulation Y, effective April 21, 1997. 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, 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-- Capital Standards" and "Item 1.
Business--Supervision and Regulation--Prompt Corrective Action and Other
Enforcement Mechanisms" for additional discussion on capital ratios.
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.
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 periodic examination by, and may be required to file reports
with, the California Department of Financial Institutions.
The Company's securities are registered with the Securities and Exchange
Commission (SEC) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). As such, the Company is subject to information reporting, proxy
solicitation, insider trading restrictions, and other requirements and
restrictions as specified in the Exchange Act.
The Company's common stock is listed on the Nasdaq National Market, and, as
such, the Company is subject to the reporting and other requirements of the
Nasdaq Stock Market.
THE BANK
The Bank, as a California-chartered bank and a member of the Federal Reserve
System, is subject to primary supervision, periodic examination and regulation
by the California Commission of Financial Institutions (the "Commissioner") 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, management, earnings prospects, liquidity, sensitivity
to market risk, or other aspects of the Bank's operations are unsatisfactory, or
that the Bank 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, as a California-chartered bank, would result in a revocation
of the Bank's charter. The Commissioner has many of the same remedial powers.
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. For additional discussion related to deposit insurance, see "Item 1.
Business--Supervision and Regulation--Premiums for Deposit Insurance."
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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, reserves against deposits, interest rates on deposits and 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" for further discussion related to minimum capital guidelines.
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 aforementioned 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 made during such
period). Notwithstanding this restriction, a bank may, with the prior approval
of the Commissioner, 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 15 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 Commissioner may impose
similar limitations on the conduct of California-chartered banks. See "Item 1.
Business--Supervision and Regulation--Capital Standards" and "Item 1.
Business--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
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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" for related discussion regarding restrictions on
transactions with affiliates.
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
qualifying Tier 1 and Tier 2 capital) and qualifying 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 qualifying Tier 1 capital relative 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.
The federal banking agencies have adopted a joint agency policy statement
which provides that the adequacy and effectiveness of a bank's interest rate
risk management process and the level of its interest rate exposures are
critical factors in the evaluation of the bank's capital adequacy. A bank with
material weaknesses in its interest rate risk management process or high levels
of interest rate exposure relative to its capital will be directed by the
federal banking agencies to take corrective actions. Such actions may include
recommendations or directions to raise additional capital, strengthen management
expertise, improve management information and measurement systems, reduce levels
of interest rate exposure, or some combination thereof depending upon the
individual financial institution's circumstances.
The federal banking agencies have issued a final rule which provides that
financial institutions which have significant amounts of their assets
concentrated in high risk loans or nontraditional banking activities, and who
fail to adequately manage these risks, may be required to set aside capital in
excess of the regulatory minimums. 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 capital adequacy.
10
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 have issued regulations which limit the amount of deferred tax
assets that are allowable in computing a financial institution's regulatory
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 ratio calculations.
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 Company and 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 15 to the Consolidated
Financial Statements-- Regulatory Matters" for the Company's and Bank's capital
ratios as of December 31, 1997.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal banking agencies possess broad powers to take corrective and other
supervisory action as deemed appropriate on an insured depository institution
and its holding company. 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.
The Company's and the Bank's capital ratios were in excess of regulatory
guidelines for a well capitalized depository institution as of December 31,
1997. See "Item 8. Financial Statements and Supplementary Data--Note 15 to the
Consolidated Financial Statements--Regulatory Matters" for the Company's and
Bank's capital ratios as of December 31, 1997.
A depository 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.
Federal law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, from making
capital distributions, if after such transaction the institution would be
undercapitalized.
In addition to measures taken under the prompt corrective action provisions,
banking organizations may be subject to potential enforcement actions by the
federal regulators for unsafe or unsound practices in conducting their
businesses, or for violation of any law, rule, regulation, condition imposed in
writing by the agency, or term of a written agreement with the agency.
Enforcement actions may include the appointment of a conservator or receiver,
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.
11
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted guidelines to assist 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, and (v) compensation, fees and benefits. In addition, the federal
banking agencies have more recently adopted safety and soundness guidelines with
respect to asset quality and earnings. The more recently adopted asset quality
guidelines provide six standards for establishing and maintaining a system to
identify problem assets and prevent those assets from deteriorating. Under these
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. The more recently adopted earnings guidelines
set forth standards for evaluating and monitoring earnings and for ensuring that
earnings are sufficient for the maintenance of adequate capital and reserves.
PREMIUMS FOR DEPOSIT INSURANCE
The Bank's deposit accounts are insured by the Bank Insurance Fund (BIF), as
administered by the FDIC, up to the maximum permitted by law. Insurance of
deposits may be terminated by the FDIC upon a finding that the financial
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or by the financial
institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits, which
as of December 31, 1997, ranged from 0 to 27 basis points per $100 of insured
deposits, based on the risk a particular financial institution poses to its
deposit insurance fund. The risk classification is based on a financial
institution's capital group and supervisory subgroup assignment. At December 31,
1997, the Bank's assessment rate was the statutory minimum assessment of $2,000
per year.
Pursuant to the Budget Act, as of January 1, 1997, the Bank began paying, in
addition to its normal deposit insurance premium as a member of the BIF, an
amount equal to approximately 1.3 basis points per $100 of insured deposits
toward the retirement of Financing Corporation bonds ("Fico Bonds") issued in
the 1980s to assist in the recovery of the savings and loan industry. Members of
the Savings Association Insurance Fund (SAIF), by contrast, pay, in addition to
their normal deposit insurance premium as members of the SAIF, approximately 6.4
basis points per $100 of insured deposits toward the retirement of the Fico
Bonds. Under the Budget Act, the FDIC is not permitted to establish SAIF
assessment rates that are lower than comparable BIF assessment rates. Beginning
no later than January 1, 2000, the assessment rate paid toward the retirement of
the Fico Bonds will be equal for members of the BIF and the SAIF. The Budget Act
also provides for the merging of the BIF and the SAIF by January 1, 1999
provided there are no financial institutions still chartered as savings
associations at that time. Should the insurance funds be merged before January
1, 2000, the assessment rate paid by all members of this new fund toward the
retirement of the Fico Bonds would be equal upon the time of merger.
INTERSTATE BANKING AND BRANCHING
The BHCA currently permits bank holding companies from any state to acquire
banks and bank holding companies located in any other state, subject to certain
conditions, including certain nationwide and state-imposed concentration limits.
Banks have the ability, subject to certain restrictions, to acquire by
acquisition or merger branches located outside their home state. The
establishment of new interstate branches is also possible in those states with
laws that expressly permit it. Interstate branches are subject to
12
certain laws of the states in which they are located. Competition may increase
further as banks branch across state lines and enter new markets.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending laws 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 bank in meeting the credit needs of its local communities,
including low- and moderate-income neighborhoods. A bank may be subject to
substantial penalties and corrective measures for a violation of certain fair
lending laws. The federal banking agencies may take compliance with such laws
and CRA obligations into account when regulating and supervising other
activities.
A bank's compliance with its CRA obligations is measured via a
performance-based evaluation system which bases CRA ratings on a financial
institution's actual lending service and investment performance. When a bank
holding company applies for approval to acquire a bank or other bank holding
company, the Federal Reserve Board will review the CRA assessment of each
subsidiary bank of the applicant bank holding company, and such records may be
the basis for denying the application. In June 1997, the Federal Reserve Board
rated the Bank "satisfactory" in complying with its CRA obligations.
YEAR 2000 COMPLIANCE
In May 1997, the Federal Financial Institutions Examination Council issued
an interagency statement to the chief executive officers of all federally
supervised financial institutions regarding "year 2000" project awareness. It is
expected that unless financial institutions address the technology issues
relating to the coming of the year 2000, there will be major disruptions in the
operations of financial institutions. The statement provides guidance to
financial institutions, providers of data services and all examining personnel
of the federal banking agencies regarding the year 2000 issue. The federal
banking agencies intend to conduct year 2000 compliance examinations, and the
failure to implement a year 2000 compliance program by December 31, 1998 may be
viewed by the federal banking agencies as an unsafe and unsound banking
practice. In addition, the federal banking agencies will be taking into account
year 2000 compliance programs when analyzing applications to acquire a bank or
other bank holding company and may deny an application based on year
2000-related issues.
In October 1997, the SEC Divisions of Corporation Finance and Investment
Management issued Staff Legal Bulletin No. 5 related to year 2000 issues. This
legal bulletin reminded public operating companies to consider their disclosure
obligations relating to anticipated costs, problems and uncertainties associated
with the year 2000 issue.
The Company and the Bank are aware of the year 2000 issue and the potential
risks. The Bank has engaged a third party vendor, a recognized expert in
assisting in all phases of year 2000 compliance, as part of a multiphase project
to assist the Bank with addressing the year 2000 issue. The first two phases of
the year 2000 compliance project, systems inventory and risk assessment, are
projected to be completed during the second quarter of 1998. The last phase of
the project includes systems replacement and/or modification and client
notification, and is projected to begin by the third quarter of 1998. Key
customer information systems are projected to be fully compliant by December 31,
1998, with all remaining systems projected to be tested and certified no later
than the end of the second quarter of 1999. The expense and related potential
impact on the Company's pre-tax earnings of the first two phases of the year
2000 compliance project is expected to approximate $250,000. Management has not
yet assessed the potential financial impact of the last phase of the project
(systems replacement and/or modification and client notification).
13
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings per Share." SFAS No. 128 establishes standards for
computing and reporting earnings per share (EPS) and applies to entities with
publicly held common stock or financial instruments that are potentially
convertible into publicly held common stock. This statement supersedes
Accounting Principles Board (APB) Opinion No. 15, "Earnings per Share." The
presentation of primary EPS, as required by APB Opinion No. 15, is replaced with
a presentation of basic EPS, which is defined in SFAS No. 128. In addition, dual
presentation of basic EPS and diluted EPS, as defined in SFAS No. 128, is
required on the face of the income statement for all entities that have complex
capital structures. Disclosure of a reconciliation between basic EPS and diluted
EPS is also required.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
financial instruments or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed similarly to
the fully diluted EPS computation required by APB Opinion No. 15. The Company
adopted SFAS No. 128 effective December 31, 1997. See "Item 8. Financial
Statements and Supplementary Data--Note 2 to the Consolidated Financial
Statements-- Earnings Per Share" for the disclosure of the reconciliations
between basic EPS and diluted EPS for the years ended December 31, 1997, 1996
and 1995.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." SFAS No. 129 establishes standards for disclosing
information about an entity's capital structure and applies to all entities. The
Company adopted SFAS No. 129 effective December 31, 1997. No additional
disclosures in the notes to the consolidated financial statements resulted from
the Company's adoption of this statement.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for all entities for reporting
comprehensive income and its components in financial statements. This statement
requires that all items which are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income is equal to net income plus the change in
"other comprehensive income," as defined by SFAS No. 130. The only component of
other comprehensive income currently applicable to the Company is the net
unrealized gain or loss on available-for-sale investments. SFAS No. 130 requires
that an entity: (a) classify items of other comprehensive income by their nature
in a financial statement, and (b) report the accumulated balance of other
comprehensive income separately from common stock and retained earnings in the
equity section of the balance sheet. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
publicly held entities to follow in reporting information about operating
segments in annual financial statements and requires that those entities also
report selected information about operating segments in interim financial
statements. This statement also establishes standards for related disclosures
about products and services, geographic areas and major customers. This
statement is effective for financial statements issued for periods beginning
after December 15, 1997.
In January 1997, the SEC approved amendments (Release No. 33-7386) to
Regulations S-X and S-K regarding the disclosure requirements for derivative
financial instruments, other financial instruments and derivative commodity
instruments (collectively, "market risk sensitive instruments"). The amendments
require enhanced disclosure of accounting policies for derivative financial
instruments and derivative commodity instruments in the notes to the financial
statements. In addition, the amendments expand
14
existing disclosure requirements to include quantitative and qualitative
information regarding the market risk inherent in market risk sensitive
instruments. The required quantitative and qualitative information is required
to be disclosed outside of the financial statements and related notes thereto.
The accounting policies disclosure requirements are effective for all SEC
registrants in filings that include financial statements issued for periods
ending after June 15, 1997. See "Item 8. Financial Statements and Supplementary
Data--Note 1 to the Consolidated Financial Statements--Significant Accounting
Policies--Foreign Exchange Forward Contracts" for the Company's disclosure of
these accounting policies.
The quantitative and qualitative information disclosure requirements
regarding market risks are effective for all bank and thrift registrant filings
which include annual financial statements issued for periods ending after June
15, 1997. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Interest Rate Risk Management" for the
Company's disclosure of the required quantitative and qualitative information
regarding market risks.
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 July 1997, the Bank finalized an
amendment to the original lease associated with its corporate headquarters. The
amendment provides for the lease of additional premises, approximating 56,000
square feet, adjacent to the existing headquarters facility. Construction of the
interior of the building commenced in February 1998, and it is projected the
Company could begin occupying the additional premises between July 1998 and
August 1998.
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: Irvine, Menlo Park, Palo Alto, San Diego, St. Helena, and West Los
Angeles. Offices located outside of California include: Phoenix, Arizona;
Boulder, Colorado; Atlanta, Georgia; Rosemont, Illinois; Rockville, Maryland;
Wellesley, Massachusetts; Beaverton, Oregon; Austin, Texas; and Bellevue,
Washington. All Bank properties are occupied under leases which expire at
various dates through May 2005, and in most instances, include options to renew
or extend at market rates and terms. The Bank also owns leasehold improvements
and furniture, fixtures and equipment at its offices, all of which are used in
the Bank's business activities.
ITEM 3. LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item
pending at December 31, 1997, 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 1997.
15
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:
1997 1996
-------------------- --------------------
QUARTER LOW HIGH LOW HIGH
- --------------------------------------------------------------------------- --------- --------- --------- ---------
First...................................................................... $ 32.25 $ 39.50 $ 20.25 $ 22.75
Second..................................................................... $ 33.38 $ 46.00 $ 22.50 $ 26.50
Third...................................................................... $ 41.88 $ 59.75 $ 23.50 $ 28.25
Fourth..................................................................... $ 49.13 $ 58.44 $ 25.88 $ 32.25
SHAREHOLDERS
The number of shareholders of record of the Company's common stock was 670
as of January 31, 1998.
DIVIDENDS
The Company declared no cash dividends in 1996 or 1997, 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 15 to the Consolidated Financial
Statements-- Regulatory Matters" for additional discussion on restrictions and
limitations on the payment of dividends.
16
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 1997 presentations. Such reclassifications had no
effect on the results of operations or shareholders' equity.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ----------
(DOLLARS AND NUMBERS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT SUMMARY:
Net interest income.......................... $ 110,824 $ 87,275 $ 73,952 $ 60,260 $ 50,410
Provision for loan losses.................... 10,067 10,426 8,737 3,087 9,702
Noninterest income........................... 13,265 11,609 12,565 4,922 9,316
Noninterest expense.......................... 66,301 52,682 47,925 45,599 47,357
Income before taxes.......................... 47,721 35,776 29,855 16,496 2,667
Income tax expense........................... 20,043 14,310 11,702 7,430 1,066
Net income................................... 27,678 21,466 18,153 9,066 1,601
COMMON SHARE SUMMARY:
Basic earnings per share..................... $ 2.86 $ 2.33 $ 2.08 $ 1.09 $ 0.20
Diluted earnings per share................... 2.72 2.21 1.98 1.06 0.20
Book value per share......................... 17.50 14.51 11.71 9.08 8.48
Weighted average shares outstanding.......... 9,685 9,213 8,747 8,335 7,960
Weighted average diluted shares
outstanding................................ 10,169 9,691 9,144 8,533 8,163
YEAR-END BALANCE SHEET SUMMARY:
Loans, net of unearned income................ $ 1,174,645 $ 863,492 $ 738,405 $ 703,809 $ 564,555
Assets....................................... 2,625,123 1,924,544 1,407,587 1,161,539 992,289
Deposits..................................... 2,432,407 1,774,304 1,290,060 1,075,373 914,959
Shareholders' equity......................... 174,481 135,400 104,974 77,257 70,336
AVERAGE BALANCE SHEET SUMMARY:
Loans, net of unearned income................ $ 973,637 $ 779,655 $ 681,255 $ 592,759 $ 574,372
Assets....................................... 2,140,630 1,573,903 1,165,004 956,336 917,569
Deposits..................................... 1,973,118 1,441,360 1,060,333 877,787 846,298
Shareholders' equity......................... 152,118 119,788 91,710 73,461 68,198
CAPITAL RATIOS:
Total risk-based capital ratio............... 11.5% 11.5% 11.9% 10.1% 11.3%
Tier 1 risk-based capital ratio.............. 10.2% 10.2% 10.6% 8.9% 10.1%
Tier 1 leverage ratio........................ 7.1% 7.7% 8.0% 8.3% 6.9%
Average shareholders' equity to average
assets..................................... 7.1% 7.6% 7.9% 7.7% 7.4%
SELECTED FINANCIAL RATIOS:
Return on average assets..................... 1.3% 1.4% 1.6% 0.9% 0.2%
Return on average shareholders' equity....... 18.2% 17.9% 19.8% 12.3% 2.3%
Efficiency ratio............................. 55.9% 55.9% 60.6% 68.3% 68.9%
Net interest margin.......................... 5.6% 6.1% 7.1% 7.2% 6.4%
17
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 circumstances which may affect
the Company's future results. Such forward-looking 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.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements included herein, which speak only as of the date
made. The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect unanticipated events and
circumstances occurring after the date of such statements.
Certain reclassifications have been made to the Company's prior years
results to conform with 1997 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 1997 of $27.7 million, compared with net
income in 1996 and 1995 of $21.5 million and $18.2 million, respectively.
Diluted earnings per share totaled $2.72 in 1997, compared to $2.21 and $1.98 in
1996 and 1995, respectively. Return on average equity in 1997 was 18.2%,
compared with 17.9% in 1996 and 19.8% in 1995. Return on average assets in 1997
was 1.3%, compared with 1.4% in 1996 and 1.6% in 1995.
The increase in net income for 1997, as compared with 1996, was primarily
attributable to growth in net interest income, partially offset by an increase
in noninterest expense. The increase in net income for 1996, as compared with
1995, was largely due to growth in net interest income, partially 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, 1997, 1996 and 1995, and
are discussed in more detail on the following pages.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1997 TO 1996 1996 TO 1995
INCREASE INCREASE
1997 1996 (DECREASE) 1995 (DECREASE)
---------- --------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
Net interest income................................. $ 110,824 $ 87,275 $ 23,549 $ 73,952 $ 13,323
Provision for loan losses........................... 10,067 10,426 (359) 8,737 1,689
Noninterest income.................................. 13,265 11,609 1,656 12,565 (956)
Noninterest expense................................. 66,301 52,682 13,619 47,925 4,757
---------- --------- ------------ --------- ------------
Income before income taxes.......................... 47,721 35,776 11,945 29,855 5,921
Income tax expense.................................. 20,043 14,310 5,733 11,702 2,608
---------- --------- ------------ --------- ------------
Net income.......................................... $ 27,678 $ 21,466 $ 6,212 $ 18,153 $ 3,313
---------- --------- ------------ --------- ------------
---------- --------- ------------ --------- ------------
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
18
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.
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, 1997, 1996 and 1995.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- --------------------------------- --------------------
AVERAGE AVERAGE
AVERAGE YIELD AND AVERAGE YIELD AND AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
--------- --------- ----------- --------- --------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Federal funds sold and securities
purchased under agreement to
resell (1)...................... $ 312,398 $ 17,264 5.5% $ 244,408 $ 13,106 5.4% $ 188,415 $ 11,041
Investment securities:
Taxable......................... 671,390 40,360 6.0 411,743 23,587 5.7 169,740 9,985
Non-taxable (2)................. 33,801 2,320 6.9 8,112 749 9.2 6,911 699
Loans: (3), (4), (5)
Commercial...................... 858,459 95,304 11.1 658,316 75,750 11.5 587,343 70,166
Real estate construction and
term.......................... 78,311 8,063 10.3 81,358 8,471 10.4 70,698 7,209
Consumer and other.............. 36,867 3,473 9.4 39,981 3,672 9.2 23,214 2,392
--------- --------- --- --------- --------- --- --------- ---------
Total loans....................... 973,637 106,840 11.0 779,655 87,893 11.3 681,255 79,767
--------- --------- --- --------- --------- --- --------- ---------
Total interest-earning assets....... 1,991,226 166,784 8.4 1,443,918 125,335 8.7 1,046,321 101,492
--------- --------- --- --------- --------- --- --------- ---------
Cash and due from banks............. 148,044 126,830 114,431
Allowance for loan losses........... (37,568) (30,429) (24,055)
Other real estate owned............. 1,192 3,582 5,752
Other assets........................ 37,736 30,002 22,555
--------- --------- ---------
Total assets........................ $2,140,630 $1,573,903 $1,165,004
--------- --------- ---------
--------- --------- ---------
Funding sources:
Interest-bearing liabilities:
NOW deposits...................... $ 15,814 308 1.9 $ 10,256 223 2.2 $ 11,925 326
Regular money market deposits..... 345,828 9,368 2.7 312,841 8,460 2.7 288,067 7,782
Bonus money market deposits....... 895,259 40,885 4.6 588,235 26,312 4.5 329,031 16,836
Time deposits..................... 107,742 4,587 4.3 69,975 2,801 4.0 65,426 2,349
Other borrowings.................. 5 -- 5.0 30 2 5.5 38 2
--------- --------- --- --------- --------- --- --------- ---------
Total interest-bearing
liabilities........................ 1,364,648 55,148 4.0 981,337 37,798 3.9 694,487 27,295
Portion of noninterest-bearing
funding sources.................... 626,578 462,581 351,834
--------- --------- --- --------- --------- --- --------- ---------
Total funding sources............... 1,991,226 55,148 2.8 1,443,918 37,798 2.6 1,046,321 27,295
--------- --------- --- --------- --------- --- --------- ---------
Noninterest-bearing funding sources:
Demand deposits................... 608,475 460,053 365,884
Other liabilities................. 15,389 12,725 12,923
Shareholders' equity.............. 152,118 119,788 91,710
Portion used to fund
interest-earning assets......... (626,578) (462,581) (351,834)
--------- --------- ---------
Total liabilities and shareholders'
equity............................. $2,140,630 $1,573,903 $1,165,004
--------- --------- ---------
--------- --------- ---------
Net interest income and margin...... $ 111,636 5.6% $ 87,537 6.1% $ 74,197
--------- --- --------- --- ---------
--------- --- --------- --- ---------
Memorandum: Total deposits.......... $1,973,118 $1,441,360 $1,060,333
--------- --------- ---------
--------- --------- ---------
AVERAGE
YIELD AND
RATE
-----------
Interest-earning assets:
Federal funds sold and securities
purchased under agreement to
resell (1)...................... 5.9%
Investment securities:
Taxable......................... 5.9
Non-taxable (2)................. 10.1
Loans: (3), (4), (5)
Commercial...................... 11.9
Real estate construction and
term.......................... 10.2
Consumer and other.............. 10.3
---
Total loans....................... 11.7
---
Total interest-earning assets....... 9.7
---
Cash and due from banks.............
Allowance for loan losses...........
Other real estate owned.............
Other assets........................
Total assets........................
Funding sources:
Interest-bearing liabilities:
NOW deposits...................... 2.7
Regular money market deposits..... 2.7
Bonus money market deposits....... 5.1
Time deposits..................... 3.6
Other borrowings.................. 5.3
---
Total interest-bearing
liabilities........................ 3.9
Portion of noninterest-bearing
funding sources....................
---
Total funding sources............... 2.6
---
Noninterest-bearing funding sources:
Demand deposits...................
Other liabilities.................
Shareholders' equity..............
Portion used to fund
interest-earning assets.........
Total liabilities and shareholders'
equity.............................
Net interest income and margin...... 7.1%
---
---
Memorandum: Total deposits..........
- ------------------------------
(1) Includes average interest-bearing deposits in other financial institutions
of $306, $345 and $378 in 1997, 1996 and 1995, respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in 1997,
1996 and 1995. These adjustments were $812, $262 and $245 for the years
ended December 31, 1997, 1996 and 1995, respectively.
(3) Average loans include average nonaccrual loans of $19,659, $22,897 and
$16,146 in 1997, 1996 and 1995, respectively.
(4) Average loans are net of average unearned income of $6,922, $4,169 and
$3,352 in 1997, 1996 and 1995, respectively.
(5) Loan interest income includes loan fees of $10,567, $8,176 and $7,970 in
1997, 1996 and 1995, respectively.
19
Net interest income is affected by changes in the amount and mix of
interest-earnings assets and interest-bearing liabilities, referred to as
"volume change." Net interest income is also affected by changes in yields
earned on interest-earning assets and rates paid on interest-bearing
liabilities, referred to as "rate change." The following table sets forth
changes in interest income and interest expense for each major category of
interest-earning assets and interest-bearing liabilities. The table also
reflects the amount of change attributable to both volume and rate changes for
the years indicated. Changes relating to investments in non-taxable municipal
securities are presented on a fully taxable-equivalent basis using the federal
statutory rate of 35% in 1997, 1996 and 1995.
1997 COMPARED TO 1996 1996 COMPARED TO 1995
-------------------------------- ---------------------------------
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................ $ 3,757 $ 401 $ 4,158 $ 3,003 $ (938) $ 2,065
Investment securities...................... 17,269 1,075 18,344 14,097 (445) 13,652
Loans...................................... 21,286 (2,339) 18,947 11,093 (2,967) 8,126
--------- --------- ---------- ---------- --------- ----------
Increase (decrease) in interest income....... 42,312 (863) 41,449 28,193 (4,350) 23,843
--------- --------- ---------- ---------- --------- ----------
Interest expense:
NOW deposits............................... 108 (23) 85 (36) (67) (103)
Regular money market deposits.............. 894 14 908 670 8 678
Bonus money market deposits................ 14,021 552 14,573 11,594 (2,118) 9,476
Time deposits.............................. 1,608 178 1,786 182 270 452
Other borrowings........................... -- (2) (2) (1) 1 --
--------- --------- ---------- ---------- --------- ----------
Increase (decrease) in interest expense...... 16,631... 719 17,350 12,409 (1,906) 10,503
--------- --------- ---------- ---------- --------- ----------
Increase (decrease) in net interest income... $ 25,681 $ (1,582) $ 24,099 $ 15,784 $ (2,444) $ 13,340
--------- --------- ---------- ---------- --------- ----------
--------- --------- ---------- ---------- --------- ----------
Net interest income, on a fully taxable-equivalent basis, totaled $111.6
million in 1997, an increase of $24.1 million, or 27.5%, from the $87.5 million
total in 1996. The increase in net interest income was attributable to a $41.4
million, or 33.1%, increase in interest income, offset by a $17.4 million, or
45.9%, increase in interest expense over the comparable prior year period. Net
interest income in 1996, on a fully taxable-equivalent basis, increased $13.3
million, or 18.0%, compared to the $74.2 million total in 1995. This increase in
net interest income was the result of 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.
The $41.4 million increase in interest income for 1997, as compared to 1996,
was the result of a $42.3 million favorable volume variance, slightly offset by
a $0.9 million unfavorable rate variance. The $42.3 million favorable volume
variance resulted from a $547.3 million, or 37.9%, increase in average
interest-earning assets over the comparable prior year period. The increase in
average interest-earning assets resulted from strong growth in the Company's
average deposits, which increased $531.8 million, or 36.9%, from 1996 to 1997.
The increase in average interest-earning assets consisted of loans, which
increased $194.0 million, plus a combination of highly liquid, lower-yielding
federal funds sold, securities purchased under agreement to resell and
investment securities, which collectively increased $353.3 million accounting
for 64.6% of the total increase in average interest-earning assets.
Average loans increased $194.0 million, or 24.9%, in 1997 as compared to
1996, resulting in a $21.3 million favorable volume variance. This growth was
widely distributed throughout the loan portfolio,
20
as reflected by increased loan balances in most of the Company's technology,
life sciences and special industry niche practices, in specialized lending
products such as factoring, and throughout the Company's loan offices located
across the nation.
Average investment securities for 1997 increased $285.3 million, or 68.0%,
as compared to 1996, resulting in a $17.3 million favorable volume variance. The
aforementioned strong growth in average deposits exceeded the growth in average
loans during 1997, and generated excess funds that were largely invested in U.S.
agency securities, U.S. Treasury securities, mortgage-backed securities, and
municipal securities. The growth in the investment portfolio reflected
Management's actions to both increase the Company's portfolio of longer-term
securities in an effort to obtain available higher yields, and to increase as
well as to further diversify the Company's portfolio of short-term investments
in response to a significant increase in liquidity.
Average federal funds sold and securities purchased under agreement to
resell in 1997 increased a combined $68.0 million, or 27.8%, over the prior
year, resulting in a $3.8 million favorable volume variance. This increase was
largely due to the aforementioned strong growth in average deposits during 1997
coupled with Management's actions to further diversify the Company's portfolio
of short-term investments.
For additional discussion of the Company's liquidity and investment
management activities, see the Item 7 sections entitled "Interest Rate Risk
Management" and "Liquidity."
In 1997, a $2.3 million unfavorable rate variance associated with loans was
partially offset by a combined $1.5 million favorable rate variance related to
federal funds sold, securities purchased under agreement to resell and
investment securities, resulting in a decrease in interest income of $0.9
million as compared to 1996. The unfavorable rate variance related to loans
resulted from a 30 basis points decline in the average yield on loans from 1996
to 1997, and was largely due to increased competition. The average yields on
federal funds sold, securities purchased under agreement to resell and
investment securities increased in 1997 from the prior year, and resulted from
both an increase in short-term market interest rates and Management's actions to
increase the Company's portfolio of longer-term securities in an effort to
obtain available higher yields.
The yield on average interest-earning assets decreased 30 basis points in
1997 from the comparable prior year period. This decrease resulted from a
decline in the average yield on loans, largely due to increased competition, and
a shift in the composition of average interest-earning assets towards a higher
percentage of highly liquid, lower-yielding federal funds sold, securities
purchased under agreement to resell and investment securities. This shift in the
composition of average interest-earning assets resulted from the aforementioned
strong growth in average deposits outpacing growth in the Company's average
loans during 1997.
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 $28.2 million 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
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 as compared to
1995. This year-over-year increase was largely related to the Company's special
industry niches, specialized lending products and loan offices opened during
1995 and 1996. Excluding the impact of these newer 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.
21
The increase in average investment securities during 1996, as compared to
1995, of $243.2 million, or 137.7%, was primarily centered in U.S. agency
securities and commercial paper. This increase resulted from the aforementioned
strong deposit growth in 1996 having exceeded the growth in loans and was the
result of Management's decision to increase as well as to further diversify the
Company's portfolio of short-term investments 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 coupled with Management's actions to
further diversify the Company's portfolio of short-term investments in response
to a significant increase in liquidity.
Unfavorable rate variances associated with each component of
interest-earnings assets in 1996 resulted in a decrease in interest income of
$4.4 million as compared to the prior year. 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 on loans in 1996
decreased 40 basis points from 1995, accounting for the remaining $3.0 million
of the total unfavorable rate variance. This decrease was primarily 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 increased
competition, 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 during the year.
Interest expense in 1997 increased $17.4 million from 1996. This increase
was due to an unfavorable volume variance of $16.6 million and an unfavorable
rate variance of $0.7 million. The unfavorable volume variance resulted from a
$383.3 million, or 39.1%, increase in average interest-bearing liabilities in
1997 as compared to 1996. This increase was largely concentrated in the
Company's bonus money market deposit product, which increased $307.0 million, or
52.2%, and was explained by high levels of client liquidity attributable to a
strong inflow of investment capital into the venture capital community during
1997, and by growth in the number of clients served by the Company. The
year-over-year $0.7 million unfavorable rate variance was primarily due to an
increase during 1997 in the average rate paid on the Company's bonus money
market deposit product which resulted from an increase in short-term market
interest rates, as well as to a shift in the composition of interest-bearing
liabilities towards a higher percentage of deposits in the bonus money market
deposit product.
The increase in interest expense for 1996 of $10.5 million, as compared to
1995, was primarily due to a $12.4 million unfavorable volume variance,
partially offset by a favorable rate variance of $1.9 million. The unfavorable
volume variance 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 bonus money market deposit product, 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, and due to growth during 1996 in the number of
clients served by the Company.
Changes in the average rates paid on interest-bearing liabilities had a $1.9
million favorable impact on interest expense in 1996 as compared to 1995. This
decrease in interest expense largely resulted from a reduction in the average
rate paid on the Company's bonus money market deposit product from 5.1% in 1995
to 4.5% in 1996, partially offset by a shift in the composition of
interest-bearing liabilities towards a higher percentage of deposits in the
Company's bonus money market deposit product. The reduction
22
during 1996 in the average rate paid on the Company's bonus money market deposit
product was due to both a 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.
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 $10.1 million in 1997,
compared to $10.4 million and $8.7 million in 1996 and 1995, respectively. For a
more detailed discussion of credit quality and the allowance for loan losses,
see the Item 7 section entitled "Financial Condition--Credit Quality and the
Allowance for Loan Losses."
NONINTEREST INCOME
The following table summarizes the components of noninterest income for the
past three years:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Disposition of client warrants................................................... $ 5,480 $ 5,389 $ 8,205
Letter of credit and foreign exchange income..................................... 4,512 3,423 3,007
Deposit service charges.......................................................... 1,772 1,663 1,402
Investment gains (losses)........................................................ 90 1 (768)
Other............................................................................ 1,411 1,133 719
--------- --------- ---------
Total noninterest income..................................................... $ 13,265 $ 11,609 $ 12,565
--------- --------- ---------
--------- --------- ---------
Noninterest income increased $1.7 million, or 14.3%, in 1997 as compared to
1996. This increase was largely due to a $1.1 million increase in letter of
credit fees, foreign exchange fees and other trade finance income, coupled with
a combined increase of $0.4 million in the Company's other components of fee
income. 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, partially 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 on sales of investment securities.
Income from the disposition of client warrants totaled $5.5 million, $5.4
million and $8.2 million in 1997, 1996 and 1995, respectively. 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,
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 as well as the merger and acquisition environment, 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, 1997, 1996 and 1995, 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, and to evaluate and pursue new business opportunities, and was also
offset by the need to increase the provision for loan losses during those years.
As opportunities present themselves in future
23
periods, the Company may continue to reinvest some or all of the income realized
from the disposition of client warrants in furthering its business strategies.
Letter of credit fees, foreign exchange fees and other trade finance income
totaled $4.5 million in 1997, an increase of $1.1 million, or 31.8%, from the
$3.4 million total in 1996, and an increase of $1.5 million, or 50.0%, from the
$3.0 million total in 1995. 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 growing client base, a
large percentage of which provide products and services in international
markets.
Income related to deposit service charges totaled $1.8 million, $1.7 million
and $1.4 million in 1997, 1996 and 1995, 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 from 1995 through 1997 was primarily attributable to the
aforementioned growth in the Company's client base.
The Company realized a $0.1 million gain on sales of investment securities
during 1997, compared to a nominal gain on sales of investment securities during
1996 and a loss on sales of investment securities totaling $0.8 million in 1995.
The securities sold during 1997 were primarily U.S. agency securities, while the
securities sold during 1995 were primarily mortgage-backed 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 related discussion, see the Item
7 sections entitled "Interest Rate Risk Management" and "Liquidity."
Other noninterest income is largely composed of service-based fee income,
and totaled $1.4 million in 1997, compared to $1.1 million and $0.7 million in
1996 and 1995, respectively. The increase in 1997, as compared to 1996, was
primarily due to a higher volume of cash management services related to the
Company's growing client base. The increase in 1996, as compared to 1995, 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 1997 totaled $66.3 million, a $13.6 million, or
25.9%, increase from 1996. Total noninterest expense was $52.7 million in 1996,
up $4.8 million, or 9.9%, from 1995. 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 related to sales of investment securities. This ratio reflects the level
of operating expense required to generate $1 of operating revenue. The Company's
efficiency ratio was 55.9% for both 1997 and 1996, down
24
from 60.6% in 1995. The following table presents the detail of noninterest
expense and the incremental contribution of each expense line item to the
Company's efficiency ratio:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF
ADJUSTED ADJUSTED ADJUSTED
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
Compensation and benefits..................... $ 40,084 33.8% $ 31,417 33.6% $ 27,161 34.3%
Professional services......................... 6,710 5.7 4,987 5.3 5,160 6.5
Business development and travel............... 4,514 3.8 2,918 3.1 1,982 2.5
Furniture and equipment....................... 3,620 3.1 3,239 3.5 3,235 4.1
Net occupancy expense......................... 3,410 2.9 3,095 3.3 3,616 4.6
Postage and supplies.......................... 1,600 1.3 1,448 1.6 1,191 1.5
Advertising and promotion..................... 1,448 1.2 1,183 1.3 613 0.8
Telephone..................................... 1,444 1.2 1,277 1.4 1,006 1.3
Other......................................... 3,395 2.9 2,720 2.9 3,973 5.0
--------- ----------- --------- ----------- --------- -----------
Total, excluding cost of other real estate
owned................................... 66,225 55.9% 52,284 55.9% 47,937 60.6%
----------- ----------- -----------
----------- ----------- -----------
Cost of other real estate owned............... 76 398 (12)
--------- --------- ---------
Total noninterest expense................. $ 66,301 $ 52,682 $ 47,925
--------- --------- ---------
--------- --------- ---------
Compensation and benefits expenses totaled $40.1 million in 1997, an $8.7
million, or 27.6%, increase over the $31.4 million incurred in 1996.
Compensation and benefits expenses in 1996 increased $4.3 million, or 15.7%,
from the $27.2 million total in 1995. The increase in compensation and benefits
expenses in both 1997 and 1996, over the respective prior year periods, was
largely the result of an increase in the number of average full-time equivalent
personnel (FTE) employed by the Company. Average FTE were 417 in 1997, compared
with 363 and 336 in 1996 and 1995, respectively. The increase in FTE from 1995
through 1997 was primarily due to a combination of the Company's efforts to
develop and support new markets through geographic expansion, to develop and
expand products, services and niches, and to build an infrastructure sufficient
to support present and prospective business activities. Further growth in the
Company's number of FTE is likely to occur during future years as a result of
the continued expansion of the Company's business activities.
During the third and fourth quarters of 1997, the Company granted a total of
104,500 shares of its common stock to numerous employees, subject to certain
vesting requirements and resale restrictions (restricted stock). For these
restricted stock grants, unearned compensation equivalent to the aggregate $5.9
million market value of the Company's common stock on the dates of grant was
charged to shareholders' equity and will subsequently be amortized into
compensation and benefits expense over the four-year vesting period.
Professional services expenses, which consist of costs associated with
corporate legal services, litigation settlements, accounting and auditing
services, consulting, and the Company's Board of Directors, totaled $6.7 million
in 1997, a $1.7 million, or 34.5%, increase from the $5.0 million total in 1996.
The Company incurred $5.2 million in professional services expenses in 1995. The
increase in professional services expenses in 1997, as compared to 1996,
primarily related to both an increase in consulting fees associated with several
business initiatives and an increase in legal fees largely related to the
workout of two commercial credits. The level of professional services expenses
during the past three years reflects the extensive efforts undertaken by the
Company to continue to build and support its infrastructure, as well as evaluate
and pursue new business opportunities, and also reflects the Company's efforts
in outsourcing
25
several corporate 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.
Certain lawsuits and claims arising in the ordinary course of business have
been filed or are pending against the Company and/or the Bank. Based upon
information available to the Company, its review of such claims to date and
consultation with its legal counsel, Management believes the liability relating
to these actions, if any, will not have a material adverse effect on the
Company's liquidity, consolidated financial position or results of operations.
Business development and travel expenses totaled $4.5 million in 1997, an
increase of $1.6 million, or 54.7%, compared to the $2.9 million total in 1996.
The Company incurred $2.0 million in business development and travel expenses in
1995. The increase in business development and travel expenses during each of
the last two years was largely attributable to overall growth in the Company's
business, including both an increase in the number of FTE and expansion into new
geographic markets.
Occupancy, furniture and equipment expenses totaled $7.0 million in 1997,
$6.3 million in 1996 and $6.9 million in 1995. The increase in occupancy,
furniture and equipment expenses in 1997, as compared to 1996, was primarily the
result of investments in computer equipment and software associated with
technology upgrades and the Company's aforementioned growth in personnel. The
higher level of occupancy, furniture and equipment expenses in 1995, as compared
to the combined amount incurred in 1996, 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, furniture
and equipment expenses in 1995 and 1996 were also impacted by costs related to
furniture, computer equipment and other related costs associated with both the
Company's aforementioned growth in personnel and its geographic expansion during
1995 and 1996. The Company opened new loan offices in Atlanta, Georgia and
Phoenix, Arizona during 1997, and in West Los Angeles, California and Rosemont,
Illinois in early 1998, and intends to continue its geographic expansion into
other emerging technology marketplaces across the U.S. during future years.
In July 1997, the Bank finalized an amendment to the original lease
associated with its corporate headquarters. The amendment provides for the lease
of additional premises, approximating 56,000 square feet, adjacent to the
existing headquarters facility. Construction of the interior of the building
commenced in February 1998, and it is projected the Company could begin
occupying these additional premises between July 1998 and August 1998. Future
minimum rental payments related to the additional premises are projected to be
approximately $0.8 million for 1998, $1.1 million per year for 1999 through
2001, $1.2 million per year for 2002 through 2003, $1.3 million in the year
2004, and $0.6 million in the year 2005. The Company expects to incur other
occupancy, furniture and equipment expenses in 1998 and future periods
associated with the construction, furnishing and maintenance of these additional
premises, in addition to the future minimum rental payments detailed above.
The Company and the Bank are aware of the "year 2000" issue and the
potential risks. The Bank has engaged a third party vendor, a recognized expert
in assisting in all phases of year 2000 compliance, as part of a multiphase
project to assist the Bank with addressing the year 2000 issue. The first two
phases of the year 2000 compliance project, systems inventory and risk
assessment, are projected to be completed during the second quarter of 1998. The
last phase of the project includes systems replacement and/or modification and
client notification, and is projected to begin by the third quarter of 1998. Key
customer information systems are projected to be fully compliant by December 31,
1998, with all remaining systems projected to be tested and certified no later
than the end of the second quarter of 1999. The expense and related potential
impact on the Company's pre-tax earnings of the first two phases of the year
2000 compliance project is expected to approximate $250,000. Management has not
yet assessed the potential financial impact of the last phase of the project
(systems replacement and/or modification and client notification).
26
Postage and supplies expenses totaled $1.6 million, $1.4 million and $1.2
million in 1997, 1996 and 1995, respectively. Total telephone expenses were $1.4
million in 1997, $1.3 million in 1996 and $1.0 million in 1995. The increase in
postage and supplies and telephone expenses during each of the past two years
was largely the result of overall growth in the Company's business, including
both an increase in the number of FTE and expansion into new geographic markets.
Advertising and promotion expenses totaled $1.4 million in 1997, $1.2
million in 1996 and $0.6 million in 1995. The increase in advertising and
promotion expenses in 1996 and 1997, compared to 1995, reflects a concerted
effort by the Company to increase its marketing efforts nationwide. These
efforts have been largely facilitated through a formal relationship with an
advertising and public relations firm.
Other noninterest expenses totaled $3.4 million, $2.7 million and $4.0
million in 1997, 1996 and 1995, respectively. The increase in other noninterest
expenses in 1997 of $0.7 million, as compared to 1996, was largely due to both
expenses associated with an asset which was acquired through foreclosure during
1997, and an increase in costs associated with certain vendor provided services
resulting from growth in the Company's client base. The $1.3 million decrease in
other noninterest expenses from 1995 to 1996 was primarily related to lower FDIC
deposit insurance premiums resulting 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 Company incurred minimal net costs associated with other real estate
owned (OREO) in 1997 and 1995, and incurred $0.4 million in net OREO-related
costs in 1996. The net OREO-related costs in 1996 were largely explained by the
write-down in the first quarter of 1996 of one property owned by the Company.
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 42.0% in 1997, compared to 40.0%
in 1996 and 39.2% in 1995. The increase in the Company's effective income tax
rate for 1997, as compared to 1996, and the increase in the Company's effective
income tax rate for 1996, as compared to 1995, were attributable to adjustments
in the Company's estimate of its income tax liabilities.
FINANCIAL CONDITION
The Company's total assets were $2.6 billion at December 31, 1997, an
increase of $700.6 million, or 36.4%, compared to $1.9 billion at December 31,
1996.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell
totaled a combined $321.8 million at December 31, 1997, an increase of $11.4
million, or 3.7%, compared to the $310.3 million outstanding at the prior year
end. This increase was attributable to the Company investing excess funds,
resulting from the strong growth in deposits during 1997 having exceeded the
growth in loans, in these types of short-term, liquid investments, and was
coupled with Management's actions to diversify the Company's portfolio of
short-term investments.
27
INVESTMENT SECURITIES
The following table details the composition of investment securities, all of
which were classified as available-for-sale and reported at fair value, at
December 31, 1997, 1996 and 1995.
DECEMBER 31,
------------------------------------
1997 1996 1995
------------ ---------- ----------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities................................................... $ 217,685 $ 75,547 $ 39,898
U.S. agencies and corporations:
Discount notes and bonds 462,405 298,488 163,757
Mortgage-backed securities............................................... 144,437 8,168 --
Collateralized mortgage obligations...................................... 41,051 58,038 57,207
Obligations of states and political subdivisions........................... 60,436 22,787 6,581
Commercial paper........................................................... 41,829 143,086 52,523
Bankers' acceptances....................................................... 16,140 -- --
Other debt securities...................................................... 25,007 13,000 --
Other equity securities.................................................... 4,914 5,908 1,343
------------ ---------- ----------
Total...................................................................... $ 1,013,904 $ 625,022 $ 321,309
------------ ---------- ----------
------------ ---------- ----------
Investment securities totaled $1.0 billion at December 31, 1997. This
represented a $388.9 million, or 62.2%, increase over the December 31, 1996
balance of $625.0 million. This increase resulted from excess funds that were
generated by strong growth in the Company's deposits outpacing the growth in
loans during 1997, and primarily consisted of U.S. Treasury securities, U.S.
agency securities, mortgage-backed securities, and municipal securities,
partially offset by a decrease in commercial paper. The growth in the investment
portfolio reflected Management's actions to both increase the portfolio of
longer-term securities in an effort to obtain available higher yields, and to
increase as well as to further diversify the Company's portfolio of short-term
investments in response to a significant increase in liquidity.
At December 31, 1997, 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.
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, 1997. 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
28
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.
DECEMBER 31, 1997
---------------------------------------------------------------------------------------------
AFTER
FIVE
AFTER ONE YEAR TO FIVE YEARS TO
TOTAL ONE YEAR OR LESS YEARS TEN YEARS
-------------------------- -------------------------- -------------------------- ---------
FAIR WEIGHTED- FAIR WEIGHTED- FAIR WEIGHTED- FAIR
VALUE AVERAGE YIELD VALUE AVERAGE YIELD VALUE AVERAGE YIELD VALUE
--------- --------------- --------- --------------- --------- --------------- ---------
(DOLLARS IN THOUSANDS)
U.S. Treasury
securities........... $ 217,685 5.9% $ 104,066 5.5% $ 113,619 6.3% --
U.S. agencies and
corporations:
Discount notes and
bonds.............. 462,405 6.0 210,735 5.7 251,670 6.3 --
Mortgage-backed
securities......... 144,437 6.5 -- -- -- -- $ 9,776
Collateralized
mortgage
obligations........ 41,051 6.8 -- -- 902 5.6 17,362
Obligations of states
and political
subdivisions......... 60,436 6.5 42,969 6.1 7,189 8.2 10,278
Commercial paper....... 41,829 5.8 41,829 5.8 -- -- --
Bankers' acceptances... 16,140 5.7 16,140 5.7 -- -- --
Other debt
securities........... 25,007 5.8 13,000 5.7 -- -- 12,007
Other equity
securities........... 4,914 -- -- -- -- -- --
-- -- --
--------- --------- --------- ---------
Total.................. $1,013,904 6.1% $ 428,739 5.7% $ 373,380 6.3% $ 49,423
-- -- --
-- -- --
--------- --------- --------- ---------
--------- --------- --------- ---------
AFTER TEN YEARS
--------------------------
WEIGHTED- FAIR WEIGHTED-
AVERAGE YIELD VALUE AVERAGE YIELD
--------------- --------- ---------------
U.S. Treasury
securities........... -- -- --
U.S. agencies and
corporations:
Discount notes and
bonds.............. -- -- --
Mortgage-backed
securities......... 6.5% $ 134,661 6.5%
Collateralized
mortgage
obligations........ 7.2 22,787 6.5
Obligations of states
and political
subdivisions......... 7.1 -- --
Commercial paper....... -- -- --
Bankers' acceptances... -- -- --
Other debt
securities........... 6.0 -- --
Other equity
securities........... -- 4,914 --
-- --
---------
Total.................. 6.8% $ 162,362 6.3%
-- --
-- --
---------
---------
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 with or 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.
LOANS
The composition of the loan portfolio, net of unearned income, for each of
the past five years is as follows:
DECEMBER 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Commercial......................................... $ 1,051,218 $ 755,699 $ 622,488 $ 613,469 $ 470,649
Real estate construction........................... 53,583 27,540 17,194 10,512 17,283
Real estate term................................... 33,395 44,475 56,845 58,977 49,710
Consumer and other................................. 36,449 35,778 41,878 20,851 26,913
------------ ---------- ---------- ---------- ----------
Total loans........................................ $ 1,174,645 $ 863,492 $ 738,405 $ 703,809 $ 564,555
------------ ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ----------
Total loans at December 31, 1997, net of unearned income, were $1.2 billion,
representing a $311.2 million, or 36.0%, increase compared to the $863.5 million
outstanding at December 31, 1996. The increase in loans from the 1996 year-end
total was widely distributed throughout the loan portfolio, as evidenced by
increased loan balances in most of the Company's market niches, specialized
lending products and loan offices.
29
The following table sets forth the remaining contractual maturity
distribution of the Company's loans (reported on a gross basis) at December 31,
1997 for fixed and variable rate commercial and real estate construction loans:
DECEMBER 31, 1997
--------------------------------------------------
AFTER ONE
YEAR AND
ONE YEAR THROUGH FIVE AFTER FIVE
OR LESS YEARS YEARS TOTAL
---------- ------------- ----------- ----------
(DOLLARS IN THOUSANDS)
Fixed rate loans:
Commercial..................................................... $ 14,975 $ 94,785 $ 79,267 $ 189,027
Real estate construction....................................... -- 132 -- 132
---------- ------------- ----------- ----------
Total fixed rate loans......................................... $ 14,975 $ 94,917 $ 79,267 $ 189,159
---------- ------------- ----------- ----------
---------- ------------- ----------- ----------
Variable rate loans:
Commercial..................................................... $ 510,514 $ 308,956 $ 49,875 $ 869,345
Real estate construction....................................... 38,846 15,265 -- 54,111
---------- ------------- ----------- ----------
Total variable rate loans...................................... $ 549,360 $ 324,221 $ 49,875 $ 923,456
---------- ------------- ----------- ----------
---------- ------------- ----------- ----------
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. As of December 31, 1997, no particular industry
sector (as identified by Standard Industrial Codes) represented more than 10.0%
of the Company's loan portfolio.
Management of the Company has been undertaking an ongoing evaluation of the
economic events occurring in Asia during recent months. Based on the results to
date from this evaluation, no significant current or forecasted negative impact
has been identified with respect to the Company's loan growth, credit quality,
overall financial condition, and results of operations. Future events and
circumstances surrounding the economic conditions in Asia cannot be predicted,
nor can the impact of these future events and circumstances on the Company's
loan growth, credit quality, overall financial condition, and results of
operations be determined at the present time.
General conditions in the public equity markets, in particular those related
to public stock offerings, as well as the merger and acquisitions environment,
may have an impact on the Bank. One consequence of an active market for public
stock offerings and mergers and acquisitions is the payoff or reduction of a
portion of the Bank's loans by some of its clients which complete public stock
offerings, or merge with, or are acquired by, another company. Such a reduction
in outstanding loans, if significant, could adversely affect the Company's
consolidated earnings.
LOAN ADMINISTRATION
Authority over the Company's loan policies resides with the Company's Board
of Directors. This authority 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, practice managers and loan
administrators. Requests for new and existing credits which meet certain size
30
and underwriting criteria may be approved outside of the Company's Internal Loan
Committee by designated practice managers jointly with a loan administrator.
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 practice
report to the Chief Credit Officer, who also acts as chair of the Internal Loan
Committee.
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 and earnings.
Lending money involves an inherent risk of nonpayment. Through the
administration of loan policies and monitoring of the loan 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 loan portfolio by segregating the allowance for
loan losses into three components: "specific," "loss migration," and "general."
The specific component is established by allocating a portion of the allowance
for loan losses to individual classified credits on the basis of specific
circumstances and assessments. The loss migration component is calculated as a
function of the historical loss migration experience of the internal loan credit
risk rating categories. The general component 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 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.
31
An analysis of the allowance for loan losses for the past five years is as
follows:
DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Balance at January 1,...................................... $ 32,700 $ 29,700 $ 20,000 $ 25,000 $ 22,000
Charge-offs:
Commercial............................................... (9,236) (9,056) (4,248) (10,913) (5,058)
Real estate.............................................. -- (634) (653) (495) (5,967)
Consumer and other....................................... -- (38) (57) -- --
--------- --------- --------- --------- ---------
Total charge-offs.......................................... (9,236) (9,728) (4,958) (11,408) (11,025)
--------- --------- --------- --------- ---------
Recoveries:
Commercial............................................... 3,170 2,050 3,106 2,398 3,064
Real estate.............................................. 986 217 2,815 923 1,259
Consumer and other....................................... 13 35 -- -- --
--------- --------- --------- --------- ---------
Total recoveries........................................... 4,169 2,302 5,921 3,321 4,323
--------- --------- --------- --------- ---------
Net (charge-offs) recoveries............................... (5,067) (7,426) 963 (8,087) (6,702)
Provision for loan losses.................................. 10,067 10,426 8,737 3,087 9,702
--------- --------- --------- --------- ---------
Balance at December 31,.................................... $ 37,700 $ 32,700 $ 29,700 $ 20,000 $ 25,000
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net charge-offs (recoveries) to average total loans........ 0.5% 1.0% (0.1)% 1.4% 1.2%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
The following table displays the allocation of the allowance for loan losses
among specific classes of loans:
DECEMBER 31,
-----------------------------------------------------------------------------------------
1997 1996 1995 1994
------------------------ ------------------------ ------------------------ -----------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Commercial........................... $ 30,394 89.5% $ 18,716 87.5% $ 16,176 84.3% $ 12,748
Real estate term..................... 426 2.8 873 5.2 707 7.7 765
Real estate construction............. 274 4.6 140 3.2 87 2.4 345
Consumer and other................... 386 3.1 615 4.1 339 5.6 312
Unallocated.......................... 6,220 N/A 12,356 N/A 12,391 N/A 5,830
----------- ----- ----------- ----- ----------- ----- -----------
Total................................ $ 37,700 100.0% $ 32,700 100.0% $ 29,700 100.0% $ 20,000
----------- ----- ----------- ----- ----------- ----- -----------
----------- ----- ----------- ----- ----------- ----- -----------
1993
------------------------
PERCENT OF PERCENT OF
TOTAL LOANS AMOUNT TOTAL LOANS
----------- ----------- -----------
Commercial........................... 87.2% $ 19,374 83.5%
Real estate term..................... 8.4 539 8.8
Real estate construction............. 1.4 204 3.0
Consumer and other................... 3.0 274 4.7
Unallocated.......................... N/A 4,609 N/A
----- ----------- -----
Total................................ 100.0% $ 25,000 100.0%
----- ----------- -----
----- ----------- -----
The allowance for loan losses totaled $37.7 million at December 31, 1997, an
increase of $5.0 million, or 15.3%, compared to the $32.7 million total at
December 31, 1996. This increase was due to $10.1 million in additional
provisions to the allowance for loan losses, offset by net charge-offs of $5.1
million during 1997. The unallocated component of the allowance for loan losses
as of December 31, 1997 decreased $6.1 million, or 49.7%, from the prior year
end. This decrease was mostly explained by an increase in specific allocations
of the allowance for loan losses totaling $10.7 million which primarily related
to two largely unsecured commercial credits aggregating $14.1 million that were
placed on nonaccrual status during 1997. Gross charge-offs for 1997 were $9.2
million and included charge-offs totaling $6.5 million related to two commercial
credits, one in the Bank's technology and life sciences niche and the other in
one of the Bank's special industry niches. Gross recoveries of $4.2 million in
1997 included $1.1 million related to a commercial credit in one of the Bank's
special industry niches that was partially charged off in 1996.
32
Gross charge-offs for 1996 were $9.7 million, and primarily resulted from
five credits, none of which were related to the Bank's technology and life
sciences niche. Gross recoveries of $2.3 million in 1996 included $0.9 million
related to one commercial credit that was partially charged off in 1994. Net
loan recoveries in 1995 of $1.0 million included $2.7 million in recoveries from
a real estate client relationship that had been charged off in 1992 and $1.1
million in recoveries related to a commercial credit that was partially charged
off in 1994. 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 included $6.0 million in gross charge-offs related to real
estate credits.
In general, Management believes the allowance for loan losses is adequate as
of December 31, 1997. 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
which are still accruing interest, loans on nonaccrual status and OREO and other
foreclosed assets. The table below sets forth certain relationships between
nonperforming loans, nonperforming assets and the allowance for loan losses.
There was no difference during 1997, 1996 and 1995 between the Company's
nonaccrual loans and impaired loans. Loans placed on nonaccrual status were
measured by the Company for impairment based on the fair value of the underlying
collateral in accordance with SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan."
DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Nonperforming assets:
Loans past due 90 days or more............................. $ 1,016 $ 8,556 $ 906 $ 444 $ 2,014
Nonaccrual loans (1)....................................... 24,476 14,581 27,867 11,269 43,001
--------- --------- --------- --------- ---------
Total nonperforming loans.................................. 25,492 23,137 28,773 11,713 45,015
OREO and other foreclosed assets (1)....................... 1,858 1,948 4,955 7,089 14,261
--------- --------- --------- --------- ---------
Total nonperforming assets................................. $ 27,350 $ 25,085 $ 33,728 $ 18,802 $ 59,276
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Nonperforming loans as a percent of total loans............ 2.2% 2.7% 3.9% 1.7% 8.0%
OREO and other foreclosed assets as a percent of total
assets................................................... 0.1% 0.1% 0.4% 0.6% 1.4%
Nonperforming assets as a percent of total assets.......... 1.0% 1.3% 2.4% 1.6% 6.0%
Allowance for loan losses.................................. $ 37,700 $ 32,700 $ 29,700 $ 20,000 $ 25,000
As a percent of total loans.............................. 3.2% 3.8% 4.0% 2.8% 4.4%
As a percent of nonaccrual loans......................... 154.0% 224.3% 106.6% 177.5% 58.1%
As a percent of nonperforming loans...................... 147.9% 141.3% 103.2% 170.8% 55.5%
- ------------------------
(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 and $13,824 at December 31, 1994 and 1993, respectively.
The detailed composition of nonaccrual loans is presented in the following
table. There were no real estate construction loans on nonaccrual status at
December 31, 1997 and 1996.
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Commercial.............................................................................. $ 24,127 $ 11,595
Real estate term........................................................................ -- 2,546
Consumer and other...................................................................... 349 440
--------- ---------
Total nonaccrual loans.................................................................. $ 24,476 $ 14,581
--------- ---------
--------- ---------
33
Nonperforming loans totaled $25.5 million at December 31, 1997, an increase
of $2.4 million, or 10.2%, from the $23.1 million total at December 31, 1996, as
a $9.9 million net increase in nonaccrual loans during 1997 was largely offset
by the payoff during the first quarter of 1997 of one credit in excess of $8.0
million that was more than 90 days past due, and still accruing interest, as of
December 31, 1996. The increase in nonaccrual loans at December 31, 1997, from
the prior year end, was largely due to two commercial credits totaling
approximately $14.1 million which were placed on nonaccrual status during the
last half of 1997. Management believes each of these two credits, based on
currently known information, is adequately covered with specific reserves and
collateral.
Nonperforming loans at December 31, 1996 included the aforementioned credit
in excess of $8.0 million that was more than 90 days past due, and still
accruing interest, as of December 31, 1996. The Export-Import Bank of the U.S.
(EX-IM) provided the Bank with a guarantee of this credit facility, and the Bank
received the guarantee payment related to this credit from the EX-IM in the
first quarter of 1997. The $17.1 million increase in nonperforming loans at
December 31, 1995, compared to year-end 1994, was concentrated in two commercial
credits, both of which were paid off during 1996 and 1997. The significant
improvement in nonperforming loans during 1994, compared to the level at the end
of 1993, reflected 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 six loans with principal amounts aggregating approximately $13.7
million, that, on the basis of information known by Management, were judged to
have a higher than normal risk of becoming nonperforming. The Company is not
aware of any other loans where known information about possible problems of the
borrower casts serious doubts about the ability of the borrower to comply with
the loan repayment terms.
OREO and other foreclosed assets totaled a combined $1.9 million at both
December 31, 1997 and 1996. The OREO and other foreclosed assets balance at
December 31, 1997 consisted of two OREO properties and one other asset which was
acquired through foreclosure. The OREO properties each consist of multiple
undeveloped lots and were acquired by the Company prior to June 1993. The OREO
balance, which totaled $0.7 million at the end of 1997, decreased $1.3 million
during 1997 due to the sales of lots related to one of the aforementioned
properties. The one other asset acquired through foreclosure, which totaled $1.2
million at December 31, 1997, consists of a favorable leasehold right under a
master lease which the Company acquired upon foreclosure of a loan during the
third quarter of 1997.
DEPOSITS
The Company's deposits are largely obtained from companies within the
technology and life sciences niche, and, to a lesser extent, from businesses
within the Company's special industry niches and from individuals served by the
Company's Executive Banking Division. 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,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ----------
(DOLLARS IN THOUSANDS)
Noninterest-bearing demand................... $ 788,442 $ 599,257 $ 451,318 $ 401,455 $ 356,806
NOW.......................................... 21,348 8,443 10,956 11,636 14,271
Regular money market......................... 351,921 326,661 288,619 328,115 422,787
Bonus money market........................... 1,146,075 754,730 473,717 245,420 49,642
Time......................................... 124,621 85,213 65,450 88,747 71,453
------------ ------------ ------------ ------------ ----------
Total deposits............................... $ 2,432,407 $ 1,774,304 $ 1,290,060 $ 1,075,373 $ 914,959
------------ ------------ ------------ ------------ ----------
------------ ------------ ------------ ------------ ----------
34
Total deposits were $2.4 billion at December 31, 1997, an increase of $658.1
million, or 37.1%, from the prior year-end total of $1.8 billion. A significant
portion of the increase in deposits during 1997 was concentrated in the
Company's highest-rate paying deposit product, its bonus money market deposit
product, which increased $391.3 million, or 51.9%, and in the Company's
noninterest-bearing demand deposits, which increased $189.2 million, or 31.6%,
from the prior year end. Increased balances during 1997 in all of the Company's
deposit products were explained by high levels of client liquidity attributable
to a strong inflow of investment capital into the venture capital community, and
by growth during 1997 in the number of clients served by the Company.
The aggregate amount of time deposit accounts individually exceeding
$100,000 totaled $110.4 million and $75.0 million at December 31, 1997 and 1996,
respectively. At December 31, 1997, all time deposit accounts exceeding $100,000
were scheduled to mature within one year. 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.
INTEREST RATE RISK MANAGEMENT
A key objective of asset/liability management is to manage interest rate
risk associated with changing asset and liability cash flows and market interest
rate movements. Interest rate risk occurs when interest rate sensitive assets
and liabilities do not reprice simultaneously and in equal volumes. The
asset/liability committee of the Bank (ALCO) provides oversight to the Company's
interest rate risk management process and recommends policy guidelines regarding
exposure to interest rates for approval by the Board of Directors. Adherence to
these policies is monitored on an ongoing basis, and decisions related to the
management of interest rate exposure are made when appropriate and agreed to by
the ALCO.
The Company manages interest rate risk principally through strategies
involving its investment securities portfolio, including adjusting both the
maturity structure of the portfolio and the amount of interest rate sensitive
securities. Company policies also permit the limited use of off-balance sheet
derivative instruments in managing interest rate risk, however, as of December
31, 1997, no such derivative instruments have been utilized by the Company in
connection with its interest rate risk management process.
The Company's monitoring activities related to managing interest rate risk
include both interest rate sensitivity "gap" analysis and the use of a
simulation model. While traditional gap analysis provides a simple picture of
the interest rate risk embedded in the balance sheet, it provides only a static
view of interest rate sensitivity at a specific point in time and does not
measure the potential volatility in forecasted results relating to changes in
market interest rates over time. Accordingly, the Company combines the use of
gap analysis with use of a simulation model which provides a dynamic assessment
of interest rate sensitivity.
The interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets anticipated to reprice within a specific time
period and the amount of funding sources anticipated to reprice within that same
time period. A gap is considered positive when the amount of interest rate
sensitive assets repricing within a specific time period exceeds the amount of
funding sources repricing within that same time period. Positive cumulative gaps
in early time periods suggest that earnings will increase when interest rates
rise. Negative cumulative gaps suggest that earnings will increase when interest
rates fall. 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, 1997 indicates that the Company was positioned
within these guidelines as the cumulative one-year gap as a percentage of
interest-earning assets was 7.4%. The following table illustrates the Company's
interest rate sensitivity gap positions at December 31, 1997.
35
INTEREST RATE SENSITIVITY ANALYSIS AS OF
DECEMBER 31, 1997
ASSETS AND LIABILITIES WHICH MATURE OR REPRICE
-------------------------------------------------------------------------------------------------
AFTER 1 AFTER 3 AFTER 6 AFTER 1
1 DAY TO 1 MONTH TO 3 MONTHS TO 6 MONTHS TO 1 YEAR TO 5 AFTER 5 NOT
IMMEDIATELY MONTH MONTHS MONTHS YEAR YEARS YEARS STATED
----------- ---------- ----------- ----------- ----------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Federal funds sold and
securities purchased
under agreement to
resell (1)............ -- $ 321,773 -- -- -- -- -- --
Investment securities:
U.S. Treasury and
agencies
obligations......... -- 31,773 $ 147,428 $ 89,549 $ 47,219 $ 364,121 -- --
Collateralized
mortgage obligations
and mortgage-backed
securities (2)...... -- 16,855 13,764 17,055 46,645 89,351 $ 1,818 --
Obligations of states
and political
subdivisions........ -- 14 28 17,200 26,004 8,602 8,588 --
Commercial paper and
other debt
securities.......... -- 28,346 42,630 -- -- -- 12,000 --
Other equity
securities (3)...... -- -- -- -- -- -- -- $ 4,914
----------- ---------- ----------- ----------- ----------- ----------- --------- ---------
Total investment
securities............ -- 76,988 203,850 123,804 119,868 462,074 22,406 4,914
----------- ---------- ----------- ----------- ----------- ----------- --------- ---------
Loans (4), (5).......... $ 907,316 5,307 9,271 39,250 21,671 157,370 14,539 19,921
----------- ---------- ----------- ----------- ----------- ----------- --------- ---------
Total Interest-Earning
Assets................ $ 907,316 $ 404,068 $ 213,121 $ 163,054 $ 141,539 $ 619,444 $ 36,945 $ 24,835
----------- ---------- ----------- ----------- ----------- ----------- --------- ---------
----------- ---------- ----------- ----------- ----------- ----------- --------- ---------
FUNDING SOURCES:
Money market and NOW
deposits............ -- $1,519,344 -- -- -- -- -- --
Time deposits......... -- 70,997 $ 30,453 $ 14,251 $ 8,719 $ 168 $ 33 --
----------- ---------- ----------- ----------- ----------- ----------- --------- ---------
Total interest-bearing
deposits.............. -- 1,590,341 30,453 14,251 8,719 168 33 --
Portion of noninterest-
bearing funding
sources............... -- -- -- -- -- -- -- $ 866,357
----------- ---------- ----------- ----------- ----------- ----------- --------- ---------
Total Funding Sources... -- $1,590,341 $ 30,453 $ 14,251 $ 8,719 $ 168 $ 33 $ 866,357
----------- ---------- ----------- ----------- ----------- ----------- --------- ---------
----------- ---------- ----------- ----------- ----------- ----------- --------- ---------
GAP..................... $ 907,316 $(1,186,273) $ 182,668 $ 148,803 $ 132,820 $ 619,276 $ 36,912 $(841,522)
CUMULATIVE GAP.......... $ 907,316 $ (278,957) $ (96,289) $ 52,514 $ 185,334 $ 804,610 $ 841,522 --
TOTAL
---------
INTEREST-EARNING ASSETS:
Federal funds sold and
securities purchased
under agreement to
resell (1)............ $ 321,773
Investment securities:
U.S. Treasury and
agencies
obligations......... 680,090
Collateralized
mortgage obligations
and mortgage-backed
securities (2)...... 185,488
Obligations of states
and political
subdivisions........ 60,436
Commercial paper and
other debt
securities.......... 82,976
Other equity
securities (3)...... 4,914
---------
Total investment
securities............ 1,013,904
---------
Loans (4), (5).......... 1,174,645
---------
Total Interest-Earning
Assets................ $2,510,322
---------
---------
FUNDING SOURCES:
Money market and NOW
deposits............ $1,519,344
Time deposits......... 124,621
---------
Total interest-bearing
deposits.............. 1,643,965
Portion of noninterest-
bearing funding
sources............... 866,357
---------
Total Funding Sources... $2,510,322
---------
---------
GAP..................... --
CUMULATIVE GAP.......... --
- ------------------------------
(1) Includes interest-bearing deposits in other financial institutions of $273
as of December 31, 1997.
(2) Principal cash flows are based on estimated principal payments as of
December 31, 1997.
(3) Not stated column consists of equity securities and Federal Reserve Bank
stock as of December 31, 1997.
(4) Not stated column consists of nonaccrual loans of $24,476 and overdrafts of
$3,454, offset by unearned income of $8,009 as of December 31, 1997.
(5) Maturity/repricing columns for fixed rate loans are based upon the amount
and timing of related principal payments as of December 31, 1997.
36
One application of the aforementioned simulation model involves measurement
of the impact of market interest rate changes on the net present value of
estimated cash flows from the Company's assets, liabilities and off-balance
sheet items, defined as the Company's market value of portfolio equity (MVPE).
This analysis assesses the changes in market values of interest rate sensitive
financial instruments which would occur in response to an instantaneous and
sustained increase or decrease in market interest rates of 100 and 200 basis
points, and the resulting effect on the Company's MVPE. Policy guidelines
establish maximum variances in the Company's MVPE of 20.0% and 30.0% in the
event of an instantaneous and sustained increase or decrease in market interest
rates of 100 and 200 basis points, respectively. At December 31, 1997, the
Company's MVPE exposure related to the aforementioned changes in market interest
rates was within policy guidelines.
The following table presents the Company's MVPE exposure at December 31,
1997 and December 31, 1996 related to an instantaneous and sustained increase or
decrease in market interest rates of 100 and 200 basis points, respectively.
CHANGE IN INTEREST
RATES (BASIS POINTS) ESTIMATED INCREASE/
- ----------------------- (DECREASE) IN MVPE
-----------------------
(DOLLARS IN THOUSANDS) ESTIMATED MVPE AMOUNT PERCENT
---------------- ---------- -----------
December 31, 1997:
+200 $ 173,905 $ (21,298) (10.9)%
+100 184,625 (10,578) (5.4)
-- 195,203 -- --
(100) 206,513 11,310 5.8
(200) 217,811 22,608 11.6
December 31, 1996:
+200 $ 136,370 $ (16,218) (10.6)%
+100 144,184 (8,404) (5.5)
-- 152,588 -- --
(100) 161,636 9,048 5.9
(200) 171,243 18,655 12.2
The preceding table indicates that in the event of an instantaneous and
sustained increase in market interest rates, the Company's MVPE would be
expected to decrease, and that in the event of an instantaneous and sustained
decrease in market interest rates, the Company's MVPE would be expected to
increase.
The market value calculations supporting the results in the preceding table
are based on the present value of estimated cash flows utilizing both market
interest rates provided by independent broker/dealers and other publicly
available sources which the Company deems reliable. These calculations do not
contemplate any changes which the ALCO could make to reduce the Company's MVPE
exposure in response to a change in market interest rates.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the preceding table. For
example, although certain of the Company's assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. In addition, the interest rates on certain
of the Company's asset and liability categories may precede, or lag behind,
changes in market interest rates. Also, the actual rates of prepayments on loans
and investments could vary significantly from the assumptions utilized in
deriving the results as presented in the preceding table. Further, a change in
U.S. Treasury rates accompanied by a change in the shape of the treasury yield
curve could result in different MVPE estimations from those presented herein.
Accordingly, the results in the preceding table should not be relied upon as
indicative of
37
actual results in the event of changing market interest rates. Additionally, the
resulting MVPE estimates are not intended to represent, and should not be
construed to represent, the underlying value of the Company.
The simulation model also provides the ALCO with the ability to simulate the
Company's net interest income using either one interest rate forecast (simple
simulation) or a forecast of multiple interest rate scenarios (stochastic
simulation). In order to measure, as of December 31, 1997, 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 market interest rate
forecast derived from the treasury yield curve. For the rising and falling
interest rate scenarios, the base market interest rate forecast was increased or
decreased, as applicable, by 200 basis points in 12 equal increments over a
one-year period. Company policy guidelines provide that the difference between a
base market interest rate forecast scenario over the succeeding one-year period
compared with the aforementioned rising and falling interest rate scenarios over
the same time period should not result in net interest income sensitivity
exceeding 20.0%. Simulations as of December 31, 1997 indicated the Company was
well within these policy guidelines.
Interest rate risk is the most significant market risk impacting the
Company. Other types of market risk affecting the Company in the normal course
of its business activities include foreign currency exchange risk and equity
price risk. The impact on the Company, resulting from these latter two market
risks, is deemed immaterial and no separate quantitative information concerning
market rate and price exposure is presented herein. The Company does not
maintain a portfolio of trading securities and does not intend to engage in such
activities in the immediate future.
LIQUIDITY
Another important objective of asset/liability management is to manage
liquidity. The objective of liquidity management is to ensure that funds are
available in a timely manner to meet loan demand and depositors' needs, and to
service other liabilities as they come due, without causing an undue amount of
cost or risk, and without causing a disruption to normal operating conditions.
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 by the Company, 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, 1997, the Bank's ratio of
liquid assets to total deposits was 52.1%. This ratio is well in excess of the
Bank's minimum policy guidelines and is slightly higher than the comparable
ratio of 47.3% as of December 31, 1996. 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, 1997 and
1996, the Bank was in compliance with all of these policy measures.
38
In analyzing the Company's liquidity during 1997, reference is made to the
Company's consolidated statement of cash flows for the year ended December 31,
1997 (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 $27.7 million
for 1997, 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 $382.5 million, and the net change in total loans resulting from loan
originations and principal collections, which resulted in a net cash outflow of
$323.9 million in 1997. Financing activities reflected the net change in the
Company's total deposits, which increased $658.1 million during 1997, and
included $4.8 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 outflow of $6.3 million for 1997 and total cash and cash
equivalents, as defined in the Company's consolidated statement of cash flows,
of $426.8 million at December 31, 1997.
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 the
issuance of common stock under the Company's employee benefit plans, including
the Company's stock option plans, defined contribution plans and employee stock
purchase plan.
Shareholders' equity was $174.5 million at December 31, 1997, an increase of
$39.1 million, or 28.9%, from the $135.4 million balance at December 31, 1996.
This increase was due to both 1997 net income of $27.7 million and $11.4 million
in net capital generated during 1997 primarily through the Company's employee
benefit plans. The Company has not paid a cash dividend on its common stock
since 1992, and does not have any material commitments for capital expenditures
as of December 31, 1997.
The table below presents the relationship between the following significant
financial ratios:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Return on average assets.......................................................... 1.3% 1.4% 1.6%
DIVIDED BY
Average equity as a percentage of average assets.................................. 7.1% 7.6% 7.9%
EQUALS
Return on average equity.......................................................... 18.2% 17.9% 19.8%
TIMES
Earnings retained................................................................. 100.0% 100.0% 100.0%
EQUALS
Internal capital growth........................................................... 18.2% 17.9% 19.8%
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 ratio and Tier 1 risk-based capital ratio requirements are
10.0% and 6.0%, respectively, of risk-weighted assets and certain off-balance
sheet items for a well capitalized depository institution.
The Federal Reserve Board has also established minimum capital leverage
ratio guidelines for state member banks. The ratio is determined using Tier 1
capital divided by quarterly average total assets. The guidelines require a
minimum of 5.0% for a well capitalized depository institution.
39
The Company's and the Bank's capital ratios were in excess of regulatory
guidelines for a well capitalized depository institution as of December 31,
1997, 1996 and 1995. Capital ratios for the Company are set forth below:
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Total risk-based capital ratio....................................................... 11.5% 11.5% 11.9%
Tier 1 risk-based capital ratio...................................................... 10.2% 10.2% 10.6%
Tier 1 leverage ratio................................................................ 7.1% 7.7% 8.0%
The Company's total risk-based capital ratio and Tier 1 risk-based capital
ratio at the end of 1997 were unchanged from the prior year end, as growth in
Tier 1 capital was offset by an increase in total assets. This increase in total
assets was largely in lower risk-weighted categories and resulted from the
Company's strong deposit growth exceeding its loan growth during 1997. The
decrease in the Company's Tier 1 leverage ratio from December 31, 1996 to
December 31, 1997 was primarily attributable to an increase in average total
assets due to the aforementioned strong growth in deposits during 1997. 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
which was attributable to strong deposit growth. See "Item 8. Financial
Statements and Supplementary Data--Note 15 to the Consolidated Financial
Statements--Regulatory Matters" for the Bank's capital ratios at December 31,
1997 and 1996.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
[LOGO]
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, 1997 and
1996, 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, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP San Jose,
California
January 15, 1998
41
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks............................................................... $ 105,059 $ 122,836
Federal funds sold and securities purchased under agreement to resell................. 321,773 310,341
Investment securities, at fair value.................................................. 1,013,904 625,022
Loans, net of unearned income......................................................... 1,174,645 863,492
Allowance for loan losses............................................................. (37,700) (32,700)
------------ ------------
Net loans............................................................................. 1,136,945 830,792
Premises and equipment................................................................ 4,460 4,155
Other real estate owned............................................................... 689 1,948
Accrued interest receivable and other assets.......................................... 42,293 29,450
------------ ------------
Total assets.......................................................................... $ 2,625,123 $ 1,924,544
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand.......................................................... $ 788,442 $ 599,257
NOW................................................................................. 21,348 8,443
Money market........................................................................ 1,497,996 1,081,391
Time................................................................................ 124,621 85,213
------------ ------------
Total deposits........................................................................ 2,432,407 1,774,304
Other liabilities..................................................................... 18,235 14,840
------------ ------------
Total liabilities..................................................................... 2,450,642 1,789,144
------------ ------------
Shareholders' Equity:
Preferred stock, no par value:
20,000,000 shares authorized; none outstanding
Common stock, no par value:
30,000,000 shares authorized; 9,970,237 and 9,329,993 shares outstanding at December
31, 1997 and 1996, respectively................................................... 83,009 65,968
Retained earnings..................................................................... 94,999 67,321
Net unrealized gain on available-for-sale investments................................. 2,419 2,456
Unearned compensation................................................................. (5,946) (345)
------------ ------------
Total shareholders' equity............................................................ 174,481 135,400
------------ ------------
Total liabilities and shareholders' equity............................................ $ 2,625,123 $ 1,924,544
------------ ------------
------------ ------------
See notes to consolidated financial statements.
42
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Interest income:
Loans...................................................................... $ 106,840 $ 87,893 $ 79,767
Investment securities...................................................... 41,868 24,074 10,439
Federal funds sold and securities purchased under agreement to resell...... 17,264 13,106 11,041
---------- ---------- ----------
Total interest income........................................................ 165,972 125,073 101,247
---------- ---------- ----------
Interest expense:
Deposits................................................................... 55,148 37,796 27,293
Other borrowings........................................................... -- 2 2
---------- ---------- ----------
Total interest expense....................................................... 55,148 37,798 27,295
---------- ---------- ----------
Net interest income.......................................................... 110,824 87,275 73,952
Provision for loan losses.................................................... 10,067 10,426 8,737
---------- ---------- ----------
Net interest income after provision for loan losses.......................... 100,757 76,849 65,215
---------- ---------- ----------
Noninterest income:
Disposition of client warrants............................................. 5,480 5,389 8,205
Letter of credit and foreign exchange income............................... 4,512 3,423 3,007
Deposit service charges.................................................... 1,772 1,663 1,402
Investment gains (losses).................................................. 90 1 (768)
Other...................................................................... 1,411 1,133 719
---------- ---------- ----------
Total noninterest income..................................................... 13,265 11,609 12,565
---------- ---------- ----------
Noninterest expense:
Compensation and benefits.................................................. 40,084 31,417 27,161
Professional services...................................................... 6,710 4,987 5,160
Business development and travel............................................ 4,514 2,918 1,982
Furniture and equipment.................................................... 3,620 3,239 3,235
Net occupancy expense...................................................... 3,410 3,095 3,616
Postage and supplies....................................................... 1,600 1,448 1,191
Advertising and promotion.................................................. 1,448 1,183 613
Telephone.................................................................. 1,444 1,277 1,006
Cost of other real estate owned............................................ 76 398 (12)
Other...................................................................... 3,395 2,720 3,973
---------- ---------- ----------
Total noninterest expense.................................................... 66,301 52,682 47,925
---------- ---------- ----------
Income before income tax expense............................................. 47,721 35,776 29,855
Income tax expense........................................................... 20,043 14,310 11,702
---------- ---------- ----------
Net income................................................................... $ 27,678 $ 21,466 $ 18,153
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share..................................................... $ 2.86 $ 2.33 $ 2.08
Diluted earnings per share................................................... $ 2.72 $ 2.21 $ 1.98
---------- ---------- ----------
---------- ---------- ----------
See notes to consolidated financial statements.
43
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
---------------------------------------------------------------------------
COMMON STOCK UNREALIZED
--------------------- RETAINED GAIN (LOSS) ON UNEARNED
SHARES AMOUNT EARNINGS INVESTMENTS COMPENSATION TOTAL
---------- --------- --------- -------------- ------------- ----------
(DOLLARS IN THOUSANDS)
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
---------- --------- --------- ------- ------------- ----------
Common stock issued under employee benefit
plans.................................... 640,244 12,891 -- -- (6,416) 6,475
Income tax benefit from stock options
exercised and vesting of restricted
stock.................................... -- 4,150 -- -- -- 4,150
Net income................................. -- -- 27,678 -- -- 27,678
Net change in unrealized gain (loss) on
available-for-sale investments........... -- -- -- (37) -- (37)
Amortization of unearned compensation...... -- -- -- -- 815 815
---------- --------- --------- ------- ------------- ----------
Balance at December 31, 1997............... 9,970,237 $ 83,009 $ 94,999 $ 2,419 $ (5,946) $ 174,481
---------- --------- --------- ------- ------------- ----------
---------- --------- --------- ------- ------------- ----------
See notes to consolidated financial statements.
44
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
----------- ----------- ----------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income.............................................................. $ 27,678 $ 21,466 $ 18,153
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses............................................. 10,067 10,426 8,737
Provision for other real estate owned................................. -- 550 --
Depreciation and amortization......................................... 1,334 1,183 1,944
Net (gain) loss on sales of investment securities..................... (90) (1) 768
Net (gain) loss on disposals of premises and equipment................ (4) -- 1,117
Net gain on sales of other real estate owned.......................... (45) (416) (271)
Deferred income tax benefit........................................... (1,358) (2,834) (3,864)
Increase in unearned income........................................... 2,351 1,845 159
Increase in accrued interest receivable............................... (7,519) (3,586) (102)
Other, net............................................................ 969 (576) 1,638
----------- ----------- ----------
Net cash provided by operating activities................................. 33,383 28,057 28,279
----------- ----------- ----------
Cash flows from investing activities:
Proceeds from maturities and paydowns of investment securities.......... 1,149,471 1,000,558 201,291
Proceeds from sales of investment securities............................ 139,451 21,277 33,463
Purchases of investment securities...................................... (1,671,449) (1,313,637) (390,770)
Net increase in loans................................................... (323,909) (136,660) (40,121)
Proceeds from recoveries of charged off loans........................... 4,169 2,302 5,921
Net proceeds from sales of other real estate owned...................... 1,304 2,873 2,837
Purchases of premises and equipment..................................... (1,691) (641) (5,561)
----------- ----------- ----------
Net cash applied to investing activities.................................. (702,654) (423,928) (192,940)
----------- ----------- ----------
Cash flows from financing activities:
Net increase in deposits................................................ 658,103 484,244 214,687
Proceeds from issuance of common stock, net of issuance costs........... 4,823 2,479 2,450
----------- ----------- ----------
Net cash provided by financing activities................................. 662,926 486,723 217,137
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents...................... (6,345) 90,852 52,476
Cash and cash equivalents at January 1,................................... 433,177 342,325 289,849
----------- ----------- ----------
Cash and cash equivalents at December 31,................................. $ 426,832 $ 433,177 $ 342,325
----------- ----------- ----------
----------- ----------- ----------
Supplemental disclosures:
Interest paid........................................................... $ 54,891 $ 37,737 $ 27,239
Income taxes paid....................................................... $ 19,772 $ 16,775 $ 14,677
Non-cash investing activities:
Transfer of loans to other real estate owned and other foreclosed
assets................................................................ $ 1,169 $ -- $ 408
Transfer of investment securities from held-to-maturity to
available-for-sale.................................................... $ -- $ -- $ 6,196
----------- ----------- ----------
----------- ----------- ----------
See notes to consolidated financial statements.
45
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of 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 1996 and 1995 consolidated financial statements to conform to the 1997
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, a California-chartered bank with headquarters in Santa Clara,
California. The Bank maintains regional banking offices in California, and
additionally has loan offices in Arizona, Colorado, Georgia, Illinois, 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 $273,000 and $341,000 at December 31, 1997
and 1996, respectively.
46
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVESTMENT SECURITIES
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," investment securities are classified as either
"available-for-sale," "held-to-maturity" or "trading" upon acquisition.
Securities that are held to meet investment objectives such as interest rate
risk and liquidity management, but which may be sold by the Company as needed to
implement Management strategies, are classified as available-for-sale and are
accounted for at fair value. 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.
Securities acquired with the ability and positive intent to hold to maturity
are classified as held-to-maturity and are accounted for at historical cost,
adjusted for the amortization of premiums or the accretion of discounts to
maturity, where appropriate. Unrealized losses on held-to-maturity securities
are realized and charged against earnings when it is determined that an other
than temporary decline in value has occurred.
Securities acquired and held principally for the purpose of sale in the near
term are classified as trading and are accounted for at fair value. Unrealized
gains and losses resulting from fair value adjustments on trading securities, as
well as gains and losses realized upon the sale of investment securities, are
included in noninterest income.
The amortization of premiums and the accretion of discounts are included in
interest income over the contractual terms of the underlying investment
securities using the interest method or the straight-line method, if not
materially different. Gains and losses realized upon the sale of investment
securities are computed on the specific identification method.
LOANS
Loans are reported at the principal amount outstanding, net of unearned
income. Unearned income includes both deferred loan origination and commitment
fees and costs. The net amount of unearned income is amortized into loan
interest income over the contractual terms of the underlying loans and
commitments using the interest method or the straight-line method, if not
materially different.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision charged to
expense. It is the Company's policy to charge off loans which, in the judgment
of Management, are deemed to have a substantial risk of loss.
The allowance for loan losses is maintained at a level deemed adequate by
the Company, based upon various estimates and judgments, to provide for known
and inherent risks in the loan portfolio, including loan commitments. The
evaluation of the adequacy of the allowance for loan losses is based upon a
continuous review of a number of factors, including historical loss experience,
a review of specific loans, loan concentrations, prevailing and anticipated
economic conditions that may impact the borrowers' abilities to repay loans as
well as the value of underlying collateral, delinquency analysis, and an
assessment of credit risk in the loan portfolio established through an ongoing
credit review process by the Company and through periodic regulatory
examinations.
47
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NONACCRUAL LOANS
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition
and Disclosures" require the Company to measure impairment of a loan based upon
the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, the Company may
measure impairment based on the loan's observable market price or the fair value
of the collateral if the loan is collateral-dependent. A loan is considered
impaired when, based upon currently known information, it is deemed probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the agreement.
Loans are placed on nonaccrual status when they become 90 days past due as
to principal or interest payments (unless the principal and interest are well
secured and in the process of collection), when the Company has determined,
based upon currently known information, that the timely collection of principal
or interest is doubtful, or when the loans otherwise become impaired under the
provisions of SFAS No. 114.
When a loan is placed on nonaccrual status, the accrued interest is reversed
against interest income and the loan is accounted for on the cash or cost
recovery method thereafter until qualifying for return to accrual status.
Generally, a loan will be returned to accrual status when all delinquent
principal and interest become current in accordance with the terms of the loan
agreement and full collection of the principal appears probable.
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, 1997 and 1996.
OTHER REAL ESTATE OWNED
Loans secured by real estate are transferred to OREO at the time of
foreclosure. OREO is carried on the Company's balance sheet at the lower of the
recorded investment in the loan or the fair value of the property foreclosed
upon less estimated costs of disposal. Upon transfer of a loan to OREO, an
appraisal is obtained and any excess of the loan balance over the fair value of
the property less estimated costs of disposal is charged against the allowance
for loan losses. Revenues and expenses associated with OREO, and subsequent
adjustments to the fair value of the property and to the estimated costs of
disposal, are realized and reported as a component of noninterest expense when
incurred.
FOREIGN EXCHANGE FORWARD CONTRACTS
The Company enters into foreign exchange forward contracts with customers
involved in international trade finance activities, and enters into offsetting
foreign exchange forward contracts with correspondent banks to hedge against the
risk of fluctuations in foreign currency exchange rates related to the forward
contracts entered into with its customers. The notional, or contract, amounts
associated with these financial instruments are not recorded as assets or
liabilities in the Company's consolidated balance sheets. Fees on these foreign
exchange forward contracts are included in noninterest income when the contracts
are settled. Cash flows resulting from these financial instruments are
classified in the same category as the
48
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
STOCK-BASED COMPENSATION
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 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.
EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS
No. 128 establishes standards for computing and reporting EPS and applies to
entities with publicly held common stock or financial instruments that are
potentially convertible into publicly held common stock. This statement
supersedes APB Opinion No. 15, "Earnings per Share." The presentation of primary
EPS, as required by APB Opinion No. 15, is replaced with a presentation of basic
EPS, which is defined in SFAS No. 128. In addition, dual presentation of basic
EPS and diluted EPS, as defined in SFAS No. 128, is required on the face of the
income statement for all entities that have complex capital structures.
Disclosure of a reconciliation between basic EPS and diluted EPS is also
required.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
financial instruments or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed similarly to
the fully diluted EPS computation required by APB Opinion No. 15. The Company
adopted SFAS No. 128 effective December 31, 1997. See "Note 2
49
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to the Consolidated Financial Statements--Earnings Per Share" for the disclosure
of the reconciliations between basic EPS and diluted EPS for the years ended
December 31, 1997, 1996 and 1995.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for all entities for reporting
comprehensive income and its components in financial statements. This statement
requires that all items which are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income is equal to net income plus the change in
"other comprehensive income," as defined by SFAS No. 130. The only component of
other comprehensive income currently applicable to the Company is the net
unrealized gain or loss on available-for-sale investments. SFAS No. 130 requires
that an entity: (a) classify items of other comprehensive income by their nature
in a financial statement, and (b) report the accumulated balance of other
comprehensive income separately from common stock and retained earnings in the
equity section of the balance sheet. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
publicly held entities to follow in reporting information about operating
segments in annual financial statements and requires that those entities also
report selected information about operating segments in interim financial
statements. This statement also establishes standards for related disclosures
about products and services, geographic areas and major customers. This
statement is effective for financial statements issued for periods beginning
after December 15, 1997.
50
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. EARNINGS PER SHARE
The following is a reconciliation of basic EPS to diluted EPS for the years
ended December 31, 1997, 1996 and 1995:
YEARS ENDED DECEMBER 31, 1997,
1996 AND 1995
---------------------------------
NET PER SHARE
INCOME SHARES AMOUNT
--------- --------- -----------
(DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
1997:
Basic EPS:
Income available to common shareholders........................................... $ 27,678 9,685 $ 2.86
Effect of Dilutive Securities:
Stock options and restricted stock................................................ -- 484 --
--------- --------- -----
Diluted EPS:
Income available to common shareholders plus assumed conversions.................. $ 27,678 10,169 $ 2.72
--------- --------- -----
--------- --------- -----
1996:
Basic EPS:
Income available to common shareholders........................................... $ 21,466 9,213 $ 2.33
Effect of Dilutive Securities:
Stock options and restricted stock................................................ -- 478 --
--------- --------- -----
Diluted EPS:
Income available to common shareholders plus assumed conversions.................. $ 21,466 9,691 $ 2.21
--------- --------- -----
--------- --------- -----
1995:
Basic EPS:
Income available to common shareholders........................................... $ 18,153 8,747 $ 2.08
Effect of Dilutive Securities:
Stock options and restricted stock................................................ -- 397 --
--------- --------- -----
Diluted EPS:
Income available to common shareholders plus assumed conversions.................. $ 18,153 9,144 $ 1.98
--------- --------- -----
--------- --------- -----
51
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RESTRICTIONS ON CASH BALANCES
The Bank is required to maintain reserves against customer deposits by
keeping balances with the Federal Reserve Bank of San Francisco in a
noninterest-bearing cash account. The minimum required reserve amounts were $7.2
million and $46.0 million at December 31, 1997 and 1996, respectively. The
decrease in the minimum required reserve amount at the end of 1997, compared to
the prior year end, was due to a decrease in the amount of reservable customer
deposits. The average required reserve balance totaled $31.5 million in 1997 and
$33.6 million in 1996.
4. SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Securities purchased under agreement to resell outstanding at December 31,
1997 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 $130.0 million in
1997, and the maximum amount outstanding at any month-end during 1997 was $130.0
million.
5. INVESTMENT SECURITIES
All investment securities were classified as available-for-sale at December
31, 1997 and 1996. The Company did not maintain a trading portfolio during 1997
or 1996. The following tables detail the major components of the Company's
investment securities portfolio at December 31, 1997 and 1996.
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
Available-for-sale securities:
U.S. Treasury securities..................................... $ 216,231 $ 1,488 $ (34) $ 217,685
U.S. agencies and corporations:
Discount notes and bonds................................... 461,659 889 (143) 462,405
Mortgage-backed securities................................. 143,834 666 (63) 144,437
Collateralized mortgage obligations........................ 40,974 101 (24) 41,051
Obligations of states and political subdivisions............. 60,108 380 (52) 60,436
Commercial paper............................................. 41,829 -- -- 41,829
Bankers' acceptances......................................... 16,140 -- -- 16,140
Other debt securities........................................ 24,996 14 (3) 25,007
Other equity securities...................................... 4,033 881 -- 4,914
------------ ----------- ----- ------------
Total.................................................... $ 1,009,804 $ 4,419 $ (319) $ 1,013,904
------------ ----------- ----- ------------
------------ ----------- ----- ------------
52
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
Available-for-sale securities:
U.S. Treasury securities......................................... $ 75,090 $ 619 $ (162) $ 75,547
U.S. agencies and corporations:
Discount notes and bonds....................................... 298,305 909 (726) 298,488
Collateralized mortgage obligations............................ 58,386 1 (349) 58,038
Mortgage-backed securities..................................... 8,469 -- (301) 8,168
Commercial paper................................................. 143,086 -- -- 143,086
Obligations of states and political subdivisions................. 22,528 274 (15) 22,787
Other debt securities............................................ 13,000 -- -- 13,000
Other equity securities.......................................... 1,996 3,912 -- 5,908
---------- ----------- ----------- ----------
Total.......................................................... $ 620,860 $ 5,715 $ (1,553) $ 625,022
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
The amortized cost and fair value of investment securities classified as
available-for-sale at December 31, 1997, categorized by remaining contractual
maturity, are shown below. Expected remaining maturities of 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, 1997
--------------------------
AMORTIZED
COST FAIR VALUE
------------ ------------
(DOLLARS IN THOUSANDS)
Due in one year or less............................................................... $ 428,784 $ 428,739
Due after one year through five years................................................. 370,988 373,380
Due after five years through ten years................................................ 49,187 49,423
Due after ten years................................................................... 160,845 162,362
------------ ------------
Total............................................................................... $ 1,009,804 $ 1,013,904
------------ ------------
------------ ------------
Investment securities with a fair value of $21.7 million and $46.3 million
at December 31, 1997 and 1996, respectively, were pledged to secure certain
public deposits and a line of credit at the Federal Reserve Bank of San
Francisco discount window.
Sales of available-for-sale investment securities resulted in the Company
realizing gross gains of $162,000, $1,000 and $6,000, and gross losses of
$72,000, $200 and $774,000 in 1997, 1996 and 1995, respectively.
53
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The detailed composition of loans, net of unearned income of $8.0 million
and $5.7 million at December 31, 1997 and 1996, respectively, is presented in
the following table:
DECEMBER 31,
------------------------
1997 1996
------------ ----------
(DOLLARS IN THOUSANDS)
Commercial.............................................................................. $ 1,051,218 $ 755,699
Real estate construction................................................................ 53,583 27,540
Real estate term........................................................................ 33,395 44,475
Consumer and other...................................................................... 36,449 35,778
------------ ----------
Total loans............................................................................. $ 1,174,645 $ 863,492
------------ ----------
------------ ----------
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. As of December 31, 1997, no particular industry
sector (as identified by Standard Industrial Codes) represented more than 10.0%
of the Company's loan portfolio.
The activity in the allowance for loan losses is summarized below:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Balance at January 1,............................................................ $ 32,700 $ 29,700 $ 20,000
Provision for loan losses........................................................ 10,067 10,426 8,737
Loans charged off................................................................ (9,236) (9,728) (4,958)
Recoveries....................................................................... 4,169 2,302 5,921
--------- --------- ---------
Balance at December 31,.......................................................... $ 37,700 $ 32,700 $ 29,700
--------- --------- ---------
--------- --------- ---------
The aggregate recorded investment in loans for which impairment has been
determined in accordance with SFAS No. 114 totaled $24.5 million and $14.6
million at December 31, 1997 and 1996, respectively. Allocations of the
allowance for loan losses related to impaired loans totaled $15.9 million at
December 31, 1997 and $5.2 million at December 31, 1996. Average impaired loans
for 1997 and 1996 totaled $19.7 million and $22.9 million, respectively. If
these loans had not been impaired, $1.1 million and $1.6 million in interest
income would have been realized during the years ended December 31, 1997 and
1996, respectively. The Company realized no interest income on such impaired
loans during 1997 or 1996.
54
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Cost:
Furniture and equipment................................................................. $ 5,549 $ 4,205
Leasehold improvements.................................................................. 3,352 3,066
--------- ---------
Total cost................................................................................ 8,901 7,271
Accumulated depreciation and amortization................................................. (4,441) (3,116)
--------- ---------
Premises and equipment--net............................................................... $ 4,460 $ 4,155
--------- ---------
--------- ---------
The Company is obligated under a number of noncancelable operating leases
for premises which expire at various dates through May 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 noncancelable operating leases:
YEARS ENDING DECEMBER 31,
-------------------------
(DOLLARS IN THOUSANDS)
1998................................................................................... $ 2,873
1999................................................................................... 3,153
2000................................................................................... 2,996
2001................................................................................... 2,812
2002................................................................................... 2,617
After 2002............................................................................. 5,799
-------
Total.................................................................................. $ 20,250
-------
-------
Rent expense for premises leased under operating leases totaled $2.0
million, $1.9 million and $2.0 million for the years ended December 31, 1997,
1996 and 1995, respectively.
8. DEPOSITS
The aggregate amount of time deposit accounts individually exceeding
$100,000 totaled $110.4 million and $75.0 million at December 31, 1997 and 1996,
respectively. At December 31, 1997, all time deposit accounts exceeding $100,000
were scheduled to mature within one year.
55
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The components of the Company's provision for income taxes consist of the
following:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Current provision:
Federal........................................................................ $ 16,287 $ 12,425 $ 12,137
State.......................................................................... 5,114 4,719 3,429
Deferred benefit:
Federal........................................................................ (1,328) (1,770) (3,383)
State.......................................................................... (30) (1,064) (481)
--------- --------- ---------
Income tax expense............................................................... $ 20,043 $ 14,310 $ 11,702
--------- --------- ---------
--------- --------- ---------
A reconciliation between the federal statutory income tax rate and the
Company's effective income tax rate is shown below.
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Federal statutory income tax rate........................................................ 35.0% 35.0% 35.0%
State income taxes, net of the federal tax effect........................................ 6.9 6.6 6.4
Tax-exempt interest income............................................................... (1.1) (0.4) (0.5)
Other--net............................................................................... 1.2 (1.2) (1.7)
--------- --------- ---------
Effective income tax rate................................................................ 42.0% 40.0% 39.2%
--------- --------- ---------
--------- --------- ---------
Deferred tax assets (liabilities) consist of the following:
YEARS ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Deferred tax assets:
Allowance for loan losses.............................................................. $ 14,813 $ 12,955
Other reserves not currently deductible................................................ 2,812 3,158
State income taxes..................................................................... 1,450 1,608
Depreciation and amortization.......................................................... 985 768
--------- ---------
Gross deferred tax assets................................................................ 20,060 18,489
Deferred tax liabilities:
Other deferred tax liabilities......................................................... (306) (93)
Net unrealized gain on available-for-sale investments.................................. (1,681) (1,706)
--------- ---------
Gross deferred tax liabilities........................................................... (1,987) (1,799)
--------- ---------
Net deferred tax assets.................................................................. $ 18,073 $ 16,690
--------- ---------
--------- ---------
56
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
10. EMPLOYEE BENEFIT PLANS
The Silicon Valley Bank 401(k) and Employee Stock Ownership Plan (the
"plan") is a combined 401(k) tax-deferred savings plan and employee stock
ownership plan (ESOP) in which all employees of the Company are eligible to
participate.
Employees participating in the 401(k) component of the plan may elect to
have a portion of their salary deferred and contributed to the plan. The amount
of salary deferred is not subject to federal or state income taxes at the time
of deferral. The Company matches up to $1,000 of an employee's contributions in
any plan year, with the Company's matching contribution vesting in equal annual
increments over five years. The Company's matching 401(k) contributions totaled
$0.4 million in 1997 and $0.3 million in both 1996 and 1995.
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 $0.9 million in 1997 and $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
Company's common stock, in an amount not exceeding 10.0% of the eligible
employee's base salary earned in the fiscal year, less IRC Section 401(k) and
Section 125 deferrals. The ESOP contributions vest in equal annual increments
over five years. The Company's contributions to the ESOP totaled $1.7 million,
$1.4 million and $1.5 million for 1997, 1996 and 1995, respectively. At December
31, 1997, the ESOP owned 437,931 equivalent shares of the Company's common
stock. All shares held by the ESOP are treated as outstanding shares in both the
Company's basic and diluted earnings per share computations.
The Company maintains an employee stock purchase plan (ESPP) under which
participating employees may annually contribute up to 10.0% of their gross
compensation to purchase shares of the Company's common stock at 85.0% 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 to the employees and
results in no expense to the Company. For the first six-month offering period of
1997, 20,908 shares of the Company's common stock were issued under the ESPP at
$27.41 per share, while 15,137 shares of the Company's common stock were issued
at $38.46 per share for the second six-month offering period of 1997. At
December 31, 1997, 94,769 shares of the Company's common stock were reserved for
future issuance under the ESPP.
In April 1997, the Company's shareholders approved the 1997 Equity Incentive
Plan (the "1997 Plan"). The 1997 Plan, along with the Company's 1983 and 1989
stock option plans, provides for the
57
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
granting of incentive and non-qualified stock options which entitle directors,
employees and certain other parties to purchase shares of the Company's common
stock at a price not less than 100% and 85% of the fair market value of the
common stock on the date the option is granted for incentive and non-qualified
stock options, respectively. Options may vest over various periods not in excess
of five years from the date of grant and expire five to ten years from the date
of grant. The following table provides stock option information related to the
1983 and 1989 stock option plans and the 1997 Plan:
1997 1996 1995
----------------------- ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ---------- ----------- ---------- -----------
Outstanding at January 1,................ 1,034,355 $ 12.50 1,116,202 $ 10.29 996,001 $ 8.15
Granted................................ 414,000 34.16 143,477 24.56 372,093 14.39
Exercised.............................. (459,356) 8.65 (215,239) 9.07 (222,811) 7.48
Forfeited.............................. (36,445) 23.72 (10,085) 12.44 (29,081) 10.41
---------- ----------- ---------- ----------- ---------- -----------
Outstanding at December 31,.............. 952,554 $ 23.35 1,034,355 $ 12.50 1,116,202 $ 10.29
---------- ----------- ---------- ----------- ---------- -----------
---------- ----------- ---------- ----------- ---------- -----------
Exercisable at December 31,.............. 420,959 $ 16.13 666,096 $ 11.14 580,358 $ 8.05
---------- ----------- ---------- ----------- ---------- -----------
---------- ----------- ---------- ----------- ---------- -----------
The following table summarizes information about stock options outstanding
as of December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------
WEIGHTED- AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGES OF NUMBER CONTRACTUAL LIFE IN EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING YEARS PRICE EXERCISABLE PRICE
- ----------------------------------------------- ----------- ------------------- ----------- ----------- -----------
$ 5.62 - $ 9.50................................ 92,041 0.46 $ 8.72 92,041 $ 8.72
9.88 - 12.75................................ 66,486 1.18 10.22 66,486 10.22
13.63 - 13.63................................ 134,150 2.06 13.63 77,885 13.63
14.13 - 23.00................................ 131,400 2.85 15.98 51,210 15.49
24.25 - 31.25................................ 129,977 3.39 24.69 110,837 24.47
33.00 - 33.00................................ 358,000 9.02 33.00 22,500 33.00
38.50 - 55.38................................ 40,500 8.53 44.62 -- --
----------- --- ----------- ----------- -----------
$ 5.62 - $55.38................................ 952,554 5.03 $ 23.35 420,959 $ 16.13
----------- --- ----------- ----------- -----------
----------- --- ----------- ----------- -----------
At December 31, 1997, options for 421,200 and 14,691 shares were available
for future grant under the Company's 1997 Plan and 1989 stock option plan,
respectively. There were no shares available for future grant under the
Company's 1983 stock option plan.
The Company's 1989 stock option plan and 1997 Plan also provide for the
granting of shares of the Company's common stock to directors, employees and
certain other parties. Shares granted to employees under these plans may be
subject to certain vesting requirements and resale restrictions (restricted
stock). For restricted stock, unearned compensation equivalent to the market
value of the Company's common stock on the date of grant is charged to
shareholders' equity and amortized into noninterest expense over the vesting
term. In 1997, 110,300 shares of restricted stock were issued to employees at a
weighted-average fair value of $55.91 per share. In 1996, 17,500 shares of
restricted stock were issued to employees
58
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
at a weighted-average fair value of $23.46 per share. There were no restricted
stock grants in 1995. At December 31, 1997, there were 133,134 shares of
restricted stock outstanding, and the vesting of these shares occurs at various
periods through the year 2001.
The Company recognized $0.8 million, $0.1 million and $0.5 million in
employee stock-based compensation costs resulting from the amortization of
unearned compensation related to restricted stock, stock options and other
miscellaneous employee stock awards during 1997, 1996 and 1995, 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
1997, 1996 and 1995. The weighted-average fair values of options granted to
employees, directors and certain other parties were $16.32, $10.83 and $6.70 per
share in 1997, 1996 and 1995, respectively. Had compensation cost related to
both the Company's stock option awards to employees and directors and to the
ESPP been determined under the fair value method prescribed under SFAS No. 123,
the Company's net income, basic earnings per share and diluted earnings per
share would have been the pro forma amounts indicated below.
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net income:
As reported.................................................................... $ 27,678 $ 21,466 $ 18,153
Pro forma (1).................................................................. 24,892 20,465 17,189
Basic earnings per share:
As reported.................................................................... $ 2.86 $ 2.33 $ 2.08
Pro forma (1).................................................................. 2.57 2.22 1.97
Diluted earnings per share:
As reported.................................................................... $ 2.72 $ 2.21 $ 1.98
Pro forma (1).................................................................. 2.47 2.12 1.90
- ------------------------
(1) The pro forma amounts noted above only reflect the effects of
stock-based compensation grants made after 1994. Because stock options are
granted each year and vest over various periods, these pro forma amounts may not
reflect the full effect of applying the fair value method established by SFAS
No. 123 that would be expected if all outstanding stock option grants were
accounted for under this method.
59
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of the stock option grants in 1997, 1996 and 1995 used in
determining the pro forma net income and the basic and diluted earnings per
share amounts indicated above were estimated using the Black-Scholes
option-pricing model with the following assumptions:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Dividend yield........................................................................... --% --% --%
Expected life of options in years........................................................ 5 4 4
Expected volatility of the Company's underlying common stock............................. 44.69% 47.53% 51.08%
Expected risk-free interest rate......................................................... 6.29% 6.05% 6.29%
The expected volatility of the Company's underlying common stock and the
expected risk-free interest rate were calculated using a term commensurate with
the expected life of the options.
Compensation expense related to the ESPP in 1997, 1996 and 1995, used in
determining the pro forma net income and basic and diluted earnings per share
amounts indicated above, was equal to the difference between the fair value of
the Company's common stock when issued under the ESPP and the actual price paid
by employees to acquire the common stock.
11. RELATED PARTIES
In December 1997, Silicon Valley Bancshares (parent company) loaned $250,000
to an officer of the Company to purchase a primary residence in Northern
California in connection with a relocation agreement. The loan is interest-free,
is secured by a second deed of trust on the aforementioned residence and is
payable in five annual installments of $50,000 beginning in December 1998. In
January 1998, Silicon Valley Bancshares also loaned the same officer $600,000 as
part of the same relocation agreement. This second loan is interest-free, is
secured by a second deed of trust on the aforementioned residence and is due in
full in December 2002. The Company had no other loans outstanding to related
parties during 1997. In a separate agreement, the Bank awarded the same officer
a $250,000 bonus, payable in five annual installments of $50,000 beginning in
December 1998.
The Silicon Valley Bank Foundation (the "Foundation") was established by the
Company in 1995 to maintain good corporate citizenship in its communities. The
Foundation is funded entirely by the Company, and received contributions from
the Company totaling $0.1 million in 1997, 1996 and 1995.
12. 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, 1997 and 1996, the Company
had $426.1 million
60
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and $392.2 million of unused loan commitments available to customers, of which
$86.4 million and $80.2 million had a fixed interest rate, respectively. The
Company's exposure arising from interest rate risk associated with fixed rate
loan commitments is not considered material. Commitments which are unavailable
for funding due to customers not meeting all collateral, compliance and
financial covenants required under loan commitment agreements totaled $1.4
billion and $952.5 million at December 31, 1997 and 1996, respectively. The
Company's potential exposure to credit loss, in the event of nonperformance by
the other party to the financial instrument, is the contractual amount of the
available unused loan commitment. The Company uses the same credit approval and
monitoring process in extending loan commitments as it does in making loans. The
actual liquidity needs or the credit risk that the Company has experienced have
historically been lower than the contractual amount of commitments to extend
credit because a significant portion of these commitments expire without being
drawn upon. The Company evaluates each potential borrower and the necessary
collateral on an individual basis. The type of collateral varies, but may
include real property, bank deposits, or business and personal assets. The
potential credit risk associated with these commitments is considered in
Management's evaluation of the adequacy of the allowance for loan losses.
COMMERCIAL AND STANDBY LETTERS OF CREDIT
Commercial and standby letters of credit represent conditional commitments
issued by the Company on behalf of a customer to guarantee the performance of
the customer to a third party when certain specified future events have
occurred. Commercial letters of credit are issued primarily for inventory
purchases by customers and are typically short-term in nature. Standby letters
of credit are typically issued as a credit enhancement for clients' contractual
obligations to third parties such as landlords. Letters of credit have fixed
expiration dates and generally require a fee paid by the customer upon the
Company issuing the commitment. Fees generated from these letters of credit are
recognized in noninterest income over the commitment period. At December 31,
1997 and 1996, commercial and standby letters of credit totaled a combined
$112.9 million and $81.1 million, respectively.
The credit risk involved in issuing letters of credit is essentially the
same as that involved with extending loan commitments to customers, and
accordingly, the Company uses a credit evaluation process and collateral
requirements similar to those for loan commitments. The actual liquidity needs
or the credit risk that the Company has experienced have historically been lower
than the contractual amount of letters of credit issued because a significant
portion of these conditional commitments expire without being drawn upon.
FOREIGN EXCHANGE FORWARD CONTRACTS
The Company enters into foreign exchange forward contracts with customers
involved in international trade finance activities, either as the purchaser or
seller of foreign currency at a future date, depending upon the customer need.
The Company enters into offsetting foreign exchange forward contracts with
correspondent banks to hedge against the risk of fluctuations in foreign
currency exchange rates related to the foreign exchange forward contracts
entered into with its customers. These contracts are short-term in nature,
typically expiring in less than 90 days. At December 31, 1997 and 1996, the
notional amounts of these contracts totaled $28.2 million and $28.7 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 $0.3
million at December 31, 1997 and $0.9 million at December 31, 1996. The Company
has incurred no losses from counterparty nonperformance and anticipates
performance by all counterparties to such foreign exchange forward contracts.
61
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair values for its financial
instruments. Fair value estimates, methods and assumptions, set forth below for
the Company's financial instruments, are made solely to comply with the
requirements of SFAS No. 107 and should be read in conjunction with the
Company's consolidated financial statements and related notes.
Fair values are based on estimates or calculations at the transaction level
using present value techniques in instances where quoted market prices are not
available. Because broadly traded markets do not exist for most of the Company's
financial instruments, the fair value calculations attempt to incorporate the
effect of current market conditions at a specific time. Fair valuations are
Management's estimates of the values, and they are often calculated based on
current pricing policies, the economic and competitive environment, the
characteristics of the financial instruments, expected losses, and other such
factors. These calculations are subjective in nature, involve uncertainties and
matters of significant judgment, and do not include tax ramifications;
therefore, the results cannot be determined with precision, substantiated by
comparison to independent markets, and may not be realized in an actual sale or
immediate settlement of the instruments. There may be inherent weaknesses in any
calculation technique, and changes in the underlying assumptions used, including
discount rates and estimates of future cash flows, could significantly affect
the results. For all of these reasons, the aggregation of the fair value
calculations presented herein does not represent, and should not be construed to
represent, the underlying value of the Company.
The following methods and assumptions have been used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate the value.
Cash and cash equivalents: This category includes cash and due from banks,
interest-bearing deposits in other financial institutions, federal funds sold,
and securities purchased under agreement to resell. The cash equivalents are
readily convertible to known amounts of cash and 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 by discounting
estimated cash flows at the effective interest rates on the loans, and 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
62
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1997 and 1996, respectively.
Although Management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued since the most recent year end and the estimated fair values of these
financial instruments may have changed significantly since that point in time.
The estimated fair values of the Company's financial instruments at December
31, 1997 and 1996 are presented below. Bracketed amounts in the estimated fair
value columns represent estimated cash outflows required to settle the
obligations at market rates as of the respective reporting dates.
DECEMBER 31,
------------------------------------------------------
1997 1996
-------------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Financial Assets:
Cash and due from banks................................ $ 105,059 $ 105,059 $ 122,836 $ 122,836
Federal funds sold and securities purchased under
agreement to resell.................................. 321,773 321,773 310,341 310,341
Investment securities, at fair value................... 1,013,904 1,013,904 625,022 625,022
Net loans.............................................. 1,136,945 1,151,273 830,792 836,074
Financial Liabilities:
Noninterest-bearing demand deposits.................... 788,442 788,442 599,257 599,257
NOW deposits........................................... 21,348 21,348 8,443 8,443
Money market deposits.................................. 1,497,996 1,497,996 1,081,391 1,081,391
Time deposits.......................................... 124,621 124,922 85,213 85,282
Off-Balance Sheet Financial Instruments:
Foreign exchange forward contracts--receive............ -- 13,798 -- 13,445
Foreign exchange forward contracts--pay................ -- (13,798) -- (13,445)
14. LEGAL MATTERS
Certain lawsuits and claims arising in the ordinary course of business have
been filed or are pending against the Company and/or the Bank. Based upon
information available to the Company, its review of such claims to date and
consultation with its legal counsel, Management believes the liability relating
to these actions, if any, will not have a material adverse effect on the
Company's liquidity, consolidated financial position or results of operations.
15. REGULATORY MATTERS
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without the prior approval of the Federal Reserve Board and the
California Department of Financial Institutions. At December 31, 1997,
approximately $56.0 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
63
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
additional discretionary actions by regulators that, if undertaken, could have a
material impact on the Company's and/or the Bank's financial condition and
results of operations. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of the Company's
and the Bank's balance sheet items, as well as certain off-balance sheet items,
as calculated under regulatory accounting practices. The Company's and the
Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Under these capital guidelines, the minimum total risk-based capital ratio
and Tier 1 risk-based capital ratio requirements are 10.0% and 6.0%,
respectively, of risk-weighted assets and certain off-balance sheet items for a
well capitalized depository institution.
The Federal Reserve Board has also established minimum capital leverage
ratio guidelines for state member banks. The ratio is determined using Tier 1
capital divided by quarterly average total assets. The guidelines require a
minimum of 5.0% for a well capitalized depository institution.
Management believes, as of December 31, 1997, that the Company and the Bank
meet all capital adequacy requirements to which they are subject. As of December
31, 1997, 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.
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, 1997 and 1996:
MINIMUM
ACTUAL ACTUAL CAPITAL
RATIO AMOUNT MINIMUM RATIO REQUIREMENT
----------- ---------- ------------- ------------
(DOLLARS IN THOUSANDS)
As of December 31, 1997:
Total risk-based capital ratio
Company........................................................ 11.5% $ 193,256 8.0% $ 134,325
Bank........................................................... 10.8% $ 181,472 8.0% $ 134,056
Tier 1 risk-based capital ratio
Company........................................................ 10.2% $ 172,061 4.0% $ 67,163
Bank........................................................... 9.6% $ 160,319 4.0% $ 67,028
Tier 1 leverage ratio
Company........................................................ 7.1% $ 172,061 4.0% $ 97,411
Bank........................................................... 6.6% $ 160,319 4.0% $ 97,107
As of December 31, 1996:
Total risk-based capital ratio
Company........................................................ 11.5% $ 149,408 8.0% $ 104,074
Bank........................................................... 10.8% $ 140,308 8.0% $ 103,601
Tier 1 risk-based capital ratio
Company........................................................ 10.2% $ 132,944 4.0% $ 52,037
Bank........................................................... 9.6% $ 123,916 4.0% $ 51,801
Tier 1 leverage ratio
Company........................................................ 7.7% $ 132,944 4.0% $ 69,151
Bank........................................................... 7.2% $ 123,916 4.0% $ 68,814
64
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. REVOLVING LINE OF CREDIT
In January 1997, the Bank established a $30.0 million revolving line of
credit with another financial institution to further support any short-term
liquidity needs of the Bank. The revolving line of credit is unsecured, is
subject to certain covenants and bears interest on outstanding principal equal
to the issuing financial institution's prime rate. The revolving line of credit
expires on March 31, 1998, and the Bank had no borrowings under this credit
facility during 1997. Management believes that, as of December 31, 1997, the
Bank is in compliance with all covenants related to this revolving line of
credit.
17. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The condensed balance sheets of Silicon Valley Bancshares (parent company
only) at December 31, 1997 and 1996, and the related condensed income statements
and condensed statements of cash flows for the years ended December 31, 1997,
1996 and 1995 are presented below. Certain reclassifications have been made to
the parent company's 1996 and 1995 financial information to conform to the 1997
presentations. Such reclassifications had no effect on the results of operations
or shareholders' equity.
CONDENSED BALANCE SHEETS
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
Assets:
Cash on deposit with subsidiary bank.................................................... $ 8,584 $ 4,225
Investment securities, at fair value.................................................... 3,433 9,538
Loan to related party................................................................... 250 --
Other assets............................................................................ 516 212
Investment in subsidiary bank........................................................... 162,218 124,064
---------- ----------
Total assets.............................................................................. $ 175,001 $ 138,039
---------- ----------
---------- ----------
Liabilities............................................................................... $ 520 $ 2,639
Shareholders' equity...................................................................... 174,481 135,400
---------- ----------
Total liabilities and shareholders' equity................................................ $ 175,001 $ 138,039
---------- ----------
---------- ----------
CONDENSED INCOME STATEMENTS
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest income.................................................................. $ 630 $ 345 $ 99
Income from the disposition of client warrants................................... 5,480 5,389 8,205
General and administrative expenses.............................................. (229) (175) (86)
Income tax expense............................................................... (2,470) (2,364) (3,497)
--------- --------- ---------
Income before equity in net income of subsidiary bank............................ 3,411 3,195 4,721
Equity in net income of subsidiary bank.......................................... 24,267 18,271 13,432
--------- --------- ---------
Net income....................................................................... $ 27,678 $ 21,466 $ 18,153
--------- --------- ---------
--------- --------- ---------
65
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income.................................................................. $ 27,678 $ 21,466 $ 18,153
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in net income of subsidiary bank................................... (24,267) (18,271) (13,432)
Increase in other assets.................................................. (304) (196) (16)
Increase (decrease) in liabilities........................................ (876) 924 217
Other, net................................................................ 14 27 16
---------- ---------- ----------
Net cash provided by operating activities..................................... 2,245 3,950 4,938
---------- ---------- ----------
Cash flows from investing activities:
Net (increase) decrease in investment securities............................ 3,074 (5,626) --
Net increase in loan to related party....................................... (250) -- --
Investment in subsidiary bank............................................... (7,115) (2,956) (5,720)
---------- ---------- ----------
Net cash applied to investing activities...................................... (4,291) (8,582) (5,720)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs............... 6,405 4,298 4,267
---------- ---------- ----------
Net cash provided by financing activities..................................... 6,405 4,298 4,267
---------- ---------- ----------
Net increase (decrease) in cash............................................... 4,359 (334) 3,485
Cash on deposit with subsidiary bank at January 1,............................ 4,225 4,559 1,074
---------- ---------- ----------
Cash on deposit with subsidiary bank at December 31,.......................... $ 8,584 $ 4,225 $ 4,559
---------- ---------- ----------
---------- ---------- ----------
18. UNAUDITED QUARTERLY FINANCIAL DATA
1997 1996
-------------------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net interest income................ $ 23,857 $ 27,082 $ 29,054 $ 30,831 $ 20,273 $ 20,866 $ 22,942
Provision for loan losses.......... 3,348 2,618 1,716 2,385 1,523 2,065 2,962
Noninterest income................. 4,830 2,977 2,806 2,652 1,833 3,554 2,013
Noninterest expense................ 14,667 15,754 17,618 18,262 12,788 12,960 13,207
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes......... 10,672 11,687 12,526 12,836 7,795 9,395 8,786
Income tax expense................. 4,482 4,908 5,261 5,392 3,118 3,758 3,514
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income......................... $ 6,190 $ 6,779 $ 7,265 $ 7,444 $ 4,677 $ 5,637 $ 5,272
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Basic earnings per share........... $ 0.65 $ 0.71 $ 0.75 $ 0.75 $ 0.51 $ 0.61 $ 0.57
Diluted earnings per share......... $ 0.62 $ 0.67 $ 0.71 $ 0.72 $ 0.49 $ 0.58 $ 0.54
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
FOURTH
QUARTER
-----------
Net interest income................ $ 23,194
Provision for loan losses.......... 3,876
Noninterest income................. 4,209
Noninterest expense................ 13,727
-----------
Income before income taxes......... 9,800
Income tax expense................. 3,920
-----------
Net income......................... $ 5,880
-----------
-----------
Basic earnings per share........... $ 0.64
Diluted earnings per share......... $ 0.60
-----------
-----------
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the sections titled "Proposal No.
1--Election of Directors," "Information on Executive Officers" and "Section
16(a) Beneficial Ownership Reporting Compliance" contained in the definitive
proxy statement for the Company's 1998 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 Executive Committee of the Board on
Executive Compensation," "Table 1--Summary Compensation Table," "Table 2--Option
Grants in Last Fiscal Year," "Table 3--Aggregated Option Exercises in Last
Fiscal Year and Fiscal Year-End Option Values," "Termination Arrangements,"
"Return to Shareholders Performance Graph," and "Director Compensation"
contained in the definitive proxy statement for the Company's 1998 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 Principal
Shareholders" contained in the definitive proxy statement for the Company's 1998
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
1998 Annual Meeting of Shareholders is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2.
The financial statements and supplementary data contained in Item 8 of this
report are filed as part of this report.
All schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included in
the financial statements or related notes.
(a) 3.
Exhibits are listed in the Index to Exhibits beginning on page 70 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, 1997.
67
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 13, 1998
68
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ DANIEL J. KELLEHER
- ------------------------------ Chairman of the Board of March 13, 1998
Daniel J. Kelleher Directors and Director
President, Chief Executive
/s/ JOHN C. DEAN Officer and Director
- ------------------------------ (Principal Executive March 13, 1998
John C. Dean Officer)
Executive Vice President,
/s/ SCOTT H. RAY Chief Financial Officer
- ------------------------------ (Principal Financial March 13, 1998
Scott H. Ray Officer)
/s/ CHRISTOPHER T. LUTES Senior Vice President,
- ------------------------------ Controller (Principal March 13, 1998
Christopher T. Lutes Accounting Officer)
/s/ GARY K. BARR
- ------------------------------ Director March 13, 1998
Gary K. Barr
/s/ JAMES F. BURNS, JR.
- ------------------------------ Director March 13, 1998
James F. Burns, Jr.
/s/ DAVID DEWILDE
- ------------------------------ Director March 13, 1998
David deWilde
/s/ CLARENCE J. FERRARI, JR.
- ------------------------------ Director March 13, 1998
Clarence J. Ferrari, Jr.
/s/ HENRY M. GAY
- ------------------------------ Director March 13, 1998
Henry M. Gay
/s/ JAMES R. PORTER
- ------------------------------ Director March 13, 1998
James R. Porter
/s/ MICHAEL ROSTER
- ------------------------------ Director March 13, 1998
Michael Roster
/s/ ANN R. WELLS
- ------------------------------ Director March 13, 1998
Ann R. Wells
69
INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- ------------ ------------------------------------------------------------------------------------ -----------------
3.1 Articles of Incorporation of the Company, as amended(2) --
3.2 Bylaws of the Company, amendment and restatement effective as of August 21, 1997(13) --
4.1 Article Three of Articles of Incorporation (included in Exhibit 3.1)(2) --
10.3 Employment Agreement between Silicon Valley Bancshares and John C. Dean(5) --
10.7 Lease Agreement between Silicon Valley Bancshares and Almaden Tower Partners, a
California general partnership; Ten Almaden Blvd., San Jose, California 95113(3) --
10.9 Lease Agreement between Silicon Valley Bank and Palo Alto Square; Two Palo Alto
Square, Palo Alto, California 94306(1) --
10.9(a) Second amendment to lease outlined in Exhibit 10.9(5) --
10.10 Lease Agreement between Silicon Valley Bank and Sharon Land Company; 3000 Sand Hill
Road, Menlo Park, California 94025(2) --
10.10(a) First amendment to lease outlined in Exhibit 10.10(6) --
10.10(b) Second amendment to lease outlined in Exhibit 10.10(6) --
10.15 Lease Agreement between Silicon Valley Bank and Ms. Anita McGill; 11000 S.W. Stratus
Avenue, Suite 170, Beaverton, Oregon 97005(4) --
10.16 Lease Agreement between Silicon Valley Bank and Westwood Company-Palo Alto, a
California Limited Partnership; 1731 Embarcadero Road, Palo Alto, California
94303(5) --
10.17 Lease Agreement between Silicon Valley Bank and WRC Properties, Inc.; 3003 Tasman
Drive, Santa Clara, CA 95054(6) --
10.17(a) First amendment to lease outlined in Exhibit 10.17(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(6) --
10.24 Lease Agreement between Norman B. Leventhal and Edwin N. Sidman, Trustees and
Silicon Valley Bank; 40 William Street, Wellesley, Massachusetts 02181(8) --
10.28 Amendment and Restatement of the Silicon Valley Bancshares 1989 Stock Option
Plan(10) --
10.29 Silicon Valley Bank Money Purchase Pension Plan(10) --
10.30 Amendment and Restatement of the Silicon Valley Bank Money Purchase Pension Plan(10) --
10.31 Amendment and Restatement of the Silicon Valley Bank 401(k) and Employee Stock
Ownership Plan(10) --
10.32 Executive Change in Control Severance Benefits Agreement(11) --
70
INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- ------------ ------------------------------------------------------------------------------------ -----------------
10.33 Change in Control Severance Policy For Non-executives(11) --
10.34 Silicon Valley Bancshares 1997 Equity Incentive Plan(12) --
10.35 Silicon Valley Bancshares 1988 Employee Stock Purchase Plan Effective June 22, 1988,
revised October 17, 1997(13) --
10.36 Relocation Agreement between Silicon Valley Bancshares and Kenneth P. and Ruth
Wilcox, as of December 18, 1997................................................... 73
10.37 Bonus Agreement between Silicon Valley Bank and Kenneth P. Wilcox, as of December
18, 1997.......................................................................... 76
11.1 Calculation of Earnings per Share................................................... 77
21.1 Subsidiaries of Silicon Valley Bancshares........................................... 78
23.1 Independent Auditors' Consent....................................................... 79
27.1 Financial Data Schedule............................................................. 80
71
INDEX TO EXHIBITS
(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) Incorporated by reference to Exhibits 10.28, 10.29, 10.30, and 10.31 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.
(11) 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.
(12) Incorporated by reference to Exhibits 10.17(a) and 10.34 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(13) Incorporated by reference to Exhibits 3.2 and 10.35 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
72