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As filed with the Securities and Exchange Commission on March 17, 2000
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________.
Commission File Number: 33-41102
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SILICON VALLEY BANCSHARES
(Exact name of registrant as specified in its charter)
Delaware 91-1962278
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3003 Tasman Drive
Santa Clara, California 95054-1191
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 654-7400
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($0.001 par value) Nasdaq National Market
(Title of each class) (Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of its common stock on January 31,
2000, on the Nasdaq National Market was $1,276,717,983.
At January 31, 2000, 22,900,771 shares of the registrant's common stock
($0.001 par value) were outstanding.
Documents Incorporated by Reference
Parts of Form 10-K
Documents Incorporated Into Which Incorporated
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Definitive proxy statement for the Company's 2000 Annual
Meeting of Stockholders to be filed within 120 days of
the end of the fiscal year ended December 31, 1999 Part III
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This report contains a total of 101 pages, including exhibits.
The Exhibit Index is on page 87.
TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS.................................................... 3
ITEM 2. PROPERTIES.................................................. 13
ITEM 3. LEGAL PROCEEDINGS........................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 14
ITEM 6. SELECTED FINANCIAL DATA..................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 84
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 84
ITEM 11. EXECUTIVE COMPENSATION...................................... 84
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 84
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 84
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 84
85
SIGNATURES............................................................
87
INDEX TO EXHIBITS.....................................................
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PART I
ITEM 1. BUSINESS
General
Silicon Valley Bancshares is a bank holding company incorporated in
Delaware. Our principal subsidiary, Silicon Valley Bank, is a California
state-chartered bank and a member of the Federal Reserve System and its deposits
are insured by the Federal Deposit Insurance Corporation. Our headquarters are
located at 3003 Tasman Drive, Santa Clara, California 95054 and our telephone
number is (408) 654-7400. When we refer to "Silicon Valley Bancshares," or "we"
or similar words, we intend to include Silicon Valley Bancshares and its
subsidiaries collectively, including Silicon Valley Bank. When we refer to
"Silicon," we are referring only to Silicon Valley Bancshares.
Business Overview
We provide innovative banking products and services to emerging growth and
middle-market companies, focusing primarily on companies in the technology and
life sciences industries that are backed by venture capital investors. A key
component of our business strategy is to develop relationships with our clients
at a very early stage, and to offer them banking products and services which
meet their needs throughout their life cycle. We have cultivated strong
relationships with venture capital firms, many of whom are our clients, which
provide us with access to many potential banking clients.
Our unique business strategy and focus has resulted in significant growth in
recent years. Our banking operations have expanded from a single location in
Santa Clara, California to a national network of 22 offices located in Arizona,
California, Colorado, Georgia, Illinois, Massachusetts, Minnesota, Oregon,
Pennsylvania, Texas, Virginia, and Washington.
TECHNOLOGY AND LIFE SCIENCES NICHE
Our technology and life sciences niche serves primarily venture
capital-backed companies within a variety of technology and life sciences
industries and markets throughout the United States. Because these companies'
primary source of funding is equity from venture capitalists, they generally
keep large cash balances in their deposit accounts with us and often do not
borrow large amounts under their credit facilities. Lending to this niche
typically involves working capital lines of credit, equipment financing, asset
acquisition loans, and bridge financing. Our technology and life sciences niche
includes the following practices.
Our COMMUNICATIONS AND ON-LINE SERVICES practice serves companies in the
networking, telecommunications and on-line services industries. The networking
industry includes companies supplying the equipment and services that facilitate
distributed enterprise networks such as local and wide area networks. The
telecommunications industry encompasses the suppliers of equipment and services
to companies and consumers for the transmission of voice, data and video.
Companies included in the on-line services industry supply access, content,
services, and support to individuals and businesses participating on the
internet, or in other on-line activities.
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Our COMPUTERS AND PERIPHERALS practice focuses on companies that are engaged
in the support and manufacturing of computers, electronic components and related
peripheral products. Specific markets these companies serve include personal
computers, specialty computer systems, add-in boards, printers, storage devices,
networking equipment, and contract manufacturing.
Our SEMICONDUCTORS practice serves companies involved in the design,
manufacturing and marketing of integrated circuits. This includes companies
involved in the manufacturing of semiconductor production equipment and
semiconductors, testing and related services, electronic parts wholesaling,
computer-aided design, and computer-aided manufacturing.
Our SOFTWARE practice primarily serves companies that design integrated
computer systems, provide computer programming services and develop and market
commercial and industrial applications as well as prepackaged software.
Our LIFE SCIENCES practice serves companies in the biotechnology, medical
devices and health care services industries. The biotechnology industry includes
companies involved in research and development of therapeutics and diagnostics
for the medical and pharmaceuticals industries. The medical devices industry
encompasses companies involved in the design, manufacturing and distribution of
surgical instruments and medical equipment. Companies included in the health
care services industry deal with patients, either in a primary care or secondary
care role.
In addition to the industry-related practices discussed above, we provide
commercial lending and other financial products and services to other clients
associated with the technology and life sciences industries. Through our PACIFIC
RIM practice, we serve U.S.-based technology and life sciences companies that
receive equity funding from Asian or Asian-based venture capital sources.
Through our VENTURE CAPITAL practice, we provide venture capital firms with
financing and other specialized products and services. Lastly, through our
EMERGING TECHNOLOGIES practice, we target non-venture-backed technology
companies in northern California, with a primary focus on the software industry.
SPECIAL INDUSTRY NICHES
We have always served a variety of commercial enterprises unrelated to our
technology and life sciences niche. We serve these clients through several
special industry niche practices. We continue to follow this strategy by
identifying industries whose financial services needs we believe are
underserved. The following is a brief summary of our special industry niche
practices.
Our REAL ESTATE practice makes real estate construction and term loans whose
primary source of repayment is cash flow or sales proceeds from real property
collateral. We focus on construction loans for residential and commercial
projects, and construction and mini-permanent loans on retail, industrial and
office projects in northern California.
Our PREMIUM WINERIES practice focuses on wineries which produce select or
exclusive vintages of up to 150,000 cases annually. Our lending in this niche
consists of both short-term inventory loans and term loans related to vineyard
acquisition and development, equipment financing and cooperage.
Our MEDIA PRACTICE focuses on acquisition, recapitalization and plant
upgrade financings of less than $10 million for radio, television, outdoor
advertising, and cable television operators.
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In addition to serving the special industry niches listed above, we serve a
broad array of industries in northern California through our DIVERSIFIED
INDUSTRIES practice. This practice allows us to continue to evaluate potential
niches by initially identifying and serving a few clients in related industries
or markets.
SPECIALIZED PRODUCTS AND SERVICES
We offer a variety of specialized lending products and other financial
products and services to clients in various stages of development. These
services allow us to begin serving companies in their start-up phases, and then
gradually expand the services we provide as the companies grow.
From the time companies receive their initial funding, we seek to serve
their cash management needs. Initially, we provide investment services to assist
our clients with managing their short-term investments. On behalf of clients, we
purchase investment securities that include U.S. Treasury securities, U.S.
agency securities, commercial paper, Eurodollar deposits, and bankers'
acceptances. We also offer our clients access to private label mutual fund
products as an alternative to our deposit products.
In addition, our new Internet site, eSource-TM-, provides our early stage
clients with an on-line resource providing access to various services that
technology and life sciences entrepreneurs require. In eSource-TM- we have
formed a broad national and global network of service providers in a variety of
areas important to our clients, including financial and administrative services,
office set-up services, human resources, staffing services, risk management
services, and industry specific research.
As our clients conduct research and development and prepare for production,
we offer equipment leasing services as well as vendor financing for many types
of technology purchases, including software, hardware, maintenance, and
professional services. We structure these arrangements to suit the risk profile
of the client in its stage of growth.
Once our clients enter production, many experience rapid growth and
consequently require banking products which augment their cash flow. We offer
factoring services, which involves purchasing clients' accounts receivable at a
discount, making operating funds immediately available to the clients, and then
managing the collection of these receivables.
As our clients mature, we may offer more advanced cash management products,
providing services to help our customers manage cash collections and
disbursements efficiently and cost effectively. These services include wholesale
lockbox services, electronic information reporting and controlled disbursement
services. In addition, we also provide real estate loans, typically to finance
commercial real estate to be owned and operated by our clients.
We also assist our many clients who do business internationally by providing
foreign exchange, import and export letters of credit, documentary collections,
and a number of other trade finance products and services. We have been granted
delegated authority by the Export-Import Bank of the U.S. and the California
Export Finance Office. This enables us to provide our clients with working
capital loans guaranteed by the Export-Import Bank and California Export Finance
Office to finance foreign receivables and inventory intended for export, as well
as to provide purchase order financing.
If our clients experience periods when their profit performance has been
interrupted or where they need greater financial flexibility, we may assist them
by providing asset-based credit facilities that involve
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frequent monitoring of the underlying collateral, which generally consists of
accounts receivable, inventory and equipment.
For clients in the more advanced stages of growth, we pursue opportunities
in mezzanine lending and will provide private equity and debt placement
services, high yield debt services and mergers and acquisitions advice. We also
assist our clients through investment bank referrals for public offerings,
equity research, sales and trading services, asset securitizations, and fixed
income services.
For clients in all stages of their growth cycle, we focus on serving the
personal banking needs of senior executives and owners of our client companies.
In addition, we serve the personal banking needs of partners and senior
executives of venture capital firms and other professionals whose businesses are
related to our niche practices.
Supervision and Regulation
Our operations are subject to extensive regulation by federal and state
banking regulatory agencies. This regulatory framework is intended primarily to
protect Silicon Valley Bank's depositors and the federal deposit insurance fund
from losses and not for the benefit of our stockholders. As a bank holding
company, Silicon is subject to the Federal Reserve Board's supervision and
examination under the Bank Holding Company Act. Silicon Valley Bank, as a
California-chartered bank and a member of the Federal Reserve System, is subject
to supervision and examination by the Federal Reserve Board and the Commissioner
of the California Department of Financial Institutions. The following summary
describes some of the more significant laws, regulations and policies that
affect our operations. It is not intended to be a complete listing of all laws
that apply to us. Any change in the statutes, regulations or policies that apply
to our operations may have a material effect on our business.
MEMORANDUM OF UNDERSTANDING.
In late September 1999, Silicon Valley Bank entered into an agreement
pursuant to a memorandum of understanding with the Federal Reserve Bank of San
Francisco (as the delegate for the Federal Reserve Board) and the California
Department of Financial Institutions. The key feature of this arrangement was
Silicon Valley Bank's commitment to maintain its Tier 1 leverage ratio--the
ratio of a bank's Tier 1 capital to its total quarterly average tangible
assets--at a minimum of 7.25%. This is a higher ratio than the 5% ratio usually
required for a bank to be considered well-capitalized for bank regulatory
purposes. Silicon Valley Bank also committed to obtain the regulators' consent
before paying dividends; further enhance its credit monitoring and review
policies and submit reports to the regulators regarding credit quality. The
Federal Reserve Bank of San Francisco also directed Silicon to obtain its
approval before paying dividends, incurring debt, repurchasing capital stock, or
entering into agreements to acquire any entities or portfolios.
During the first nine months of 1999, Silicon Valley Bank's Tier 1 leverage
ratio had declined below internally established target levels, largely as a
result of the rapid growth in deposits experienced by Silicon Valley Bank.
Silicon Valley Bank's deposit growth in 1999 was driven by high levels of client
liquidity attributable to a strong inflow of investment capital into the venture
capital and emerging growth company communities, and by growth in the number of
clients served by Silicon Valley Bank. In order to slow the growth in deposits
due to the Tier 1 leverage ratio capital requirements, Silicon Valley Bank
implemented a program during the third quarter of 1999 to market off-balance
sheet products, such as mutual fund
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products, to clients. This allowed Silicon Valley Bank to continue serving its
clients' needs while restraining balance sheet growth driven by deposits.
Silicon also contributed $41.6 million of the proceeds of its common stock
offering in December 1999 to the capital of Silicon Valley Bank. As a result of
these measures, Silicon Valley Bank's Tier 1 leverage ratio was 7.9% at December
31, 1999, well in excess of the amount required by the regulators under the
memorandum of understanding. Silicon Valley Bank believes that it was in full
compliance with the capital requirements [and other provisions] of the
memorandum of understanding at the end of 1999. For a more complete discussion
of our regulatory capital requirements and capital levels at the end of 1999,
see "Item 1. Business--Supervision and Regulation--Capital Standards Applicable
to Silicon and Silicon Valley Bank" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Capital Resources."
RECENT ADOPTION OF GRAMM-LEACH BLILEY ACT.
On November 12, 1999, the President signed into law the Gramm-Leach-Bliley
Act, or GLB Act, which significantly changed the regulatory structure and
oversight of the financial services industry. Effective March 12, 2000, the GLB
Act repealed the provisions of the Glass-Steagall Act that restricted banks and
securities firms from affiliating. It also revised the Bank Holding Company Act
to permit a qualifying bank holding company, called a financial holding company,
to engage in a full range of financial activities, including banking, insurance,
securities, and merchant banking activities. It also permits [qualifying] bank
holding companies to acquire many types of financial firms without the prior
approval of the Federal Reserve Board.
The GLB Act thus provides expanded financial affiliation opportunities for
existing bank holding companies and permits other financial services providers
to acquire banks and become bank holding companies without ceasing any existing
financial activities. Previously, a bank holding company could only engage in
activities that were "closely related to banking." This limitation no longer
applies to bank holding companies that qualify to be treated as financial
holding companies. To qualify as a financial holding company, a bank holding
company's subsidiary depository institutions must be well-capitalized and have
at least satisfactory general, managerial and Community Reinvestment Act
examination ratings. Effective March 11, 2000, a nonqualifying bank holding
company becomes limited to activities that were permissible under the BHCA as of
November 11, 1999. Silicon expects that it will elect financial holding company
status at some point after the effective date of the financial holding company
provisions of the GLB Act, although it would not currently qualify to elect to
be treated as a financial holding company.
Also effective on March 12, 2000, the GLB Act changed the powers of national
banks and their subsidiaries, and made similar changes in the powers of state
bank subsidiaries. It permits a national bank to underwrite, deal in and
purchase state and local revenue bonds. It also allows a subsidiary of a
national bank to engage in financial activities that the bank cannot, except for
general insurance underwriting and real estate development and investment. In
order for a subsidiary to engage in new financial activities, the national bank
and its depository institution affiliates must be well capitalized, have at
least satisfactory general, managerial and Community Reinvestment Act
examination ratings and meet other qualification requirements relating to total
assets, subordinated debt, capital, risk management, and affiliate transactions.
Subsidiaries of state banks can exercise the same powers as national bank
subsidiaries if they satisfy the same qualifying rules that apply to national
banks. Although Silicon Valley Bank expects to take advantage of these expanded
powers at some point in the future, it does not currently qualify to do so.
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The GLB Act also reformed the overall regulatory framework of the financial
services industry. In order to implement its underlying purposes, the GLB Act
preempted state laws that would restrict the types of financial affiliations
that are authorized or permitted under the GLB Act, subject to specified
exceptions for state insurance laws and regulations. With regard to securities
laws, effective May 12, 2001, the GLB Act will remove the current blanket
exemption for banks from being considered brokers or dealers under the
Securities Exchange Act of 1934 and replaces it with a number of more limited
exemptions. Thus, previously exempted banks, such as Silicon Valley Bank, may
become subject to the broker-dealer registration and supervision requirements of
the Securities Exchange Act of 1934. The exemption that prevented bank holding
companies and banks that advise mutual funds from being considered investment
advisers under the Investment Advisers Act of 1940 will also be eliminated.
Separately, effective November 12, 2000, or such later date as adopted in
implementing standards required to be enacted by May 12, 2000, the GLB Act
imposes customer privacy requirements on any company engaged in financial
activities. Under these requirements, a financial company is required to protect
the security and confidentiality of customer nonpublic personal information.
Also, for customers that obtain a financial product such as a loan for personal,
family or household purposes, a financial company is required to disclose its
privacy policy to the customer at the time the relationship is established and
annually thereafter including its policies concerning the sharing of the
customer's nonpublic personal information with affiliates and third parties. If
an exemption is not available, a financial company must provide consumers with a
notice of its information sharing practices that allows the consumer to reject
the disclosure of its nonpublic personal information to third parties. Third
parties that receive such information are subject to the same restrictions as
the financial company on the reuse of the information. Finally, a financial
company is prohibited from disclosing an account number or similar item to a
third party for use in telemarketing, direct mail marketing or other marketing
through electronic mail.
CAPITAL STANDARDS APPLICABLE TO SILICON AND SILICON VALLEY BANK.
SILICON
The Federal Reserve Board has adopted minimum risk-based capital guidelines
intended to provide a measure of capital that reflects the degree of risk
associated with a banking organization's operations for both transactions
reported on the balance sheet as assets, and transactions, such as commitments,
letters of credit and recourse arrangements, which are recorded as off-balance
sheet items. Under these guidelines, dollar amounts of assets and credit
equivalent amounts of off-balance sheet items are adjusted by one of several
conversion factors and/or risk adjustment percentages. The Federal Reserve Board
requires bank holding companies generally to maintain a minimum ratio of
qualifying total capital to risk-adjusted assets of 8% (10% to be
well-capitalized) and a minimum ratio of Tier 1 capital to risk-adjusted assets
of 4% (6% to be well-capitalized). The Federal Reserve Board also requires
Silicon to maintain a minimum amount of Tier 1 capital to total quarterly
average assets, referred to as the Tier 1 leverage ratio. For a bank holding
company in the highest of the five categories used by regulators to rate banking
organizations, the minimum Tier 1 leverage ratio must be 3%; for all other
institutions the ratio is 4% (5% to be well-capitalized). In addition to these
requirements, the Federal Reserve Board may set individual minimum capital
requirements for specific institutions at rates significantly above the minimum
guidelines and ratios. In addition, under certain circumstances, Silicon must
file written notice with, and obtain approval from, the Federal Reserve Board
prior to purchasing or redeeming its equity securities. See "Item 1.
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Business--Supervision and Regulation--Prompt Corrective Action and Other
Enforcement Mechanisms" for additional discussion of capital ratios.
SILICON VALLEY BANK
The federal banking agencies require a minimum ratio of qualifying total
capital to risk-adjusted assets of 8% (10% to be well-capitalized) and a minimum
ratio of Tier 1 capital to risk-adjusted assets of 4% (6% to be well
capitalized). In addition to the risk-based guidelines, federal banking
regulators also require banking organizations to maintain a minimum Tier 1
leverage ratio. For a banking organization rated in the highest of the five
categories used by regulators to rate banking organizations, the minimum Tier 1
leverage ratio must be 3%; for all other institutions the ratio is 4% (5% to be
well-capitalized). In addition to these uniform risk-based capital guidelines
and leverage ratio requirements that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
Under Silicon Valley Bank's memorandum of understanding with the Federal Reserve
Board and the Commissioner of the California Department of Financial
Institutions, Silicon Valley Bank is currently required to maintain a minimum
Tier 1 leverage ratio of 7.25%. See "Item 1. Business--Supervision and
Regulation--Memorandum of Understanding." See "Item 8. Financial Statements and
Supplementary Data--Note 17 to the Consolidated Financial Statements--Regulatory
Matters" for Silicon's and Silicon Valley Bank's capital ratios as of December
31, 1999.
The federal banking agencies have also adopted a joint agency policy
statement which provides that the adequacy and effectiveness of a bank's
interest rate risk management process and the level of its interest rate
exposures are critical factors in the evaluation of the bank's capital adequacy.
A bank with material weaknesses in its interest rate risk management process or
high levels of interest rate exposure relative to its capital will be directed
by the federal banking agencies to take corrective actions. Financial
institutions which have significant amounts of their assets concentrated in high
risk loans or nontraditional banking activities, and who fail to adequately
manage these risks, may be required to set aside capital in excess of the
regulatory minimums.
BANK HOLDING COMPANY REGULATION OF SILICON.
As a registered bank holding company, Silicon and its subsidiaries are
subject to the Federal Reserve Board's supervision, regulation, examination, and
reporting requirements under the Bank Holding Company Act. Until Silicon
qualifies to be treated as a financial holding company under the GLB Act as
discussed above, Silicon must seek the prior approval of the Federal Reserve
Board before acquiring ownership or control of more than 5% of the outstanding
shares of any class of voting securities, or substantially all of the assets, of
any company, including a bank or bank holding company. While financial holding
companies will be permitted to acquire ownership or control of entities engaged
in specified financial activities without prior approval, the existing
restrictions on directly or indirectly acquiring shares of a bank were not
changed by the GLB Act. In addition, until Silicon qualifies as a financial
holding company, it will be generally allowed to engage, directly or indirectly,
only in banking and other activities that were deemed by the Federal Reserve
Board to be so closely related to banking or managing or controlling banks as to
be a proper incident thereto.
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The Federal Reserve Board requires Silicon to maintain minimum capital
ratios that are discussed above. Under Federal Reserve Board regulations, a bank
holding company is also required to serve as a source of financial and
managerial strength to its subsidiary banks and may not conduct its operations
in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's
policy that in serving as a source of strength to its subsidiary banks, a bank
holding company should stand ready to use available resources to provide
adequate capital funds to its subsidiary banks during periods of financial
stress or adversity and should maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its obligations to
serve as a source of strength to its subsidiary banks or to observe established
guidelines with respect to the payment of dividends by bank holding companies
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board's
regulations or both.
Silicon's ability to pay cash dividends is limited by generally applicable
Delaware corporation law limits. Silicon is also currently required to seek
prior approval from the Federal Reserve Board before paying dividends. In
addition, there are statutory and regulatory limitations on the amount of
dividends which may be paid to Silicon by Silicon Valley Bank. See "Item 1.
Business--Supervision and Regulation--Restrictions on Dividends" and "Memorandum
of Understanding" for further discussion of current limitations on the ability
of Silicon Valley Bank to pay dividends to Silicon.
Silicon is also treated as a bank holding company under the California
Financial Code. As such, Silicon and its subsidiaries are subject to periodic
examination by, and may be required to file reports with, the California
Department of Financial Institutions.
REGULATION OF SILICON VALLEY BANK.
Silicon Valley Bank is a California-chartered bank and a member of the
Federal Reserve System. It is subject to primary supervision, periodic
examination and regulation by the Commissioner of the California Department of
Financial Institutions, or the Commissioner, the Federal Reserve Board and the
Federal Deposit Insurance Corporation. The Federal Reserve Board and the
Commissioner require Silicon Valley Bank to maintain minimum capital levels that
are discussed above. Both the Federal Reserve Board and the Commissioner also
have broad powers and remedies available if they determine that the financial
condition, capital resources, asset quality, management, earnings prospects,
liquidity, sensitivity to market risk, or other aspects of Silicon Valley Bank's
operations are unsatisfactory, or that Silicon Valley Bank is violating or has
violated any law or regulation.
RESTRICTIONS ON DIVIDENDS.
As discussed above, Silicon is currently required to seek approval from the
Federal Reserve Board before paying dividends. Silicon is a legal entity
separate and distinct from Silicon Valley Bank. Silicon Valley Bank is subject
to various [California] statutory and regulatory restrictions on its ability to
pay dividends to Silicon. Under such restrictions, the amount available for
payment of dividends to Silicon by Silicon Valley Bank totaled $83.6 million at
December 31, 1999. Under the memorandum of understanding with the Federal
Reserve Board and the Commissioner, Silicon Valley Bank has committed to obtain
these regulators' consent prior to the payment of dividends. The Federal Reserve
Board and the Commissioner have the authority to prohibit Silicon Valley Bank
from engaging in activities that, in their opinion,
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constitute unsafe or unsound practices in conducting its business. It is
possible, depending upon the financial condition of the bank in question and
other factors, that they could assert that the payment of dividends or other
payments might, under some circumstances, be an unsafe or unsound practice.
Further, if Silicon Valley Bank fails to comply with its minimum capital
requirements, its regulators could restrict its ability to pay dividends using
prompt corrective action or other enforcement powers. The Commissioner may
impose similar limitations on the conduct of California-chartered banks. See
"Item 8. Financial Statements and Supplementary Data--Note 17 to the
Consolidated Financial Statements--Regulatory Matters" for further discussion on
dividend restrictions.
TRANSACTIONS WITH AFFILIATES.
Silicon Valley Bank is subject to restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, Silicon or other affiliates, the purchase of, or investments in,
stock or other securities of Silicon or other affiliates, the taking of such
securities as collateral for loans, and the purchase of assets of Silicon or
other affiliates. These restrictions prevent Silicon and such other affiliates
from borrowing from Silicon Valley Bank unless the loans are secured by
specified amounts of collateral. Any such secured loans and investments by
Silicon Valley Bank to, or in, Silicon or to, or in, any other affiliate are
limited, individually, to 10% of Silicon Valley Bank's capital and surplus (as
defined by federal regulations), and such secured loans and investments are
limited, in the aggregate, to 20% of Silicon Valley Bank's capital and surplus
(as defined by federal regulations). California law also imposes restrictions on
transactions involving Silicon and other controlling persons of Silicon Valley
Bank. Additional restrictions on transactions with affiliates may be imposed on
Silicon Valley Bank under the prompt corrective action provisions of federal
law. See "Item 1. Business--Supervision and Regulation--Prompt Corrective Action
and Other Enforcement Mechanisms" for related discussion regarding restrictions
on transactions with affiliates.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS.
Federal banking agencies possess broad powers to take corrective and other
supervisory action on an insured bank and its holding company. Federal laws
require each federal banking agency to take prompt corrective action to resolve
the problems of insured banks. Each federal banking agency has issued
regulations defining five categories in which an insured depository institution
will be placed, based on the level of its capital ratios: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized.
A bank that, based upon its capital levels, is classified as well
capitalized, adequately capitalized or undercapitalized may be treated as though
it were in the next lower capital category if the appropriate federal banking
agency, after notice and opportunity for hearing, determines that an unsafe or
unsound condition, or an unsafe or unsound practice, warrants such treatment. At
each successive lower capital category, an insured bank is subject to more
restrictions. The federal banking agencies, however, may not treat an
institution as critically undercapitalized unless its capital ratios actually
warrant such treatment.
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In addition to measures taken under the prompt corrective action provisions,
bank holding companies and insured banks may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in conducting
their businesses, or for violation of any law, rule, regulation, condition
imposed in writing by the agency, or term of a written agreement with the
agency. Enforcement actions may include the appointment of a conservator or
receiver for the bank, the issuance of a cease and desist order that can be
judicially enforced, the termination of the bank's deposit insurance, the
imposition of civil monetary penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against officers, directors and other institution-
affiliated parties, and the enforcement of such actions through injunctions or
restraining orders based upon a judicial determination that the agency would be
harmed if such equitable relief was not granted.
SAFETY AND SOUNDNESS GUIDELINES.
The federal banking agencies have adopted guidelines to assist in
identifying and addressing potential safety and soundness concerns before
capital becomes impaired. The guidelines establish operational and managerial
standards relating to: (i) internal controls, information systems and internal
audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset
growth, and (v) compensation, fees and benefits. In addition, the federal
banking agencies have adopted safety and soundness guidelines for asset quality
and for evaluating and monitoring earnings to ensure that earnings are
sufficient for the maintenance of adequate capital and reserves.
PREMIUMS FOR DEPOSIT INSURANCE.
Silicon Valley Bank's deposit accounts are insured by the Bank Insurance
Fund, as administered by the Federal Deposit Insurance Corporation, up to the
maximum permitted by law. The Federal Deposit Insurance Corporation's annual
assessment for the insurance of Bank Insurance Fund deposits as of December 31,
1999, ranged from 0 to 27 basis points per $100 of insured deposits. The amount
charged is based on the regulatory capital of an institution and on a
supervisory assessment of its operational risk profile. At December 31, 1999,
Silicon Valley Bank's assessment rate was 3 basis points per $100 of insured
deposits.
Silicon Valley Bank is also required to pay an annual assessment of
approximately 1.2 basis points per $100 of insured deposits toward the
retirement of U.S. government issued Financing Corporation bonds. By contrast,
depository institutions such as thrifts whose deposits are insured by the
Savings Association Insurance Fund have paid an annual assessment approximately
five times greater than that of institutions with Bank Insurance Fund deposits.
However, as of January 1, 2000, the assessment rate paid on the Financing
Corporation bonds will be equal for all institutions. Silicon Valley Bank's
assessment rate will increase to 2.1 basis points per $100 of insured deposits
because of this change.
INTERSTATE BANKING AND BRANCHING.
Bank holding companies from any state may generally acquire banks and bank
holding companies located in any other state, subject in some cases to
nationwide and state-imposed deposit concentration limits and limits on the
acquisition of recently established banks. Banks also have the ability, subject
to specific restrictions, to acquire by acquisition or merger branches located
outside their home state. The
12
establishment of new interstate branches is also possible in those states with
laws that expressly permit it. Interstate branches are subject to many of the
laws of the states in which they are located.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING.
Silicon Valley Bank is subject to a variety of fair lending laws and
reporting obligations involving home mortgage lending operations and Community
Reinvestment Act, or CRA, activities. The CRA generally requires the federal
banking agencies to evaluate the record of a bank in meeting the credit needs of
its local communities, including low-and moderate-income neighborhoods. A bank
can also become subject to substantial penalties and corrective measures for a
violation of certain fair lending laws. The federal banking agencies may take
compliance with such laws and CRA obligations into account when regulating and
supervising other activities or assessing whether to approve certain
applications. In April 1999, the Federal Reserve Board rated Silicon Valley Bank
"satisfactory" in complying with its CRA obligations.
ITEM 2. PROPERTIES
In 1995, we relocated our corporate headquarters and main branch and entered
into a 10-year lease on a two-story office building located at 3003 Tasman
Drive, Santa Clara, California. In July 1997, we finalized an amendment to the
original lease associated with our corporate headquarters. The amendment
provides for the lease of additional premises, approximating 56,000 square feet,
adjacent to the existing headquarters facility. We began occupying the
additional premises in August 1998.
We operate offices throughout the Silicon Valley: Santa Clara, Palo Alto and
Sand Hill, the center of the venture capital community in California. Other
regional offices within California include Irvine, Los Angeles, Napa, San Diego,
San Francisco, Santa Barbara, and Sonoma. Office locations outside of California
include: Phoenix, Arizona; Boulder, Colorado; Atlanta, Georgia; Chicago,
Illinois; Boston, Massachusetts; Minneapolis, Minnesota; Northern Virginia;
Portland, Oregon; Philadelphia, Pennsylvania; Austin, Texas; Dallas, Texas; and
Seattle, Washington. All of our properties are occupied under leases, which
expire at various dates through May 2005, and in most instances, include options
to renew or extend at market rates and terms. We also own leasehold
improvements, equipment and furniture and fixtures at our offices, all of which
are used in our business activities.
ITEM 3. LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item
pending at December 31, 1999, or at the date of this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote by the stockholders of Silicon's common
stock during the fourth quarter of 1999.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Our common stock is traded over the counter on the National Association of
Securities Dealers Automated Quotation (Nasdaq) National Market under the symbol
"SIVB."
The following table shows the high and low sales prices for our common stock
for each quarterly period during the last two years, based on the daily closing
price as reported by the Nasdaq National Market.
1999 1998
------------------- -------------------
Quarter Low High Low High
- ------- -------- -------- -------- --------
First....................................................... $16.81 $21.00 $25.19 $31.94
Second...................................................... $16.94 $24.75 $30.47 $36.00
Third....................................................... $21.56 $28.50 $14.81 $38.50
Fourth...................................................... $22.88 $52.84 $12.50 $26.63
STOCKHOLDERS
The number of stockholders of record of our common stock was 600 as of
January 31, 2000.
DIVIDENDS
We have not paid cash dividends on our common stock since 1992 and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Our ability to pay cash dividends is limited by generally applicable
corporate and banking laws and regulations. See "Item 1. Business--Supervision
and Regulation--Restrictions on Dividends," and "Item 8. Financial Statements
and Supplementary Data--Note 17 to the Consolidated Financial
Statements--Regulatory Matters" for additional discussion on restrictions and
limitations on the payment of dividends. In addition, our memorandum of
understanding with our regulators requires us to seek regulatory consent before
paying dividends. See "Item 1. Business--Supervision and Regulation--Memorandum
of Understanding."
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
financial statements and supplementary data as presented in Item 8 of this
report. Certain reclassifications have been made to our prior years results to
conform with 1999 presentations. Such reclassifications had no effect on the
results of operations or stockholders' equity. In addition, the common stock
summary information for years prior to 1998 have been restated to reflect a
two-for-one stock split, distributed on May 1, 1998. Such reclassifications had
no effect on the results of operations or stockholders' equity.
Years Ended December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(Dollars and numbers in thousands, except per share amounts)
Income Statement Summary:
Net interest income................................ $ 205,439 $ 146,615 $ 110,824 $ 87,275 $ 73,952
Provision for loan losses.......................... 52,407 37,159 10,067 10,426 8,737
Noninterest income................................. 58,855 23,162 13,265 11,609 12,565
Noninterest expense................................ 125,659 83,645 66,301 52,682 47,925
---------- ---------- ---------- ---------- ----------
Income before taxes................................ 86,228 48,973 47,721 35,776 29,855
Income tax expense................................. 34,030 20,117 20,043 14,310 11,702
---------- ---------- ---------- ---------- ----------
Net income......................................... $ 52,198 $ 28,856 $ 27,678 $ 21,466 $ 18,153
========== ========== ========== ========== ==========
Common Share Summary:
Basic earnings per share........................... $ 2.53 $ 1.42 $ 1.43 $ 1.17 $ 1.04
Diluted earnings per share......................... 2.46 1.38 1.36 1.11 0.99
Book value per share............................... 16.47 10.42 8.75 7.26 5.86
Weighted average shares outstanding................ 20,629 20,268 19,370 18,426 17,494
Weighted average diluted shares outstanding........ 21,259 20,923 20,338 19,382 18,288
Year-End Balance Sheet Summary:
Loans, net of unearned income...................... $1,623,005 $1,611,921 $1,174,645 $ 863,492 $ 738,405
Assets............................................. 4,596,398 3,545,452 2,625,123 1,924,544 1,407,587
Deposits........................................... 4,109,405 3,269,753 2,432,407 1,774,304 1,290,060
Stockholders' equity............................... 368,850 215,865 174,481 135,400 104,974
Average Balance Sheet Summary:
Loans, net of unearned income...................... $1,591,634 $1,318,826 $ 973,637 $ 779,655 $ 681,255
Assets............................................. 3,992,410 2,990,548 2,140,630 1,573,903 1,165,004
Deposits........................................... 3,681,598 2,746,041 1,973,118 1,441,360 1,060,333
Stockholders' equity............................... 238,085 198,675 152,118 119,788 91,710
Capital Ratios:
Total risk-based capital ratio..................... 15.5% 11.5% 11.5% 11.5% 11.9%
Tier 1 risk-based capital ratio.................... 14.3% 10.3% 10.2% 10.2% 10.6%
Tier 1 leverage ratio.............................. 8.8% 7.6% 7.1% 7.7% 8.0%
Average stockholders' equity to average assets..... 6.0% 6.6% 7.1% 7.6% 7.9%
Selected Financial Ratios:
Return on average assets........................... 1.3% 1.0% 1.3% 1.4% 1.6%
Return on average stockholders' equity............. 21.9% 14.5% 18.2% 17.9% 19.8%
Efficiency ratio................................... 54.5% 53.8% 55.9% 55.9% 60.6%
Net interest margin................................ 5.5% 5.2% 5.6% 6.1% 7.1%
Other Data:
Off-balance sheet client funds..................... $5,666,278 $1,096,300 N/A N/A N/A
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis of financial condition
and results of operations in conjunction with our consolidated financial
statements and supplementary data as presented in Item 8 of this report. This
discussion and analysis includes "forward-looking statements" as that term is
used in the securities laws. All statements regarding our expected financial
position, business and strategies are forward-looking statements. In addition,
in this discussion and analysis the words "anticipates," "believes,"
"estimates," "seeks," "expects," "plans," "intends" and similar expressions, as
they relate to Silicon or our management, are intended to identify
forward-looking statements. Although we believe that the expectations reflected
in these forward-looking statements are reasonable, and have based these
expectations on our beliefs as well as our assumptions, such expectations may
prove to be incorrect.
For information with respect to factors that could cause actual results to
differ from the expectations stated in the forward-looking statements, see the
text under the caption "Risk Factors" included at the end of this section. We
urge investors to consider these factors carefully in evaluating the
forward-looking statements contained in this discussion and analysis. All
subsequent written or oral forward-looking statements attributable to our
company or persons acting on our behalf are expressly qualified in their
entirety by these cautionary statements. The forward-looking statements included
in this filing are made only as of the date of this filing. We do not intend,
and undertake no obligation, to update these forward-looking statements.
Certain reclassifications have been made to our prior years results to
conform with 1999 presentations. Such reclassifications had no effect on our
results of operations or stockholders' equity.
Results of Operations
EARNINGS SUMMARY
We reported net income in 1999 of $52.2 million, compared with net income in
1998 and 1997 of $28.9 million and $27.7 million, respectively. Diluted earnings
per share totaled $2.46 in 1999, compared to $1.38 and $1.36 in 1998 and 1997,
respectively. Return on average equity in 1999 was 21.9%, compared with 14.5% in
1998 and 18.2% in 1997. Return on average assets in 1999 was 1.3%, compared with
1.0% in 1998 and 1.3% in 1997.
The increase in net income for 1999, as compared to 1998, was primarily
attributable to growth in both net interest income and noninterest income,
partially offset by increases in the provision for loan losses and in
noninterest expense. The slight increase in net income for 1998, as compared to
1997, was primarily attributable to growth in both net interest income and
noninterest income, and was almost entirely offset by a significant increase in
the provision for loan losses and an increase in noninterest expense. The major
components of net income and changes in these components are summarized in the
following table
16
for the years ended December 31, 1999, 1998 and 1997, and are discussed in more
detail on the following pages.
Years Ended December 31,
----------------------------------------------------------
1999 to 1998 to
1998 1997
1999 1998 Increase 1997 Increase
---------- ---------- -------- ---------- --------
(Dollars in thousands)
Net interest income..................................... $205,439 $146,615 $58,824 $110,824 $35,791
Provision for loan losses............................... 52,407 37,159 15,248 10,067 27,092
Noninterest income...................................... 58,855 23,162 35,693 13,265 9,897
Noninterest expense..................................... 125,659 83,645 42,014 66,301 17,344
-------- -------- ------- -------- -------
Income before income taxes.............................. 86,228 48,973 37,255 47,721 1,252
Income tax expense...................................... 34,030 20,117 13,913 20,043 74
-------- -------- ------- -------- -------
Net income.............................................. $ 52,198 $ 28,856 $23,342 $ 27,678 $ 1,178
======== ======== ======= ======== =======
NET INTEREST INCOME AND MARGIN
Net interest income is defined as the difference between interest earned,
primarily on loans and investments, and interest paid on funding sources,
primarily deposits. Net interest income is our principal source of revenue. Net
interest margin is defined as the amount of net interest income, on a fully
taxable-equivalent basis, expressed as a percentage of average interest-earning
assets. The average yield earned on interest-earning assets is the amount of
taxable-equivalent interest income expressed as a percentage of average
interest-earning assets. The average rate paid on funding sources is defined as
interest expense as a percentage of average interest-earning assets.
17
The following table sets forth average assets, liabilities and stockholders'
equity, interest income and interest expense, average yields and rates, and the
composition of our net interest margin for the years ended December 31, 1999,
1998 and 1997.
Years Ended December 31,
---------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
Average Average
Yield Yield
Average and Average and
Balance Interest Rate Balance Interest Rate
------------ ---------- -------- ------------ ---------- --------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and securities purchased
under agreement to resell (1)................. $ 618,338 $ 31,204 5.0% $ 396,488 $ 21,305 5.4%
Investment securities:
Taxable....................................... 1,441,081 82,193 5.7 1,044,918 61,515 5.9
Non-taxable (2)............................... 135,549 8,460 6.2 78,234 5,034 6.4
Loans: (3), (4), (5)
Commercial.................................... 1,393,134 143,744 10.3 1,157,949 122,708 10.6
Real estate construction and term............. 138,943 13,988 10.1 115,743 12,364 10.7
Consumer and other............................ 59,557 5,241 8.8 45,134 4,064 9.0
---------- -------- ---- ---------- -------- ----
Total loans..................................... 1,591,634 162,973 10.2 1,318,826 139,136 10.6
---------- -------- ---- ---------- -------- ----
Total interest-earning assets..................... 3,786,602 284,830 7.5 2,838,466 226,990 8.0
---------- -------- ---- ---------- -------- ----
Cash and due from banks........................... 186,841 137,096
Allowance for loan losses......................... (59,383) (40,055)
Other real estate owned........................... 181 681
Other assets...................................... 78,169 54,360
---------- ----------
Total assets...................................... $3,992,410 $2,990,548
========== ==========
Funding sources:
Interest-bearing liabilities:
NOW deposits.................................... $ 32,664 620 1.9 $ 18,702 348 1.9
Regular money market deposits................... 357,006 8,770 2.5 338,585 9,189 2.7
Bonus money market deposits..................... 1,907,517 58,510 3.1 1,487,240 63,155 4.3
Time deposits................................... 207,108 8,530 4.1 131,530 5,917 4.5
Other borrowings................................ -- -- -- 66 4 6.0
---------- -------- ---- ---------- -------- ----
Total interest-bearing liabilities................ 2,504,295 76,430 3.1 1,976,123 78,613 4.0
Portion of noninterest-bearing
funding sources................................. 1,282,307 862,343
---------- -------- ---- ---------- -------- ----
Total funding sources............................. 3,786,602 76,430 2.0 2,838,466 78,613 2.8
---------- -------- ---- ---------- -------- ----
Noninterest-bearing funding sources:
Demand deposits................................. 1,177,303 769,984
Other liabilities............................... 34,220 22,146
Trust preferred securities (6).................. 38,507 23,620
Stockholders' equity............................ 238,085 198,675
Portion used to fund interest-
earning assets................................ (1,282,307) (862,343)
---------- ----------
Total liabilities and stockholders' equity........ $3,992,410 $2,990,548
========== ==========
Net interest income and margin.................... $208,400 5.5% $148,377 5.2%
======== ==== ======== ====
Total deposits.................................... $3,681,598 $2,746,041
========== ==========
Years Ended December 31,
------------------------------------
1997
------------------------------------
Average
Yield
Average and
Balance Interest Rate
------------ ---------- --------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and securities purchased
under agreement to resell (1)................. $ 312,398 $ 17,264 5.5%
Investment securities:
Taxable....................................... 671,390 40,360 6.0
Non-taxable (2)............................... 33,801 2,320 6.9
Loans: (3), (4), (5)
Commercial.................................... 858,459 95,304 11.1
Real estate construction and term............. 78,311 8,063 10.3
Consumer and other............................ 36,867 3,473 9.4
---------- -------- ----
Total loans..................................... 973,637 106,840 11.0
---------- -------- ----
Total interest-earning assets..................... 1,991,226 166,784 8.4
---------- -------- ----
Cash and due from banks........................... 148,044
Allowance for loan losses......................... (37,568)
Other real estate owned........................... 1,192
Other assets...................................... 37,736
----------
Total assets...................................... $2,140,630
==========
Funding sources:
Interest-bearing liabilities:
NOW deposits.................................... $ 15,814 308 1.9
Regular money market deposits................... 345,828 9,368 2.7
Bonus money market deposits..................... 895,259 40,885 4.6
Time deposits................................... 107,742 4,587 4.3
Other borrowings................................ 5 -- 5.0
---------- -------- ----
Total interest-bearing liabilities................ 1,364,648 55,148 4.0
Portion of noninterest-bearing
funding sources................................. 626,578
---------- -------- ----
Total funding sources............................. 1,991,226 55,148 2.8
---------- -------- ----
Noninterest-bearing funding sources:
Demand deposits................................. 608,475
Other liabilities............................... 15,389
Trust preferred securities (6).................. --
Stockholders' equity............................ 152,118
Portion used to fund interest-
earning assets................................ (626,578)
----------
Total liabilities and stockholders' equity........ $2,140,630
==========
Net interest income and margin.................... $111,636 5.6%
======== ====
Total deposits.................................... $1,973,118
==========
- ----------------------------------------
(1) Includes average interest-bearing deposits in other financial institutions
of $255, $240 and $306 in 1999, 1998 and 1997, respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in 1999,
1998 and 1997. These adjustments were $2,961, $1,762 and $812 for the years
ended December 31, 1999, 1998 and 1997, respectively.
(3) Average loans include average nonaccrual loans of $37,827, $26,158 and
$19,681 in 1999, 1998 and 1997, respectively.
(4) Average loans are net of average unearned income of $9,328, $8,299 and
$6,922 in 1999, 1998 and 1997, respectively.
(5) Loan interest income includes loan fees of $15,738, $12,935 and $10,567 in
1999, 1998 and 1997, respectively.
(6) The 8.25% annual distribution to SVB Capital I is recorded as a component of
noninterest expense.
18
Net interest income is affected by changes in the amount and mix of
interest-earnings assets and interest-bearing liabilities, referred to as
"volume change." Net interest income is also affected by changes in yields
earned on interest-earning assets and rates paid on interest-bearing
liabilities, referred to as "rate change." The following table sets forth
changes in interest income and interest expense for each major category of
interest-earning assets and interest-bearing liabilities. The table also
reflects the amount of change attributable to both volume and rate changes for
the years indicated. Changes relating to investments in non-taxable municipal
securities are presented on a fully taxable-equivalent basis using the federal
statutory rate of 35% in 1999, 1998 and 1997.
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
------------------------------- ------------------------------
Volume Rate Total Volume Rate Total
-------- --------- -------- -------- -------- --------
(Dollars in thousands)
Interest income:
Federal funds sold and securities purchased
under agreement to resell.................... $11,195 $ (1,296) $ 9,899 $ 4,518 $ (477) $ 4,041
Investment securities.......................... 26,074 (1,970) 24,104 24,765 (896) 23,869
Loans.......................................... 27,933 (4,096) 23,837 36,418 (4,122) 32,296
------- -------- ------- ------- ------- -------
Increase (decrease) in interest income........... 65,202 (7,362) 57,840 65,701 (5,495) 60,206
------- -------- ------- ------- ------- -------
Interest expense:
NOW deposits................................... 265 7 272 54 (14) 40
Regular money market deposits.................. 453 (872) (419) (197) 18 (179)
Bonus money market deposits.................... 12,891 (17,536) (4,645) 25,138 (2,868) 22,270
Time deposits.................................. 3,113 (500) 2,613 1,070 260 1,330
Other borrowings............................... (4) -- (4) 4 -- 4
------- -------- ------- ------- ------- -------
Increase (decrease) in interest expense.......... 16,718 (18,901) (2,183) 26,069 (2,604) 23,465
------- -------- ------- ------- ------- -------
Increase (decrease) in net interest income....... $48,484 $ 11,539 $60,023 $39,632 $(2,891) $36,741
======= ======== ======= ======= ======= =======
Net interest income, on a fully taxable-equivalent basis, totaled $208.4
million in 1999, an increase of $60.0 million, or 40.5%, from the $148.4 million
total in 1998. The increase in net interest income was attributable to a $57.8
million, or 25.5%, increase in interest income, combined with a $2.2 million, or
2.8%, decrease in interest expense over the comparable prior year period. Net
interest income, on a fully taxable-equivalent basis, totaled $148.4 million in
1998, an increase of $36.7 million, or 32.9%, compared to the $111.6 million
total in 1997. This increase in net interest income was attributable to a $60.2
million, or 36.1%, increase in interest income, offset by a $23.5 million, or
42.5%, increase in interest expense over the comparable prior year period.
19
The $57.8 million increase in interest income for 1999, as compared to 1998,
was the result of a $65.2 million favorable volume variance, slightly offset by
a $7.4 million unfavorable rate variance. The $65.2 million favorable volume
variance resulted from a $948.1 million, or 33.4%, increase in average
interest-earning assets over the comparable prior year period. The increase in
average interest-earning assets resulted from strong growth in our average
deposits, which increased $935.6 million, or 34.1%, from 1998 to 1999. The
increase in average interest-earning assets consisted of loans, which increased
$272.8 million, plus a combination of highly liquid, lower-yielding federal
funds sold, securities purchased under agreement to resell and investment
securities, which collectively increased $675.3 million, accounting for 71.2% of
the total increase in average interest-earning assets.
Average loans increased $272.8 million, or 20.7%, in 1999 as compared to
1998, resulting in a $27.9 million favorable volume variance. This growth was
widely distributed throughout the loan portfolio, as reflected by increased
average loan balances in most of our technology, life sciences and special
industry niche practices, in specialized lending products, and throughout our
loan offices located across the nation.
Average investment securities for 1999 increased $453.5 million, or 40.4%,
as compared to 1998, resulting in a $26.1 million favorable volume variance. The
aforementioned strong growth in average deposits exceeded the growth in average
loans during 1999, and generated excess funds that were largely invested in U.S.
agency securities, mortgage-backed securities, collateralized mortgage
obligations, and commercial paper. The growth in the investment portfolio
reflected our actions to continue to increase, as well as further diversify our
portfolio of short-term investments in response to the continuing increase in
liquidity.
Average federal funds sold and securities purchased under agreement to
resell in 1999 increased a combined $221.9 million, or 56.0%, over the prior
year, resulting in an $11.2 million favorable volume variance. This increase was
largely due to the aforementioned strong growth in average deposits during 1999
and our actions to continue to further diversify our portfolio of short-term
investments.
Unfavorable rate variances associated with each component of
interest-earning assets combined to decrease interest income by $7.4 million in
1999, as compared to the prior year. Short-term market interest rates have
declined on an overall basis during the past year. As a result of this decline,
we earned lower yields during 1999 on federal funds sold, securities purchased
under agreements to resell and our investment securities, a significant portion
of which were short-term in nature, resulting in a $3.3 million unfavorable rate
variance as compared to the prior year. The average yield on loans in 1999 also
decreased 40 basis points from the respective prior year, accounting for the
remaining $4.1 million of the total unfavorable rate variance. This decrease was
primarily attributable to a 36 basis points decline in our weighted average
prime rate in 1999 as compared to the similar prior year period. Approximately
77.5% of our loans were prime rate-based at the end of 1999.
The yield on average interest-earning assets decreased 50 basis points in
1999 from the comparable prior year period. This decrease resulted from a slight
decline in the average yield on loans, largely due to a decline in our average
prime rate, as well as to a continuing shift in the composition of
interest-earning assets towards a higher percentage of highly liquid,
lower-yielding federal funds sold, securities purchased under agreement to
resell and investment securities. This shift in the composition of average
interest-earning assets resulted from the aforementioned strong growth in
deposits continuing to outpace the growth in loans.
20
The $60.2 million increase in interest income for 1998, as compared to 1997,
was the result of a $65.7 million favorable volume variance, slightly offset by
a $5.5 million unfavorable rate variance. The $65.7 million favorable volume
variance resulted from a $847.2 million, or 42.5%, increase in average
interest-earning assets over the comparable prior year period. The increase in
average interest-earning assets resulted from strong growth in our average
deposits, which increased $772.9 million, or 39.2%, from 1997 to 1998.
Average loans increased $345.2 million, or 35.5%, in 1998 as compared to
1997, resulting in a $36.4 million favorable volume variance. This growth was
widely distributed throughout the loan portfolio, as reflected by increased loan
balances in all of our technology, life sciences and special industry niche
practices, in specialized lending products, and throughout our loan offices
located across the nation.
Average investment securities for 1998 increased $418.0 million, or 59.3%,
as compared to 1997, resulting in a $24.8 million favorable volume variance. The
aforementioned strong growth in average deposits exceeded the growth in average
loans during 1998, and generated excess funds that were largely invested in U.S.
agency securities, collateralized mortgage obligations and municipal securities.
Average federal funds sold and securities purchased under agreement to
resell in 1998 increased a combined $84.1 million, or 26.9%, over the prior
year, resulting in a $4.5 million favorable volume variance. This increase was
largely due to the aforementioned strong growth in average deposits during 1998
coupled with our actions to further diversify our portfolio of short-term
investments.
Unfavorable rate variances associated with each component of
interest-earning assets in 1998 resulted in a decrease in interest income of
$5.5 million as compared to the prior year. Short-term market interest rates
declined during the second half of 1998. As a result of this decline, we earned
lower yields in 1998 on federal funds sold, securities purchased under agreement
to resell and investment securities, a significant portion of which were
short-term in nature, resulting in a $1.4 million unfavorable rate variance as
compared to the prior year. The average yield on loans in 1998 decreased 40
basis points from 1997, accounting for the remaining $4.1 million of the total
unfavorable rate variance. This decrease was primarily attributable to both
increased competition and a decline in the average prime rate we charged during
the second half of 1998, as a substantial portion of our loans are prime
rate-based.
The total yield on average interest-earning assets decreased 40 basis points
in 1998 from the comparable prior year period. This decrease resulted from a
decline in the average yield on loans, largely due to both increased competition
and a decline in our prime rate, as well as to a continuing shift in the
composition of interest-earning assets towards a higher percentage of highly
liquid, lower yielding federal funds sold, securities purchased under agreement
to resell and investment securities. This shift in the composition of average
interest-earning assets resulted from the aforementioned strong growth in
deposits continuing to outpace the growth in our average loans during 1998.
Interest expense in 1999 decreased $2.2 million from 1998. This decrease was
due to a favorable rate variance of $18.9 million, largely offset by an
unfavorable volume variance of $16.7 million. The favorable rate variance
largely resulted from a reduction in the average rate paid on our bonus money
market deposit product, from 4.3% in 1998 to 3.1% in 1999. The reduction during
1999 in the average rate paid on our bonus money market deposit product was
primarily attributable to a decline in short-term market interest
21
rates during the second half of 1998 and to our lowering the rates paid on bonus
money market deposits by an additional 163 basis points during 1999.
The unfavorable volume variance of $16.7 million resulted from a $528.2
million, or 26.7%, increase in average interest-bearing liabilities in 1999 as
compared to 1998. This increase was largely concentrated in our bonus money
market deposit product, which increased $420.3 million, or 28.3%, and was
explained by high levels of client liquidity attributable to a strong inflow of
investment capital into the venture capital community during the past year, and
by growth in the number of clients we serve.
The average cost of funds paid on average interest-bearing liabilities
decreased 90 basis points from 1998 to 1999. This decrease in the average cost
of funds was largely due to a decrease of 120 basis points in the average rate
paid on our bonus money market deposit product.
Interest expense in 1998 increased $23.5 million from 1997. This increase
was due to an unfavorable volume variance of $26.1 million, partially offset by
a favorable rate variance of $2.6 million. The unfavorable volume variance
resulted from a $611.5 million, or 44.8%, increase in average interest-bearing
liabilities in 1998 as compared to 1997. This increase was largely concentrated
in our bonus money market deposit product, which increased $592.0 million, or
66.1%, and was explained by high levels of client liquidity attributable to a
strong inflow of investment capital into the venture capital community during
1998, and by growth in the number of clients we serve.
Changes in the average rates paid on interest-bearing liabilities had a $2.6
million favorable impact on interest expense in 1998 as compared to 1997. This
decrease in interest expense largely resulted from a reduction in the average
rate paid on our bonus money market deposit product from 4.6% in 1997 to 4.3% in
1998. The reduction during 1998 in the average rate paid on our bonus money
market deposit product was largely attributable to a decline in short-term
market interest rates during the second half of 1998.
The average cost of funds paid in 1998 of 2.8% was flat with the prior year.
Although the average rate paid on our bonus money market deposit product
decreased during 1998 as compared to 1997, this was offset by a continuing shift
in the composition of average interest-bearing liabilities towards a higher
percentage of deposits in that product.
PROVISION FOR LOAN LOSSES
The provision for loan losses is based on our evaluation of the adequacy of
the existing allowance for loan losses in relation to total loans, and on our
periodic assessment of the inherent and identified risk dynamics of the loan
portfolio resulting from reviews of selected individual loans and loan
commitments.
Our provision for loan losses totaled $52.4 million in 1999 compared to
$37.2 million and $10.1 million in 1998 and 1997, respectively. The increase in
our provision for loan losses in 1999 was in response to an increasing trend in
net charge-offs. We incurred net charge-offs of $26.6 million in 1999 and $28.9
million in 1998, compared to $5.1 million in 1997. For a more detailed
discussion of credit quality and the allowance for loan losses, see the Item 7
section entitled "Financial Condition-Credit Quality and the Allowance for Loan
Losses."
22
NONINTEREST INCOME
The following table summarizes the components of noninterest income for the
past three years:
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Disposition of client warrants.............................. $33,003 $ 6,657 $ 5,480
Letter of credit and foreign exchange income................ 14,027 7,397 4,512
Client investment fees...................................... 4,529 473 299
Deposit service charges..................................... 2,764 1,730 1,772
Investment gains............................................ 1,056 5,240 90
Other....................................................... 3,476 1,665 1,112
------- ------- -------
Total noninterest income.................................... $58,855 $23,162 $13,265
======= ======= =======
Noninterest income increased $35.7 million, or 154.1%, in 1999 as compared
to 1998. This increase was largely due to a $26.3 million increase in income
from the disposition of client warrants, coupled with a $6.6 million increase in
letter of credit fees, foreign exchange fees and other trade finance income and
a $4.1 million increase in client investment fees. This increase was partially
offset by a decrease of $4.2 million in investment gains. Noninterest income
increased $9.9 million, or 74.6%, in 1998 as compared to 1997. This increase was
largely due to a $5.2 million increase in investment gains, a $2.9 million
increase in letter of credit fees, foreign exchange fees and other trade finance
income and a $1.2 million increase in income from the disposition of client
warrants.
Income from the disposition of client warrants totaled $33.0 million, $6.7
million and $5.5 million in 1999, 1998 and 1997, respectively. We have
historically obtained rights to acquire stock, in the form of warrants, in
certain clients primarily as part of negotiated credit facilities. The receipt
of warrants does not change the loan covenants or other collateral control
techniques we employee to mitigate the risk of a loan becoming nonperforming,
and collateral requirements on loans with warrants are similar to lending
arrangements where warrants are not obtained. The timing and amount of income
from the disposition of client warrants typically depends upon factors beyond
our control, including the general condition of the public equity markets as
well as the merger and acquisition environment. We therefore cannot predict the
timing and amount of income with any degree of accuracy and it is likely to very
materially from period to period. During the years ended December 31, 1999, 1998
and 1997, a significant portion of the income from the disposition of client
warrants was offset by expenses related to our efforts to build an
infrastructure sufficient to support present and prospective business
activities, and was also offset by increases to the provision for loan losses in
those same years.
Based on December 31, 1999 market valuations, we had potential pre-tax
warrant gains totaling $68.2 million, of which $40.9 million related to two
clients. We are restricted from exercising many of these warrants until the
first three quarters of 2000. As of December 31, 1999, we held 853 warrants in
companies, many of which are non-public companies, thus we are currently unable
to value most of these warrants. Further, based on December 31, 1999 market
valuations, we had a potential pre-tax gain on a venture capital fund investment
of $42.3 million. We are restricted from selling this publicly-traded equity
instrument until the first quarter of 2000. Additionally, we are typically
precluded from using any type of
23
derivative instrument to secure the current unrealized gains associated with
many of these equity instruments. Hence, the amount of income we realize from
these equity instruments in future periods may vary materially from the current
unrealized amount due to fluctuations in the market prices of the underlying
common stock of these companies. Further, we may reinvest some or all of the
income realized from the disposition of these equity instruments in furthering
our business strategies.
Letter of credit fees, foreign exchange fees and other trade finance income
totaled $14.0 million in 1999, an increase of $6.6 million, or 89.6%, from the
$7.4 million total in 1998, and an increase of $9.5 million, or 210.9%, from the
$4.5 million total in 1997. This growth reflects a concerted effort by our
management to expand the penetration of trade finance-related products and
services among our growing client base, a large percentage of which provide
products and services in international markets.
Client investment fees totaled $4.5 million in 1999 compared to $0.5 million
and $0.3 million in 1998 and 1997, respectively. Prior to June 1999, we only
earned client investment fees on off-balance sheet funds that were invested by
clients in investment securities such as U.S. Treasuries, U.S. agencies and
commercial paper. Off-balance sheet client funds totaled $1.1 billion at
December 31, 1998. Beginning in June 1999, we began offering off-balance sheet
private label mutual fund products to clients. We earn approximately 35 basis
points on the average balance in these products. At December 31, 1999, $5.7
billion in client funds were invested off-balance sheet, including $3.7 billion
in the mutual fund products. The significant growth in the amount of off-balance
sheet client funds was explained by high levels of client liquidity attributable
to a strong inflow of investment capital into the venture capital community
during the past year, by growth in the number of clients we serve, and by
increased marketing of off-balance sheet private label mutual fund products.
Income related to deposit service charges totaled $2.8 million, $1.7 million
and $1.8 million in 1999, 1998 and 1997, respectively. Clients compensate us for
depository services either through earnings credits computed on their demand
deposit balances, or via explicit payments recognized as deposit service charges
income. The increase in deposit service charges income in 1999 was due to both a
reduction in earnings credits resulting from a decrease in short-term market
rates during 1998 and growth in our client base.
We realized $1.1 million in gains on sales of investment securities during
1999, compared to $5.2 million in gains on sales of investment securities during
1998, and a nominal gain on sales of investment securities during 1997. The 1999
gains primarily related to distributions received from venture capital fund
investments. The 1998 gains primarily related to sales of U.S. Treasury
securities, U.S. agency securities, mortgage-backed securities, and
collateralized mortgage obligations, with an aggregate book value of $433.3
million. All investment securities sold were classified as available-for-sale,
and all sales were conducted as a normal component of our asset/liability and
liquidity management activities.
Other noninterest income largely consisted of service-based fee income, and
totaled $3.5 million in 1999, compared to $1.7 million in 1998 and $1.1 million
in 1997, respectively. The increase in 1999, as compared to 1998 and 1997, was
primarily due to a higher volume of cash management and loan documentation
services related to our growing client base.
24
NONINTEREST EXPENSE
Noninterest expense in 1999 totaled $125.7 million, a $42.0 million, or
50.2%, increase from 1998. Total noninterest expense was $83.6 million in 1998,
up $17.3 million, or 26.2%, from 1997. We closely monitor our level of
noninterest expense using a variety of financial ratios, including the
efficiency ratio. The efficiency ratio is calculated by dividing the amount of
noninterest expense, excluding costs associated with other real estate owned, by
adjusted revenues, defined as the total of net interest income and noninterest
income, excluding income from the disposition of client warrants and gains or
losses related to sales of investment securities. This ratio reflects the level
of operating expense required to generate $1 of operating revenue. Our
efficiency ratio was 54.5% for 1999, compared to 53.8% and 55.9% in 1998 and
1997, respectively. The following table presents the detail of noninterest
expense and the incremental contribution of each expense line item to our
efficiency ratio:
Years Ended December 31,
-----------------------------------------------------------------------
1999 1998 1997
----------------------- --------------------- ---------------------
Percent of Percent of Percent of
Adjusted Adjusted Adjusted
Amount Revenues Amount Revenues Amount Revenues
---------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
Compensation and benefits..................... $ 75,896 33.0% $44,232 28.0% $40,084 33.8%
Professional services......................... 11,766 5.1 9,876 6.3 6,710 5.7
Net occupancy expense......................... 6,689 2.9 5,195 3.3 3,410 2.9
Business development and travel............... 6,644 2.9 6,025 3.8 4,514 3.8
Furniture and equipment....................... 6,178 2.7 6,667 4.2 3,620 3.1
Trust preferred securities distributions...... 3,300 1.4 2,012 1.3 -- --
Postage and supplies.......................... 2,582 1.1 2,225 1.4 1,600 1.3
Advertising and promotion..................... 2,285 1.0 2,215 1.4 1,448 1.2
Telephone..................................... 1,846 0.8 2,157 1.4 1,444 1.2
Other......................................... 8,205 3.6 4,255 2.7 3,395 2.9
-------- ---- ------- ---- ------- ----
Total, excluding cost of other real estate
owned....................................... 125,391 54.5% 84,859 53.8% 66,225 55.9%
==== ==== ====
Cost of other real estate owned............... 268 (1,214) 76
-------- ------- -------
Total noninterest expense..................... $125,659 $83,645 $66,301
======== ======= =======
Compensation and benefits expenses totaled $75.9 million in 1999, a $31.7
million, or 71.6%, increase over the $44.2 million incurred in 1998. This
increase was largely the result of an increase in the number of average
full-time equivalent personnel (FTE) we employ, combined with an increase in
performance-based compensation associated with our incentive bonuses and
employee stock ownership plan. Average FTE personnel increased from 521 in 1998
to 645 in 1999. Compensation and benefits expenses in 1998 increased $4.1
million, or 10.4%, from the $40.1 million total in 1997. The increase in
compensation and benefits expenses in 1998 was primarily the result of an
increase in the number of average FTE personnel we employ, partially offset by a
decrease in performance-based compensation due to lower than expected net
income. Average FTE personnel totaled 521 in 1998 compared with 417 in 1997. The
increase in FTE personnel from 1997 through 1999 was primarily due to a
combination of our efforts to develop and support new markets through geographic
expansion, to develop and expand products, services and niches, and to build an
infrastructure sufficient to support present and prospective business
activities.
25
Further growth in our FTE personnel is likely to occur during future years as a
result of the continued expansion of our business activities.
Professional services expenses, which consist of costs associated with
corporate legal services, litigation settlements, accounting and auditing
services, consulting, and our board of directors, totaled $11.8 million in 1999,
a $1.9 million, or 19.1%, increase from the $9.9 million total in 1998. We
incurred $6.7 million in professional services expenses in 1997. The increase in
professional services expense in 1999, as compared to 1998, primarily related to
an increase in consulting fees associated with several business initiatives.
Further, the increase in professional services expenses during the past three
years reflects the extensive efforts we have undertaken to continue to build and
support our infrastructure, as well as evaluate and pursue new business
opportunities. It also reflects our efforts in outsourcing several corporate
functions, such as internal audit, facilities management and credit review,
where we believe we can achieve a combination of cost savings and increased
quality of service. The increase in professional services in 1998, as compared
to 1997, primarily related to an increase in both consulting fees associated
with several business initiatives, including the year 2000 remediation project,
and legal fees primarily related to loan consultations and the workout of
various commercial credits.
Occupancy, furniture and equipment expenses totaled $12.9 million in 1999,
$11.9 million in 1998 and $7.0 million in 1997. The increase in occupancy,
furniture and equipment expenses in 1999, as compared to 1998, was primarily the
result of our continued geographic expansion to develop and support new markets.
The increase in occupancy, furniture and equipment expenses in 1998, as compared
to 1997, was largely attributable to certain non-recurring costs in connection
with the expansion of our existing headquarters facility during the second
quarter of 1998 and an increase in recurring expenses associated with that
additional office space.
Business development and travel expenses totaled $6.6 million in 1999, an
increase of $0.6 million, or 10.3%, compared to the $6.0 million total in 1998.
We incurred $4.5 million in business development and travel expenses in 1997.
The increase in business development and travel expenses during each of the last
two years was largely attributable to overall growth in our business, including
both an increase in the number of FTE personnel and expansion into new
geographic markets.
Trust preferred securities distributions totaled $3.3 million in 1999, an
increase of $1.3 million, or 64.0%, compared to $2.0 million for 1998. These
distributions resulted from the issuance of $40.0 million in cumulative trust
preferred securities during the second quarter of 1998. The trust preferred
securities pay a fixed rate quarterly distribution of 8.25% and have a maximum
maturity of 30 years.
Postage and supplies expenses totaled $2.6 million, $2.2 million and $1.6
million in 1999, 1998 and 1997, respectively. Total telephone expenses were $1.9
million in 1999, $2.2 million in 1998 and $1.4 million in 1997. The increase in
postage and supplies during each of the past two years was largely the result of
overall growth in our business, including both an increase in the number of FTE
personnel and expansion into new geographic markets. The decrease in telephone
expense in 1999, as compared to 1998 relates primarily to our efforts to
negotiate lower telecommunications rates.
Advertising and promotion expenses totaled $2.3 million, $2.2 million and
$1.4 million in 1999, 1998 and 1997, respectively. The increase in advertising
and promotion expenses during each of the last two years reflects a concerted
effort to increase our marketing nationwide.
26
Other noninterest expenses totaled $8.2 million, $4.3 million and $3.4
million in 1999, 1998 and 1997, respectively. The increase in other noninterest
expenses in 1999 of $4.0 million, as compared to 1998, was primarily due to $2.1
million in charitable contributions made to the Silicon Valley Bank Foundation
and increased data processing costs. The $0.9 million increase in other
noninterest expenses from 1997 to 1998 was largely due to an increase in data
processing costs related to both growth in our business and several new business
initiatives commenced in 1998.
In 1999 and 1997, we incurred minimal net costs associated with OREO.
Additionally, during 1998, we realized a net gain of $1.3 million in connection
with the sale of an OREO property that consisted of multiple undeveloped lots.
INCOME TAXES
Our effective income tax rate was 39.5% in 1999, compared to 41.1% in 1998
and 42.0% in 1997. The decrease in our effective income tax rate was principally
attributable to an increase in the amount of tax-exempt interest income we
received, as well as to a change in our multi-state income tax rate.
Financial Condition
Assets totaled $4.6 billion at December 31, 1999, an increase of $1.1
billion, or 29.6%, compared to $3.5 billion at December 31, 1998.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell
totaled a combined $898.0 million at December 31, 1999, an increase of $498.8
million, or 125.0%, compared to the $399.2 million outstanding at the prior year
end. This increase was attributable to our desire to maintain a high level of
liquidity at year end in anticipation of the century date change.
27
INVESTMENT SECURITIES
The following table details the composition of investment securities, all of
which were classified as available-for-sale and reported at fair value, at
December 31, 1999, 1998 and 1997.
December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(Dollars in thousands)
U.S. Treasury securities.................................... $ 29,798 $ 41,049 $ 217,685
U.S. agencies and corporations:
Discount notes and bonds.................................. 855,570 498,016 462,405
Mortgage-backed securities................................ 161,822 125,059 144,437
Collateralized mortgage obligations....................... 221,952 155,149 41,051
Obligations of states and political subdivisions............ 196,396 515,770 60,436
Commercial paper and other debt securities.................. 117,084 48,464 66,836
Money market mutual funds................................... 27,103 -- --
Bankers' acceptances........................................ -- -- 16,140
Warrant securities.......................................... 68,358 670 897
Venture capital fund investments............................ 52,561 5,359 2,368
Other private equity investments............................ 4,428 569 168
Federal Reserve Bank stock and tax credit funds............. 12,336 7,397 1,481
---------- ---------- ----------
Total....................................................... $1,747,408 $1,397,502 $1,013,904
========== ========== ==========
Investment securities totaled $1.7 billion at December 31, 1999, an increase
of $349.9 million, or 25.0%, over the December 31, 1998 balance of $1.4 billion.
This increase resulted from excess funds that were generated by strong growth in
our deposits outpacing the growth in loans during 1999, and primarily consisted
of U.S. agency securities, mortgage-backed securities, collateralized mortgage
obligations, and commercial paper. The decrease in U.S. Treasury securities and
obligations of states and political subdivisions was primarily due to
maturities. The overall growth in the investment portfolio reflected our actions
to increase as well as to further diversify our investment portfolio in response
to a continued significant increase in liquidity.
The increase in short-term market interest rates during 1999 resulted in a
pre-tax unrealized loss on our available-for-sale fixed income securities
investment portfolio of $44.5 million as of December 31, 1999. This unrealized
loss was offset by a pre-tax unrealized gain of $113.0 million associated with
corporate equity securities, which includes our warrant securities, venture
capital fund investments and other private equity investments. Because of the
level of liquidity we maintain, we do not anticipate having to sell fixed income
investment securities and incurring material losses on sales in future periods
for liquidity purposes. Additionally, we are restricted from selling many of the
corporate equity securities until the first three quarters of 2000. We are also
typically precluded from using any type of derivative instrument to secure the
current unrealized gains associated with many of these equity instruments.
Hence, the amount of income we recognize in future periods from the disposition
of these equity instruments may vary materially from the current unrealized
amount due to fluctuations in the market prices of the underlying common stock
of these companies.
Investment securities totaled $1.4 billion at December 31, 1998, a $383.6
million, or 37.8%, increase over the December 31, 1997 balance of $1.0 billion.
This increase resulted from excess funds
28
that were generated by strong growth in our deposits outpacing the growth in
loans during 1998, and primarily consisted of U.S. agency securities,
collateralized mortgage obligations and municipal securities. The significant
increase in municipal securities was composed of both taxable and non-taxable
municipal obligations, and was largely attributable to our obtaining slightly
higher yields on these investments as compared to U.S. agency discount notes and
bonds and other short-term securities. The decreases in U.S. Treasury
securities, mortgage-backed securities and commercial paper was primarily due to
sales and maturities. The overall growth in the investment portfolio reflected
our actions to increase as well as to further diversify our portfolio of
short-term investments in response to a continued significant increase in
liquidity.
At December 31, 1999, there were no investment securities held by us which
were issued by a single party, excluding securities issued by the U.S.
Government or by U.S. Government agencies and corporations, and which exceeded
10.0% of our stockholders' equity at year end.
The following table provides the remaining contractual principal maturities
and fully taxable-equivalent yields on investment securities as of December 31,
1999. The weighted-average yield is computed using the amortized cost of
available-for-sale securities, which are reported at fair value. Expected
remaining maturities of certain U.S. agency securities, mortgage-backed
securities and collateralized mortgage obligations will generally differ from
their contractual maturities because borrowers may have the right to prepay
obligations with or without penalties. Warrant securities, venture capital fund
investments, other private equity investments, Federal Reserve Bank stock, and
tax credit funds, were included in the table below as maturing after 10 years.
December 31, 1999
------------------------------------------------------------------
After One
One Year Year to
Total or Less Five Years
---------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Fair Average Fair Average Fair Average
Value Yield Value Yield Value Yield
----------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
U.S. Treasury securities......... $ 29,798 5.6% $ 5,006 5.6% $ 24,792 5.6%
U.S. agencies and corporations:
Discount notes and bonds....... 855,570 5.8 66,928 5.8 788,642 5.8
Mortgage-backed securities..... 161,822 6.4 -- -- -- --
Collateralized mortgage
obligations.................. 221,952 6.4 -- -- 9,613 6.3
Obligations of states and
political subdivisions......... 196,396 6.4 9,323 6.2 30,302 6.2
Commercial paper and other debt
securities..................... 117,084 7.1 117,084 7.1 -- --
Money market mutual funds........ 27,103 5.5 27,103 5.5 -- --
Warrant securities............... 68,358 -- -- -- -- --
Venture capital fund
investments.................... 52,561 -- -- -- -- --
Other private equity
investments.................... 4,428 -- -- -- -- --
Federal Reserve Bank stock and
tax credit funds............... 12,336 -- -- -- -- --
---------- --- -------- --- -------- ---
Total............................ $1,747,408 6.0% $225,444 6.4% $853,349 5.8%
========== === ======== === ======== ===
December 31, 1999
-------------------------------------------
After Five
Years to After
Ten Years Ten Years
--------------------- ---------------------
Weighted- Weighted-
Fair Average Fair Average
Value Yield Value Yield
---------- ---------- ---------- ----------
(Dollars in thousands)
U.S. Treasury securities......... -- -- -- --
U.S. agencies and corporations:
Discount notes and bonds....... -- -- -- --
Mortgage-backed securities..... $ 5,084 6.1% $156,738 6.4%
Collateralized mortgage
obligations.................. 22,558 6.4 189,781 6.4
Obligations of states and
political subdivisions......... 91,271 6.4 65,500 6.5
Commercial paper and other debt
securities..................... -- -- -- --
Money market mutual funds........ -- -- -- --
Warrant securities............... -- -- 68,358 --
Venture capital fund
investments.................... -- -- 52,561 --
Other private equity
investments.................... -- -- 4,428 --
Federal Reserve Bank stock and
tax credit funds............... -- -- 12,336 --
-------- --- -------- ---
Total............................ $118,913 6.4% $549,702 6.0%
======== === ======== ===
29
Mortgage-backed securities (MBS), collateralized mortgage obligations (CMO)
and callable U.S. agency securities (Agencies) pose risks not associated with
fixed maturity bonds, primarily related to the ability of the borrower to call
or prepay the debt with or without penalty. This risk, known as prepayment risk,
may cause the MBS, the CMO and the Agencies to remain outstanding for a period
of time different than that assumed at the time of purchase. When interest rates
decline, prepayments generally tend to increase, causing the average expected
remaining maturity of the MBS, the CMO and the Agencies to decline. Conversely,
if interest rates rise, prepayments tend to decrease, lengthening the average
expected remaining maturity of the MBS, the CMO and the Agencies.
LOANS
The composition of the loan portfolio, net of unearned income, for each of
the past five years is as follows:
December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ---------- ----------
(Dollars in thousands)
Commercial...................................... $1,414,728 $1,429,980 $1,051,218 $755,699 $622,488
Real estate construction........................ 76,209 74,023 53,583 27,540 17,194
Real estate term................................ 67,738 60,841 33,395 44,475 56,845
Consumer and other.............................. 64,330 47,077 36,449 35,778 41,878
---------- ---------- ---------- -------- --------
Total loans...................................