Back to GetFilings.com
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 33-41102
------------------------
SILICON VALLEY BANCSHARES
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2856336
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or organization) Number)
3003 TASMAN DRIVE
SANTA CLARA, CALIFORNIA 95054-1191
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (408) 654-7282
------------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (no par value) Nasdaq National Market
(Title of each class) (Name of each exchange on which
registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of its common stock on January 31,
1998, on the Nasdaq National Market was $558,358,755.
At January 31, 1998, 10,128,957 shares of the registrant's common stock (no
par value) were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PARTS OF FORM 10-K
DOCUMENTS INCORPORATED INTO WHICH INCORPORATED
- ---------------------------------------------------------------- ----------------------------
Definitive proxy statement for the Company's 1998 Annual Meeting
of Shareholders to be filed within 120 days of the end of the
fiscal year ended December 31, 1997 Part III
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This report contains a total of 80 pages, including exhibits.
The Exhibit Index is on page 70.
TABLE OF CONTENTS
PAGE
-----
PART I
- -----------------------------------------------------------------------------------------------------------
ITEM 1. BUSINESS.......................................................................................... 3
ITEM 2. PROPERTIES........................................................................................ 15
ITEM 3. LEGAL PROCEEDINGS................................................................................. 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................... 15
PART II
- -----------------------------------------------------------------------------------------------------------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................... 16
ITEM 6. SELECTED FINANCIAL DATA........................................................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................... 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. 67
PART III
- -----------------------------------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................ 67
ITEM 11. EXECUTIVE COMPENSATION............................................................................ 67
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................... 67
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................... 67
PART IV
- -----------------------------------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................. 67
SIGNATURES................................................................................................. 68
INDEX TO EXHIBITS.......................................................................................... 70
2
PART I
ITEM 1. BUSINESS
GENERAL
Silicon Valley Bancshares (the "Company") is a California corporation and
bank holding company that was incorporated on April 23, 1982. The Company's
principal subsidiary is Silicon Valley Bank (the "Bank"), a wholly owned
subsidiary of the Company that was organized and incorporated as a California
banking corporation on October 17, 1983. SVB Leasing Company, a wholly owned
subsidiary of the Company, was incorporated on November 14, 1984 as a California
corporation, and has remained inactive since incorporation.
The Bank is a member of the Federal Reserve System and its deposits are
insured by the Federal Deposit Insurance Corporation (FDIC). The Bank serves
emerging growth and middle-market companies in specific targeted niches,
focusing on the technology and life sciences industries, while also identifying
and capitalizing on opportunities to serve companies in other industries whose
financial services needs are underserved.
BUSINESS OVERVIEW
The Bank provides commercial lending and other financial products and
services to clients in the technology and life sciences industries, as well as
in other specifically targeted niches. These clients are served across the
nation by the Bank through branches and/or loan offices located in Arizona,
California, Colorado, Georgia, Illinois, Maryland, Massachusetts, Oregon, Texas,
and Washington. Since 1994, the Bank has refined a niche strategy based on
identifying and capitalizing on market niches whose financial services needs are
underserved. By dedicating resources within these niches, the Bank is able to
provide the highest level of expertise and quality service to its clients.
TECHNOLOGY AND LIFE SCIENCES NICHE
The Bank's technology and life sciences niche focuses on serving companies
within a variety of technology and life sciences industries and markets across
the nation. These companies are generally liquid, net providers of funds to the
Bank, and often have low utilization of their credit facilities. Lending to this
niche is typically related to working capital lines of credit, equipment
financing, asset acquisition loans, and bridge financing. The following is an
overview of the Bank's technology and life sciences niche practices.
The Communications and Online Services practice serves companies in the
networking, telecommunications and online services industries. The networking
industry includes companies supplying the equipment and services that facilitate
distributed enterprise networks such as local and wide area networks. The
telecommunications industry encompasses the suppliers of equipment and services
to companies and consumers for the transmission of voice, data and video.
Companies included in the online services industry supply access, content,
services, and support to individuals and businesses participating on the
Internet, or in other online activities.
The Computers and Peripherals practice focuses on companies that are engaged
in the support and manufacturing of computers, electronic components and related
peripheral products. Specific markets these companies serve include personal
computers, specialty computer systems, add-in boards, printers, storage devices,
networking equipment, and contract manufacturing.
The Semiconductors practice serves companies involved in the design,
manufacturing and marketing of integrated circuits. This includes companies
involved in the manufacturing of semiconductor production equipment and
semiconductors, testing and related services, electronic parts wholesaling,
computer-aided design, and computer-aided manufacturing.
3
The Software practice consists largely of companies specializing in the
design of integrated computer systems, computer programming services, and the
development and marketing of commercial and industrial applications as well as
prepackaged software.
The Life Sciences practices serve companies in the biotechnology, medical
devices and health care services industries. The biotechnology industry includes
companies involved in research and development of therapeutics and diagnostics
for the medical and pharmaceuticals industries. The medical devices industry
encompasses companies involved in the design, manufacturing and distribution of
surgical instruments and medical equipment. Companies included in the health
care services industry deal with patients, either in a primary care or secondary
care role.
In addition to the industry-related practices discussed above, the Bank has
three other practices that provide commercial lending and other financial
products and services to clients associated with the technology and life
sciences industries. The Pacific Rim practice serves the market of Asian-owned
or managed companies located in the U.S. which meet the criteria for inclusion
in any of the industries mentioned above, while the Venture Capital practice
provides venture capital firms with financing and other specialized products and
services. Lastly, the Emerging Technologies practice, which was established in
1997, primarily targets non-venture-backed technology financial relationships in
Northern California, with a primary focus on the software industry.
SPECIAL INDUSTRY NICHES
The Bank has always served a variety of commercial enterprises unrelated to
its technology and life sciences niche. These clients are served through several
special industry niche practices which generally focus their lending in specific
regions throughout the U.S. The Bank's niche strategy evolved from clients
unrelated to the technology and life sciences niche, and the Bank continues to
follow this strategy by identifying industries whose financial services needs
are underserved. The following is a brief summary of the Bank's special industry
niche practices.
The Real Estate practice is composed of real estate construction and term
loans whose primary source of repayment is cash flow or sales proceeds from real
property collateral. The focus of the Real Estate practice consists of
construction loans for residential and commercial projects, and construction and
mini-permanent loans on retail, industrial and office projects.
The Premium Wineries practice focuses on wineries which produce select or
exclusive vintages of up to 150,000 cases annually. Lending in this niche
consists of both short-term inventory loans and term loans related to vineyard
acquisition and development, equipment financing and cooperage.
The Religious Financial Resources practice serves the credit needs of
churches, temples, their affiliated schools, and other religious organizations
nationwide. Products offered to this niche include term loans for refinancing
existing debt, acquiring property and for construction, remodeling or renovation
projects.
The Entertainment practice serves the independent sector of the
entertainment industry. This practice provides production loans, lines of credit
and term loans for library and other acquisitions.
In addition to serving the niches listed above, the Bank serves a broad
array of industries through its Diversified Industries practice in Northern
California. This practice allows the Bank to continue to evaluate potential
niches by initially identifying and serving a few clients in related industries
or markets.
SPECIALIZED PRODUCTS AND SERVICES
The Bank has several divisions that offer specialized lending products and
other financial products and services to clients in the technology and life
sciences niche as well as the special industry niches discussed above, enabling
the Bank to better serve its clients' wide range of financial services needs.
These
4
divisions include: International, Cash Management, Treasury, Real Estate,
Factoring, Commercial Finance, and Executive Banking.
The International Division provides foreign exchange, import and export
letters of credit, documentary collections, and a number of other trade finance
products and services to the Bank's clients, helping them to successfully
operate in international markets. The Bank has been granted delegated authority
by the Export-Import Bank of the U.S. (EX-IM) and the California Export Finance
Office (CEFO), enabling the Bank to provide its clients with EX-IM and CEFO
guaranteed working capital loans to finance foreign receivables and inventory
intended for export, as well as provide purchase order financing.
The Cash Management Division provides services to help the Bank's customers
manage cash collections and disbursements efficiently and cost effectively.
Services provided include wholesale lockbox services, electronic information
reporting, controlled disbursement services, and a variety of other services
designed to meet the banking and cash management needs of the Bank's clients.
Through the Treasury Division, the Bank provides investment services to
assist its clients with managing short-term investments. Investment securities
purchased on behalf of clients include U.S. Treasury securities, U.S. agency
securities, commercial paper, Eurodollar deposits, and bankers' acceptances.
In addition to being a special industry niche, real estate lending is also a
product offered to the Bank's clients. This product is typically offered to
finance commercial real estate owned and operated by the Bank's client
companies.
Both the Factoring Division and the Commercial Finance Division offer
alternative financing to client companies which do not qualify for the more
traditional financing offered through the Bank's niche practices. The Factoring
Division generally serves the Bank's emerging growth client base by purchasing
clients' accounts receivable at a discount, making operating funds immediately
available to the clients, and then managing the collection of these receivables.
The Commercial Finance Division assists client companies during periods when
profit performance has been interrupted or where greater flexibility is required
by providing credit facilities that involve frequent monitoring of the
underlying collateral, which generally consists of accounts receivable,
inventory and equipment. As clients of the Factoring and Commercial Finance
Divisions grow and their financial condition strengthens, they often end up
being served through the Bank's niche practices.
The Executive Banking Division focuses on serving the personal banking needs
of senior executives and owners of the Bank's client companies, partners and
senior executives of venture capital firms, attorneys, accountants, and other
professionals whose businesses are affiliated with the Bank's niches.
EMPLOYEES
As of December 31, 1997, 1996 and 1995, the Company and the Bank, in the
aggregate, employed 454, 384 and 348 full-time equivalent personnel,
respectively, consisting of both full-time and permanent part-time employees.
Full-time equivalent is a measurement equivalent to one full-time employee
working a standard day, and is based on the number of hours worked in a given
month. The Company's and the Bank's employees are not represented by any unions
or covered by a collective bargaining agreement. Management of the Company and
the Bank believes that, in general, its employee relations are satisfactory.
COMPETITION
The banking and financial services business environment in California, as
well as the rest of the U.S., is highly and increasingly competitive. The Bank
competes for client loans, deposits and other financial products and services
with other commercial banks, savings and loan associations, securities and
brokerage companies, mortgage companies, insurance companies, finance companies,
money market and other
5
mutual funds, credit unions, and other non-bank financial services providers.
Many of these competitors are much larger in total assets and capitalization,
have greater access to capital markets and offer a broader array of financial
products and services than the Bank. The increasingly competitive environment is
primarily a result of changes in regulation, changes in technology and product
delivery systems, and the accelerating pace of consolidation among financial
services providers. In order to compete with other financial services providers,
the Bank principally relies upon promotional activities and industry knowledge
in its market areas, personal relationships with clients and other service
providers, referral sources established by officers, directors and employees,
and specialized services tailored to meet the Bank's clients' needs. In those
instances where the Bank is unable to accommodate a client's needs, the Bank
will seek to arrange for those services to be provided by its network of
correspondents and other service providers.
ECONOMIC CONDITIONS, GOVERNMENT POLICIES, LEGISLATION, AND REGULATION
The Company's profitability, like most other financial institutions, is
primarily dependent on interest rate differentials. In general, the difference
between the interest rates paid by the Bank on interest-bearing liabilities,
such as deposits and other borrowings, and the interest rates received by the
Bank on interest-earning assets, such as loans extended to its clients and
securities held in its investment portfolio, comprise the major portion of the
Company's earnings. These rates are highly sensitive to many factors that are
beyond the control of the Company and the Bank, such as inflation, recession and
unemployment, and the impact that future changes in domestic and foreign
economic conditions might have on the Company and the Bank cannot be predicted.
The Company's business is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory agencies,
particularly the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). The Federal Reserve Board implements national monetary policies
(with objectives such as curbing inflation and combating recession) through its
open-market operations in U.S. government securities, by adjusting the required
level of reserves for depository institutions subject to its reserve
requirements and by varying the target federal funds and discount rates
applicable to borrowings by depository institutions. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, investments and
deposits, and also affect interest rates earned on interest-earning assets and
paid on interest-bearing liabilities. The nature and impact on the Company and
the Bank of any future changes in monetary and fiscal policies cannot be
predicted.
From time to time, legislative acts, as well as regulations, are enacted
which have the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance between
banks and other financial services providers. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies and other financial institutions are frequently made in the U.S.
Congress, in the state legislatures and by various bank regulatory agencies. The
likelihood of any legislative or regulatory changes and the impact such changes
might have on the Company and the Bank cannot be predicted. See "Item 1.
Business--Supervision and Regulation" for additional discussion on legislative
and regulatory changes.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. This regulation is intended primarily for the protection
of depositors and the deposit insurance fund and not for the benefit of
shareholders of the Company. Set forth below is a summary description of certain
laws and regulations which relate to the operations of the Company and the Bank.
The description does not purport to be complete and is qualified in its entirety
by reference to the applicable laws and regulations.
In recent years, significant legislative proposals and reforms affecting the
financial services industry have been discussed and evaluated by the U.S.
Congress. Such proposals include, but are not limited to,
6
legislation to revise the Glass-Steagall Act and the Bank Holding Company Act of
1956, as amended (the "BHCA"), and to expand permissible activities for banks,
principally to facilitate the convergence of commercial and investment banking.
Certain proposals also have sought to expand insurance activities of banks. It
is unclear whether any of these proposals, or any form of them, will be
introduced in the current U.S. Congress and become law. Consequently, it is not
possible to determine what effect, if any, these and other legislative proposals
may have on the Company and the Bank.
THE COMPANY
The Company, as a registered bank holding company, is subject to regulation
under the BHCA and Regulation Y, which has been adopted thereunder by the
Federal Reserve Board. The Company is required to file with the Federal Reserve
Board quarterly, semi-annual and annual reports, and such additional information
as the Federal Reserve Board may require pursuant to the BHCA and Regulation Y.
The Federal Reserve Board may conduct examinations of the Company and its
subsidiaries.
The Federal Reserve Board may require that the Company terminate an activity
or terminate control of, liquidate or divest certain subsidiaries or affiliates
when the Federal Reserve Board believes the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the financial safety,
soundness or stability of any of the Company's banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including the authority to impose interest rate ceilings
and reserve requirements on such debt.
The Company is required by the Federal Reserve Board to maintain certain
minimum levels of capital, and in addition, under certain circumstances, the
Company must file written notice with, and obtain approval from, the Federal
Reserve Board prior to purchasing or redeeming its equity securities. See "Item
1. Business--Supervision and Regulation--Capital Standards" and "Item 1.
Business--Supervision and Regulation--Prompt Corrective Action and Other
Enforcement Mechanisms" for further discussion related to minimum capital
guidelines.
Under the BHCA and regulations adopted by the Federal Reserve Board, a bank
holding company and its non-banking subsidiaries are prohibited from requiring
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services.
The Company is required to obtain the prior approval of the Federal Reserve
Board for the acquisition of more than 5.0% of the outstanding shares of any
class of voting securities, or substantially all of the assets, of any bank or
bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank holding
company.
The Company is prohibited by the BHCA, except in certain instances
prescribed by statute, from acquiring direct or indirect ownership or control of
more than 5.0% of the outstanding voting shares of any company that is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. However, the Company, subject to the
prior approval of the Federal Reserve Board, may engage in, or acquire voting
shares of companies engaged in, activities that are deemed by the Federal
Reserve Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. In making any such determination, the
Federal Reserve Board considers whether the performance of such activities by
the Company or an affiliate can reasonably be expected to produce benefits to
the public, such as greater convenience, increased competition or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices. The Federal Reserve Board is also empowered to differentiate
between activities commenced "de novo" and activities commenced by acquisition,
in whole or in part, of a going concern.
7
In 1996, the Economic Growth and Regulatory Paperwork Reduction Act of 1996
(the "Budget Act") eliminated the requirement that bank holding companies seek
Federal Reserve Board approval before engaging "de novo" in permissible
non-banking activities as listed in Regulation Y, provided that the bank holding
company and its lead depository institution are "well capitalized" and that
certain other criteria specified in the Budget Act are met. Similar changes were
made to Regulation Y, effective April 21, 1997. For purposes of determining the
capital levels at which a bank holding company is considered well capitalized
under the Budget Act and Regulation Y, the Federal Reserve Board adopted, as an
interim rule, capital ratios (on a consolidated basis) that are, with the
exception of the leverage capital ratio (which is lower), the same as the levels
set for determining whether a state member bank is well capitalized under
Section 38 of the Federal Deposit Insurance Act. See "Item 1.
Business--Supervision and Regulation-- Capital Standards" and "Item 1.
Business--Supervision and Regulation--Prompt Corrective Action and Other
Enforcement Mechanisms" for additional discussion on capital ratios.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board's
regulations or both.
The Company is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and its subsidiaries
are subject to periodic examination by, and may be required to file reports
with, the California Department of Financial Institutions.
The Company's securities are registered with the Securities and Exchange
Commission (SEC) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). As such, the Company is subject to information reporting, proxy
solicitation, insider trading restrictions, and other requirements and
restrictions as specified in the Exchange Act.
The Company's common stock is listed on the Nasdaq National Market, and, as
such, the Company is subject to the reporting and other requirements of the
Nasdaq Stock Market.
THE BANK
The Bank, as a California-chartered bank and a member of the Federal Reserve
System, is subject to primary supervision, periodic examination and regulation
by the California Commission of Financial Institutions (the "Commissioner") and
the Federal Reserve Board. If, as a result of an examination of the Bank, the
Federal Reserve Board should determine that the financial condition, capital
resources, asset quality, management, earnings prospects, liquidity, sensitivity
to market risk, or other aspects of the Bank's operations are unsatisfactory, or
that the Bank is violating or has violated any law or regulation, various
remedies are available to the Federal Reserve Board. Such remedies include the
power to: enjoin "unsafe or unsound" practices, require affirmative action to
correct any conditions resulting from any violation or practice, issue an
administrative order that can be judicially enforced, direct an increase in
capital, restrict the growth of the Bank, assess civil monetary penalties,
remove officers and directors, and ultimately to terminate the Bank's deposit
insurance, which, as a California-chartered bank, would result in a revocation
of the Bank's charter. The Commissioner has many of the same remedial powers.
The deposits of the Bank are insured by the FDIC in the manner and to the
extent provided by law. For this protection, the Bank pays a quarterly statutory
assessment. For additional discussion related to deposit insurance, see "Item 1.
Business--Supervision and Regulation--Premiums for Deposit Insurance."
8
Because the Bank's deposits are insured by the FDIC, the Bank is also subject to
certain FDIC rules and regulations.
Various requirements and restrictions imposed by state and federal laws and
regulations affect the operations of the Bank. State and federal statutes and
regulations relate to many aspects of the Bank's operations, including, but not
limited to, reserves against deposits, interest rates on deposits and loans,
investments, mergers and acquisitions, borrowings, dividends, and locations of
branch offices. Further, the Bank is required to maintain certain minimum levels
of capital. See "Item 1. Business--Supervision and Regulation--Capital
Standards" for further discussion related to minimum capital guidelines.
DIVIDENDS AND OTHER TRANSFERS OF FUNDS
The Company is a legal entity separate and distinct from the Bank. The
Company's ability to pay cash dividends is limited by the California
Corporations Code to the greater of (a) the Company's retained earnings, or (b)
the Company's total assets (net of cash dividends declared) less 150.0% of the
Company's liabilities. In addition to the aforementioned cash dividend
limitations imposed on the Company, there are statutory and regulatory
limitations on the amount of dividends which may be paid to the Company by the
Bank. California law restricts the amount available for cash dividends by
state-chartered banks to the lesser of the bank's retained earnings or net
income for its last three fiscal years (less any cash dividends made during such
period). Notwithstanding this restriction, a bank may, with the prior approval
of the Commissioner, pay a cash dividend in an amount not exceeding the greater
of: (a) the retained earnings of the bank, (b) the net income for such bank's
last preceding fiscal year, or (c) the net income of the bank for its current
fiscal year.
As a Federal Reserve member bank, there are separate limitations imposed
under applicable Federal Reserve Board regulations with respect to the Bank's
ability to pay dividends to the Company. In particular, the prior approval of
the Federal Reserve Board is required if the total of all cash dividends
declared by a Federal Reserve member bank in any calendar year exceeds the
bank's net profits (as defined by the Federal Reserve Board) for that year
combined with its retained net profits (as defined by the Federal Reserve Board)
for the preceding two years, less any transfers to surplus or to a fund for the
retirement of preferred stock. Such approval authority may be delegated to the
local Federal Reserve Bank under certain circumstances. See "Item 8. Financial
Statements and Supplementary Data--Note 15 to the Consolidated Financial
Statements--Regulatory Matters" for further discussion on dividend restrictions.
The Federal Reserve Board also has the authority to prohibit the Bank from
engaging in activities that, in the Federal Reserve Board's opinion, constitute
unsafe or unsound practices in conducting its business. It is possible,
depending upon the financial condition of the bank in question and other
factors, that the Federal Reserve Board could assert that the payment of
dividends or other payments might, under some circumstances, be an unsafe or
unsound practice. Further, the Federal Reserve Board has established guidelines
with respect to the maintenance of appropriate levels of capital by banks or
bank holding companies under its jurisdiction. Compliance with the standards set
forth in such guidelines and the restrictions that are, or may be, imposed under
the prompt corrective action provisions of federal law could limit the amount of
dividends which the Bank or the Company may pay. The Commissioner may impose
similar limitations on the conduct of California-chartered banks. See "Item 1.
Business--Supervision and Regulation--Capital Standards" and "Item 1.
Business--Supervision and Regulation--Prompt Corrective Action and Other
Enforcement Mechanisms," for a discussion of these additional restrictions on
capital distributions.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of, or investments in,
stock or other securities thereof, the taking of such securities as collateral
for loans, and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of
9
designated amounts. Further, such secured loans and investments by the Bank to,
or in, the Company or to, or in, any other affiliate are limited, individually,
to 10.0% of the Bank's capital and surplus (as defined by federal regulations),
and such secured loans and investments are limited, in the aggregate, to 20.0%
of the Bank's capital and surplus (as defined by federal regulations).
California law also imposes certain restrictions with respect to transactions
involving the Company and other controlling persons of the Bank. Additional
restrictions on transactions with affiliates may be imposed on the Bank under
the prompt corrective action provisions of federal law. See "Item 1.
Business--Supervision and Regulation--Prompt Corrective Action and Other
Enforcement Mechanisms" for related discussion regarding restrictions on
transactions with affiliates.
CAPITAL STANDARDS
The Federal Reserve Board has adopted minimum risk-based capital guidelines
intended to provide a measure of capital that reflects the degree of risk
associated with a banking organization's operations for both transactions
reported on the balance sheet as assets, and transactions, such as commitments,
letters of credit and recourse arrangements, which are recorded as off-balance
sheet items. Under these guidelines, dollar amounts of assets and credit
equivalent amounts of off-balance sheet items are adjusted by one of several
conversion factors and/or risk adjustment percentages.
A banking organization's total and Tier 1 risk-based capital ratios are
obtained by dividing its qualifying capital by its total risk-adjusted assets.
Federal banking regulators measure risk-adjusted assets, which include
off-balance sheet items, against both total qualifying capital (the sum of
qualifying Tier 1 and Tier 2 capital) and qualifying Tier 1 capital. Tier 1
capital consists primarily of common stock, retained earnings, noncumulative
perpetual preferred stock (cumulative perpetual preferred stock for bank holding
companies), and minority interests in consolidated subsidiaries, less most
intangible assets. Tier 2 capital consists of a limited amount of the allowance
for loan losses, cumulative perpetual preferred stock, long-term preferred
stock, eligible term subordinated debt, and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 capital is
subject to certain other requirements and limitations of the federal banking
agencies. Federal banking regulators also require banking organizations to
maintain a minimum amount of qualifying Tier 1 capital relative to total
quarterly average assets, referred to as the Tier 1 leverage ratio. In addition
to these uniform risk-based capital guidelines and leverage ratio requirements
that apply across the banking industry, the federal banking regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
The federal banking agencies have adopted a joint agency policy statement
which provides that the adequacy and effectiveness of a bank's interest rate
risk management process and the level of its interest rate exposures are
critical factors in the evaluation of the bank's capital adequacy. A bank with
material weaknesses in its interest rate risk management process or high levels
of interest rate exposure relative to its capital will be directed by the
federal banking agencies to take corrective actions. Such actions may include
recommendations or directions to raise additional capital, strengthen management
expertise, improve management information and measurement systems, reduce levels
of interest rate exposure, or some combination thereof depending upon the
individual financial institution's circumstances.
The federal banking agencies have issued a final rule which provides that
financial institutions which have significant amounts of their assets
concentrated in high risk loans or nontraditional banking activities, and who
fail to adequately manage these risks, may be required to set aside capital in
excess of the regulatory minimums. The federal banking agencies have not imposed
any quantitative assessment for determining when these risks are significant,
but have identified these issues as important factors they will review in
assessing capital adequacy.
10
Federally supervised banks and savings associations are currently required
to report deferred tax assets in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The federal
banking agencies have issued regulations which limit the amount of deferred tax
assets that are allowable in computing a financial institution's regulatory
capital. The amount of any deferred tax assets in excess of this limit would be
excluded from Tier 1 capital and total assets for purposes of regulatory
risk-based capital ratio calculations.
Future changes in regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such changes could
affect the ability of the Company and the Bank to grow and could restrict the
amount of profits, if any, available for the payment of dividends. See "Item 8.
Financial Statements and Supplementary Data--Note 15 to the Consolidated
Financial Statements-- Regulatory Matters" for the Company's and Bank's capital
ratios as of December 31, 1997.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal banking agencies possess broad powers to take corrective and other
supervisory action as deemed appropriate on an insured depository institution
and its holding company. Federal laws require each federal banking agency to
take prompt corrective action to resolve the problems of insured depository
institutions, including, but not limited to, those institutions which fall below
one or more of the prescribed minimum required capital ratios. Such laws require
each federal banking agency to promulgate regulations defining the following
five categories in which an insured depository institution will be placed, based
on the level of its capital ratios: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized.
The Company's and the Bank's capital ratios were in excess of regulatory
guidelines for a well capitalized depository institution as of December 31,
1997. See "Item 8. Financial Statements and Supplementary Data--Note 15 to the
Consolidated Financial Statements--Regulatory Matters" for the Company's and
Bank's capital ratios as of December 31, 1997.
A depository institution that, based upon its capital levels, is classified
as well capitalized, adequately capitalized or undercapitalized may be treated
as though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition, or an unsafe or unsound practice, warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as critically undercapitalized unless its
capital ratios actually warrant such treatment.
Federal law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, from making
capital distributions, if after such transaction the institution would be
undercapitalized.
In addition to measures taken under the prompt corrective action provisions,
banking organizations may be subject to potential enforcement actions by the
federal regulators for unsafe or unsound practices in conducting their
businesses, or for violation of any law, rule, regulation, condition imposed in
writing by the agency, or term of a written agreement with the agency.
Enforcement actions may include the appointment of a conservator or receiver,
the issuance of a cease and desist order that can be judicially enforced, the
termination of deposit insurance (in the case of a depository institution), the
imposition of civil monetary penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties, and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted.
11
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted guidelines to assist in
identifying and addressing potential safety and soundness concerns before
capital becomes impaired. The guidelines set forth operational and managerial
standards relating to: (i) internal controls, information systems and internal
audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset
growth, and (v) compensation, fees and benefits. In addition, the federal
banking agencies have more recently adopted safety and soundness guidelines with
respect to asset quality and earnings. The more recently adopted asset quality
guidelines provide six standards for establishing and maintaining a system to
identify problem assets and prevent those assets from deteriorating. Under these
standards, an insured depository institution should: (i) conduct periodic asset
quality reviews to identify problem assets, (ii) estimate the inherent losses in
problem assets and establish reserves that are sufficient to absorb estimated
losses, (iii) compare problem asset totals to capital, (iv) take appropriate
corrective action to resolve problem assets, (v) consider the size and potential
risks of material asset concentrations, and (vi) provide periodic asset quality
reports with adequate information for management and the board of directors to
assess the level of asset risk. The more recently adopted earnings guidelines
set forth standards for evaluating and monitoring earnings and for ensuring that
earnings are sufficient for the maintenance of adequate capital and reserves.
PREMIUMS FOR DEPOSIT INSURANCE
The Bank's deposit accounts are insured by the Bank Insurance Fund (BIF), as
administered by the FDIC, up to the maximum permitted by law. Insurance of
deposits may be terminated by the FDIC upon a finding that the financial
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or by the financial
institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits, which
as of December 31, 1997, ranged from 0 to 27 basis points per $100 of insured
deposits, based on the risk a particular financial institution poses to its
deposit insurance fund. The risk classification is based on a financial
institution's capital group and supervisory subgroup assignment. At December 31,
1997, the Bank's assessment rate was the statutory minimum assessment of $2,000
per year.
Pursuant to the Budget Act, as of January 1, 1997, the Bank began paying, in
addition to its normal deposit insurance premium as a member of the BIF, an
amount equal to approximately 1.3 basis points per $100 of insured deposits
toward the retirement of Financing Corporation bonds ("Fico Bonds") issued in
the 1980s to assist in the recovery of the savings and loan industry. Members of
the Savings Association Insurance Fund (SAIF), by contrast, pay, in addition to
their normal deposit insurance premium as members of the SAIF, approximately 6.4
basis points per $100 of insured deposits toward the retirement of the Fico
Bonds. Under the Budget Act, the FDIC is not permitted to establish SAIF
assessment rates that are lower than comparable BIF assessment rates. Beginning
no later than January 1, 2000, the assessment rate paid toward the retirement of
the Fico Bonds will be equal for members of the BIF and the SAIF. The Budget Act
also provides for the merging of the BIF and the SAIF by January 1, 1999
provided there are no financial institutions still chartered as savings
associations at that time. Should the insurance funds be merged before January
1, 2000, the assessment rate paid by all members of this new fund toward the
retirement of the Fico Bonds would be equal upon the time of merger.
INTERSTATE BANKING AND BRANCHING
The BHCA currently permits bank holding companies from any state to acquire
banks and bank holding companies located in any other state, subject to certain
conditions, including certain nationwide and state-imposed concentration limits.
Banks have the ability, subject to certain restrictions, to acquire by
acquisition or merger branches located outside their home state. The
establishment of new interstate branches is also possible in those states with
laws that expressly permit it. Interstate branches are subject to
12
certain laws of the states in which they are located. Competition may increase
further as banks branch across state lines and enter new markets.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending laws and reporting obligations
involving home mortgage lending operations and Community Reinvestment Act (CRA)
activities. The CRA generally requires the federal banking agencies to evaluate
the record of a bank in meeting the credit needs of its local communities,
including low- and moderate-income neighborhoods. A bank may be subject to
substantial penalties and corrective measures for a violation of certain fair
lending laws. The federal banking agencies may take compliance with such laws
and CRA obligations into account when regulating and supervising other
activities.
A bank's compliance with its CRA obligations is measured via a
performance-based evaluation system which bases CRA ratings on a financial
institution's actual lending service and investment performance. When a bank
holding company applies for approval to acquire a bank or other bank holding
company, the Federal Reserve Board will review the CRA assessment of each
subsidiary bank of the applicant bank holding company, and such records may be
the basis for denying the application. In June 1997, the Federal Reserve Board
rated the Bank "satisfactory" in complying with its CRA obligations.
YEAR 2000 COMPLIANCE
In May 1997, the Federal Financial Institutions Examination Council issued
an interagency statement to the chief executive officers of all federally
supervised financial institutions regarding "year 2000" project awareness. It is
expected that unless financial institutions address the technology issues
relating to the coming of the year 2000, there will be major disruptions in the
operations of financial institutions. The statement provides guidance to
financial institutions, providers of data services and all examining personnel
of the federal banking agencies regarding the year 2000 issue. The federal
banking agencies intend to conduct year 2000 compliance examinations, and the
failure to implement a year 2000 compliance program by December 31, 1998 may be
viewed by the federal banking agencies as an unsafe and unsound banking
practice. In addition, the federal banking agencies will be taking into account
year 2000 compliance programs when analyzing applications to acquire a bank or
other bank holding company and may deny an application based on year
2000-related issues.
In October 1997, the SEC Divisions of Corporation Finance and Investment
Management issued Staff Legal Bulletin No. 5 related to year 2000 issues. This
legal bulletin reminded public operating companies to consider their disclosure
obligations relating to anticipated costs, problems and uncertainties associated
with the year 2000 issue.
The Company and the Bank are aware of the year 2000 issue and the potential
risks. The Bank has engaged a third party vendor, a recognized expert in
assisting in all phases of year 2000 compliance, as part of a multiphase project
to assist the Bank with addressing the year 2000 issue. The first two phases of
the year 2000 compliance project, systems inventory and risk assessment, are
projected to be completed during the second quarter of 1998. The last phase of
the project includes systems replacement and/or modification and client
notification, and is projected to begin by the third quarter of 1998. Key
customer information systems are projected to be fully compliant by December 31,
1998, with all remaining systems projected to be tested and certified no later
than the end of the second quarter of 1999. The expense and related potential
impact on the Company's pre-tax earnings of the first two phases of the year
2000 compliance project is expected to approximate $250,000. Management has not
yet assessed the potential financial impact of the last phase of the project
(systems replacement and/or modification and client notification).
13
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings per Share." SFAS No. 128 establishes standards for
computing and reporting earnings per share (EPS) and applies to entities with
publicly held common stock or financial instruments that are potentially
convertible into publicly held common stock. This statement supersedes
Accounting Principles Board (APB) Opinion No. 15, "Earnings per Share." The
presentation of primary EPS, as required by APB Opinion No. 15, is replaced with
a presentation of basic EPS, which is defined in SFAS No. 128. In addition, dual
presentation of basic EPS and diluted EPS, as defined in SFAS No. 128, is
required on the face of the income statement for all entities that have complex
capital structures. Disclosure of a reconciliation between basic EPS and diluted
EPS is also required.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
financial instruments or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed similarly to
the fully diluted EPS computation required by APB Opinion No. 15. The Company
adopted SFAS No. 128 effective December 31, 1997. See "Item 8. Financial
Statements and Supplementary Data--Note 2 to the Consolidated Financial
Statements-- Earnings Per Share" for the disclosure of the reconciliations
between basic EPS and diluted EPS for the years ended December 31, 1997, 1996
and 1995.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." SFAS No. 129 establishes standards for disclosing
information about an entity's capital structure and applies to all entities. The
Company adopted SFAS No. 129 effective December 31, 1997. No additional
disclosures in the notes to the consolidated financial statements resulted from
the Company's adoption of this statement.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for all entities for reporting
comprehensive income and its components in financial statements. This statement
requires that all items which are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income is equal to net income plus the change in
"other comprehensive income," as defined by SFAS No. 130. The only component of
other comprehensive income currently applicable to the Company is the net
unrealized gain or loss on available-for-sale investments. SFAS No. 130 requires
that an entity: (a) classify items of other comprehensive income by their nature
in a financial statement, and (b) report the accumulated balance of other
comprehensive income separately from common stock and retained earnings in the
equity section of the balance sheet. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
publicly held entities to follow in reporting information about operating
segments in annual financial statements and requires that those entities also
report selected information about operating segments in interim financial
statements. This statement also establishes standards for related disclosures
about products and services, geographic areas and major customers. This
statement is effective for financial statements issued for periods beginning
after December 15, 1997.
In January 1997, the SEC approved amendments (Release No. 33-7386) to
Regulations S-X and S-K regarding the disclosure requirements for derivative
financial instruments, other financial instruments and derivative commodity
instruments (collectively, "market risk sensitive instruments"). The amendments
require enhanced disclosure of accounting policies for derivative financial
instruments and derivative commodity instruments in the notes to the financial
statements. In addition, the amendments expand
14
existing disclosure requirements to include quantitative and qualitative
information regarding the market risk inherent in market risk sensitive
instruments. The required quantitative and qualitative information is required
to be disclosed outside of the financial statements and related notes thereto.
The accounting policies disclosure requirements are effective for all SEC
registrants in filings that include financial statements issued for periods
ending after June 15, 1997. See "Item 8. Financial Statements and Supplementary
Data--Note 1 to the Consolidated Financial Statements--Significant Accounting
Policies--Foreign Exchange Forward Contracts" for the Company's disclosure of
these accounting policies.
The quantitative and qualitative information disclosure requirements
regarding market risks are effective for all bank and thrift registrant filings
which include annual financial statements issued for periods ending after June
15, 1997. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Interest Rate Risk Management" for the
Company's disclosure of the required quantitative and qualitative information
regarding market risks.
ITEM 2. PROPERTIES
In 1995, the Bank relocated its corporate headquarters and main branch and
entered into a 10-year lease on a two story office building located at 3003
Tasman Drive, Santa Clara, California. In July 1997, the Bank finalized an
amendment to the original lease associated with its corporate headquarters. The
amendment provides for the lease of additional premises, approximating 56,000
square feet, adjacent to the existing headquarters facility. Construction of the
interior of the building commenced in February 1998, and it is projected the
Company could begin occupying the additional premises between July 1998 and
August 1998.
In addition to the headquarters lease in Santa Clara, the Bank has entered
into various other leases for properties that serve as branches and/or loan
offices. These properties are located in the following locations within
California: Irvine, Menlo Park, Palo Alto, San Diego, St. Helena, and West Los
Angeles. Offices located outside of California include: Phoenix, Arizona;
Boulder, Colorado; Atlanta, Georgia; Rosemont, Illinois; Rockville, Maryland;
Wellesley, Massachusetts; Beaverton, Oregon; Austin, Texas; and Bellevue,
Washington. All Bank properties are occupied under leases which expire at
various dates through May 2005, and in most instances, include options to renew
or extend at market rates and terms. The Bank also owns leasehold improvements
and furniture, fixtures and equipment at its offices, all of which are used in
the Bank's business activities.
ITEM 3. LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item
pending at December 31, 1997, or at the date of this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote by the shareholders of the Company's
common stock during the fourth quarter of 1997.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's common stock is traded over the counter on the National
Association of Securities Dealers Automated Quotation (Nasdaq) National Market
under the symbol "SIVB."
The following table presents the high and low sales prices for the Company's
common stock for each quarterly period during the last two years, based on the
daily closing price as reported by the Nasdaq National Market:
1997 1996
-------------------- --------------------
QUARTER LOW HIGH LOW HIGH
- --------------------------------------------------------------------------- --------- --------- --------- ---------
First...................................................................... $ 32.25 $ 39.50 $ 20.25 $ 22.75
Second..................................................................... $ 33.38 $ 46.00 $ 22.50 $ 26.50
Third...................................................................... $ 41.88 $ 59.75 $ 23.50 $ 28.25
Fourth..................................................................... $ 49.13 $ 58.44 $ 25.88 $ 32.25
SHAREHOLDERS
The number of shareholders of record of the Company's common stock was 670
as of January 31, 1998.
DIVIDENDS
The Company declared no cash dividends in 1996 or 1997, and is subject to
certain restrictions and limitations on the payment of dividends pursuant to
existing and applicable laws and regulations. See "Item 1. Business--Supervision
and Regulation--Dividends and Other Transfers of Funds," and "Item 8. Financial
Statements and Supplementary Data--Note 15 to the Consolidated Financial
Statements-- Regulatory Matters" for additional discussion on restrictions and
limitations on the payment of dividends.
16
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's financial statements and supplementary data as presented in Item 8 of
this report. Certain reclassifications have been made to the Company's prior
years results to conform with 1997 presentations. Such reclassifications had no
effect on the results of operations or shareholders' equity.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ----------
(DOLLARS AND NUMBERS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT SUMMARY:
Net interest income.......................... $ 110,824 $ 87,275 $ 73,952 $ 60,260 $ 50,410
Provision for loan losses.................... 10,067 10,426 8,737 3,087 9,702
Noninterest income........................... 13,265 11,609 12,565 4,922 9,316
Noninterest expense.......................... 66,301 52,682 47,925 45,599 47,357
Income before taxes.......................... 47,721 35,776 29,855 16,496 2,667
Income tax expense........................... 20,043 14,310 11,702 7,430 1,066
Net income................................... 27,678 21,466 18,153 9,066 1,601
COMMON SHARE SUMMARY:
Basic earnings per share..................... $ 2.86 $ 2.33 $ 2.08 $ 1.09 $ 0.20
Diluted earnings per share................... 2.72 2.21 1.98 1.06 0.20
Book value per share......................... 17.50 14.51 11.71 9.08 8.48
Weighted average shares outstanding.......... 9,685 9,213 8,747 8,335 7,960
Weighted average diluted shares
outstanding................................ 10,169 9,691 9,144 8,533 8,163
YEAR-END BALANCE SHEET SUMMARY:
Loans, net of unearned income................ $ 1,174,645 $ 863,492 $ 738,405 $ 703,809 $ 564,555
Assets....................................... 2,625,123 1,924,544 1,407,587 1,161,539 992,289
Deposits..................................... 2,432,407 1,774,304 1,290,060 1,075,373 914,959
Shareholders' equity......................... 174,481 135,400 104,974 77,257 70,336
AVERAGE BALANCE SHEET SUMMARY:
Loans, net of unearned income................ $ 973,637 $ 779,655 $ 681,255 $ 592,759 $ 574,372
Assets....................................... 2,140,630 1,573,903 1,165,004 956,336 917,569
Deposits..................................... 1,973,118 1,441,360 1,060,333 877,787 846,298
Shareholders' equity......................... 152,118 119,788 91,710 73,461 68,198
CAPITAL RATIOS:
Total risk-based capital ratio............... 11.5% 11.5% 11.9% 10.1% 11.3%
Tier 1 risk-based capital ratio.............. 10.2% 10.2% 10.6% 8.9% 10.1%
Tier 1 leverage ratio........................ 7.1% 7.7% 8.0% 8.3% 6.9%
Average shareholders' equity to average
assets..................................... 7.1% 7.6% 7.9% 7.7% 7.4%
SELECTED FINANCIAL RATIOS:
Return on average assets..................... 1.3% 1.4% 1.6% 0.9% 0.2%
Return on average shareholders' equity....... 18.2% 17.9% 19.8% 12.3% 2.3%
Efficiency ratio............................. 55.9% 55.9% 60.6% 68.3% 68.9%
Net interest margin.......................... 5.6% 6.1% 7.1% 7.2% 6.4%
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's financial statements
and supplementary data as presented in Item 8 of this report. In addition to
historical information, this discussion and analysis includes certain
forward-looking statements regarding events and circumstances which may affect
the Company's future results. Such forward-looking statements are subject to
risks and uncertainties that could cause the Company's actual results to differ
materially. These risks and uncertainties include, but are not limited to, those
described in this discussion and analysis, as well as those described in Item 1
of this report.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements included herein, which speak only as of the date
made. The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect unanticipated events and
circumstances occurring after the date of such statements.
Certain reclassifications have been made to the Company's prior years
results to conform with 1997 presentations. Such reclassifications had no effect
on the results of operations or shareholders' equity.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
The Company reported net income in 1997 of $27.7 million, compared with net
income in 1996 and 1995 of $21.5 million and $18.2 million, respectively.
Diluted earnings per share totaled $2.72 in 1997, compared to $2.21 and $1.98 in
1996 and 1995, respectively. Return on average equity in 1997 was 18.2%,
compared with 17.9% in 1996 and 19.8% in 1995. Return on average assets in 1997
was 1.3%, compared with 1.4% in 1996 and 1.6% in 1995.
The increase in net income for 1997, as compared with 1996, was primarily
attributable to growth in net interest income, partially offset by an increase
in noninterest expense. The increase in net income for 1996, as compared with
1995, was largely due to growth in net interest income, partially offset by
increases in both the provision for loan losses and noninterest expense. The
major components of net income and changes in these components are summarized in
the following table for the years ended December 31, 1997, 1996 and 1995, and
are discussed in more detail on the following pages.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1997 TO 1996 1996 TO 1995
INCREASE INCREASE
1997 1996 (DECREASE) 1995 (DECREASE)
---------- --------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
Net interest income................................. $ 110,824 $ 87,275 $ 23,549 $ 73,952 $ 13,323
Provision for loan losses........................... 10,067 10,426 (359) 8,737 1,689
Noninterest income.................................. 13,265 11,609 1,656 12,565 (956)
Noninterest expense................................. 66,301 52,682 13,619 47,925 4,757
---------- --------- ------------ --------- ------------
Income before income taxes.......................... 47,721 35,776 11,945 29,855 5,921
Income tax expense.................................. 20,043 14,310 5,733 11,702 2,608
---------- --------- ------------ --------- ------------
Net income.......................................... $ 27,678 $ 21,466 $ 6,212 $ 18,153 $ 3,313
---------- --------- ------------ --------- ------------
---------- --------- ------------ --------- ------------
NET INTEREST INCOME AND MARGIN
Net interest income represents the difference between interest earned,
primarily on loans and investments, and interest paid on funding sources,
primarily deposits, and is the principal source of revenue for the Company. Net
interest margin is the amount of net interest income, on a fully taxable-
equivalent basis, expressed as a percentage of average interest-earning assets.
The average yield earned on
18
interest-earning assets is the amount of taxable-equivalent interest income
expressed as a percentage of average interest-earning assets. The average rate
paid on funding sources expresses interest expense as a percentage of average
interest-earning assets.
The following table sets forth average assets, liabilities and shareholders'
equity, interest income and interest expense, average yields and rates, and the
composition of the Company's net interest margin for the years ended December
31, 1997, 1996 and 1995.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- --------------------------------- --------------------
AVERAGE AVERAGE
AVERAGE YIELD AND AVERAGE YIELD AND AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
--------- --------- ----------- --------- --------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Federal funds sold and securities
purchased under agreement to
resell (1)...................... $ 312,398 $ 17,264 5.5% $ 244,408 $ 13,106 5.4% $ 188,415 $ 11,041
Investment securities:
Taxable......................... 671,390 40,360 6.0 411,743 23,587 5.7 169,740 9,985
Non-taxable (2)................. 33,801 2,320 6.9 8,112 749 9.2 6,911 699
Loans: (3), (4), (5)
Commercial...................... 858,459 95,304 11.1 658,316 75,750 11.5 587,343 70,166
Real estate construction and
term.......................... 78,311 8,063 10.3 81,358 8,471 10.4 70,698 7,209
Consumer and other.............. 36,867 3,473 9.4 39,981 3,672 9.2 23,214 2,392
--------- --------- --- --------- --------- --- --------- ---------
Total loans....................... 973,637 106,840 11.0 779,655 87,893 11.3 681,255 79,767
--------- --------- --- --------- --------- --- --------- ---------
Total interest-earning assets....... 1,991,226 166,784 8.4 1,443,918 125,335 8.7 1,046,321 101,492
--------- --------- --- --------- --------- --- --------- ---------
Cash and due from banks............. 148,044 126,830 114,431
Allowance for loan losses........... (37,568) (30,429) (24,055)
Other real estate owned............. 1,192 3,582 5,752
Other assets........................ 37,736 30,002 22,555
--------- --------- ---------
Total assets........................ $2,140,630 $1,573,903 $1,165,004
--------- --------- ---------
--------- --------- ---------
Funding sources:
Interest-bearing liabilities:
NOW deposits...................... $ 15,814 308 1.9 $ 10,256 223 2.2 $ 11,925 326
Regular money market deposits..... 345,828 9,368 2.7 312,841 8,460 2.7 288,067 7,782
Bonus money market deposits....... 895,259 40,885 4.6 588,235 26,312 4.5 329,031 16,836
Time deposits..................... 107,742 4,587 4.3 69,975 2,801 4.0 65,426 2,349
Other borrowings.................. 5 -- 5.0 30 2 5.5 38 2
--------- --------- --- --------- --------- --- --------- ---------
Total interest-bearing
liabilities........................ 1,364,648 55,148 4.0 981,337 37,798 3.9 694,487 27,295
Portion of noninterest-bearing
funding sources.................... 626,578 462,581 351,834
--------- --------- --- --------- --------- --- --------- ---------
Total funding sources............... 1,991,226 55,148 2.8 1,443,918 37,798 2.6 1,046,321 27,295
--------- --------- --- --------- --------- --- --------- ---------
Noninterest-bearing funding sources:
Demand deposits................... 608,475 460,053 365,884
Other liabilities................. 15,389 12,725 12,923
Shareholders' equity.............. 152,118 119,788 91,710
Portion used to fund
interest-earning assets......... (626,578) (462,581) (351,834)
--------- --------- ---------
Total liabilities and shareholders'
equity............................. $2,140,630 $1,573,903 $1,165,004
--------- --------- ---------
--------- --------- ---------
Net interest income and margin...... $ 111,636 5.6% $ 87,537 6.1% $ 74,197
--------- --- --------- --- ---------
--------- --- --------- --- ---------
Memorandum: Total deposits.......... $1,973,118 $1,441,360 $1,060,333
--------- --------- ---------
--------- --------- ---------
AVERAGE
YIELD AND
RATE
-----------
Interest-earning assets:
Federal funds sold and securities
purchased under agreement to
resell (1)...................... 5.9%
Investment securities:
Taxable......................... 5.9
Non-taxable (2)................. 10.1
Loans: (3), (4), (5)
Commercial...................... 11.9
Real estate construction and
term.......................... 10.2
Consumer and other.............. 10.3
---
Total loans....................... 11.7
---
Total interest-earning assets....... 9.7
---
Cash and due from banks.............
Allowance for loan losses...........
Other real estate owned.............
Other assets........................
Total assets........................
Funding sources:
Interest-bearing liabilities:
NOW deposits...................... 2.7
Regular money market deposits..... 2.7
Bonus money market deposits....... 5.1
Time deposits..................... 3.6
Other borrowings.................. 5.3
---
Total interest-bearing
liabilities........................ 3.9
Portion of noninterest-bearing
funding sources....................
---
Total funding sources............... 2.6
---
Noninterest-bearing funding sources:
Demand deposits...................
Other liabilities.................
Shareholders' equity..............
Portion used to fund
interest-earning assets.........
Total liabilities and shareholders'
equity.............................
Net interest income and margin...... 7.1%
---
---
Memorandum: Total deposits..........
- ------------------------------
(1) Includes average interest-bearing deposits in other financial institutions
of $306, $345 and $378 in 1997, 1996 and 1995, respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in 1997,
1996 and 1995. These adjustments were $812, $262 and $245 for the years
ended December 31, 1997, 1996 and 1995, respectively.
(3) Average loans include average nonaccrual loans of $19,659, $22,897 and
$16,146 in 1997, 1996 and 1995, respectively.
(4) Average loans are net of average unearned income of $6,922, $4,169 and
$3,352 in 1997, 1996 and 1995, respectively.
(5) Loan interest income includes loan fees of $10,567, $8,176 and $7,970 in
1997, 1996 and 1995, respectively.
19
Net interest income is affected by changes in the amount and mix of
interest-earnings assets and interest-bearing liabilities, referred to as
"volume change." Net interest income is also affected by changes in yields
earned on interest-earning assets and rates paid on interest-bearing
liabilities, referred to as "rate change." The following table sets forth
changes in interest income and interest expense for each major category of
interest-earning assets and interest-bearing liabilities. The table also
reflects the amount of change attributable to both volume and rate changes for
the years indicated. Changes relating to investments in non-taxable municipal
securities are presented on a fully taxable-equivalent basis using the federal
statutory rate of 35% in 1997, 1996 and 1995.
1997 COMPARED TO 1996 1996 COMPARED TO 1995
-------------------------------- ---------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
-------------------------------- ---------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- --------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Interest income:
Federal funds sold and securities purchased
under agreement to resell................ $ 3,757 $ 401 $ 4,158 $ 3,003 $ (938) $ 2,065
Investment securities...................... 17,269 1,075 18,344 14,097 (445) 13,652
Loans...................................... 21,286 (2,339) 18,947 11,093 (2,967) 8,126
--------- --------- ---------- ---------- --------- ----------
Increase (decrease) in interest income....... 42,312 (863) 41,449 28,193 (4,350) 23,843
--------- --------- ---------- ---------- --------- ----------
Interest expense:
NOW deposits............................... 108 (23) 85 (36) (67) (103)
Regular money market deposits.............. 894 14 908 670 8 678
Bonus money market deposits................ 14,021 552 14,573 11,594 (2,118) 9,476
Time deposits.............................. 1,608 178 1,786 182 270 452
Other borrowings........................... -- (2) (2) (1) 1 --
--------- --------- ---------- ---------- --------- ----------
Increase (decrease) in interest expense...... 16,631... 719 17,350 12,409 (1,906) 10,503
--------- --------- ---------- ---------- --------- ----------
Increase (decrease) in net interest income... $ 25,681 $ (1,582) $ 24,099 $ 15,784 $ (2,444) $ 13,340
--------- --------- ---------- ---------- --------- ----------
--------- --------- ---------- ---------- --------- ----------
Net interest income, on a fully taxable-equivalent basis, totaled $111.6
million in 1997, an increase of $24.1 million, or 27.5%, from the $87.5 million
total in 1996. The increase in net interest income was attributable to a $41.4
million, or 33.1%, increase in interest income, offset by a $17.4 million, or
45.9%, increase in interest expense over the comparable prior year period. Net
interest income in 1996, on a fully taxable-equivalent basis, increased $13.3
million, or 18.0%, compared to the $74.2 million total in 1995. This increase in
net interest income was the result of a $23.8 million, or 23.5%, increase in
interest income, offset by a $10.5 million, or 38.5%, increase in interest
expense over the comparable prior year period.
The $41.4 million increase in interest income for 1997, as compared to 1996,
was the result of a $42.3 million favorable volume variance, slightly offset by
a $0.9 million unfavorable rate variance. The $42.3 million favorable volume
variance resulted from a $547.3 million, or 37.9%, increase in average
interest-earning assets over the comparable prior year period. The increase in
average interest-earning assets resulted from strong growth in the Company's
average deposits, which increased $531.8 million, or 36.9%, from 1996 to 1997.
The increase in average interest-earning assets consisted of loans, which
increased $194.0 million, plus a combination of highly liquid, lower-yielding
federal funds sold, securities purchased under agreement to resell and
investment securities, which collectively increased $353.3 million accounting
for 64.6% of the total increase in average interest-earning assets.
Average loans increased $194.0 million, or 24.9%, in 1997 as compared to
1996, resulting in a $21.3 million favorable volume variance. This growth was
widely distributed throughout the loan portfolio,
20
as reflected by increased loan balances in most of the Company's technology,
life sciences and special industry niche practices, in specialized lending
products such as factoring, and throughout the Company's loan offices located
across the nation.
Average investment securities for 1997 increased $285.3 million, or 68.0%,
as compared to 1996, resulting in a $17.3 million favorable volume variance. The
aforementioned strong growth in average deposits exceeded the growth in average
loans during 1997, and generated excess funds that were largely invested in U.S.
agency securities, U.S. Treasury securities, mortgage-backed securities, and
municipal securities. The growth in the investment portfolio reflected
Management's actions to both increase the Company's portfolio of longer-term
securities in an effort to obtain available higher yields, and to increase as
well as to further diversify the Company's portfolio of short-term investments
in response to a significant increase in liquidity.
Average federal funds sold and securities purchased under agreement to
resell in 1997 increased a combined $68.0 million, or 27.8%, over the prior
year, resulting in a $3.8 million favorable volume variance. This increase was
largely due to the aforementioned strong growth in average deposits during 1997
coupled with Management's actions to further diversify the Company's portfolio
of short-term investments.
For additional discussion of the Company's liquidity and investment
management activities, see the Item 7 sections entitled "Interest Rate Risk
Management" and "Liquidity."
In 1997, a $2.3 million unfavorable rate variance associated with loans was
partially offset by a combined $1.5 million favorable rate variance related to
federal funds sold, securities purchased under agreement to resell and
investment securities, resulting in a decrease in interest income of $0.9
million as compared to 1996. The unfavorable rate variance related to loans
resulted from a 30 basis points decline in the average yield on loans from 1996
to 1997, and was largely due to increased competition. The average yields on
federal funds sold, securities purchased under agreement to resell and
investment securities increased in 1997 from the prior year, and resulted from
both an increase in short-term market interest rates and Management's actions to
increase the Company's portfolio of longer-term securities in an effort to
obtain available higher yields.
The yield on average interest-earning assets decreased 30 basis points in
1997 from the comparable prior year period. This decrease resulted from a
decline in the average yield on loans, largely due to increased competition, and
a shift in the composition of average interest-earning assets towards a higher
percentage of highly liquid, lower-yielding federal funds sold, securities
purchased under agreement to resell and investment securities. This shift in the
composition of average interest-earning assets resulted from the aforementioned
strong growth in average deposits outpacing growth in the Company's average
loans during 1997.
The $23.8 million increase in interest income for 1996, as compared to 1995,
was due to a $28.2 million favorable volume variance, slightly offset by a $4.4
million unfavorable rate variance. The $28.2 million favorable volume variance
was attributable to growth in average interest-earning assets, which increased
$397.6 million, or 38.0%, from the prior year comparable period. The increase in
average interest-earning assets consisted of increases in each component of the
Company's interest-earning assets, and resulted from significant growth in
average deposits, which were up $381.0 million, or 35.9%, from the comparable
prior year period.
Average loans increased $98.4 million, or 14.4%, in 1996 as compared to
1995. This year-over-year increase was largely related to the Company's special
industry niches, specialized lending products and loan offices opened during
1995 and 1996. Excluding the impact of these newer offices, the Company's
technology and life sciences niche experienced minimal net loan growth during
1996 as an active market for public stock offerings, coupled with merger and
acquisition activity involving the Company's client base, resulted in the payoff
or reduction of a number of credit facilities by the Company's clients.
21
The increase in average investment securities during 1996, as compared to
1995, of $243.2 million, or 137.7%, was primarily centered in U.S. agency
securities and commercial paper. This increase resulted from the aforementioned
strong deposit growth in 1996 having exceeded the growth in loans and was the
result of Management's decision to increase as well as to further diversify the
Company's portfolio of short-term investments in connection with its liquidity
and investment management activities. This increase in average investment
securities also reflected Management's decision to lengthen the average life of
the Company's investment portfolio in an effort to obtain the higher yields
available due to the steepening of the yield curve during 1996. Average federal
funds sold and securities purchased under agreement to resell increased $56.0
million, or 29.7%, in 1996, and this increase was also a result of the
aforementioned strong growth in deposits coupled with Management's actions to
further diversify the Company's portfolio of short-term investments in response
to a significant increase in liquidity.
Unfavorable rate variances associated with each component of
interest-earnings assets in 1996 resulted in a decrease in interest income of
$4.4 million as compared to the prior year. Short-term market interest rates
declined during the latter part of 1995 and early 1996, and remained relatively
unchanged for the remainder of 1996. As a result of this decline, the Company
earned lower yields in 1996 on federal funds sold, securities purchased under
agreement to resell and its investment securities, a significant portion of
which were short-term in nature, resulting in a $1.4 million unfavorable rate
variance as compared to the prior year. The average yield on loans in 1996
decreased 40 basis points from 1995, accounting for the remaining $3.0 million
of the total unfavorable rate variance. This decrease was primarily attributable
to both increased competition and a decline in the average prime rate charged by
the Company, as a substantial portion of the Company's loans are prime
rate-based. The overall decrease in the yield on average interest-earning assets
of one percent from 1995 to 1996 was due to a combination of increased
competition, the decline in short-term market interest rates as well as the
Company's prime rate, and a shift in the composition of average interest-earning
assets towards a higher percentage of short-term, lower-yielding investment
securities, as the Company's strong growth in average deposits during 1996
outpaced growth in average loans during the year.
Interest expense in 1997 increased $17.4 million from 1996. This increase
was due to an unfavorable volume variance of $16.6 million and an unfavorable
rate variance of $0.7 million. The unfavorable volume variance resulted from a
$383.3 million, or 39.1%, increase in average interest-bearing liabilities in
1997 as compared to 1996. This increase was largely concentrated in the
Company's bonus money market deposit product, which increased $307.0 million, or
52.2%, and was explained by high levels of client liquidity attributable to a
strong inflow of investment capital into the venture capital community during
1997, and by growth in the number of clients served by the Company. The
year-over-year $0.7 million unfavorable rate variance was primarily due to an
increase during 1997 in the average rate paid on the Company's bonus money
market deposit product which resulted from an increase in short-term market
interest rates, as well as to a shift in the composition of interest-bearing
liabilities towards a higher percentage of deposits in the bonus money market
deposit product.
The increase in interest expense for 1996 of $10.5 million, as compared to
1995, was primarily due to a $12.4 million unfavorable volume variance,
partially offset by a favorable rate variance of $1.9 million. The unfavorable
volume variance resulted from a $286.9 million, or 41.3%, increase in average
interest-bearing liabilities. This increase was almost entirely related to the
Company's bonus money market deposit product, which increased $259.2 million
from the prior year due to the high level of client liquidity attributable to
the strong inflow of investment capital into the venture capital community and
into the public equity markets, and due to growth during 1996 in the number of
clients served by the Company.
Changes in the average rates paid on interest-bearing liabilities had a $1.9
million favorable impact on interest expense in 1996 as compared to 1995. This
decrease in interest expense largely resulted from a reduction in the average
rate paid on the Company's bonus money market deposit product from 5.1% in 1995
to 4.5% in 1996, partially offset by a shift in the composition of
interest-bearing liabilities towards a higher percentage of deposits in the
Company's bonus money market deposit product. The reduction
22
during 1996 in the average rate paid on the Company's bonus money market deposit
product was due to both a decline in short-term market interest rates during the
latter part of 1995 and early 1996, and to a reduction in the pricing of this
deposit product in early 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses is based on Management's evaluation of the
adequacy of the existing allowance for loan losses in relation to total loans,
and on Management's periodic assessment of the inherent and identified risk
dynamics of the loan portfolio resulting from reviews of selected individual
loans and loan commitments.
The Company's provision for loan losses totaled $10.1 million in 1997,
compared to $10.4 million and $8.7 million in 1996 and 1995, respectively. For a
more detailed discussion of credit quality and the allowance for loan losses,
see the Item 7 section entitled "Financial Condition--Credit Quality and the
Allowance for Loan Losses."
NONINTEREST INCOME
The following table summarizes the components of noninterest income for the
past three years:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Disposition of client warrants................................................... $ 5,480 $ 5,389 $ 8,205
Letter of credit and foreign exchange income..................................... 4,512 3,423 3,007
Deposit service charges.......................................................... 1,772 1,663 1,402
Investment gains (losses)........................................................ 90 1 (768)
Other............................................................................ 1,411 1,133 719
--------- --------- ---------
Total noninterest income..................................................... $ 13,265 $ 11,609 $ 12,565
--------- --------- ---------
--------- --------- ---------
Noninterest income increased $1.7 million, or 14.3%, in 1997 as compared to
1996. This increase was largely due to a $1.1 million increase in letter of
credit fees, foreign exchange fees and other trade finance income, coupled with
a combined increase of $0.4 million in the Company's other components of fee
income. Noninterest income decreased $1.0 million, or 7.6%, in 1996 as compared
to 1995. This decrease was due to a $2.8 million decline in income from the
disposition of client warrants, partially offset by a combined increase of $1.1
million in the Company's components of fee income, and by a $0.8 million
decrease in losses incurred on sales of investment securities.
Income from the disposition of client warrants totaled $5.5 million, $5.4
million and $8.2 million in 1997, 1996 and 1995, respectively. The Company has
historically obtained rights to acquire stock (in the form of warrants) in
certain clients as part of negotiated credit facilities. The receipt of warrants
does not change the loan covenants or other collateral control techniques
employed by the Company to mitigate the risk of a loan becoming nonperforming,
and collateral requirements on loans with warrants are similar to lending
arrangements where warrants are not obtained. The timing and amount of income
from the disposition of client warrants typically depends upon factors beyond
the control of the Company, including the general condition of the public equity
markets as well as the merger and acquisition environment, and therefore cannot
be predicted with any degree of accuracy and is likely to vary materially from
period to period. During the years ended December 31, 1997, 1996 and 1995, a
significant portion of the income realized by the Company from the disposition
of client warrants was offset by expenses related to the Company's efforts to
build an infrastructure sufficient to support present and prospective business
activities, and to evaluate and pursue new business opportunities, and was also
offset by the need to increase the provision for loan losses during those years.
As opportunities present themselves in future
23
periods, the Company may continue to reinvest some or all of the income realized
from the disposition of client warrants in furthering its business strategies.
Letter of credit fees, foreign exchange fees and other trade finance income
totaled $4.5 million in 1997, an increase of $1.1 million, or 31.8%, from the
$3.4 million total in 1996, and an increase of $1.5 million, or 50.0%, from the
$3.0 million total in 1995. The growth in this category of noninterest income
reflects a concerted effort by Management to expand the penetration of trade
finance-related products and services among the Company's growing client base, a
large percentage of which provide products and services in international
markets.
Income related to deposit service charges totaled $1.8 million, $1.7 million
and $1.4 million in 1997, 1996 and 1995, respectively. Clients compensate the
Company for depository services either through earnings credits computed on
their demand deposit balances, or via explicit payments recognized by the
Company as deposit service charges income. The increase in deposit service
charges income from 1995 through 1997 was primarily attributable to the
aforementioned growth in the Company's client base.
The Company realized a $0.1 million gain on sales of investment securities
during 1997, compared to a nominal gain on sales of investment securities during
1996 and a loss on sales of investment securities totaling $0.8 million in 1995.
The securities sold during 1997 were primarily U.S. agency securities, while the
securities sold during 1995 were primarily mortgage-backed securities. All
investment securities sold were classified as available-for-sale, and all sales
were conducted as a normal component of the Company's asset/liability and
liquidity management activities. For additional related discussion, see the Item
7 sections entitled "Interest Rate Risk Management" and "Liquidity."
Other noninterest income is largely composed of service-based fee income,
and totaled $1.4 million in 1997, compared to $1.1 million and $0.7 million in
1996 and 1995, respectively. The increase in 1997, as compared to 1996, was
primarily due to a higher volume of cash management services related to the
Company's growing client base. The increase in 1996, as compared to 1995, was
the result of increased fees associated with the Company's periodic examinations
of client accounts receivables which are pledged as collateral on loans.
NONINTEREST EXPENSE
Noninterest expense in 1997 totaled $66.3 million, a $13.6 million, or
25.9%, increase from 1996. Total noninterest expense was $52.7 million in 1996,
up $4.8 million, or 9.9%, from 1995. Management closely monitors the Company's
level of noninterest expense using a variety of financial ratios, including the
efficiency ratio. The efficiency ratio is calculated by dividing the amount of
noninterest expense, excluding costs associated with other real estate owned, by
adjusted revenues, defined as the total of net interest income and noninterest
income, excluding income from the disposition of client warrants and gains or
losses related to sales of investment securities. This ratio reflects the level
of operating expense required to generate $1 of operating revenue. The Company's
efficiency ratio was 55.9% for both 1997 and 1996, down
24
from 60.6% in 1995. The following table presents the detail of noninterest
expense and the incremental contribution of each expense line item to the
Company's efficiency ratio:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF
ADJUSTED ADJUSTED ADJUSTED
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
Compensation and benefits..................... $ 40,084 33.8% $ 31,417 33.6% $ 27,161 34.3%
Professional services......................... 6,710 5.7 4,987 5.3 5,160 6.5
Business development and travel............... 4,514 3.8 2,918 3.1 1,982 2.5
Furniture and equipment....................... 3,620 3.1 3,239 3.5 3,235 4.1
Net occupancy expense......................... 3,410 2.9 3,095 3.3 3,616 4.6
Postage and supplies.......................... 1,600 1.3 1,448 1.6 1,191 1.5
Advertising and promotion..................... 1,448 1.2 1,183 1.3 613 0.8
Telephone..................................... 1,444 1.2 1,277 1.4 1,006 1.3
Other......................................... 3,395 2.9 2,720 2.9 3,973 5.0
--------- ----------- --------- ----------- --------- -----------
Total, excluding cost of other real estate
owned................................... 66,225 55.9% 52,284 55.9% 47,937 60.6%
----------- ----------- -----------
----------- ----------- -----------
Cost of other real estate owned............... 76 398 (12)
--------- --------- ---------
Total noninterest expense................. $ 66,301 $ 52,682 $ 47,925
--------- --------- ---------
--------- --------- ---------
Compensation and benefits expenses totaled $40.1 million in 1997, an $8.7
million, or 27.6%, increase over the $31.4 million incurred in 1996.
Compensation and benefits expenses in 1996 increased $4.3 million, or 15.7%,
from the $27.2 million total in 1995. The increase in compensation and benefits
expenses in both 1997 and 1996, over the respective prior year periods, was
largely the result of an increase in the number of average full-time equivalent
personnel (FTE) employed by the Company. Average FTE were 417 in 1997, compared
with 363 and 336 in 1996 and 1995, respectively. The increase in FTE from 1995
through 1997 was primarily due to a combination of the Company's efforts to
develop and support new markets through geographic expansion, to develop and
expand products, services and niches, and to build an infrastructure sufficient
to support present and prospective business activities. Further growth in the
Company's number of FTE is likely to occur during future years as a result of
the continued expansion of the Company's business activities.
During the third and fourth quarters of 1997, the Company granted a total of
104,500 shares of its common stock to numerous employees, subject to certain
vesting requirements and resale restrictions (restricted stock). For these
restricted stock grants, unearned compensation equivalent to the aggregate $5.9
million market value of the Company's common stock on the dates of grant was
charged to shareholders' equity and will subsequently be amortized into
compensation and benefits expense over the four-year vesting period.
Professional services expenses, which consist of costs associated with
corporate legal services, litigation settlements, accounting and auditing
services, consulting, and the Company's Board of Directors, totaled $6.7 million
in 1997, a $1.7 million, or 34.5%, increase from the $5.0 million total in 1996.
The Company incurred $5.2 million in professional services expenses in 1995. The
increase in professional services expenses in 1997, as compared to 1996,
primarily related to both an increase in consulting fees associated with several
business initiatives and an increase in legal fees largely related to the
workout of two commercial credits. The level of professional services expenses
during the past three years reflects the extensive efforts undertaken by the
Company to continue to build and support its infrastructure, as well as evaluate
and pursue new business opportunities, and also reflects the Company's efforts
in outsourcing
25
several corporate functions, such as internal audit, facilities management and
credit review, where the Company believes it can achieve a combination of cost
savings and increased quality of service.
Certain lawsuits and claims arising in the ordinary course of business have
been filed or are pending against the Company and/or the Bank. Based upon
information available to the Company, its review of such claims to date and
consultation with its legal counsel, Management believes the liability relating
to these actions, if any, will not have a material adverse effect on the
Company's liquidity, consolidated financial position or results of operations.
Business development and travel expenses totaled $4.5 million in 1997, an
increase of $1.6 million, or 54.7%, compared to the $2.9 million total in 1996.
The Company incurred $2.0 million in business development and travel expenses in
1995. The increase in business development and travel expenses during each of
the last two years was largely attributable to overall growth in the Company's
business, including both an increase in the number of FTE and expansion into new
geographic markets.
Occupancy, furniture and equipment expenses totaled $7.0 million in 1997,
$6.3 million in 1996 and $6.9 million in 1995. The increase in occupancy,
furniture and equipment expenses in 1997, as compared to 1996, was primarily the
result of investments in computer equipment and software associated with
technology upgrades and the Company's aforementioned growth in personnel. The
higher level of occupancy, furniture and equipment expenses in 1995, as compared
to the combined amount incurred in 1996, was primarily related to certain
non-recurring costs incurred during 1995 in connection with the Company's move
into a new headquarters facility. These non-recurring costs included both the
disposal and purchase of leasehold improvements and equipment. The move into the
new facility was completed in the fourth quarter of 1995. Occupancy, furniture
and equipment expenses in 1995 and 1996 were also impacted by costs related to
furniture, computer equipment and other related costs associated with both the
Company's aforementioned growth in personnel and its geographic expansion during
1995 and 1996. The Company opened new loan offices in Atlanta, Georgia and
Phoenix, Arizona during 1997, and in West Los Angeles, California and Rosemont,
Illinois in early 1998, and intends to continue its geographic expansion into
other emerging technology marketplaces across the U.S. during future years.
In July 1997, the Bank finalized an amendment to the original lease
associated with its corporate headquarters. The amendment provides for the lease
of additional premises, approximating 56,000 square feet, adjacent to the
existing headquarters facility. Construction of the interior of the building
commenced in February 1998, and it is projected the Company could begin
occupying these additional premises between July 1998 and August 1998. Future
minimum rental payments related to the additional premises are projected to be
approximately $0.8 million for 1998, $1.1 million per year for 1999 through
2001, $1.2 million per year for 2002 through 2003, $1.3 million in the year
2004, and $0.6 million in the year 2005. The Company expects to incur other
occupancy, furniture and equipment expenses in 1998 and future periods
associated with the construction, furnishing and maintenance of these additional
premises, in addition to the future minimum rental payments detailed above.
The Company and the Bank are aware of the "year 2000" issue and the
potential risks. The Bank has engaged a third party vendor, a recognized expert
in assisting in all phases of year 2000 compliance, as part of a multiphase
project to assist the Bank with addressing the year 2000 issue. The first two
phases of the year 2000 compliance project, systems inventory and risk
assessment, are projected to be completed during the second quarter of 1998. The
last phase of the project includes systems replacement and/or modification and
client notification, and is projected to begin by the third quarter of 1998. Key
customer information systems are projected to be fully compliant by December 31,
1998, with all remaining systems projected to be tested and certified no later
than the end of the second quarter of 1999. The expense and related potential
impact on the Company's pre-tax earnings of the first two phases of the year
2000 compliance project is expected to approximate $250,000. Management has not
yet assessed the potential financial impact of the last phase of the project
(systems replacement and/or modification and client notification).
26
Postage and supplies expenses totaled $1.6 million, $1.4 million and $1.2
million in 1997, 1996 and 1995, respectively. Total telephone expenses were $1.4
million in 1997, $1.3 million in 1996 and $1.0 million in 1995. The increase in
postage and supplies and telephone expenses during each of the past two years
was largely the result of overall growth in the Company's business, including
both an increase in the number of FTE and expansion into new geographic markets.
Advertising and promotion expenses totaled $1.4 million in 1997, $1.2
million in 1996 and $0.6 million in 1995. The increase in advertising and
promotion expenses in 1996 and 1997, compared to 1995, reflects a concerted
effort by the Company to increase its marketing efforts nationwide. These
efforts have been largely facilitated through a formal relationship with an
advertising and public relations firm.
Other noninterest expenses totaled $3.4 million, $2.7 million and $4.0
million in 1997, 1996 and 1995, respectively. The increase in other noninterest
expenses in 1997 of $0.7 million, as compared to 1996, was largely due to both
expenses associated with an asset which was acquired through foreclosure during
1997, and an increase in costs associated with certain vendor provided services
resulting from growth in the Company's client base. The $1.3 million decrease in
other noninterest expenses from 1995 to 1996 was primarily related to lower FDIC
deposit insurance premiums resulting from reductions in the Bank's insurance
premium assessment rate during both the third quarter of 1995 and the first
quarter of 1996 due to completion of the recapitali