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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 19, 1999
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 33-41102
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SILICON VALLEY BANCSHARES
(Exact name of registrant as specified in its charter)
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CALIFORNIA 94-2856336
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3003 TASMAN DRIVE
SANTA CLARA, CALIFORNIA 95054-1191
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (408) 654-7282
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock (no par value) Nasdaq National Market
(Title of each class) (Name of each exchange on which registered)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of its common stock on January 31,
1999, on the Nasdaq National Market was $390,300,699.
At January 31, 1999, 20,746,881 shares of the registrant's common stock (no
par value) were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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PARTS OF FORM 10-K
DOCUMENTS INCORPORATED INTO WHICH INCORPORATED
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Definitive proxy statement for the Company's 1999 Annual Meeting
of Shareholders to be filed within 120 days of the end of the
fiscal year ended December 31, 1998 Part III
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This report contains a total of 138 pages, including exhibits.
The Exhibit Index is on page 71.
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS................................................................................... 3
ITEM 2. PROPERTIES................................................................................. 13
ITEM 3. LEGAL PROCEEDINGS.......................................................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................. 14
ITEM 6. SELECTED FINANCIAL DATA.................................................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....... 68
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 68
ITEM 11. EXECUTIVE COMPENSATION..................................................................... 68
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................. 68
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 68
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........................... 68
SIGNATURES.............................................................................................. 69
INDEX TO EXHIBITS....................................................................................... 71
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PART I
ITEM 1. BUSINESS
GENERAL
Silicon Valley Bancshares (the "Company") is a California corporation and
bank holding company that was incorporated on April 23, 1982. The Company's
principal subsidiary is Silicon Valley Bank (the "Bank"), a wholly owned
subsidiary of the Company that was organized and incorporated as a California
banking corporation on October 17, 1983. The Bank is a member of the Federal
Reserve System and its deposits are insured by the Bank Insurance Fund (the
"BIF"), as administered by the Federal Deposit Insurance Corporation (the
"FDIC"). 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. Additionally, during the second quarter of 1998
the Company issued $40.0 million in cumulative trust preferred securities
through a newly formed special-purpose trust (SVB Capital I).
BUSINESS OVERVIEW
The Bank serves emerging growth and middle-market companies in 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. The Bank serves
clients across the nation 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
seeks 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.
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
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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 technology and life
sciences companies that receive equity funding from Asian (or Asian-based)
venture capital sources, 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 current 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 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 divisions include: International, Cash Management, Treasury, Real Estate,
Factoring, Commercial Finance, Corporate 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.
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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. To the extent that clients of the Factoring and
Commercial Finance Divisions grow and their financial condition strengthens,
they may thereafter be served through the Bank's niche practices.
The Corporate Finance Division pursues opportunities in leasing, mezzanine
lending and debt placements, targeting bank-eligible investment banking
transactions.
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, 1998, 1997 and 1996, the Company and the Bank, in the
aggregate, employed 590, 454 and 384 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, their employee relations are satisfactory.
COMPETITION
The banking and financial services business environment in California, as
well as the rest of the U.S., is highly and increasingly competitive. The Bank
competes for client loans, deposits and other financial products and services
with other commercial banks, savings and loan associations, securities and
brokerage companies, mortgage companies, insurance companies, finance companies,
money market and other mutual funds, credit unions, and other non-bank financial
services providers. Many of these competitors are much larger in total assets
and capitalization, have greater access to capital markets and offer a broader
array of financial 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 that of 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.
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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, 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. The
Company may engage "de novo" in permissible non-banking activities as listed in
Regulation Y without the approval of the Federal Reserve Board, provided that
the Company and the Bank are "well capitalized" and that certain other criteria
are met. For purposes of determining the capital levels at which a bank holding
company is considered well capitalized under Regulation Y, the Federal Reserve
Board has adopted a minimum total risk-based capital
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ratio of 10% on a consolidated basis and a minimum Tier 1 risk-based capital
ratio of 6% on a consolidated basis. 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 of capital ratios.
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.
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's ability to pay cash dividends is limited by the California
Corporation 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% 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. See "Item 1. Business--Supervision and Regulation--Dividends and Other
Transfers of Funds" for further discussion regarding limitations on the ability
of the Bank to pay dividends to the Company.
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 (the "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 under the
symbol "SIVB", 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 Commissioner of the California Department 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
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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." 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 Bank
is subject to various statutory and regulatory restrictions on its ability to
pay dividends to the Company. Under such restrictions, the amount available for
payment of dividends to the Company by the Bank totaled $68.3 million at
December 31, 1998. In addition, the Commissioner and the Federal Reserve Board
have the authority to prohibit the Bank from paying dividends, depending upon
the Bank's financial condition, if such payment is deemed to constitute an
unsafe or unsound practice. See "Item 8. Financial Statements and Supplementary
Data--Note 17 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 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.
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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.
The federal banking agencies require a minimum ratio of qualifying total
capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount of
Tier 1 capital to total quarterly average assets, referred to as the Tier 1
leverage ratio. For a banking organization rated in the highest of the five
categories used by regulators to rate banking organizations, the minimum Tier 1
leverage ratio must be 3%. In addition to these uniform risk-based capital
guidelines and leverage ratio requirements that apply across the industry, the
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios.
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.
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.
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 17 to the Consolidated
Financial Statements--Regulatory Matters" for the Company's and Bank's capital
ratios as of December 31, 1998.
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,
1998. See "Item 8. Financial Statements and Supplementary Data-- Note 17 to the
Consolidated Financial Statements--Regulatory Matters" for the Company's and
Bank's capital ratios as of December 31, 1998.
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,
9
<PAGE>
however, may not treat an institution as critically undercapitalized unless its
capital ratios actually warrant such treatment.
In addition to measures taken under the prompt corrective action provisions,
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.
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 federal banking agencies have also
adopted asset quality guidelines which 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. Finally, the
federal banking agencies have adopted earnings guidelines which 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 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, 1998, 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,
1998, the Bank's assessment rate was the statutory minimum assessment of $2,000
per year.
In addition to its normal deposit insurance premium as a member of the BIF,
the Bank pays 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 (the "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 Economic Growth and Paperwork
Reduction Act (the "Paperwork Reduction 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. 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.
10
<PAGE>
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 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 READINESS DISCLOSURE
The Federal Financial Institutions Examination Council (FFIEC), an oversight
authority for financial institutions, has issued several interagency statements
on Year 2000 project awareness. These statements require financial institutions
to, among other things, examine the Year 2000 implications of their reliance on
vendors, determine the potential impact of the Year 2000 issue on their
customers, suppliers and borrowers, and to survey its exposure, measure its risk
and prepare a plan to address the Year 2000 issue. In addition, federal banking
regulators have issued safety and soundness guidelines to be followed by
financial institutions to assure resolution of any Year 2000 problems. The
federal banking agencies have asserted that Year 2000 testing and certification
is a key safety and soundness issue in conjunction with regulatory examinations,
and the failure to appropriately address the Year 2000 issue could result in
supervisory action, including the reduction of the institution's supervisory
ratings, the denial of applications for mergers or acquisitions, or the
imposition of civil monetary penalties.
The Company, following an initial awareness phase, is utilizing a
three-phase plan for achieving Year 2000 readiness. The Assessment Phase was
intended to determine which computers, operating systems and applications
require remediation and prioritizing those remediation efforts by identifying
mission critical systems. The Assessment Phase has been completed except for the
on-going assessment of new systems. The Remediation and Testing Phase addressed
the correction or replacement of any non-compliant hardware and software related
to the mission critical systems and testing of those systems. Since most of the
Bank's information technology systems are off-the-shelf software, remediation
efforts have focused on obtaining Year 2000 compliant application upgrades. The
Bank's core banking system, which runs loans, deposits and the general ledger,
has been upgraded to the Year 2000 compliant version and has been forward date
tested and Year 2000 certified by the Bank. The Year 2000 releases for all of
the Bank's other internal mission critical systems have also been received,
forward date tested and certified. The next step of this phase, testing mission
critical service providers, is anticipated to be substantially completed by
March 31, 1999. During the final phase, the Implementation Phase, remediated and
validated code will be tested in interfaces with customers, business partners,
government institutions, and others. It is anticipated that the Implementation
Phase will be substantially completed by June 30, 1999.
The Company may be impacted by the Year 2000 compliance issues of
governmental agencies, businesses and other entities who provide data to, or
receive data from, the Company, and by entities, such as borrowers, vendors,
customers, and business partners, whose financial condition or operational
capability is significant to
11
<PAGE>
the Company. Therefore, the Company's Year 2000 project also includes assessing
the Year 2000 readiness of certain customers, borrowers, vendors, business
partners, counterparties, and governmental entities. In addition to assessing
the readiness of these external parties, the Company is developing contingency
plans which will include plans to recover operations and alternatives to
mitigate the effects of counterparties whose own failure to properly address
Year 2000 issues may adversely impact the Company's ability to perform certain
functions. These contingency plans are currently being developed and are
expected to be substantially completed by June 30, 1999.
If Year 2000 issues are not adequately addressed by the Company and
significant third parties, the Company's business, results of operations and
financial position could be materially adversely affected. Failure of certain
vendors to be Year 2000 compliant could result in disruption of important
services upon which the Company depends, including, but not limited to, such
services as telecommunications, electrical power and data processing. Failure of
the Company's loan customers to properly prepare for the Year 2000 could also
result in increases in problem loans and credit losses in future years. It is
not, however, possible to quantify the potential impact of any such losses at
this time. Notwithstanding the Company's efforts, there can be no assurance that
the Company or significant third party vendors or other significant third
parties will adequately address their Year 2000 issues. The Company is
continuing to assess the Year 2000 readiness of third parties but does not know
at this time whether the failure of third parties to be Year 2000 compliant will
have a material effect on the Company's results of operations, liquidity and
financial condition.
The Company currently estimates that its total cost for the Year 2000
project will approximate $3.0 million. During 1998, the Company incurred $1.5
million in charges related to its Year 2000 remediation effort and expects to
incur $1.5 million in 1999. Charges include the cost of external consulting and
the cost of accelerated replacement of hardware, but do not include the cost of
internal staff redeployed to the Year 2000 project. The Company does not believe
that the redeployment of internal staff will have a material impact on its
financial condition or results of operations.
The foregoing paragraphs contain a number of forward-looking statements.
These statements reflect Management's best current estimates, which were based
on numerous assumptions about future events, including the continued
availability of certain resources, representations received from third party
service providers and other factors. There can be no guarantee that these
estimates, including Year 2000 costs, will be achieved, and actual results could
differ materially from those estimates. A number of important factors could
cause Management's estimates and the impact of the Year 2000 issue to differ
materially from what is described in the forward-looking statements contained in
the above paragraphs. Those factors include, but are not limited to, the
availability and cost of programmers and other systems personnel, inaccurate or
incomplete execution of the phases, results of Year 2000 testing, adequate
resolution of Year 2000 issues by the Company's customers, vendors, competitors,
and counterparties, and similar uncertainties.
The forward-looking statements made in the foregoing Year 2000 discussion
speak only as of the date on which such statements are made, and the Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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
and was adopted by the Company as of January 1, 1998. See "Item 8. Financial
Statements and Supplementary Data--Note 11 to the Consolidated Financial
Statements--Comprehensive Income."
12
<PAGE>
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 and was adopted by the Company as of December 31, 1998.
See "Item 8. Financial Statements and Supplementary Data--Note 1 to the
Consolidated Financial Statements--Significant Accounting Policies."
SFAS No. 132, "Statement on Employers' Disclosures about Pensions and Other
Post-Retirement Benefits" was issued by the FASB in February 1998. This
statement is effective for financial statements issued for fiscal years
beginning after December 15, 1997. The Company does not have a pension plan or
provide for other post-retirement benefits for employees, and thus this
statement does not have a material impact on the Company's consolidated
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The statement is effective for
fiscal quarters of fiscal years beginning after June 15, 1999. The Company
expects to adopt this statement on January 1, 2000. The Company has not yet
determined the impact of its adoption on the Company's consolidated financial
statements.
In October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities," which establishes accounting and reporting
standards for certain activities of mortgage banking enterprises and other
enterprises that conduct operations that are substantially similar. SFAS No. 134
requires that after the securitization of mortgage loans held for sale, the
resulting mortgage-backed securities and other retained interests should be
classified in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," based on the company's ability and intent to
sell or hold those investments. SFAS No. 134 is effective for the first fiscal
quarter beginning after December 15, 1998. The Company does not expect the
adoption of this statement to have a material impact on the Company's
consolidated financial statements.
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. The Company began
occupying the additional premises in 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, 1998, 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 1998.
13
<PAGE>
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. The 1997 stock
prices have been restated to reflect a two-for-one stock split distributed on
May 1, 1998.
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
QUARTER LOW HIGH LOW HIGH
- ------------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
First.................................................................... $ 25.19 $ 31.94 $ 16.13 $ 19.75
Second................................................................... $ 30.47 $ 36.00 $ 16.69 $ 23.00
Third.................................................................... $ 14.81 $ 38.50 $ 20.94 $ 29.88
Fourth................................................................... $ 12.50 $ 26.63 $ 24.57 $ 29.22
</TABLE>
SHAREHOLDERS
The number of shareholders of record of the Company's common stock was 721
as of January 31, 1999.
DIVIDENDS
The Company declared no cash dividends in 1997 or 1998, 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 17 to the Consolidated Financial
Statements--Regulatory Matters" for additional discussion on restrictions and
limitations on the payment of dividends.
14
<PAGE>
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 1998 presentations. In addition, the Common Share
Summary information for the prior years has been restated to reflect a
two-for-one stock split distributed on May 1, 1998. Such reclassifications had
no effect on the results of operations or shareholders' equity.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(DOLLARS AND NUMBERS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT SUMMARY:
Net interest income....................... $ 146,615 $ 110,824 $ 87,275 $ 73,952 $ 60,260
Provision for loan losses................. 37,159 10,067 10,426 8,737 3,087
Noninterest income........................ 23,162 13,265 11,609 12,565 4,922
Noninterest expense....................... 83,645 66,301 52,682 47,925 45,599
Income before taxes....................... 48,973 47,721 35,776 29,855 16,496
Income tax expense........................ 20,117 20,043 14,310 11,702 7,430
Net income................................ 28,856 27,678 21,466 18,153 9,066
COMMON SHARE SUMMARY:
Basic earnings per share.................. $ 1.42 $ 1.43 $ 1.17 $ 1.04 $ 0.55
Diluted earnings per share................ 1.38 1.36 1.11 0.99 0.53
Book value per share...................... 10.42 8.75 7.26 5.86 4.54
Weighted average shares outstanding....... 20,268 19,370 18,426 17,494 16,670
Weighted average diluted shares
outstanding............................. 20,923 20,338 19,382 18,288 17,066
YEAR-END BALANCE SHEET SUMMARY:
Loans, net of unearned income............. $ 1,611,921 $ 1,174,645 $ 863,492 $ 738,405 $ 703,809
Assets.................................... 3,545,452 2,625,123 1,924,544 1,407,587 1,161,539
Deposits.................................. 3,269,753 2,432,407 1,774,304 1,290,060 1,075,373
Shareholders' equity...................... 215,865 174,481 135,400 104,974 77,257
AVERAGE BALANCE SHEET SUMMARY:
Loans, net of unearned income............. $ 1,318,826 $ 973,637 $ 779,655 $ 681,255 $ 592,759
Assets.................................... 2,990,548 2,140,630 1,573,903 1,165,004 956,336
Deposits.................................. 2,746,041 1,973,118 1,441,360 1,060,333 877,787
Shareholders' equity...................... 198,675 152,118 119,788 91,710 73,461
CAPITAL RATIOS:
Total risk-based capital ratio............ 11.5% 11.5% 11.5% 11.9% 10.1%
Tier 1 risk-based capital ratio........... 10.3% 10.2% 10.2% 10.6% 8.9%
Tier 1 leverage ratio..................... 7.6% 7.1% 7.7% 8.0% 8.3%
Average shareholders' equity to average
assets.................................. 6.6% 7.1% 7.6% 7.9% 7.7%
SELECTED FINANCIAL RATIOS:
Return on average assets.................. 1.0% 1.3% 1.4% 1.6% 0.9%
Return on average shareholders'
equity.................................. 14.5% 18.2% 17.9% 19.8% 12.3%
Efficiency ratio.......................... 53.8% 55.9% 55.9% 60.6% 68.3%
Net interest margin....................... 5.2% 5.6% 6.1% 7.1% 7.2%
</TABLE>
15
<PAGE>
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 1998 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 1998 of $28.9 million, compared with net
income in 1997 and 1996 of $27.7 million and $21.5 million, respectively.
Diluted earnings per share totaled $1.38 in 1998, compared to $1.36 and $1.11 in
1997 and 1996, respectively. Return on average equity in 1998 was 14.5%,
compared with 18.2% in 1997 and 17.9% in 1996. Return on average assets in 1998
was 1.0%, compared with 1.3% in 1997 and 1.4% in 1996.
The slight increase in net income for 1998, as compared to 1997, was
primarily attributable to growth in both net interest income and noninterest
income, and was almost entirely offset by a significant increase in the
provision for loan losses and an increase in noninterest expense. The increase
in net income for 1997, as compared with 1996, was largely due to growth in net
interest income, partially offset by an increase in noninterest expense. The
major components of net income and changes in these components are summarized in
the following table for the years ended December 31, 1998, 1997 and 1996, and
are discussed in more detail on the following pages.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1997 TO 1996
1998 TO 1997 INCREASE
1998 1997 INCREASE 1996 (DECREASE)
---------- ---------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net interest income............................. $ 146,615 $ 110,824 $ 35,791 $ 87,275 $ 23,549
Provision for loan losses....................... 37,159 10,067 27,092 10,426 (359)
Noninterest income.............................. 23,162 13,265 9,897 11,609 1,656
Noninterest expense............................. 83,645 66,301 17,344 52,682 13,619
---------- ---------- ------------ --------- ------------
Income before income taxes...................... 48,973 47,721 1,252 35,776 11,945
Income tax expense.............................. 20,117 20,043 74 14,310 5,733
---------- ---------- ------------ --------- ------------
Net income...................................... $ 28,856 $ 27,678 $ 1,178 $ 21,466 $ 6,212
---------- ---------- ------------ --------- ------------
---------- ---------- ------------ --------- ------------
</TABLE>
NET INTEREST INCOME AND MARGIN
Net interest income represents the difference between interest earned,
primarily on loans and investments, and interest paid on funding sources,
primarily deposits, and is the principal source of revenue for the Company. Net
interest margin is the amount of net interest income, on a fully
taxable-equivalent basis, expressed as a percentage of average interest-earning
assets. The average yield earned on interest-earning assets is the amount of
taxable-equivalent interest income expressed as a percentage of average
interest-earning assets. The average rate paid on funding sources expresses
interest expense as a percentage of average interest-earning assets.
16
<PAGE>
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, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- --------------------------------- --------------------
AVERAGE AVERAGE
YIELD YIELD
AVERAGE AND AVERAGE AND AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
--------- --------- ----------- --------- --------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and
securities purchased under
agreement to resell (1)..... $ 396,488 $ 21,305 5.4% $ 312,398 $ 17,264 5.5% $ 244,408 $ 13,106
Investment securities:
Taxable..................... 1,044,918 61,515 5.9 671,390 40,360 6.0 411,743 23,587
Non-taxable (2)............. 78,234 5,034 6.4 33,801 2,320 6.9 8,112 749
Loans: (3), (4), (5)
Commercial.................. 1,157,949 122,708 10.6 858,459 95,304 11.1 658,316 75,750
Real estate construction and
term...................... 115,743 12,364 10.7 78,311 8,063 10.3 81,358 8,471
Consumer and other.......... 45,134 4,064 9.0 36,867 3,473 9.4 39,981 3,672
--------- --------- ----- --------- --------- ----- --------- ---------
Total loans................... 1,318,826 139,136 10.6 973,637 106,840 11.0 779,655 87,893
--------- --------- ----- --------- --------- ----- --------- ---------
Total interest-earning assets... 2,838,466 226,990 8.0 1,991,226 166,784 8.4 1,443,918 125,335
--------- --------- ----- --------- --------- ----- --------- ---------
Cash and due from banks......... 137,096 148,044 126,830
Allowance for loan losses....... (40,055) (37,568) (30,429)
Other real estate owned......... 681 1,192 3,582
Other assets.................... 54,360 37,736 30,002
--------- --------- ---------
Total assets.................... $2,990,548 $2,140,630 $1,573,903
--------- --------- ---------
--------- --------- ---------
Funding sources:
Interest-bearing liabilities:
NOW deposits.................. $ 18,702 348 1.9 $ 15,814 308 1.9 $ 10,256 223
Regular money market
deposits.................... 338,585 9,189 2.7 345,828 9,368 2.7 312,841 8,460
Bonus money market deposits... 1,487,240 63,155 4.3 895,259 40,885 4.6 588,235 26,312
Time deposits................. 131,530 5,917 4.5 107,742 4,587 4.3 69,975 2,801
Other borrowings.............. 66 4 6.0 5 -- 5.0 30 2
--------- --------- ----- --------- --------- ----- --------- ---------
Total interest-bearing
liabilities................... 1,976,123 78,613 4.0 1,364,648 55,148 4.0 981,337 37,798
Portion of noninterest-bearing
funding sources............... 862,343 626,578 462,581
--------- --------- ----- --------- --------- ----- --------- ---------
Total funding sources........... 2,838,466 78,613 2.8 1,991,226 55,148 2.8 1,443,918 37,798
--------- --------- ----- --------- --------- ----- --------- ---------
Noninterest-bearing funding
sources:
Demand deposits............... 769,984 608,475 460,053
Other liabilities............. 22,146 15,389 12,725
Trust preferred securities.... 23,620 -- --
Shareholders' equity.......... 198,675 152,118 119,788
Portion used to fund interest-
earning assets.............. (862,343) (626,578) (462,581)
--------- --------- ---------
Total liabilities and
shareholders'
equity........................ $2,990,548 $2,140,630 $1,573,903
--------- --------- ---------
--------- --------- ---------
Net interest income and
margin........................ $ 148,377 5.2% $ 111,636 5.6% $ 87,537
--------- ----- --------- ----- ---------
--------- ----- --------- ----- ---------
Memorandum: Total deposits...... $2,746,041 $1,973,118 $1,441,360
--------- --------- ---------
--------- --------- ---------
<CAPTION>
AVERAGE
YIELD
AND
RATE
-----------
<S> <C>
Interest-earning assets:
Federal funds sold and
securities purchased under
agreement to resell (1)..... 5.4%
Investment securities:
Taxable..................... 5.7
Non-taxable (2)............. 9.2
Loans: (3), (4), (5)
Commercial.................. 11.5
Real estate construction and
term...................... 10.4
Consumer and other.......... 9.2
-----
Total loans................... 11.3
-----
Total interest-earning assets... 8.7
-----
Cash and due from banks.........
Allowance for loan losses.......
Other real estate owned.........
Other assets....................
Total assets....................
Funding sources:
Interest-bearing liabilities:
NOW deposits.................. 2.2
Regular money market
deposits.................... 2.7
Bonus money market deposits... 4.5
Time deposits................. 4.0
Other borrowings.............. 5.5
-----
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.............
Trust preferred securities....
Shareholders' equity..........
Portion used to fund interest-
earning assets..............
Total liabilities and
shareholders'
equity........................
Net interest income and
margin........................ 6.1%
-----
-----
Memorandum: Total deposits......
</TABLE>
- ------------------------------
(1) Includes average interest-bearing deposits in other financial institutions
of $240, $306 and $345 in 1998, 1997 and 1996, respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in 1998,
1997 and 1996. These adjustments were $1,762, $812 and $262 for the years
ended December 31, 1998, 1997 and 1996, respectively.
(3) Average loans include average nonaccrual loans of $26,158, $19,681 and
$22,897 in 1998, 1997 and 1996, respectively.
(4) Average loans are net of average unearned income of $8,299, $6,922 and
$4,169 in 1998, 1997 and 1996, respectively.
(5) Loan interest income includes loan fees of $12,935, $10,567 and $8,176 in
1998, 1997 and 1996, respectively.
17
<PAGE>
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 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
------------------------------- -------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
------------------------------- -------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Federal funds sold and securities purchased
under agreement to resell.................. $ 4,518 $ (477) $ 4,041 $ 3,757 $ 401 $ 4,158
Investment securities........................ 24,765 (896) 23,869 17,269 1,075 18,344
Loans........................................ 36,418 (4,122) 32,296 21,286 (2,339) 18,947
--------- --------- --------- --------- --------- ---------
Increase (decrease) in interest income......... 65,701 (5,495) 60,206 42,312 (863) 41,449
--------- --------- --------- --------- --------- ---------
Interest expense:
NOW deposits................................. 54 (14) 40 108 (23) 85
Regular money market deposits................ (197) 18 (179) 894 14 908
Bonus money market deposits.................. 25,138 (2,868) 22,270 14,021 552 14,573
Time deposits................................ 1,070 260 1,330 1,608 178 1,786
Other borrowings............................. 4 -- 4 -- (2) (2)
--------- --------- --------- --------- --------- ---------
Increase (decrease) in interest expense........ 26,069 (2,604) 23,465 16,631 719 17,350
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net interest income..... $ 39,632 $ (2,891) $ 36,741 $ 25,681 $ (1,582) $ 24,099
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
Net interest income, on a fully taxable-equivalent basis, totaled $148.4
million in 1998, an increase of $36.8 million, or 32.9%, from the $111.6 million
total in 1997. The increase in net interest income was attributable to a $60.2
million, or 36.1%, increase in interest income, offset by a $23.5 million, or
42.5%, increase in interest expense over the comparable prior year period. Net
interest income in 1997, on a fully taxable-equivalent basis, increased $24.1
million, or 27.5%, compared to the $87.5 million total in 1996. This increase in
net interest income was the result of 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.
The $60.2 million increase in interest income for 1998, as compared to 1997,
was the result of a $65.7 million favorable volume variance, slightly offset by
a $5.5 million unfavorable rate variance. The $65.7 million favorable volume
variance resulted from a $847.2 million, or 42.5%, increase in average interest-
earning assets over the comparable prior year period. The increase in average
interest-earning assets resulted from strong growth in the Company's average
deposits, which increased $772.9 million, or 39.2%, from 1997 to 1998. The
increase in average interest-earning assets consisted of loans, which increased
$345.2 million, plus a combination of highly liquid, lower-yielding federal
funds sold, securities purchased under agreement to resell and investment
securities, which collectively increased $502.0 million, accounting for 59.3% of
the total increase in average interest-earning assets.
Average loans increased $345.2 million, or 35.5%, in 1998 as compared to
1997, resulting in a $36.4 million favorable volume variance. This growth was
widely distributed throughout the loan portfolio, as reflected by increased loan
balances in all of the Company's technology, life sciences and special industry
niche practices, in specialized lending products, and throughout the Company's
loan offices located across the nation.
In December 1998, the Company announced that the Bank had discontinued new
loan originations associated with its Religious Financial Resources (RFR)
Division. Started in 1995, the Bank had approximately $175.0 million in
outstanding loans to religious organizations, predominantly for construction of
buildings for
18
<PAGE>
worship and education, as of December 31, 1998. Competitive changes within the
religious organizations market affected the Bank's ability to generate its
anticipated loan yield and provide returns that exceed the Company's required
return on capital. The credit quality of the RFR portfolio was not a factor in
the Company's decision to discontinue new RFR loan origination. Since inception,
the Company has not incurred any losses associated with the RFR portfolio. The
discontinuation of new RFR loan origination could have an effect on the future
loan growth of the Company.
Average investment securities for 1998 increased $418.0 million, or 59.3%,
as compared to 1997, resulting in a $24.8 million favorable volume variance. The
aforementioned strong growth in average deposits exceeded the growth in average
loans during 1998, and generated excess funds that were largely invested in U.S.
agency securities, collateralized mortgage obligations and municipal securities.
The growth in the investment portfolio reflected Management's actions 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 1998 increased a combined $84.1 million, or 26.9%, over the prior
year, resulting in a $4.5 million favorable volume variance. This increase was
largely due to the aforementioned strong growth in average deposits during 1998
coupled with 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."
Unfavorable rate variances associated with each component of
interest-earning assets in 1998 resulted in a decrease in interest income of
$5.5 million as compared to the prior year. Short-term market interest rates
declined during the second half of 1998. As a result of this decline, the
Company earned lower yields in 1998 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 1998
decreased 40 basis points from 1997, accounting for the remaining $4.1 million
of the total unfavorable rate variance. This decrease was primarily attributable
to both increased competition and a decline in the average prime rate charged by
the Company during the second half of 1998, as a substantial portion of the
Company's loans are prime rate-based.
The yield on average interest-earning assets decreased 40 basis points in
1998 from the comparable prior year period. This decrease resulted from a
decline in the average yield on loans, largely due to both increased competition
and a decline in the Company's prime rate, as well as a continuing shift in the
composition of interest-earning assets towards a higher percentage of highly
liquid, lower-yielding federal funds sold, securities purchased under agreement
to resell and investment securities. This shift in the composition of average
interest-earning assets resulted from the aforementioned strong growth in
deposits continuing to outpace the growth in the Company's average loans during
1998.
The $41.4 million increase in interest income for 1997, as compared to 1996,
was due to a $42.3 million favorable volume variance, slightly offset by a $0.9
million unfavorable rate variance. The $42.3 million favorable volume variance
was attributable to growth in average interest-earning assets, which increased
$547.3 million, or 37.9%, 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 $531.8 million, or 36.9%, from the comparable
1996 period.
Average loans increased $194.0 million, or 24.9%, in 1997 as compared to
1996. This year-over-year increase was widely distributed throughout the
Company's niches and products, as well as the Company's loan offices located
across the nation.
The increase in average investment securities during 1997, as compared to
1996, of $285.3 million, or 68.0%, was largely invested in U.S. agency
securities, U.S. Treasury securities, mortgage-backed securities, and municipal
securities. This increase resulted from the aforementioned strong deposit growth
in 1997 that exceeded the growth in loans and was the result of Management's
decision 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
19
<PAGE>
liquidity. Average federal funds sold and securities purchased under agreement
to resell increased $68.0 million, or 27.8%, in 1997, and 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 1997, a $2.3 million unfavorable rate variance associated with loans was
partially offset by a combined $1.4 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 total yield on average interest-earning assets declined 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 agreements 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.
Interest expense in 1998 increased $23.5 million from 1997. This increase
was due to an unfavorable volume variance of $26.1 million, partially offset by
a favorable rate variance of $2.6 million. The unfavorable volume variance
resulted from a $611.5 million, or 44.8%, increase in average interest-bearing
liabilities in 1998 as compared to 1997. This increase was largely concentrated
in the Company's bonus money market deposit product, which increased $592.0
million, or 66.1%, and was explained by high levels of client liquidity
attributable to a strong inflow of investment capital into the venture capital
community during 1998, and by growth in the number of clients served by the
Company.
Changes in the average rates paid on interest-bearing liabilities had a $2.6
million favorable impact on interest expense in 1998 as compared to 1997. This
decrease in interest expense largely resulted from a reduction in the average
rate paid on the Company's bonus money market deposit product from 4.6% in 1997
to 4.3% in 1998. The reduction during 1998 in the average rate paid on the
Company's bonus money market deposit product was largely attributable to a
decline in short-term market interest rates during the second half of 1998.
The average cost of funds paid in 1998 of 2.8% was flat with the prior year.
Although the average rate paid on the Company's bonus money market deposit
product decreased during 1998 as compared to 1997, this was offset by a
continuing shift in the composition of average interest-bearing liabilities
towards a higher percentage of deposits in that product.
The increase in interest expense for 1997 of $17.3 million, as compared to
1996, 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 primarily related to
the Company's bonus money market deposit product, which increased $307.0 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 1997 in the number of
clients served by the Company. The year-over-year $0.7 million unfavorable rate
variance was largely attributable 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 a shift in the
composition of interest-bearing liabilities towards a higher percentage of
deposits in the bonus money market deposit product.
In 1997, the average cost of funds paid increased to 2.8%, up from 2.6% in
1996. This increase was attributable to both an increase in the average rate
paid on the Company's bonus money market deposit product in response to 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.
20
<PAGE>
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 $37.2 million in 1998, a
significant increase compared to $10.1 million and $10.4 million in 1997 and
1996, respectively. The large increase in the Company's provision for loan
losses in 1998 was in response to the Company incurring $28.9 million in net
charge-offs in 1998, versus $5.1 million and $7.4 million in 1997 and 1996,
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Letter of credit and foreign exchange income................................... $ 7,397 $ 4,512 $ 3,423
Disposition of client warrants................................................. 6,657 5,480 5,389
Investment gains............................................................... 5,240 90 1
Deposit service charges........................................................ 1,730 1,772 1,663
Other.......................................................................... 2,138 1,411 1,133
--------- --------- ---------
Total noninterest income....................................................... $ 23,162 $ 13,265 $ 11,609
--------- --------- ---------
--------- --------- ---------
</TABLE>
Noninterest income increased $9.9 million, or 74.6%, in 1998 as compared to
1997. This increase was largely due to a $5.2 million increase in investment
gains, coupled with a $2.9 million increase in letter of credit fees, foreign
exchange fees and other trade finance income and a $1.2 million increase in
income from the disposition of client warrants. 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.
Letter of credit fees, foreign exchange fees and other trade finance income
totaled $7.4 million in 1998, an increase of $2.9 million, or 63.9%, from the
$4.5 million total in 1997, and an increase of $4.0 million, or 116.1%, from the
$3.4 million total in 1996. 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 from the disposition of client warrants totaled $6.7 million, $5.5
million and $5.4 million in 1998, 1997 and 1996, 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. Therefore income from
the disposition of client warrants cannot be predicted with any degree of
accuracy and is likely to vary materially from period to period. During the
years ended December 31, 1998, 1997 and 1996, a significant portion of the
income 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 was also offset by increases to the
provision for loan losses during those years. As opportunities present
themselves in future periods, the Company may continue to reinvest some or all
of the income realized from the disposition of client warrants in furthering its
business strategies.
21
<PAGE>
The Company realized $5.2 million in gains on sales of investment securities
during 1998, compared to $0.1 million in gains on sales of investment securities
during 1997, and a nominal gain on sales of investment securities during 1996.
The book value of securities sold during 1998 totaled $433.3 million and
primarily consisted of U.S. Treasury securities, U.S. agency securities,
mortgage-backed securities, and collateralized mortgage obligations. 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.
Income related to deposit service charges totaled $1.7 million, $1.8 million
and $1.7 million in 1998, 1997 and 1996, 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.
Other noninterest income is largely composed of service-based fee income,
and totaled $2.1 million in 1998, compared to $1.4 million in 1997 and $1.1
million in 1996, respectively. The increase in 1998, as compared to 1997 and
1996, was primarily due to a higher volume of cash management and loan
documentation services related to the Company's growing client base.
NONINTEREST EXPENSE
Noninterest expense in 1998 totaled $83.6 million, a $17.3 million, or
26.2%, increase from 1997. Total noninterest expense was $66.3 million in 1997,
up $13.6 million, or 25.9%, from 1996. 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 53.8% for 1998, down from 55.9% for both 1997 and 1996. The
following table presents the detail of noninterest expense and the incremental
contribution of each expense line item to the Company's efficiency ratio:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF
ADJUSTED ADJUSTED ADJUSTED
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Compensation and benefits................ $ 44,232 28.0% $ 40,084 33.8% $ 31,417 33.6%
Professional services.................... 9,876 6.3 6,710 5.7 4,987 5.3
Furniture and equipment.................. 6,667 4.2 3,620 3.1 3,239 3.5
Business development and travel.......... 6,025 3.8 4,514 3.8 2,918 3.1
Net occupancy expense.................... 5,195 3.3 3,410 2.9 3,095 3.3
Postage and supplies..................... 2,225 1.4 1,600 1.3 1,448 1.5
Advertising and promotion................ 2,215 1.4 1,448 1.2 1,183 1.3
Telephone................................ 2,157 1.4 1,444 1.2 1,277 1.4
Trust preferred securities
distributions.......................... 2,012 1.3 -- -- -- --
Other.................................... 4,255 2.7 3,395 2.9 2,720 2.9
--------- ----------- --------- ----------- --------- -----------
Total, excluding cost of other real
estate owned........................... 84,859 53.8% 66,225 55.9% 52,284 55.9%
----------- ----------- -----------
----------- ----------- -----------
Cost of other real estate owned.......... (1,214) 76 398
--------- --------- ---------
Total noninterest expense................ $ 83,645 $ 66,301 $ 52,682
--------- --------- ---------
--------- --------- ---------
</TABLE>
Compensation and benefits expenses totaled $44.2 million in 1998, a $4.1
million, or 10.4%, increase over the $40.1 million incurred in 1997. This
increase was largely the result of an increase in the number of average
full-time equivalent (FTE) personnel employed by the Company, from 417 in 1997
to 521 in 1998, partially offset by a decrease in variable-based compensation
expenses associated with the Company's incentive bonus pool and employee stock
ownership plan due to lower than expected net income. Compensation and benefits
22
<PAGE>
expenses in 1997 increased $8.7 million, or 27.6%, from the $31.4 million total
in 1996. The increase in compensation and benefits expenses in 1997 was
primarily the result of an increase in the number of average FTE employed by the
Company. Average FTE were 417 in 1997 compared with 363 in 1996. The increase in
FTE from 1996 through 1998 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 FTE is likely to occur during future years as a result
of the continued expansion of the Company's business activities.
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 $9.9 million
in 1998, a $3.2 million, or 47.2%, increase from the $6.7 million total in 1997.
The Company incurred $5.0 million in professional services expenses in 1996. The
increase in professional services expenses in 1998, as compared to 1997 and
1996, primarily related to an increase in both consulting fees associated with
several business initiatives, including the Year 2000 remediation project, and
legal fees primarily related to loan consultations and the workout of various
commercial credits. The level of professional services expenses during the past
three years further 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. It also reflects the Company's efforts in
outsourcing 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.
Occupancy, furniture and equipment expenses totaled $11.9 million in 1998,
$7.0 million in 1997 and $6.3 million in 1996. The increase in occupancy,
furniture and equipment expenses in 1998, as compared to 1997 and 1996, was
largely attributable to the Company incurring certain non-recurring costs in
connection with the expansion of its existing headquarters facility during the
second quarter of 1998 and an increase in recurring expenses associated with
that additional office space. Occupancy, furniture and equipment expenses were
also impacted by costs related to furniture, computer equipment and other
related costs associated with the Company opening new loan offices in West Los
Angeles, California and Rosemont, Illinois in early 1998. The Company intends to
continue its geographic expansion into other emerging technology marketplaces
across the U.S. during future years as opportunities to serve new markets arise.
Business development and travel expenses totaled $6.0 million in 1998, an
increase of $1.5 million, or 33.5%, compared to the $4.5 million total in 1997.
The Company incurred $2.9 million in business development and travel expenses in
1996. 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.
Postage and supplies expenses totaled $2.2 million, $1.6 million and $1.4
million in 1998, 1997 and 1996, respectively. Total telephone expenses were $2.2
million in 1998, $1.4 million in 1997 and $1.3 million in 1996. 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 $2.2 million in 1998, $1.4
million in 1997 and $1.2 million in 1996. The increase in advertising and
promotion expenses in 1998, compared to 1997 and 1996, reflects a concerted
effort by the Company to increase its marketing efforts nationwide.
Trust preferred securities distributions totaled $2.0 million in 1998 and
resulted from the issuance of $40.0 million in cumulative trust preferred
securities during the second quarter of 1998. The trust preferred securities pay
a fixed rate quarterly distribution of 8.25% and have a maximum maturity of 30
years. For further discussion related to the trust preferred securities, see the
Item 7 sections entitled "Liquidity" and "Capital Resources."
Other noninterest expenses totaled $4.3 million, $3.4 million and $2.7
million in 1998, 1997 and 1996, respectively. The increase in other noninterest
expenses in 1998 of $0.9 million, as compared to 1997, was primarily due to an
increase in data processing costs related to both the aforementioned overall
growth in the Company's business and several new business initiatives begun in
1998. In addition, there was an increase in costs associated with certain vendor
provided services resulting from growth in the Company's client base.
23
<PAGE>
The $0.7 million increase in other noninterest expenses from 1996 to 1997 was
largely due to expenses associated with both 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 Company realized a net gain of $1.3 million in connection with the sale
of an other real estate owned (OREO) property during 1998. In 1997, the Company
incurred minimal net costs associated with OREO, and in 1996, $0.4 million in
net OREO-related costs were incurred, primarily due to the write-down of one
property owned by the Company. The Company's net costs associated with OREO
include: maintenance expenses, property taxes, marketing costs, net operating
expense or income associated with income-producing properties, property
write-downs, and gains or losses on the sales of such properties.
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.
INCOME TAXES
The Company's effective income tax rate was 41.1% in 1998, compared to 42.0%
in 1997 and 40.0% in 1996. The slight decrease in the Company's effective income
tax rate for 1998, as compared to 1997, was attributable to an increase in the
amount of tax-exempt interest income received by the Company. The increase in
the Company's effective income tax rate from 1996 to 1997, was due to
adjustments in the Company's estimate of its income tax liabilities.
FINANCIAL CONDITION
The Company's total assets were $3.5 billion at December 31, 1998, an
increase of $920.3 million, or 35.1%, compared to $2.6 billion at December 31,
1997.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell
totaled a combined $399.2 million at December 31, 1998, an increase of $77.4
million, or 24.1%, compared to the $321.8 million outstanding at the prior year
end. This increase was attributable to the Company investing excess funds
resulting from the strong growth in deposits during 1998 which exceeded the
growth in loans, in these types of short-term, liquid investments.
INVESTMENT SECURITIES
The following table details the composition of investment securities, all of
which were classified as available-for-sale and reported at fair value, at
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1998 1997 1996
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury securities................................................ $ 41,049 $ 217,685 $ 75,547
U.S. agencies and corporations:
Discount notes and bonds.............................................. 498,016 462,405 298,488
Mortgage-backed securities............................................ 125,059 144,437 8,168
Collateralized mortgage obligations................................... 155,149 41,051 58,038
Obligations of states and political subdivisions........................ 515,770 60,436 22,787
Commercial paper........................................................ 9,993 41,829 143,086
Bankers' acceptances.................................................... -- 16,140 --
Other debt securities................................................... 38,471 25,007 13,000
Other equity securities................................................. 13,995 4,914 5,908
------------ ------------ ----------
Total................................................................... $ 1,397,502 $ 1,013,904 $ 625,022
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
24
<PAGE>
Investment securities totaled $1.4 billion at December 31, 1998. This
represented a $383.6 million, or 37.8%, increase over the December 31, 1997
balance of $1.0 billion. This increase resulted from excess funds that were
generated by strong growth in the Company's deposits outpacing the growth in
loans during 1998, and primarily consisted of U.S. agency securities,
collateralized mortgage obligations and municipal securities. The significant
increase in municipal securities was composed of both taxable and non-taxable
municipal obligations, and was largely attributable to the Company obtaining
slightly higher yields on these investments as compared to U.S. agency discount
notes and bonds and other short-term securities. The decreases in U.S. Treasury
securities, mortgage-backed securities and commercial paper was primarily due to
sales and maturities. The overall growth in the investment portfolio reflected
Management's actions to increase as well as to further diversify the Company's
portfolio of short-term investments in response to a continued significant
increase in liquidity.
At December 31, 1998, there were no investment securities held by the
Company which were issued by a single party, excluding securities issued by the
U.S. Government or by U.S. Government agencies and corporations, and which
exceeded 10.0% of the Company's shareholders' equity at year end.
The following table provides the remaining contractual principal maturities
and fully taxable-equivalent yields on investment securities held by the Company
as of December 31, 1998. The weighted-average yield is computed using the
amortized cost of available-for-sale securities, which are reported at fair
value. Expected remaining maturities of mortgage-backed securities and
collateralized mortgage obligations will generally differ from their contractual
maturities because borrowers may have the right to prepay obligations with or
without penalties. Other equity securities, consisting largely of the common
stock of client companies, Federal Reserve Bank stock, investments in tax credit
funds, and venture capital investments, were included in the table below as
maturing after ten years.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------------------------------------
AFTER
AFTER ONE FIVE
ONE YEAR YEAR TO YEARS TO
TOTAL OR LESS FIVE YEARS TEN YEARS
-------------------------- -------------------------- -------------------------- ---------
WEIGHTED- WEIGHTED- WEIGHTED-
FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE FAIR
VALUE YIELD VALUE YIELD VALUE YIELD VALUE
--------- --------------- --------- --------------- --------- --------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities.............. $ 41,049 5.1% $ 41,049 5.1% -- -- --
U.S. agencies and
corporations:
Discount notes and
bonds................. 498,016 5.6 241,665 5.3 $ 256,351 6.0% --
Mortgage-backed
securities............ 125,059 6.4 -- -- -- -- --
Collateralized mortgage
obligations........... 155,149 6.6 -- -- 12,397 6.3 $ 17,502
Obligations of states and
political
subdivisions............ 515,770 5.7 427,034 5.5 17,083 6.5 71,653
Commercial paper.......... 9,993 5.2 9,993 5.2 -- -- --
Other debt securities..... 38,471 5.8 22,000 5.8 4,429 5.6 12,042
Other equity securities... 13,995 -- -- -- -- -- --
-- -- --
--------- --------- --------- ---------
Total..................... $1,397,502 5.8% $ 741,741 5.4% $ 290,260 6.0% $ 101,197
-- -- --
-- -- --
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
AFTER
TEN YEARS
--------------------------
WEIGHTED- WEIGHTED-
AVERAGE FAIR AVERAGE
YIELD VALUE YIELD
--------------- --------- ---------------
<S> <C> <C> <C>
U.S. Treasury
securities.............. -- -- --
U.S. agencies and
corporations:
Discount notes and
bonds................. -- -- --
Mortgage-backed
securities............ -- $ 125,059 6.4%
Collateralized mortgage
obligations........... 6.7% 125,250 6.6
Obligations of states and
political
subdivisions............ 5.7 -- --
Commercial paper.......... -- -- --
Other debt securities..... 6.0 -- --
Other equity securities... -- 13,995 --
-- --
---------
Total..................... 5.9% $ 264,304 6.1%
-- --
-- --
---------
---------
</TABLE>
Mortgage-backed securities (MBS) and collateralized mortgage obligations
(CMO) pose risks not associated with fixed maturity bonds, primarily related to
the ability of the mortgage borrower to prepay the loan with or without penalty.
This risk, known as prepayment risk, may cause the MBS and the CMO to remain
outstanding for a period of time different than that assumed at the time of
purchase. When interest rates decline, prepayments generally tend to increase,
causing the average expected remaining maturity of the MBS and the CMO to
decline. Conversely, if interest rates rise, prepayments tend to decrease,
lengthening the average expected remaining maturity of the MBS and the CMO.
25
<PAGE>
LOANS
The composition of the loan portfolio, net of unearned income, for each of
the past five years is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial..................................... $ 1,429,980 $ 1,051,218 $ 755,699 $ 622,488 $ 613,469
Real estate construction....................... 74,023 53,583 27,540 17,194 10,512
Real estate term............................... 60,841 33,395 44,475 56,845 58,977
Consumer and other............................. 47,077 36,449 35,778 41,878 20,851
------------ ------------ ---------- ---------- ----------
Total loans.................................... $ 1,611,921 $ 1,174,645 $ 863,492 $ 738,405 $ 703,809
------------ ------------ ---------- ---------- ----------
------------ ------------ ---------- ---------- ----------
</TABLE>
Total loans at December 31, 1998, net of unearned income, were $1.6 billion,
representing a $437.3 million, or 37.2%, increase compared to the $1.2 billion
outstanding at December 31, 1997. The increase in loans from the 1997 year-end
total was widely distributed throughout the loan portfolio, as evidenced by
increased loan balances in all of the Company's market niches, specialized
lending products and loan offices.
In December 1998, the Company announced that the Bank had discontinued new
loan originations associated with its Religious Financial Resources (RFR)
Division. Started in 1995, the Bank had approximately $175.0 million in
outstanding loans to religious organizations, predominantly for construction of
buildings for worship and education, as of December 31, 1998. Competitive
changes within the religious organizations market affected the Bank's ability to
generate its anticipated loan yield and provide returns that exceed the
Company's required return on capital. The credit quality of the RFR portfolio
was not a factor in the Company's decision to discontinue new RFR loan
origination. Since inception, the Company has not incurred any losses associated
with the RFR portfolio. The discontinuation of new RFR loan origination could
have an effect on the future loan growth of the Company.
The following table sets forth the remaining contractual maturity
distribution of the Company's loans (reported on a gross basis) at December 31,
1998 for fixed and variable rate commercial and real estate construction loans:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------
AFTER ONE
YEAR AND
ONE YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
---------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed rate loans:
Commercial................................................... $ 45,023 $ 156,087 $ 151,074 $ 352,184
Real estate construction..................................... -- 12,217 -- 12,217
---------- ----------- ----------- ------------
Total fixed rate loans....................................... $ 45,023 $ 168,304 $ 151,074 $ 364,401
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
Variable rate loans:
Commercial................................................... $ 691,952 $ 370,994 $ 23,896 $ 1,086,842
Real estate construction..................................... 59,485 2,439 564 62,488
---------- ----------- ----------- ------------
Total variable rate loans.................................... $ 751,437 $ 373,433 $ 24,460 $ 1,149,330
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
</TABLE>
Upon maturity, loans satisfying the Company's credit quality standards may
be eligible for renewal. Such renewals are subject to the normal underwriting
and credit administration practices associated with new loans. The Company does
not grant loans with unconditional extension terms.
A substantial percentage of the Company's loans are commercial in nature,
and such loans are generally made to emerging growth and middle-market companies
in a variety of industries. As of December 31, 1998, only one industry sector
(as identified by Standard Industrial Codes) represented more than 10.0% of the
Company's loan portfolio. The Religious Financial Resources Division, in which
new loan originations were
26
<PAGE>
discontinued in December 1998, represented 10.6% of the Company's total loan
portfolio as of December 31, 1998.
Management of the Company has continued to evaluate both the economic events
occurring in Asia during 1998 and the forecasts for the U.S. economy for 1999,
in an effort to determine the impact on the markets the Company serves. Now a
full year after commencement of the Asian economic crisis, the Company has
determined it has no direct exposure to the crisis. Only one borrowing client
has been critically affected by the Asian economic crisis and that asset has
been written down to reflect the perceived exposure. The outlook for the U.S.
economy in 1999 is uncertain and although no significant current or forecasted
negative impact has been identified with respect to the Company's loan growth,
credit quality, overall financial condition, and results of operations,
Management has decided to bolster the allowance for loan losses. Future events
and circumstances surrounding the economic conditions in the U.S. and Asia
cannot be predicted, nor can the impact of these future events and circumstances
on the Company's loan growth, credit quality, overall financial condition, and
results of operations be determined at the present time.
General conditions in the public equity markets, in particular those related
to public stock offerings, as well as the merger and acquisitions environment,
may have an impact on the Bank. One consequence of an active market for public
stock offerings and mergers and acquisitions is the payoff or reduction of a
portion of the Bank's loans by some of its clients which complete public stock
offerings, or merge with, or are acquired by, another company. Such a reduction
in outstanding loans, if significant, could adversely affect the Company's
consolidated earnings.
LOAN ADMINISTRATION
Authority over the Company's loan policies resides with the Company's Board
of Directors. This authority is managed through the approval and periodic review
of the Company's loan policies. The Board of Directors delegates authority to
the Directors' Loan Committee to supervise the loan underwriting, approval and
monitoring activities of the Company. The Directors' Loan Committee consists of
outside Board of Directors members and the Company's Chief Executive Officer,
who serves as an alternate.
Under the oversight of the Directors' Loan Committee, lending authority is
delegated to the Chief Credit Officer and the Company's Internal Loan Committee
consisting of the Chief Credit Officer, certain managers and loan
administrators. Requests for new and existing credits which meet certain size
and underwriting criteria may be approved outside of the Company's Internal Loan
Committee by designated senior lenders or jointly with a loan administrator.
CREDIT QUALITY AND THE ALLOWANCE FOR LOAN LOSSES
Credit risk is defined as the possibility of sustaining a loss because other
parties to the financial instrument fail to perform in accordance with the terms
of the contract. While the Bank follows underwriting and credit monitoring
procedures which it believes are appropriate in growing and managing the loan
portfolio, in the event of nonperformance by these other parties, the Bank's
potential exposure to credit losses could significantly affect the Company's
consolidated financial position and earnings.
Lending money involves an inherent risk of nonpayment. Through the
administration of loan policies and monitoring of the loan portfolio, Management
seeks to reduce such risks. The allowance for loan losses is an estimate to
provide a financial buffer for losses, both identified and unidentified, in the
loan portfolio.
Management regularly reviews and monitors the loan portfolio to determine
the risk profile of each credit, and to identify credits whose risk profiles
have changed. This review includes, but is not limited to, such factors as
payment status, the financial condition of the borrower, borrower compliance
with loan covenants, underlying collateral values, potential loan
concentrations, and general economic conditions. Potential problem credits are
identified and, based upon known information, action plans are developed.
27
<PAGE>
Management has established an evaluation process designed to determine the
adequacy of the allowance for loan losses. This process attempts to assess the
risk of losses inherent in the loan portfolio by segregating the allowance for
loan losses into three components: "specific," "loss migration," and "general."
The specific component is established by allocating a portion of the allowance
for loan losses to individual classified credits on the basis of specific
circumstances and assessments. The loss migration component is calculated as a
function of the historical loss migration experience of the internal loan credit
risk rating categories. The general component is an unallocated portion that
supplements the first two components and includes: Management's judgment of the
effect of current and forecasted economic conditions on the borrowers' abilities
to repay, an evaluation of the allowance for loan losses in relation to the size
of the overall loan portfolio, an evaluation of the composition of, and growth
trends within, the loan portfolio, consideration of the relationship of the
allowance for loan losses to nonperforming loans, net charge-off trends, and
other factors. While this evaluation process utilizes historical and other
objective information, the classification of loans and the establishment of the
allowance for loan losses, relies, to a great extent, on the judgment and
experience of Management.
An analysis of the allowance for loan losses for the past five years is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at January 1,................................ $ 37,700 $ 32,700 $ 29,700 $ 20,000 $ 25,000
Charge-offs:
Commercial......................................... (31,123) (9,236) (9,056) (4,248) (10,913)
Real estate........................................ -- -- (634) (653) (495)
Consumer and other................................. -- -- (38) (57) --
--------- --------- --------- --------- ---------
Total charge-offs.................................... (31,123) (9,236) (9,728) (4,958) (11,408)
--------- --------- --------- --------- ---------
Recoveries:
Commercial......................................... 1,897 3,170 2,050 3,106 2,398
Real estate........................................ 366 986 217 2,815 923
Consumer and other................................. 1 13 35 -- --
--------- --------- --------- --------- ---------
Total recoveries..................................... 2,264 4,169 2,302 5,921 3,321
--------- --------- --------- --------- ---------
Net (charge-offs) recoveries......................... (28,859) (5,067) (7,426) 963 (8,087)
Provision for loan losses............................ 37,159 10,067 10,426 8,737 3,087
--------- --------- --------- --------- ---------
Balance at December 31,.............................. $ 46,000 $ 37,700 $ 32,700 $ 29,700 $ 20,000
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net charge-offs (recoveries) to average total
loans.............................................. 2.2% 0.5% 1.0% (0.1)% 1.4%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The following table displays the allocation of the allowance for loan losses
among specific classes of loans:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995
----------------------- ----------------------- ----------------------- -----------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
----------- ---------- ----------- ---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial.......................... $ 28,417 95.8% $ 30,394 89.5% $ 18,716 87.5% $ 16,176
Real estate term.................... 438 1.4 426 2.8 873 5.2 707
Real estate construction............ 374 1.3 274 4.6 140 3.2 87
Consumer and other.................. 434 1.5 386 3.1 615 4.1 339
Unallocated......................... 16,337 N/A 6,220 N/A 12,356 N/A 12,391
----------- ---------- ----------- ---------- ----------- ---------- -----------
Total............................... $ 46,000 100.0% $ 37,700 100.0% $ 32,700 100.0% $ 29,700
----------- ---------- ----------- ---------- ----------- ---------- -----------
----------- ---------- ----------- ---------- ----------- ---------- -----------
<CAPTION>
1994
-----------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
LOANS AMOUNT LOANS
---------- ----------- ----------
<S> <C> <C> <C>
Commercial.......................... 84.3% $ 12,748 87.2%
Real estate term.................... 7.7 765 8.4
Real estate construction............ 2.4 345 1.4
Consumer and other.................. 5.6 312 3.0
Unallocated......................... N/A 5,830 N/A
---------- ----------- ----------
Total............................... 100.0% $ 20,000 100.0%
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
The allowance for loan losses totaled $46.0 million at December 31, 1998, an
increase of $8.3 million, or 22.0%, compared to $37.7 million at December 31,
1997. This increase was due to $37.2 million in additional provisions to the
allowance for loan losses, offset by net charge-offs of $28.9 million during
1998. The 1998
28
<PAGE>
net charge-off amount was composed of $31.1 million in gross charge-offs and
$2.3 million in gross recoveries.
The 1998 gross charge-off total included $17.4 million and $7.2 million in
charge-offs that were incurred during the third and fourth quarters of 1998,
respectively. Gross charge-offs for the third quarter of 1998, the largest of
which was $7.0 million, were primarily related to five commercial credits and
were not concentrated in any particular niche or industry. Of the total 1998
third quarter gross charge-offs, $8.1 million were classified as nonperforming
loans at the end of 1997, while $8.7 million were disclosed in the Company's
1998 second quarter 10-Q as having a higher than normal risk of becoming
nonperforming loans during the third quarter of 1998.
The Company incurred $7.2 million in gross charge-offs during the fourth
quarter of 1998, primarily centered in the Company's QuickStart and bridge
portfolios. Gross charge-offs in the fourth quarter of 1998 included three
bridge loans and four QuickStart loans totaling $2.5 million and $1.9 million,
respectively. The Company's QuickStart product is based in large part on an
analysis that indicates that almost all venture capital-backed clients that
receive a first round of equity infusion from a venture capitalist will receive
a second round. The analysis indicated that the second round typically occurred
18 months after the first round. Hence, proceeds from the second round could be
used to pay off the 18 month term loan offered under the QuickStart product.
However, the second round has been occurring much sooner than expected and the
additional cash infusion has occasionally been depleted before 18 months. The
likelihood of a third round occurring is not as great as a second round and thus
this has resulted in higher than anticipated charge-offs related to this product
during the fourth quarter of 1998.
The unallocated component of the allowance for loan losses as of December
31, 1998 increased $10.1 million, or 162.7%, from the prior year end. This
increase reflects Management's decision to further bolster the allowance for
loan losses and maintain strong coverage ratios based on the economic
uncertainty surrounding many of the Company's markets in 1999 and the higher
than normal charge-offs experienced during the third and fourth quarters of
1998.
Gross charge-offs for 1997 were $9.2 million, and included charge-offs
totaling $6.5 million related to two commercial credits, one in the Bank's
technology and life sciences niche and the other in one of the Bank's special
industry niches. Gross recoveries of $4.2 million in 1997 included $1.1 million
related to a commercial credit in one of the Bank's special industry niches that
was partially charged off in 1996. Gross charge-offs for 1996 were $9.7 million,
and primarily resulted from five credits, none of which were related to the
Bank's technology and life sciences niche. Gross recoveries of $2.3 million in
1996 included $0.9 million related to one commercial credit that was partially
charged off in 1994. Net loan recoveries in 1995 of $1.0 million included $2.7
million in recoveries from a real estate client relationship that had been
charged off in 1992 and $1.1 million in recoveries related to a commercial
credit that was partially charged off in 1994. Net loan charge-offs of $8.1
million in 1994 included the partial charge-off of loans to two commercial
borrowers totaling $5.5 million.
In general, Management believes the allowance for loan losses is adequate as
of December 31, 1998. However, future changes in circumstances, economic
conditions or other factors could cause Management to increase or decrease the
allowance for loan losses as deemed necessary.
Nonperforming assets consist of loans that are past due 90 days or more
which are still accruing interest, loans on nonaccrual status and OREO and other
foreclosed assets. The table below sets forth certain relationships between
nonperforming loans, nonperforming assets and the allowance for loan losses.
During 1998, 1997 and 1996, the Company's nonaccrual loans represented all
impaired loans. Loans placed on nonaccrual status were measured by the Company
for impairment based on the fair value of the underlying collateral or the net
present value of the expected cash flows in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan."
29
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonperforming assets:
Loans past due 90 days or more........................... $ 441 $ 1,016 $ 8,556 $ 906 $ 444
Nonaccrual loans (1)..................................... 19,444 24,476 14,581 27,867 11,269
--------- --------- --------- --------- ---------
Total nonperforming loans................................ 19,885 25,492 23,137 28,773 11,713
OREO and other foreclosed assets (1)..................... 1,800 1,858 1,948 4,955 7,089
--------- --------- --------- --------- ---------
Total nonperforming assets............................... $ 21,685 $ 27,350 $ 25,085 $ 33,728 $ 18,802
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Nonperforming loans as a percent of total loans.......... 1.2% 2.2% 2.7% 3.9% 1.7%
OREO and other foreclosed assets as a percent of total
assets................................................. 0.1% 0.1% 0.1% 0.4% 0.6%
Nonperforming assets as a percent of total assets........ 0.6% 1.0% 1.3% 2.4% 1.6%
Allowance for loan losses................................ $ 46,000 $ 37,700 $ 32,700 $ 29,700 $ 20,000
As a percent of total loans............................ 2.8% 3.2% 3.8% 4.0% 2.8%
As a percent of nonaccrual loans....................... 236.6% 154.0% 224.3% 106.6% 177.5%
As a percent of nonperforming loans.................... 231.3% 147.9% 141.3% 103.2% 170.8%
</TABLE>
- ------------------------
(1) In accordance with SFAS No. 114, in-substance foreclosure loans have been
reclassified from OREO to nonaccrual loans. The reclassified amount is
$1,377 at December 31, 1994.
The detailed composition of nonaccrual loans is presented in the following
table. There were no real estate construction or term loans on nonaccrual status
at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Commercial................................................................................ $ 18,979 $ 24,127
Consumer and other........................................................................ 465 349
--------- ---------
Total nonaccrual loans.................................................................... $ 19,444 $ 24,476
--------- ---------
--------- ---------
</TABLE>
Nonperforming loans totaled $19.9 million at December 31, 1998, a decrease
of $5.6 million, or 22.0%, from the $25.5 million total at December 31, 1997. Of
the total nonperforming loans at year-end 1997, $10.0 million were charged off,
$7.4 million were placed on performing status and $4.8 million were repaid
during 1998. Additionally, $16.6 million in loans were placed on nonperforming
status during 1998 and still classified as nonperforming loans at the end of
1998.
Nonperforming loans at December 31, 1997 totaled $25.5 million, an increase
of $2.4 million, or 10.2%, from the $23.1 million total at December 31, 1996, as
a $9.9 million net increase in nonaccrual loans during 1997 was largely offset
by the payoff during the first quarter of 1997 of one credit in excess of $8.0
million that was more than 90 days past due, and still accruing interest, as of
December 31, 1996. The increase in nonaccrual loans at December 31, 1997, from
the prior year end, was primarily due to two commercial credits totaling
approximately $14.1 million which were placed on nonaccrual status during the
last half of 1997, one of which was returned to performing status in the first
quarter of 1998 and the other was partially charged off in 1998, with the
remaining balance still in nonperforming. Nonperforming loans at December 31,
1996 included the aforementioned credit in excess of $8.0 million that was more
than 90 days past due, and still accruing interest, as of December 31, 1996. The
Export-Import Bank of the U.S. (EX-IM) provided the Bank with a guarantee of
this credit facility, and the Bank received the guarantee payment related to
this credit from the EX-IM in the first quarter of 1997. The $17.1 million
increase in nonperforming loans at December 31, 1995, compared to year-end 1994,
was concentrated in two commercial credits, both of which were paid off during
1996 and 1997.
30
<PAGE>
In addition to the loans disclosed in the foregoing analysis, Management has
identified three loans with principal amounts aggregating approximately $11.1
million, that, on the basis of information known by Management, were judged to
have a higher than normal risk of becoming nonperforming. The Company is not
aware of any other loans where known information about possible problems of the
borrower casts serious doubts about the ability of the borrower to comply with
the loan repayment terms.
OREO and other foreclosed assets totaled a combined $1.8 million and $1.9
million at December 31, 1998 and 1997, respectively. The OREO and other
foreclosed assets balance at December 31, 1998 consisted of one OREO property
and one other asset which was acquired through foreclosure. The OREO property
consists of multiple undeveloped lots and was acquired by the Company prior to
June 1993. The one other asset acquired through foreclosure, which totaled $1.1
million at December 31, 1998, consists of a favorable leasehold right under a
master lease which the Company acquired upon foreclosure of a loan during 1997.
DEPOSITS
The Company's deposits are largely obtained from companies within the
technology and life sciences niche, and, to a lesser extent, from businesses
within the Company's special industry niches and from individuals served by the
Company's Executive Banking Division. The Company does not obtain deposits from
conventional retail sources and does not accept brokered deposits. The following
table presents the composition of the Company's deposits for the last five
years:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Noninterest-bearing demand................ $ 921,790 $ 788,442 $ 599,257 $ 451,318 $ 401,455
NOW....................................... 19,978 21,348 8,443 10,956 11,636
Regular money market...................... 350,110 351,921 326,661 288,619 328,115
Bonus money market........................ 1,835,249 1,146,075 754,730 473,717 245,420
Time...................................... 142,626 124,621 85,213 65,450 88,747
------------ ------------ ------------ ------------ ------------
Total deposits............................ $ 3,269,753 $ 2,432,407 $ 1,774,304 $ 1,290,060 $ 1,075,373
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
Total deposits were $3.3 billion at December 31, 1998, an increase of $837.3
million, or 34.4%, from the prior year-end total of $2.4 billion. A significant
portion of the increase in deposits during 1998 was concentrated in the
Company's highest-rate paying deposit product, its bonus money market deposit
product, which increased $689.2 million, or 60.1%, and in the Company's
noninterest-bearing demand deposits, which increased $133.3 million, or 16.9%,
from the prior year end. Increased balances during 1998 in most of the Company's
deposit products were explained by high levels of client liquidity attributable
to a strong inflow of investment capital into the venture capital community, and
by growth during 1998 in the number of clients served by the Company.
The aggregate amount of time deposit accounts individually exceeding
$100,000 totaled $122.8 million and $110.4 million at December 31, 1998 and
1997, respectively. At December 31, 1998, all time deposit accounts exceeding
$100,000 were scheduled to mature within one year. No material portion of the
Company's deposits has been obtained from a single depositor and the loss of any
one depositor would not materially affect the business of the Company.
YEAR 2000 READINESS DISCLOSURE
The Federal Financial Institutions Examination Council (FFIEC), an oversight
authority for financial institutions, has issued several interagency statements
on Year 2000 project awareness. These statements require financial institutions
to, among other things, examine the Year 2000 implications of their reliance on
vendors, determine the potential impact of the Year 2000 issue on their
customers, suppliers and borrowers, and to survey its exposure, measure its risk
and prepare a plan to address the Year 2000 issue. In addition, federal banking
regulators have issued safety and soundness guidelines to be followed by
financial institutions to assure resolution of any Year 2000 problems. The
federal banking agencies have asserted that Year 2000 testing and certification
is a key safety and soundness issue in conjunction with regulatory examinations,
and the failure to appropriately address the Year 2000 issue could result in
supervisory action, including the
31
<PAGE>
reduction of the institution's supervisory ratings, the denial of applications
for mergers or acquisitions, or the imposition of civil monetary penalties.
The Company, following an initial awareness phase, is utilizing a
three-phase plan for achieving Year 2000 readiness. The Assessment Phase was
intended to determine which computers, operating systems and applications
require remediation and prioritizing those remediation efforts by identifying
mission critical systems. The Assessment Phase has been completed except for the
on-going assessment of new systems. The Remediation and Testing Phase addressed
the correction or replacement of any non-compliant hardware and software related
to the mission critical systems and testing of those systems. Since most of the
Bank's information technology systems are off-the-shelf software, remediation
efforts have focused on obtaining Year 2000 compliant application upgrades. The
Bank's core banking system, which runs loans, deposits and the general ledger,
has been upgraded to the Year 2000 compliant version and has been forward date
tested and Year 2000 certified by the Bank. The Year 2000 releases for all of
the Bank's other internal mission critical systems have also been received,
forward date tested and certified. The next step of this phase, testing mission
critical service providers, is anticipated to be substantially completed by
March 31, 1999. During the final phase, the Implementation Phase, remediated and
validated code will be tested in interfaces with customers, business partners,
government institutions, and others. It is anticipated that the Implementation
Phase will be substantially completed by June 30, 1999.
The Company may be impacted by the Year 2000 compliance issues of
governmental agencies, businesses and other entities who provide data to, or
receive data from, the Company, and by entities, such as borrowers, vendors,
customers, and business partners, whose financial condition or operational
capability is significant to the Company. Therefore, the Company's Year 2000
project also includes assessing the Year 2000 readiness of certain customers,
borrowers, vendors, business partners, counterparties, and governmental
entities. In addition to assessing the readiness of these external parties, the
Company is developing contingency plans which will include plans to recover
operations and alternatives to mitigate the effects of counterparties whose own
failure to properly address Year 2000 issues may adversely impact the Company's
ability to perform certain functions. These contingency plans are currently
being developed and are expected to be substantially completed by June 30, 1999.
If Year 2000 issues are not adequately addressed by the Company and
significant third parties, the Company's business, results of operations and
financial position could be materially adversely affected. Failure of certain
vendors to be Year 2000 compliant could result in disruption of important
services upon which the Company depends, including, but not limited to, such
services as telecommunications, electrical power and data processing. Failure of
the Company's loan customers to properly prepare for the Year 2000 could also
result in increases in problem loans and credit losses in future years. It is
not, however, possible to quantify the potential impact of any such losses at
this time. Notwithstanding the Company's efforts, there can be no assurance that
the Company or significant third party vendors or other significant third
parties will adequately address their Year 2000 issues. The Company is
continuing to assess the Year 2000 readiness of third parties but does not know
at this time whether the failure of third parties to be Year 2000 compliant will
have a material effect on the Company's results of operations, liquidity and
financial condition.
The Company currently estimates that its total cost for the Year 2000
project will approximate $3.0 million. During 1998, the Company incurred $1.5
million in charges related to its Year 2000 remediation effort and expects to
incur $1.5 million in 1999. Charges include the cost of external consulting and
the cost of accelerated replacement of hardware, but do not include the cost of
internal staff redeployed to the Year 2000 project. The Company does not believe
that the redeployment of internal staff will have a material impact on its
financial condition or results of operations.
The foregoing paragraphs contain a number of forward-looking statements.
These statements reflect Management's best current estimates, which were based
on numerous assumptions about future events, including the continued
availability of certain resources, representations received from third party
service providers and other factors. There can be no guarantee that these
estimates, including Year 2000 costs, will be achieved, and actual results could
differ materially from those estimates. A number of important factors could
cause Management's estimates and the impact of the Year 2000 issue to differ
materially from what is described in the forward-looking statements contained in
the above paragraphs. Those factors include, but are not limited to, the
availability and cost of programmers and other systems personnel, inaccurate or
incomplete
32
<PAGE>
execution of the phases, results of Year 2000 testing, adequate resolution of
Year 2000 issues by the Company's customers, vendors, competitors, and
counterparties, and similar uncertainties.
The forward-looking statements made in the foregoing Year 2000 discussion
speak only as of the date on which such statements are made, and the Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events.
INTEREST RATE RISK MANAGEMENT
A key objective of asset/liability management is to manage interest rate
risk associated with changing asset and liability cash flows and market interest
rate movements. Interest rate risk occurs when interest rate sensitive assets
and liabilities do not reprice simultaneously and in equal volumes. The
asset/liability committee of the Bank (ALCO) provides oversight to the Company's
interest rate risk management process and recommends policy guidelines regarding
exposure to interest rates for approval by the Board of Directors. Adherence to
these policies is monitored on an ongoing basis, and decisions related to the
management of interest rate exposure are made when appropriate and agreed to by
the ALCO.
The Company manages interest rate risk principally through strategies
involving its investment securities portfolio, including adjusting both the
maturity structure of the portfolio and the amount of interest rate sensitive
securities. Company policies also permit the limited use of off-balance sheet
derivative instruments in managing interest rate risk. At December 31, 1998, the
Company held one such off-balance sheet derivative transaction in the form of an
interest rate swap for a notional principal amount of $150 million to mature on
November 29, 1999. This transaction was entered into as part of the Company's
normal interest rate risk management process. See "Item 8. Financial Statements
and Supplementary Data--Note 14 to the Consolidated Financial
Statements--Financial Instruments With Off-Balance Sheet Risk" for additional
related discussion.
The Company's monitoring activities related to managing interest rate risk
include both interest rate sensitivity "gap" analysis and the use of a
simulation model. While traditional gap analysis provides a simple picture of
the interest rate risk embedded in the balance sheet, it provides only a static
view of interest rate sensitivity at a specific point in time and does not
measure the potential volatility in forecasted results relating to changes in
market interest rates over time. Accordingly, the Company combines the use of
gap analysis with use of a simulation model which provides a dynamic assessment
of interest rate sensitivity.
The interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets anticipated to reprice within a specific time
period and the amount of funding sources anticipated to reprice within that same
time period. A gap is considered positive when the amount of interest rate
sensitive assets repricing within a specific time period exceeds the amount of
funding sources repricing within that same time period. Positive cumulative gaps
in early time periods suggest that earnings will increase when interest rates
rise. Negative cumulative gaps suggest that earnings will increase when interest
rates fall. Company policy guidelines provide that the cumulative one-year gap
as a percentage of interest-earning assets should not exceed 20.0%. The gap
analysis as of December 31, 1998 indicates that the Company was positioned
within these guidelines as the cumulative one-year gap as a percentage of
interest-earning assets was 6.6%. The following table illustrates the Company's
interest rate sensitivity gap positions at December 31, 1998.
33
<PAGE>
INTEREST RATE SENSITIVITY ANALYSIS AS OF
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS AND LIABILITIES WHICH MATURE OR REPRICE
----------------------------------------------------------------------------------------
AFTER AFTER AFTER AFTER
1 DAY TO 1 MONTH TO 3 MONTHS TO 6 MONTHS 1 YEAR TO AFTER 5
IMMEDIATELY 1 MONTH 3 MONTHS 6 MONTHS TO 1 YEAR 5 YEARS YEARS
------------ ---------- ----------- ------------ ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold and
securities purchased under
agreement to resell (1)....... -- $ 399,202 -- -- -- -- --
Investment securities:
U.S.Treasury and agencies
obligations................. -- 199,363 $ 25,117 $ 11,078 $ 47,156 $ 256,351 --
Collateralized mortgage
obligations and
mortgage-backed
securities (2).............. -- 44,242 19,714 32,140 49,365 129,910 $ 4,837
Obligations of states and
political subdivisions...... -- 337,029 72,600 9,983 7,422 17,083 71,653
Commercial paper and other
debt securities............. -- 16,993 15,000 4,429 -- -- 12,042
Other equity securities (3)... -- -- -- -- -- -- --
------------ ---------- ----------- ------------ ----------- ----------- ---------
Total investment securities..... -- 597,627 132,431 57,630 103,943 403,344 88,532
------------ ---------- ----------- ------------ ----------- ----------- ---------
Loans (4), (5).................. $1,124,236 11,472 16,155 72,776 56,053 252,388 60,592
------------ ---------- ----------- ------------ ----------- ----------- ---------
Total Interest-Earning Assets... $1,124,236 $1,008,301 $ 148,586 $ 130,406 $ 159,996 $ 655,732 $ 149,124
------------ ---------- ----------- ------------ ----------- ----------- ---------
------------ ---------- ----------- ------------ ----------- ----------- ---------
FUNDING SOURCES:
Money market and NOW
deposits.................... -- $2,205,337 -- -- -- -- --
Time deposits................. -- 84,246 $ 26,066 $ 13,534 $ 18,620 $ 160 --
------------ ---------- ----------- ------------ ----------- ----------- ---------
Total interest-bearing
deposits...................... -- 2,289,583 26,066 13,534 18,620 160 --
Trust preferred securities...... -- -- -- -- -- -- $ 38,485
Portion of noninterest-bearing
funding sources............... -- -- -- -- -- -- --
------------ ---------- ----------- ------------ ----------- ----------- ---------
Total Funding Sources........... -- $2,289,583 $ 26,066 $ 13,534 $ 18,620 $ 160 $ 38,485
------------ ---------- ----------- ------------ ----------- ----------- ---------
------------ ---------- ----------- ------------ ----------- ----------- ---------
OFF-BALANCE SHEET ITEMS:
Interest rate swap............ $ (150,000) -- -- -- $ 150,000 -- --
------------ ---------- ----------- ------------ ----------- ----------- ---------
------------ ---------- ----------- ------------ ----------- ----------- ---------
GAP............................. $ 974,236 $(1,281,282) $ 122,520 $ 116,872 $ 291,376 $ 655,572 $ 110,639
CUMULATIVE GAP.................. $ 974,236 $ (307,046) $(184,526) $ (67,654) $ 223,722 $ 879,294 $ 989,933
<CAPTION>
NOT
STATED TOTAL
--------- ---------
<S> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold and
securities purchased under
agreement to resell (1)....... -- $ 399,202
Investment securities:
U.S.Treasury and agencies
obligations................. -- 539,065
Collateralized mortgage
obligations and
mortgage-backed
securities (2).............. -- 280,208
Obligations of states and
political subdivisions...... -- 515,770
Commercial paper and other
debt securities............. -- 48,464
Other equity securities (3)... $ 13,995 13,995
--------- ---------
Total investment securities..... 13,995 1,397,502
--------- ---------
Loans (4), (5).................. 18,249 1,611,921
--------- ---------
Total Interest-Earning Assets... $ 32,244 $3,408,625
--------- ---------
--------- ---------
FUNDING SOURCES:
Money market and NOW
deposits.................... -- $2,205,337
Time deposits................. -- 142,626
--------- ---------
Total interest-bearing
deposits...................... -- 2,347,963
Trust preferred securities...... -- 38,485
Portion of noninterest-bearing
funding sources............... $1,022,177 1,022,177
--------- ---------
Total Funding Sources........... $1,022,177 $3,408,625
--------- ---------
--------- ---------
OFF-BALANCE SHEET ITEMS:
Interest rate swap............ -- --
--------- ---------
--------- ---------
GAP............................. $(989,933) --
CUMULATIVE GAP.................. -- --
</TABLE>
- ------------------------------
(1) Includes interest-bearing deposits in other financial institutions of $202
as of December 31, 1998.
(2) Principal cash flows are based on estimated principal payments as of
December 31, 1998.
(3) Not stated column consists of equity securities, tax credit funds, venture
capital investments, and Federal Reserve Bank stock as of December 31, 1998.
(4) Not stated column consists of nonaccrual loans of $19,444 and overdrafts of
$8,807, offset by unearned income of $10,003 as of December 31, 1998.
(5) Maturity/repricing columns for fixed rate loans are based upon the amount
and timing of related principal payments as of December 31, 1998.
34
<PAGE>
One application of the aforementioned simulation model involves measurement
of the impact of market interest rate changes on the net present value of
estimated cash flows from the Company's assets, liabilities and off-balance
sheet items, defined as the Company's market value of portfolio equity (MVPE).
This analysis assesses the changes in market values of interest rate sensitive
financial instruments which would occur in response to an instantaneous and
sustained increase or decrease in market interest rates of 100 and 200 basis
points, and the resulting effect on the Company's MVPE. Policy guidelines
establish maximum variances in the Company's MVPE of 20.0% and 30.0% in the
event of an instantaneous and sustained increase or decrease in market interest
rates of 100 and 200 basis points, respectively. At December 31, 1998, the
Company's MVPE exposure related to the aforementioned changes in market interest
rates was within policy guidelines.
The following table presents the Company's MVPE exposure at December 31,
1998 and December 31, 1997 related to an instantaneous and sustained increase or
decrease in market interest rates of 100 and 200 basis points, respectively.
<TABLE>
<CAPTION>
CHANGE IN INTEREST ESTIMATED INCREASE/
RATES (BASIS POINTS) (DECREASE) IN MVPE
- ---------------------- ESTIMATED ----------------------
(DOLLARS IN THOUSANDS) MVPE AMOUNT PERCENT
----------- --------- -----------
<S> <C> <C> <C>
December 31, 1998:
+200 $ 211,016 $ (26,635) (11.2)%
+100 223,368 (14,283) (6.0)
-- 237,651 -- --
-100 249,595 11,944 5.0
-200 260,655 23,004 9.7
December 31, 1997:
+200 $ 173,905 $ (21,298) (10.9)%
+100 184,625 (10,578) (5.4)
-- 195,203 -- --
-100 206,513 11,310 5.8
-200 217,811 22,608 11.6
</TABLE>
The preceding table indicates that in the event of an instantaneous and
sustained increase in market interest rates, the Company's MVPE would be
expected to decrease, and that in the event of an instantaneous and sustained
decrease in market interest rates, the Company's MVPE would be expected to
increase.
The market value calculations supporting the results in the preceding table
are based on the present value of estimated cash flows utilizing both market
interest rates provided by independent broker/dealers and other publicly
available sources which the Company deems reliable. These calculations do not
contemplate any changes which the ALCO could make to reduce the Company's MVPE
exposure in response to a change in market interest rates.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the preceding table. For
example, although certain of the Company's assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. In addition, the interest rates on certain
of the Company's asset and liability categories may precede, or lag behind,
changes in market interest rates. Also, the actual rates of prepayments on loans
and investments could vary significantly from the assumptions utilized in
deriving the results as presented in the preceding table. Further, a change in
U.S. Treasury rates accompanied by a change in the shape of the treasury yield
curve could result in different MVPE estimations from those presented herein.
Accordingly, the results in the preceding table should not be relied upon as
indicative of actual results in the event of changing market interest rates.
Additionally, the resulting MVPE estimates are not intended to represent, and
should not be construed to represent, the underlying value of the Company.
The simulation model also provides the ALCO with the ability to simulate the
Company's net interest income using either one interest rate forecast (simple
simulation) or a forecast of multiple interest rate scenarios (stochastic
simulation). In order to measure, as of December 31, 1998, the sensitivity of
the
35
<PAGE>
Company's forecasted net interest income to changing interest rates, utilizing
the simple simulation methodology, both a rising and falling interest rate
scenario were projected and compared to a base market interest rate forecast
derived from the treasury yield curve. For the rising and falling interest rate
scenarios, the base market interest rate forecast was increased or decreased, as
applicable, by 200 basis points in 12 equal increments over a one-year period.
Company policy guidelines provide that the difference between a base market
interest rate forecast scenario over the succeeding one-year period compared
with the aforementioned rising and falling interest rate scenarios over the same
time period should not result in net interest income sensitivity exceeding
20.0%. Simulations as of December 31, 1998 indicated that the Company was well
within these policy guidelines.
Interest rate risk is the most significant market risk impacting the
Company. Other types of market risk affecting the Company in the normal course
of its business activities include foreign currency exchange risk and equity
price risk. The impact on the Company, resulting from these latter two market
risks, is deemed immaterial and no separate quantitative information concerning
market rate and price exposure is presented herein. The Company does not
maintain a portfolio of trading securities and does not intend to engage in such
activities in the immediate future.
LIQUIDITY
Another important objective of asset/liability management is to manage
liquidity. The objective of liquidity management is to ensure that funds are
available in a timely manner to meet loan demand and depositors' needs, and to
service other liabilities as they come due, without causing an undue amount of
cost or risk, and without causing a disruption to normal operating conditions.
The Company regularly assesses the amount and likelihood of projected
funding requirements through a review of factors such as historical deposit
volatility and funding patterns, present and forecasted market and economic
conditions, individual client funding needs, and existing and planned Company
business activities. The ALCO provides oversight to the liquidity management
process and recommends policy guidelines, subject to Board of Directors
approval, and courses of action to address the Company's actual and projected
liquidity needs.
The ability to attract a stable, low-cost base of deposits is the Company's
primary source of liquidity. Other sources of liquidity available to the Company
include short-term borrowings, which consist of federal funds purchased,
security repurchase agreements and other short-term borrowing arrangements. The
Company's liquidity requirements can also be met through the use of its
portfolio of liquid assets. Liquid assets, as defined by the Company, include
cash and cash equivalents in excess of the minimum levels necessary to carry out
normal business operations, federal funds sold, securities purchased under
resale agreements, investment securities maturing within six months, investment
securities eligible and available for pledging purposes with a maturity in
excess of six months, and anticipated near term cash flows from investments.
Bank policy guidelines provide that liquid assets as a percentage of total
deposits should not fall below 20.0%. At December 31, 1998, the Bank's ratio of
liquid assets to total deposits was 52.5%. This ratio is well in excess of the
Bank's minimum policy guidelines and is slightly higher than the comparable
ratio of 52.1% as of December 31, 1997. In addition to monitoring the level of
liquid assets relative to total deposits, the Bank also utilizes other policy
measures in its liquidity management activities. As of December 31, 1998 and
1997, the Bank was in compliance with all of these policy measures.
In analyzing the Company's liquidity during 1998, reference is made to the
Company's consolidated statement of cash flows for the year ended December 31,
1998 (see "Item 8. Financial Statements and Supplementary Data"). The statement
of cash flows includes separate categories for operating, investing and
financing activities. Operating activities included net income of $28.9 million
for 1998, which was adjusted for certain non-cash items including the provision
for loan losses, depreciation, deferred income taxes, and an assortment of other
miscellaneous items. Investing activities consisted primarily of both proceeds
from and purchases of investment securities, which resulted in a net cash
outflow of $371.9 million, and the net change in total loans resulting from loan
originations and principal collections, which resulted in a net cash outflow of
$470.4 million in 1998. Financing activities reflected the net change in the
Company's total deposits, which increased $837.3 million during 1998, cash
proceeds received during the year from the issuance of Company common stock of
$5.7 million, and $38.5 million in cash proceeds received in May 1998 from the
issuance of the cumulative trust preferred securities. In total, the
transactions noted above resulted in a net cash inflow of
36
<PAGE>
$95.4 million for 1998 and total cash and cash equivalents, as defined in the
Company's consolidated statement of cash flows, of $522.2 million at December
31, 1998.
CAPITAL RESOURCES
Management seeks to maintain adequate capital to support anticipated asset
growth and credit risks, and to ensure that the Company and the Bank are in
compliance with all regulatory capital guidelines. The primary source of new
capital for the Company has been the retention of earnings. Aside from current
earnings, an additional source of new capital for the Company has been the
issuance of common stock under the Company's employee benefit plans, including
the Company's stock option plans, defined contribution plans and employee stock
purchase plan.
Additionally, during the second quarter of 1998 the Company issued $40.0
million in cumulative trust preferred securities through a newly formed
special-purpose trust, SVB Capital I. The securities had an offering price
(liquidation amount) of $25 per security and distributions at a fixed rate of
8.25% are paid by the Company quarterly. The securities have a maximum maturity
of 30 years and qualify as Tier 1 capital under the capital guidelines of the
Federal Reserve Board. The Company received proceeds of $38.5 million related to
the sale of these securities, net of underwriting commissions and other offering
expenses. The proceeds are being used by the Company for general corporate
purposes, which may include, without limitation, investments in liquid
government and corporate debt securities, and investments in venture capital
funds. The trust preferred securities are presented as a separate line item in
the consolidated balance sheet of the Company under the caption "Company
obligated mandatorily redeemable trust preferred securities of subsidiary trust
holding solely junior subordinated debentures." For additional related
discussion, see "Item 8. Financial Statements and Supplementary Data--Note 9 to
the Consolidated Financial Statements--Trust Preferred Securities."
Shareholders' equity totaled $215.9 million at December 31, 1998, an
increase of $41.4 million, or 23.7%, from the $174.5 million balance at December
31, 1997. This increase was due to both 1998 net income of $28.9 million and
$12.5 million in net capital generated during 1998 primarily through the
Company's employee benefit plans. The Company has not paid a cash dividend on
its common stock since 1992, and does not have any material commitments for
capital expenditures as of December 31, 1998.
The table below presents the relationship between the following significant
financial ratios:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Return on average assets............................................................ 1.0% 1.3% 1.4%
DIVIDED BY
Average equity as a percentage of average assets.................................... 6.6% 7.1% 7.6%
EQUALS
Return on average equity............................................................ 14.5% 18.2% 17.9%
TIMES
Earnings retained................................................................... 100.0% 100.0% 100.0%
EQUALS
Internal capital growth............................................................. 14.5% 18.2% 17.9%
</TABLE>
The Company and the Bank are subject to capital adequacy guidelines issued
by the Federal Reserve Board. Under these capital guidelines, the minimum total
risk-based capital ratio and Tier 1 risk-based capital ratio requirements are
10.0% and 6.0%, respectively, of risk-weighted assets and certain off-balance
sheet items for a well capitalized depository institution.
The Federal Reserve Board has also established minimum capital leverage
ratio guidelines for state member banks. The ratio is determined using Tier 1
capital divided by quarterly average total assets. The guidelines require a
minimum of 5.0% for a well capitalized depository institution.
37
<PAGE>
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,
1998, 1997 and 1996. Capital ratios for the Company are set forth below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Total risk-based capital ratio............................................................ 11.5% 11.5% 11.5%
Tier 1 risk-based capital ratio........................................................... 10.3% 10.2% 10.2%
Tier 1 leverage ratio..................................................................... 7.6% 7.1% 7.7%
</TABLE>
The Company's total risk-based capital ratio at the end of 1998 was
unchanged from the prior year end and Tier 1 risk-based capital ratio was
slightly higher than the prior year end, as growth in Tier 1 capital was offset
by an increase in total assets. This increase in total assets was largely in
lower risk-weighted categories and resulted from the Company's strong deposit
growth exceeding its loan growth during 1998. The Company's Tier 1 leverage
ratio increased to 7.6% from 7.1% at December 31, 1997. This increase was
largely attributable to the aforementioned issuance of $40.0 million in
cumulative trust preferred securities during 1998 through SVB Capital I. The
Company's total risk-based capital ratio and Tier 1 risk-based capital ratio
were unchanged at the end 1997 from the end of 1996. The decrease in the Tier 1
leverage ratio from December 31, 1996 to December 31, 1997 was primarily
attributable to an increase in average total assets due to strong growth in
deposits during 1997. See "Item 8. Financial Statements and Supplementary Data--
Note 17 to the Consolidated Financial Statements--Regulatory Matters" for the
Bank's capital ratios at December 31, 1998 and 1997.
38
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
[LOGO]
The Board of Directors and Shareholders
Silicon Valley Bancshares:
We have audited the accompanying consolidated balance sheets of Silicon
Valley Bancshares and subsidiaries (the Company) as of December 31, 1998 and
1997, and the related consolidated statements of income, comprehensive income,
changes in shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Silicon
Valley Bancshares and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Mountain View, California
January 21, 1999
39
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks............................................ $ 123,001 $ 105,059
Federal funds sold and securities purchased under agreement to
resell........................................................... 399,202 321,773
Investment securities, at fair value............................... 1,397,502 1,013,904
Loans, net of unearned income...................................... 1,611,921 1,174,645
Allowance for loan losses.......................................... (46,000) (37,700)
--------- ---------
Net loans.......................................................... 1,565,921 1,136,945
Premises and equipment............................................. 11,354 4,460
Other real estate owned............................................ 664 689
Accrued interest receivable and other assets....................... 47,808 42,293
--------- ---------
Total assets....................................................... $3,545,452 $2,625,123
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand....................................... $ 921,790 $ 788,442
NOW.............................................................. 19,978 21,348
Money market..................................................... 2,185,359 1,497,996
Time............................................................. 142,626 124,621
--------- ---------
Total deposits..................................................... 3,269,753 2,432,407
Other liabilities.................................................. 21,349 18,235
--------- ---------
Total liabilities.................................................. 3,291,102 2,450,642
--------- ---------
Company obligated mandatorily redeemable trust preferred securities
of subsidiary trust holding solely junior subordinated debentures
(trust preferred securities)..................................... 38,485 --
Shareholders' Equity:
Preferred stock, no par value:
20,000,000 shares authorized; none outstanding
Common stock, no par value:
60,000,000 shares authorized; 20,711,915 and 19,940,474 shares
outstanding at December 31, 1998 and 1997, respectively.......... 94,129 83,009
Retained earnings.................................................. 123,855 94,999
Unearned compensation.............................................. (4,191) (5,946)
Accumulated other comprehensive income:
Net unrealized gains on available-for-sale investments........... 2,072 2,419
--------- ---------
Total shareholders' equity......................................... 215,865 174,481
--------- ---------
Total liabilities and shareholders' equity......................... $3,545,452 $2,625,123
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Interest income:
Loans.............................................................................. $139,136 $106,840 $ 87,893
Investment securities.............................................................. 64,787 41,868 24,074
Federal funds sold and securities purchased under agreement to
resell........................................................................... 21,305 17,264 13,106
-------- -------- --------
Total interest income................................................................ 225,228 165,972 125,073
-------- -------- --------
Interest expense:
Deposits........................................................................... 78,609 55,148 37,796
Other borrowings................................................................... 4 -- 2
-------- -------- --------
Total interest expense............................................................... 78,613 55,148 37,798
-------- -------- --------
Net interest income.................................................................. 146,615 110,824 87,275
Provision for loan losses............................................................ 37,159 10,067 10,426
-------- -------- --------
Net interest income after provision for loan losses.................................. 109,456 100,757 76,849
-------- -------- --------
Noninterest income:
Letter of credit and foreign exchange income....................................... 7,397 4,512 3,423
Disposition of client warrants..................................................... 6,657 5,480 5,389
Investment gains................................................................... 5,240 90 1
Deposit service charges............................................................ 1,730 1,772 1,663
Other.............................................................................. 2,138 1,411 1,133
-------- -------- --------
Total noninterest income............................................................. 23,162 13,265 11,609
-------- -------- --------
Noninterest expense:
Compensation and benefits.......................................................... 44,232 40,084 31,417
Professional services.............................................................. 9,876 6,710 4,987
Furniture and equipment............................................................ 6,667 3,620 3,239
Business development and travel.................................................... 6,025 4,514 2,918
Net occupancy expense.............................................................. 5,195 3,410 3,095
Postage and supplies............................................................... 2,225 1,600 1,448
Advertising and promotion.......................................................... 2,215 1,448 1,183
Telephone.......................................................................... 2,157 1,444 1,277
Trust preferred securities distributions........................................... 2,012 -- --
Cost of other real estate owned.................................................... (1,214) 76 398
Other.............................................................................. 4,255 3,395 2,720
-------- -------- --------
Total noninterest expense............................................................ 83,645 66,301 52,682
-------- -------- --------
Income before income tax expense..................................................... 48,973 47,721 35,776
Income tax expense................................................................... 20,117 20,043 14,310
-------- -------- --------
Net income........................................................................... $ 28,856 $ 27,678 $ 21,466
-------- -------- --------
-------- -------- --------
Basic earnings per share............................................................. $ 1.42 $ 1.43 $ 1.17
Diluted earnings per share........................................................... $ 1.38 $ 1.36 $ 1.11
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements.
41
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income..................................................................... $ 28,856 $ 27,678 $ 21,466
Other comprehensive income, net of tax:
Change in unrealized gains/(losses) on available-for-sale investments:
Unrealized holding gains arising during the period......................... 6,672 3,194 5,887
Less: Reclassification adjustment for gains included in net income......... (7,019) (3,231) (3,233)
--------- --------- ---------
Other comprehensive (loss) income.............................................. (347) (37) 2,654
--------- --------- ---------
Comprehensive income........................................................... $ 28,509 $ 27,641 $ 24,120
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements
42
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998, 1997 AND 1996
----------------------------------------------------------------------------------
COMMON STOCK ACCUMULATED OTHER
---------------------- RETAINED COMPREHENSIVE UNEARNED
SHARES AMOUNT EARNINGS INCOME COMPENSATION TOTAL
--------- ----------- ----------- ----------------- --------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995............... 17,927,324 $ 59,357 $ 45,855 $ (198) $ (40) $ 104,974
Common stock issued under employee benefit
plans.................................... 732,662 5,776 -- -- (410) 5,366
Income tax benefit from stock options
exercised and vesting of restricted
stock.................................... -- 835 -- -- -- 835
Net income................................. -- -- 21,466 -- -- 21,466
Amortization of unearned compensation...... -- -- -- -- 105 105
Other comprehensive income:
Net change in unrealized gains/(losses)
on available-for-sale investments...... -- -- -- 2,654 -- 2,654
--------- ----------- ----------- ------ ------- ---------
Balance at December 31, 1996............... 18,659,986 65,968 67,321 2,456 (345) 135,400
--------- ----------- ----------- ------ ------- ---------
Common stock issued under employee benefit
plans.................................... 1,280,488 12,891 -- -- (6,416) 6,475
Income tax benefit from stock options
exercised and vesting of restricted
stock.................................... -- 4,150 -- -- -- 4,150
Net income................................. -- -- 27,678 -- -- 27,678
Amortization of unearned compensation...... -- -- -- -- 815 815
Other comprehensive income:
Net change in unrealized gains/(losses)
on available-for-sale investments...... -- -- -- (37) -- (37)
--------- ----------- ----------- ------ ------- ---------
Balance at December 31, 1997............... 19,940,474 83,009 94,999 2,419 (5,946) 174,481
--------- ----------- ----------- ------ ------- ---------
Common stock issued under employee benefit
plans.................................... 771,441 7,954 -- -- (207) 7,747
Income tax benefit from stock options
exercised and vesting of restricted
stock.................................... -- 3,166 -- -- -- 3,166
Net income................................. -- -- 28,856 -- -- 28,856
Amortization of unearned compensation...... -- -- -- -- 1,962 1,962
Other comprehensive income:
Net change in unrealized gains/(losses)
on available-for-sale investments...... -- -- -- (347) -- (347)
--------- ----------- ----------- ------ ------- ---------
Balance at December 31, 1998............... 20,711,915 $ 94,129 $ 123,855 $ 2,072 $ (4,191) $ 215,865
--------- ----------- ----------- ------ ------- ---------
--------- ----------- ----------- ------ ------- ---------
</TABLE>
See notes to consolidated financial statements.
43
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 28,856 $ 27,678 $ 21,466
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses......................... 37,159 10,067 10,426
Provision for other real estate owned............. -- -- 550
Depreciation and amortization..................... 1,837 1,334 1,183
Net gain on sales of investment securities........ (5,240) (90) (1)
Net gain on sales of other real estate owned...... (1,298) (45) (416)
Deferred income tax benefit....................... (5,346) (1,358) (2,834)
Increase in unearned income....................... 1,993 2,351 1,845
Increase in accrued interest receivable........... (1,570) (7,519) (3,586)
Other, net........................................ 5,024 965 (576)
---------- ---------- ----------
Net cash provided by operating activities............. 61,415 33,383 28,057
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from maturities and paydowns of investment
securities........................................ 1,810,770 1,149,471 1,000,558
Proceeds from sales of investment securities........ 850,879 139,451 21,277
Purchases of investment securities.................. (3,033,517) (1,671,449) (1,313,637)
Net increase in loans............................... (470,392) (323,909) (136,660)
Proceeds from recoveries of charged off loans....... 2,264 4,169 2,302
Net proceeds from sales of other real estate
owned............................................. 1,323 1,304 2,873
Purchases of premises and equipment................. (8,909) (1,691) (641)
---------- ---------- ----------
Net cash applied to investing activities.............. (847,582) (702,654) (423,928)
---------- ---------- ----------
Cash flows from financing activities:
Net increase in deposits............................ 837,347 658,103 484,244
Proceeds from issuance of trust preferred
securities, net of issuance costs................. 38,485 -- --
Proceeds from issuance of common stock, net of
issuance costs.................................... 5,706 4,823 2,479
---------- ---------- ----------
Net cash provided by financing activities............. 881,538 662,926 486,723
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents......................................... 95,371 (6,345) 90,852
Cash and cash equivalents at January 1,............... 426,832 433,177 342,325
---------- ---------- ----------
Cash and cash equivalents at December 31,............. $ 522,203 $ 426,832 $ 433,177
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures:
Interest paid....................................... $ 78,445 $ 54,891 $ 37,737
Income taxes paid................................... $ 16,990 $ 19,772 $ 16,775
Non-cash investing activities:
Transfer of loans to other real estate owned and
other foreclosed assets........................... $ -- $ 1,169 $ --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
44
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Silicon Valley Bancshares and its
subsidiaries (the "Company") conform with generally accepted accounting
principles and prevailing practices within the banking industry. Certain
reclassifications have been made to the Company's 1997 and 1996 consolidated
financial statements to conform to the 1998 presentations. Such
reclassifications had no effect on the results of operations or shareholders'
equity. The following is a summary of the significant accounting and reporting
policies used in preparing the consolidated financial statements.
NATURE OF OPERATIONS
Silicon Valley Bancshares is a bank holding company whose principal
subsidiary is Silicon Valley Bank (the "Bank"), a California-chartered bank with
headquarters in Santa Clara, California. The Bank maintains regional banking
offices in California, and additionally has loan offices in Arizona, Colorado,
Georgia, Illinois, Maryland, Massachusetts, Oregon, Texas, and Washington. The
Bank serves emerging growth and middle-market companies in targeted niches,
focusing on the technology and life sciences industries, while also identifying
and capitalizing on opportunities to serve companies in other industries whose
financial services needs are underserved. Substantially all of the assets,
liabilities and earnings of the Company relate to its investment in the Bank.
CONSOLIDATION
The consolidated financial statements include the accounts of Silicon Valley
Bancshares and those of its wholly owned subsidiaries, the Bank, SVB Capital I
and SVB Leasing Company (inactive). The revenues, expenses, assets, and
liabilities of the subsidiaries are included in the respective line items in the
consolidated financial statements after elimination of intercompany accounts and
transactions.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
judgments that affect the reported amounts of assets and liabilities as of the
balance sheet date and the results of operations for the period. Actual results
could differ from those estimates. A material estimate that is particularly
susceptible to possible change in the near term relates to the determination of
the allowance for loan losses. An estimate of possible changes or range of
possible changes cannot be made.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents as reported in the consolidated statements of cash
flows includes cash on hand, cash balances due from banks, federal funds sold,
and securities purchased under agreement to resell. The cash equivalents are
readily convertible to known amounts of cash and present insignificant risk of
changes in value due to maturity dates of 90 days or less.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell as
reported in the consolidated balance sheets includes interest-bearing deposits
in other financial institutions of $202,000 and $273,000 at December 31, 1998
and 1997, respectively.
INVESTMENT SECURITIES
Investment securities are classified as either "available-for-sale,"
"held-to-maturity" or "trading" upon acquisition.
45
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities that are held to meet investment objectives such as interest rate
risk and liquidity management, but which may be sold by the Company as needed to
implement Management strategies, are classified as available-for-sale and are
accounted for at fair value. Unrealized gains and losses on available-for-sale
securities, after applicable taxes, are excluded from earnings and are reported
as a separate component of shareholders' equity until realized. Currently, all
securities held by the Company are classified as available-for-sale.
Securities acquired with the ability and positive intent to hold to maturity
are classified as held-to-maturity and are accounted for at historical cost,
adjusted for the amortization of premiums or the accretion of discounts to
maturity, where appropriate. Unrealized losses on held-to-maturity securities
are realized and charged against earnings when it is determined that an other
than temporary decline in value has occurred.
Securities acquired and held principally for the purpose of sale in the near
term are classified as trading and are accounted for at fair value. Unrealized
gains and losses resulting from fair value adjustments on trading securities, as
well as gains and losses realized upon the sale of investment securities, are
included in noninterest income.
The amortization of premiums and the accretion of discounts are included in
interest income over the contractual terms of the underlying investment
securities using the interest method or the straight-line method, if not
materially different. Gains and losses realized upon the sale of investment
securities are computed on the specific identification method.
LOANS
Loans are reported at the principal amount outstanding, net of unearned
income. Unearned income includes both deferred loan origination and commitment
fees and costs. The net amount of unearned income is amortized into loan
interest income over the contractual terms of the underlying loans and
commitments using the interest method or the straight-line method, if not
materially different.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision charged to
expense. It is the Company's policy to charge off loans which, in the judgment
of Management, are deemed to have a substantial risk of loss.
The allowance for loan losses is maintained at a level deemed adequate by
the Company, based upon various estimates and judgments, to provide for known
and inherent risks in the loan portfolio, including loan commitments. The
evaluation of the adequacy of the allowance for loan losses is based upon a
continuous review of a number of factors, including historical loss experience,
a review of specific loans, loan concentrations, prevailing and anticipated
economic conditions that may impact the borrowers' abilities to repay loans as
well as the value of underlying collateral, delinquency analysis, and an
assessment of credit risk in the loan portfolio established through an ongoing
credit review process by the Company and through periodic regulatory
examinations.
NONACCRUAL LOANS
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosures" require the
Company to measure impairment of a loan based upon the present value of expected
future cash flows discounted at the loan's effective interest rate, except that
as a practical expedient, the Company may measure impairment based on the loan's
observable market price or the fair value of the collateral if the loan is
collateral-dependent. A loan is considered impaired when, based upon currently
known information, it is deemed probable that the Company will be unable to
collect all amounts due according to the contractual terms of the agreement.
46
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans are placed on nonaccrual status when they become 90 days past due as
to principal or interest payments (unless the principal and interest are well
secured and in the process of collection), when the Company has determined,
based upon currently known information, that the timely collection of principal
or interest is doubtful, or when the loans otherwise become impaired under the
provisions of SFAS No. 114.
When a loan is placed on nonaccrual status, the accrued interest is reversed
against interest income and the loan is accounted for on the cash or cost
recovery method thereafter until qualifying for return to accrual status.
Generally, a loan will be returned to accrual status when all delinquent
principal and interest become current in accordance with the terms of the loan
agreement and full collection of the principal appears probable.
PREMISES AND EQUIPMENT
Premises and equipment are reported at cost, less accumulated depreciation
and amortization computed using the straight-line method over the estimated
useful lives of the assets or the terms of the related leases, whichever is
shorter. This time period may range from one to 10 years. The Company had no
capitalized lease obligations at December 31, 1998 and 1997.
OTHER REAL ESTATE OWNED
Loans secured by real estate are transferred to OREO at the time of
foreclosure. OREO is carried on the Company's balance sheet at the lower of the
recorded investment in the loan or the fair value of the property foreclosed
upon less estimated costs of disposal. Upon transfer of a loan to OREO, an
appraisal is obtained and any excess of the loan balance over the fair value of
the property less estimated costs of disposal is charged against the allowance
for loan losses. Revenues and expenses associated with OREO, and subsequent
adjustments to the fair value of the property and to the estimated costs of
disposal, are realized and reported as a component of noninterest expense when
incurred.
FOREIGN EXCHANGE FORWARD CONTRACTS
The Company enters into foreign exchange forward contracts with customers
involved in international trade finance activities, and enters into offsetting
foreign exchange forward contracts with correspondent banks to hedge against the
risk of fluctuations in foreign currency exchange rates related to the forward
contracts entered into with its customers. The notional, or contract, amounts
associated with these financial instruments are not recorded as assets or
liabilities in the Company's consolidated balance sheets. Fees on these foreign
exchange forward contracts are included in noninterest income when the contracts
are settled. Cash flows resulting from these financial instruments are
classified in the same category as the cash flows resulting from the items being
hedged. The Company is an end-user of these derivative financial instruments and
does not conduct trading activities for such instruments.
INCOME TAXES
The Company files a consolidated federal income tax return, and consolidated
or combined state income tax returns as appropriate. The Company's federal and
state income tax provisions are based upon taxes payable for the current year as
well as current year changes in deferred taxes related to temporary differences
between the tax basis and financial statement balances of assets and
liabilities. Deferred tax assets and liabilities are included in the
consolidated financial statements at currently enacted income tax rates
applicable to the period in which the deferred tax assets and liabilities are
expected to be realized. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for income taxes.
47
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123
establishes financial accounting and reporting standards for stock-based
compensation plans, including employee stock purchase plans, stock options and
restricted stock. SFAS No. 123 encourages all entities to adopt a fair value
method of accounting for stock-based compensation plans, whereby compensation
cost is measured at the grant date based on the fair value of the award and is
realized as an expense over the service or vesting period. However, SFAS No. 123
also allows an entity to continue to measure compensation cost for these plans
using the intrinsic value method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees," which is the method currently being
used by the Company. Under the intrinsic value method, compensation cost is
generally the excess, if any, of the quoted market price of the stock at the
grant date or other measurement date over the amount which must be paid to
acquire the stock.
The Company adopted SFAS No. 123 effective January 1, 1996, but continues to
account for employee and director stock-based compensation plans under the
intrinsic value accounting methodology prescribed by APB Opinion No. 25. SFAS
No. 123 requires that stock-based compensation to parties other than employees
and directors be accounted for under the fair value method.
COMMON STOCK SPLIT
On March 19, 1998, the Company's Board of Directors approved a two-for-one
stock split to shareholders of record at the close of business April 17, 1998,
effective May 1, 1998. All per share and shares outstanding data in the
accompanying consolidated financial statements have been restated to reflect the
stock split.
EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS
No. 128 establishes standards for computing and reporting EPS and applies to
entities with publicly held common stock or financial instruments that are
potentially convertible into publicly held common stock. This statement
supersedes APB Opinion No. 15, "Earnings per Share." The presentation of primary
EPS, as required by APB Opinion No. 15, is replaced with a presentation of basic
EPS, which is defined in SFAS No. 128. In addition, dual presentation of basic
EPS and diluted EPS, as defined in SFAS No. 128, is required on the face of the
income statement for all entities that have complex capital structures.
Disclosure of a reconciliation between basic EPS and diluted EPS is also
required.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
financial instruments or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed similarly to
the fully diluted EPS computation required by APB Opinion No. 15. The Company
adopted SFAS No. 128 effective December 31, 1997. See "Note 2 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, 1998, 1997 and 1996.
SEGMENT REPORTING
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.
48
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company adopted SFAS No. 131 as of December 31, 1998, however since
Management views the Company as operating in only one segment, separate
reporting of financial information under SFAS No. 131 is not considered
necessary. Management approaches the Company's principal subsidiary, the Bank,
as one business enterprise which operates in a single economic environment,
since the products and services, types of customers and regulatory environment
all have similar economic characteristics.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 132, "Statement on Employers' Disclosures about Pensions and Other
Post-Retirement Benefits" was issued by the FASB in February 1998. This
statement is effective for financial statements issued for fiscal years
beginning after December 15, 1997. The Company does not have a pension plan or
provide for other post-retirement benefits for employees, and thus this
statement does not have a material impact on the Company's consolidated
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The statement is effective for
fiscal quarters of fiscal years beginning after June 15, 1999. The Company
expects to adopt this statement on January 1, 2000. The Company has not yet
determined the impact of its adoption on the Company's consolidated financial
statements.
In October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities," which establishes accounting and reporting
standards for certain activities of mortgage banking enterprises and other
enterprises that conduct operations that are substantially similar. SFAS No. 134
requires that after the securitization of mortgage loans held for sale, the
resulting mortgage-backed securities and other retained interests should be
classified in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," based on the company's ability and intent to
sell or hold those investments. SFAS No. 134 is effective for the first fiscal
quarter beginning after December 15, 1998. The Company does not expect the
adoption of this statement to have a material impact on the Company's
consolidated financial statements.
49
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. EARNINGS PER SHARE
The following is a reconciliation of basic EPS to diluted EPS for the years
ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998, 1997 AND 1996
---------------------------------
NET PER SHARE
INCOME SHARES AMOUNT
--------- --------- -----------
<S> <C> <C> <C>
(DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
1998:
Basic EPS:
Income available to common shareholders........................................ $ 28,856 20,268 $ 1.42
Effect of Dilutive Securities:
Stock options and restricted stock............................................. -- 655 --
--------- --------- -----
Diluted EPS:
Income available to common shareholders plus assumed conversions............... $ 28,856 20,923 $ 1.38
--------- --------- -----
--------- --------- -----
1997:
Basic EPS:
Income available to common shareholders........................................ $ 27,678 19,370 $ 1.43
Effect of Dilutive Securities:
Stock options and restricted stock............................................. -- 968 --
--------- --------- -----
Diluted EPS:
Income available to common shareholders plus assumed conversions............... $ 27,678 20,338 $ 1.36
--------- --------- -----
--------- --------- -----
1996:
Basic EPS:
Income available to common shareholders........................................ $ 21,466 18,426 $ 1.17
Effect of Dilutive Securities:
Stock options and restricted stock............................................. -- 956 --
--------- --------- -----
Diluted EPS:
Income available to common shareholders plus assumed conversions............... $ 21,466 19,382 $ 1.11
--------- --------- -----
--------- --------- -----
</TABLE>
3. RESTRICTIONS ON CASH BALANCES
The Bank is required to maintain reserves against customer deposits by
keeping balances with the Federal Reserve Bank of San Francisco in a
noninterest-bearing cash account. The minimum required reserve amounts were $4.7
million and $7.2 million at December 31, 1998 and 1997, respectively. The
average required reserve balance totaled $4.2 million in 1998 and $31.5 million
in 1997. The decrease in the average required reserve balance in 1998, compared
to the prior year, was due to a decrease in the amount of reservable customer
deposits.
50
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Securities purchased under agreement to resell outstanding at December 31,
1998 consisted of U.S. Treasury securities. At other times during the year,
these securities also consisted of U.S. agencies and corporations discount notes
and bonds, bankers' acceptances and commercial paper. The securities underlying
the agreement are book-entry securities in the Bank's account at a correspondent
bank. Securities purchased under agreement to resell averaged $185.4 million in
1998, and the maximum amount outstanding at any month-end during 1998 was $403.0
million.
5. INVESTMENT SECURITIES
All investment securities were classified as available-for-sale at December
31, 1998 and 1997. The Company did not maintain a trading portfolio during 1998
or 1997. The following tables detail the major components of the Company's
investment securities portfolio at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Available-for-sale securities:
U.S. Treasury securities................................. $ 40,977 $ 80 $ (8) $ 41,049
U.S. agencies and corporations:
Discount notes and bonds............................... 497,046 970 -- 498,016
Mortgage-backed securities............................. 124,759 691 (391) 125,059
Collateralized mortgage obligations.................... 154,990 415 (256) 155,149
Obligations of states and political subdivisions......... 514,508 1,339 (77) 515,770
Commercial paper......................................... 9,993 -- -- 9,993
Other debt securities.................................... 38,390 87 (6) 38,471
Other equity securities.................................. 13,326 669 -- 13,995
------------ ----------- ----- ------------
Total.................................................... $ 1,393,989 $ 4,251 $ (738) $ 1,397,502
------------ ----------- ----- ------------
------------ ----------- ----- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Available-for-sale securities:
U.S. Treasury securities................................. $ 216,231 $ 1,488 $ (34) $ 217,685
U.S. agencies and corporations:
Discount notes and bonds............................... 461,659 889 (143) 462,405
Mortgage-backed securities............................. 143,834 666 (63) 144,437
Collateralized mortgage obligations.................... 40,974 101 (24) 41,051
Obligations of states and political subdivisions......... 60,108 380 (52) 60,436
Commercial paper......................................... 41,829 -- -- 41,829
Bankers' acceptances..................................... 16,140 -- -- 16,140
Other debt securities.................................... 24,996 14 (3) 25,007
Other equity securities.................................. 4,033 881 -- 4,914
------------ ----------- ----- ------------
Total.................................................... $ 1,009,804 $ 4,419 $ (319) $ 1,013,904
------------ ----------- ----- ------------
------------ ----------- ----- ------------
</TABLE>
The amortized cost and fair value of investment securities classified as
available-for-sale at December 31, 1998, categorized by remaining contractual
maturity, are shown below. Expected remaining maturities of
51
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENT SECURITIES (CONTINUED)
mortgage-backed securities and collateralized mortgage obligations will
generally differ from contractual maturities because borrowers may have the
right to prepay obligations with or without penalties. Other equity securities
were included in the table below as due after ten years.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------
AMORTIZED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Due in one year or less............................................................. $ 741,440 $ 741,741
Due after one year through five years............................................... 289,148 290,260
Due after five years through ten years.............................................. 100,245 101,197
Due after ten years................................................................. 263,156 264,304
------------ ------------
Total............................................................................... $ 1,393,989 $ 1,397,502
------------ ------------
------------ ------------
</TABLE>
Investment securities with a fair value of $42.2 million and $21.7 million
at December 31, 1998 and 1997, respectively, were pledged to secure certain
public deposits and a line of credit at the Federal Reserve Bank of San
Francisco discount window.
Sales of available-for-sale investment securities resulted in the Company
realizing gross gains of $5,300,000, $162,000 and $1,000, and gross losses of
$59,900, $72,000 and $200 in 1998, 1997 and 1996, respectively.
6. LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The detailed composition of loans, net of unearned income of $10.0 million
and $8.0 million at December 31, 1998 and 1997, respectively, is presented in
the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Commercial.......................................................................... $ 1,429,980 $ 1,051,218
Real estate construction............................................................ 74,023 53,583
Real estate term.................................................................... 60,841 33,395
Consumer and other.................................................................. 47,077 36,449
------------ ------------
Total loans......................................................................... $ 1,611,921 $ 1,174,645
------------ ------------
------------ ------------
</TABLE>
The Company's loan classifications for financial reporting purposes differ
from those for regulatory reporting purposes. Loans are classified for financial
reporting purposes based upon the purpose and primary source of repayment of the
loans. Loans are classified for regulatory reporting purposes based upon the
type of collateral securing the loans.
A substantial percentage of the Company's loans are commercial in nature,
and such loans are generally made to emerging growth and middle-market companies
in a variety of industries. As of December 31, 1998, there was only one industry
sector (as identified by Standard Industrial Codes) which represented more than
10.0% of the Company's loan portfolio. The Religious Financial Resources
Division, in which new loan originations were discontinued in December 31, 1998,
represented 10.6% of the Company's total loan portfolio as of December 31, 1998.
52
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LOANS AND THE ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The activity in the allowance for loan losses is summarized below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at January 1,.......................................................... $ 37,700 $ 32,700 $ 29,700
Provision for loan losses...................................................... 37,159 10,067 10,426
Loans charged off.............................................................. (31,123) (9,236) (9,728)
Recoveries..................................................................... 2,264 4,169 2,302
--------- --------- ---------
Balance at December 31,........................................................ $ 46,000 $ 37,700 $ 32,700
--------- --------- ---------
--------- --------- ---------
</TABLE>
The aggregate recorded investment in loans for which impairment has been
determined in accordance with SFAS No. 114 totaled $19.4 million and $24.5
million at December 31, 1998 and 1997, respectively. Allocations of the
allowance for loan losses related to impaired loans totaled $4.4 million at
December 31, 1998 and $15.9 million at December 31, 1997. Average impaired loans
for 1998 and 1997 totaled $26.2 million and $19.7 million, respectively. If
these loans had not been impaired, $2.5 million and $1.1 million in interest
income would have been realized during the years ended December 31, 1998 and
1997, respectively. The Company realized no interest income on such impaired
loans during 1998 or 1997.
7. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Cost:
Furniture and equipment.................................................................. $ 9,716 $ 5,549
Leasehold improvements................................................................... 6,962 3,352
--------- ---------
Total cost................................................................................. 16,678 8,901
Accumulated depreciation and amortization.................................................. (5,324) (4,441)
--------- ---------
Premises and equipment--net................................................................ $ 11,354 $ 4,460
--------- ---------
--------- ---------
</TABLE>
The Company is obligated under a number of noncancelable operating leases
for premises that expire at various dates through May 2005, and in most
instances, include options to renew or extend at market rates and terms. Such
leases may provide for periodic adjustments of rentals during the term of the
lease based on changes in various economic indicators. The following table
presents minimum payments under noncancelable operating leases:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
-------------
<S> <C>
(DOLLARS
IN
THOUSANDS)
1999............................................................................................ $ 3,399
2000............................................................................................ 3,249
2001............................................................................................ 3,073
2002............................................................................................ 2,886
2003............................................................................................ 2,593
After 2003...................................................................................... 3,330
-------------
Total........................................................................................... $ 18,530
-------------
-------------
</TABLE>
53
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PREMISES AND EQUIPMENT (CONTINUED)
Rent expense for premises leased under operating leases totaled $3.0
million, $2.0 million and $1.9 million for the years ended December 31, 1998,
1997 and 1996, respectively.
8. DEPOSITS
The aggregate amount of time deposit accounts individually exceeding
$100,000 totaled $122.8 million and $110.4 million at December 31, 1998 and
1997, respectively. At December 31, 1998, all time deposit accounts exceeding
$100,000 were scheduled to mature within one year.
9. TRUST PREFERRED SECURITIES
In May 1998, the Company issued $40.0 million in cumulative trust preferred
securities through a newly formed special-purpose trust, SVB Capital I. The
trust is a wholly owned consolidated subsidiary of the Company and its sole
assets are the junior subordinated deferrable interest debentures. Distributions
are cumulative and are payable quarterly at a rate of 8.25% per annum of the
stated liquidation amount of $25 per preferred security. In 1998, distributions
of $2.0 million were paid. The obligations of the trust are fully and
unconditionally guaranteed, on a subordinated basis, by the Company.
The trust preferred securities are mandatorily redeemable upon the maturity
of the debentures on June 15, 2028, or to the extent of any earlier redemption
of any debentures by the Company and are callable beginning June 15, 2003.
The purpose of issuing these trust preferred securities was to provide the
Company with a more cost-effective means of obtaining Tier 1 capital for
regulatory purposes than if the Company itself were to issue preferred stock
because the Company is allowed to deduct, for income tax purposes, distributions
to the holders of the trust preferred securities.
Issuance costs of $1.6 million related to the trust preferred securities
were deferred and are being amortized over the period until mandatory redemption
of the securities in June 2028.
Based on the Nasdaq closing price, the fair value of the trust preferred
securities was approximately $36.4 million as of December 31, 1998.
10. INCOME TAXES
The components of the Company's provision for income taxes consist of the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Current provision:
Federal...................................................................... $ 19,649 $ 16,287 $ 12,425
State........................................................................ 5,814 5,114 4,719
Deferred benefit:
Federal...................................................................... (4,629) (1,328) (1,770)
State........................................................................ (717) (30) (1,064)
--------- --------- ---------
Income tax expense............................................................. $ 20,117 $ 20,043 $ 14,310
--------- --------- ---------
--------- --------- ---------
</TABLE>
54
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
A reconciliation between the federal statutory income tax rate and the
Company's effective income tax rate is shown below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory income tax rate.................................................. 35.0% 35.0% 35.0%
State income taxes, net of the federal tax effect.................................. 6.8 6.9 6.6
Tax-exempt interest income......................................................... (2.0) (1.1) (0.4)
Other--net......................................................................... 1.3 1.2 (1.2)
--- --- ---
Effective income tax rate.......................................................... 41.1% 42.0% 40.0%
--- --- ---
--- --- ---
</TABLE>
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Deferred tax assets:
Allowance for loan losses............................................................... $ 17,893 $ 14,813
Other reserves not currently deductible................................................. 3,651 2,812
State income taxes...................................................................... 1,733 1,450
Depreciation and amortization........................................................... 1,884 985
--------- ---------
Gross deferred tax assets................................................................. 25,161 20,060
Deferred tax liabilities:
Other deferred tax liabilities.......................................................... (61) (306)
Net unrealized gain on available-for-sale securities.................................... (1,441) (1,681)
--------- ---------
Gross deferred tax liabilities............................................................ (1,502) (1,987)
--------- ---------
Net deferred tax assets................................................................... $ 23,659 $ 18,073
--------- ---------
--------- ---------
</TABLE>
The Company believes a valuation allowance is not needed to reduce the net
deferred tax assets as it is more likely than not that the net deferred tax
assets will be realized through recovery of taxes previously paid and/or future
taxable income. The amount of the total gross deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward periods are reduced.
11. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes new rules for the reporting and display
of comprehensive income and its components. The adoption of this statement had
no impact on net income or shareholders' equity. SFAS No. 130 requires the
Company's net unrealized gains or losses on available-for-sale securities to be
included in other comprehensive income.
55
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMPREHENSIVE INCOME (CONTINUED)
Components of other comprehensive (loss) income and the related income tax
expense or benefit, consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Change in unrealized gains/(losses) on available-for-sale investments:
Unrealized holding gains arising during the period........................... $ 11,310 $ 5,507 $ 9,812
Related income tax expense................................................... (4,638) (2,313) (3,925)
Less: Reclassification adjustment for gains included in net income........... (11,897) (5,570) (5,390)
Related income tax benefit................................................... 4,878 2,339 2,157
--------- --------- ---------
Other comprehensive (loss) income.............................................. $ (347) $ (37) $ 2,654
--------- --------- ---------
--------- --------- ---------
</TABLE>
12. EMPLOYEE BENEFIT PLANS
The Silicon Valley Bank 401(k) and Employee Stock Ownership Plan (the
"Plan") is a combined 401(k) tax-deferred savings plan and employee stock
ownership plan (ESOP) in which all employees of the Company are eligible to
participate.
Employees participating in the 401(k) component of the Plan may elect to
have a portion of their salary deferred and contributed to the Plan. The amount
of salary deferred is not subject to federal or state income taxes at the time
of deferral. The Company matches up to $1,000 of an employee's contributions in
any plan year, with the Company's matching contribution vesting in equal annual
increments over five years. The Company's matching 401(k) contributions totaled
$0.5 million in 1998, $0.4 million in 1997 and $0.3 million in 1996.
The Silicon Valley Bank Money Purchase Pension Plan (the "MPP Plan")
guarantees a 5.0% quarterly contribution to all individuals that are employed by
the Company on the first and last day of a fiscal quarter. The Company
contributes cash in an amount equal to 5.0% of an eligible employee's quarterly
base salary, less Internal Revenue Code (IRC) Section 401(k) and Section 125
deferrals. The MPP Plan contributions vest in equal annual increments over five
years. The Company's contributions to the MPP Plan totaled $1.1 million in 1998,
$0.9 million in 1997 and $0.8 million in 1996.
Discretionary ESOP contributions, based on the Company's net income, are
made by the Company to all eligible individuals employed by the Company on the
last day of the fiscal year. The Company may elect to contribute cash, or the
Company's common stock, in an amount not exceeding 10.0% of the eligible
employee's base salary earned in the fiscal year, less IRC Section 401(k) and
Section 125 deferrals. The ESOP contributions vest in equal annual increments
over five years. In 1998, the Company did not make a discretionary ESOP
contribution since net income for the year ended December 31, 1998 did not meet
the thresholds set by the Company's Board of Directors at the beginning of 1998.
The Company's contributions to the ESOP totaled $1.7 million and $1.4 million
for 1997 and 1996, respectively. At December 31, 1998, the ESOP owned 886,713
equivalent shares of the Company's common stock. All shares held by the ESOP are
treated as outstanding shares in both the Company's basic and diluted earnings
per share computations.
The Company maintains an employee stock purchase plan (ESPP) under which
participating employees may annually contribute up to 10.0% of their gross
compensation to purchase shares of the Company's common stock at 85.0% of its
fair market value at either the beginning or end of each six-month offering
period, whichever price is less. All employees of the Company are eligible to
participate in the ESPP. The ESPP is noncompensatory to the employees and
results in no expense to the Company. For the first six-month offering period of
1998, 36,859 shares of the Company's common stock were issued under the ESPP at
$23.91 per share, while 50,201 shares of the Company's common stock were issued
at $14.48 per share for the second six-month offering period of 1998. At
December 31, 1998, 102,478 shares of the Company's common stock were reserved
for future issuance under the ESPP.
56
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
In April 1997, the Company's shareholders approved the 1997 Equity Incentive
Plan (the "1997 Plan"). The 1997 Plan, along with the Company's 1983 and 1989
stock option plans, provides for the granting of incentive and non-qualified
stock options which entitle directors, employees and certain other parties to
purchase shares of the Company's common stock at a price not less than 100% and
85% of the fair market value of the common stock on the date the option is
granted for incentive and non-qualified stock options, respectively. Options may
vest over various periods not in excess of five years from the date of grant and
expire five to ten years from the date of grant. The following table provides
stock option information related to the 1983 and 1989 stock option plans and the
1997 Plan:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1,........... 1,905,108 $ 11.68 2,068,710 $ 6.25 2,232,404 $ 5.15
Granted........................... 381,090 29.12 828,000 17.08 286,954 12.28
Exercised......................... (616,631) 6.88 (918,712) 4.33 (430,478) 4.54
Forfeited......................... (92,480) 16.13 (72,890) 11.86 (20,170) 6.22
---------- ----------- ---------- ----------- ---------- -----------
Outstanding at December 31,......... 1,577,087 $ 17.56 1,905,108 $ 11.68 2,068,710 $ 6.25
---------- ----------- ---------- ----------- ---------- -----------
---------- ----------- ---------- ----------- ---------- -----------
Exercisable at December 31,......... 670,987 $ 12.13 841,918 $ 8.07 1,332,192 $ 5.57
---------- ----------- ---------- ----------- ---------- -----------
---------- ----------- ---------- ----------- ---------- -----------
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGES OF NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE PRICE
- ----------------- ------------ ------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 2.81 - $ 7.07 158,091 0.91 $ 6.55 158,091 $ 6.55
8.00 - 11.50 121,818 2.07 8.28 61,758 8.37
12.13 - 12.13 204,000 2.30 12.13 202,680 12.13
12.88 - 15.75 73,544 4.39 13.77 39,724 13.29
16.50 - 16.50 578,134 8.02 16.50 185,134 16.50
18.94 - 29.94 126,000 8.32 23.67 21,350 22.15
30.06 - 30.06 254,500 9.59 30.06 -- --
31.25 - 31.94 46,000 9.40 31.78 2,250 31.81
33.00 - 33.00 8,000 9.39 33.00 -- --
37.06 - 37.06 7,000 9.54 37.06 -- --
------------ --- ----------- ----------- -----------
$ 2.81 - $37.06 1,577,087 6.27 $ 17.56 670,987 $ 12.13
------------ --- ----------- ----------- -----------
------------ --- ----------- ----------- -----------
</TABLE>
At December 31, 1998, options for 524,010 and 52,862 shares were available
for future grant under the Company's 1997 Plan and 1989 stock option plan,
respectively. There were no shares available for future grant under the
Company's 1983 stock option plan.
The Company's 1989 stock option plan and 1997 Plan also provide for the
granting of shares of the Company's common stock to directors, employees and
certain other parties. Shares granted to employees under these plans may be
subject to certain vesting requirements and resale restrictions (restricted
stock). For restricted stock, unearned compensation equivalent to the market
value of the Company's common stock on the date of grant is charged to
shareholders' equity and amortized into noninterest expense over the vesting
57
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
term. In 1998, 27,000 shares of restricted stock were issued to employees at a
weighted-average fair value of $30.01 per share. In 1997, 220,600 shares of
restricted stock were issued to employees at a weighted-average fair value of
$27.95 per share. In 1996, 35,000 shares of restricted stock were issued to
employees at a weighted-average fair value of $11.73 per share. At December 31,
1998, there were 255,600 shares of restricted stock outstanding, and the vesting
of these shares occurs at various periods through the year 2002.
The Company recognized $2.0 million, $0.8 million and $0.1 million in
employee stock-based compensation costs resulting from the amortization of
unearned compensation related to restricted stock, stock options and other
miscellaneous employee stock awards during 1998, 1997 and 1996, respectively.
The Company adopted SFAS No. 123 effective January 1, 1996, but continues to
account for employee and director stock-based compensation plans under the
intrinsic value accounting methodology prescribed by APB Opinion No. 25. SFAS
No. 123 requires that stock-based compensation to parties other than employees
and directors be accounted for under the fair value method. Accordingly, no
compensation cost has been recognized for the Company's stock option awards to
employees and directors and for shares issued under the ESPP to employees in
1998, 1997 and 1996. The weighted-average fair values of options granted to
employees, directors and certain other parties were $12.39, $8.16 and $5.42 per
share in 1998, 1997 and 1996, respectively. Had compensation cost related to
both the Company's stock option awards to employees and directors and to the
ESPP been determined under the fair value method prescribed under SFAS No. 123,
the Company's net income, basic earnings per share and diluted earnings per
share would have been the pro forma amounts indicated below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income:
As reported.................................................................. $ 28,856 $ 27,678 $ 21,466
Pro forma (1)................................................................ 26,344 24,892 20,465
Basic earnings per share:
As reported.................................................................. $ 1.42 $ 1.43 $ 1.17
Pro forma (1)................................................................ 1.30 1.29 1.11
Diluted earnings per share:
As reported.................................................................. $ 1.38 $ 1.36 $ 1.11
Pro forma (1)................................................................ 1.27 1.23 1.06
</TABLE>
- ------------------------
(1) The pro forma amounts noted above only reflect the effects of stock-based
compensation grants made after 1994. Because stock options are granted each
year and vest over various periods, these pro forma amounts may not reflect
the full effect of applying the fair value method established by SFAS No.
123 that would be expected if all outstanding stock option grants were
accounted for under this method.
58
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
The fair value of the stock option grants in 1998, 1997 and 1996 used in
determining the pro forma net income and the basic and diluted earnings per
share amounts indicated above were estimated using the Black-Scholes
option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Dividend yield............................................................................ --% --% --%
Expected life of options in years......................................................... 5 5 4
Expected volatility of the Company's underlying common stock.............................. 39.5% 44.7% 47.5%
Expected risk-free interest rate.......................................................... 5.3% 6.3% 6.1%
</TABLE>
The expected volatility of the Company's underlying common stock and the
expected risk-free interest rate were calculated using a term commensurate with
the expected life of the options.
Compensation expense related to the ESPP in 1998, 1997 and 1996, used in
determining the pro forma net income and basic and diluted earnings per share
amounts indicated above, was equal to the difference between the fair value of
the Company's common stock when issued under the ESPP and the actual price paid
by employees to acquire the common stock.
13. RELATED PARTIES
Silicon Valley Bancshares had $955,000 and $250,000 in loans outstanding to
employees, as of December 31, 1998 and 1997, respectively. In December 1997,
Silicon Valley Bancshares loaned $250,000 to an officer of the Company to
purchase a primary residence in Northern California in connection with a
relocation agreement. The loan is interest-free, is secured by a second deed of
trust on the aforementioned residence and is payable in five annual installments
of $50,000, the first of which was made in December 1998. In January 1998, as
part of the same relocation agreement, an additional $600,000 was loaned to that
officer. This second loan is interest-free, is secured by a second deed of trust
on the aforementioned residence and is due in full in December 2002. In a
separate agreement, the Bank awarded the same officer a $250,000 bonus, payable
in five annual installments of $50,000 beginning in December 1998. In June 1998,
Silicon Valley Bancshares loaned $75,000 to another officer of the Company. The
unsecured loan accrues interest at the rate of 5.50% per annum and is payable in
three annual installments of $25,000 beginning in March 1999. Also in 1998, the
Company made an interest-free, secured loan of $80,000 to an employee of the
Bank. The Company had no other loans outstanding to related parties during 1998.
The Silicon Valley Bank Foundation (the "Foundation") was established by the
Company in 1995 to maintain good corporate citizenship in its communities. The
Foundation is funded entirely by the Company, and received contributions from
the Company totaling $0.1 million in 1998, 1997 and 1996.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company uses financial instruments
with off-balance sheet risk to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in foreign currency exchange rates and
market interest rates. These financial instruments include commitments to extend
credit, commercial and standby letters of credit, foreign exchange forward
contracts, and interest rate swap agreements. These instruments involve, to
varying degrees, elements of credit risk. Credit risk is defined as the
possibility of sustaining a loss because other parties to the financial
instrument fail to perform in accordance with the terms of the contract.
59
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
COMMITMENTS TO EXTEND CREDIT
A commitment to extend credit is a formal agreement to lend funds to a
customer as long as there is no violation of any condition established in the
agreement. Such commitments generally have fixed expiration dates, or other
termination clauses, and usually require a fee paid by the customer upon the
Company issuing the commitment. As of December 31, 1998 and 1997, the Company
had $859.2 million and $426.1 million of unused loan commitments available to
customers, of which $126.2 million and $86.4 million had a fixed interest rate,
respectively. The Company's exposure arising from interest rate risk associated
with fixed rate loan commitments is not considered material. Commitments which
are unavailable for funding due to customers not meeting all collateral,
compliance and financial covenants required under loan commitment agreements
totaled $1.7 billion and $1.4 billion at December 31, 1998 and 1997,
respectively. The Company's potential exposure to credit loss, in the event of
nonperformance by the other party to the financial instrument, is the
contractual amount of the available unused loan commitment. The Company uses the
same credit approval and monitoring process in extending loan commitments as it
does in making loans. The actual liquidity needs or the credit risk that the
Company has experienced have historically been lower than the contractual amount
of commitments to extend credit because a significant portion of these
commitments expire without being drawn upon. The Company evaluates each
potential borrower and the necessary collateral on an individual basis. The type
of collateral varies, but may include real property, bank deposits, or business
and personal assets. The potential credit risk associated with these commitments
is considered in Management's evaluation of the adequacy of the allowance for
loan losses.
COMMERCIAL AND STANDBY LETTERS OF CREDIT
Commercial and standby letters of credit represent conditional commitments
issued by the Company on behalf of a customer to guarantee the performance of
the customer to a third party when certain specified future events have
occurred. Commercial letters of credit are issued primarily for inventory
purchases by customers and are typically short-term in nature. Standby letters
of credit are typically issued as a credit enhancement for clients' contractual
obligations to third parties such as landlords. Letters of credit have fixed
expiration dates and generally require a fee paid by the customer upon the
Company issuing the commitment. Fees generated from these letters of credit are
recognized in noninterest income over the commitment period. At December 31,
1998 and 1997, commercial and standby letters of credit totaled a combined
$151.3 million and $112.9 million, respectively.
The credit risk involved in issuing letters of credit is essentially the
same as that involved with extending loan commitments to customers, and
accordingly, the Company uses a credit evaluation process and collateral
requirements similar to those for loan commitments. The actual liquidity needs
or the credit risk that the Company has experienced have historically been lower
than the contractual amount of letters of credit issued because a significant
portion of these conditional commitments expire without being drawn upon.
FOREIGN EXCHANGE FORWARD CONTRACTS
The Company enters into foreign exchange forward contracts with customers
involved in international trade finance activities, either as the purchaser or
seller of foreign currency at a future date, depending upon the customer need.
The Company enters into offsetting foreign exchange forward contracts with
correspondent banks to hedge against the risk of fluctuations in foreign
currency exchange rates related to the foreign exchange forward contracts
entered into with its customers. These contracts are short-term in nature,
typically expiring in less than 90 days. At December 31, 1998 and 1997, the
notional amounts of these contracts totaled $77.1 million and $28.2 million,
respectively. The maximum credit exposure for counterparty nonperformance for
foreign exchange forward contracts with both customers and correspondent banks
amounted to $2.1 million at December 31, 1998 and $0.3 million at December 31,
1997. The Company has incurred no losses from counterparty nonperformance and
anticipates performance by all counterparties to such foreign exchange forward
contracts.
60
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
INTEREST RATE SWAP AGREEMENTS
During the fourth quarter of 1998, the Company entered into an interest rate
swap agreement with a maturity of one year in order to manage its exposure to
market interest rate movements by effectively converting a portion of its
interest-earning assets from variable rate to fixed rate. The face value of the
interest rate swap at December 31, 1998 was $150.0 million. This agreement
involves the exchange of variable rate payments for fixed rate payments without
the exchange of the underlying face value. Under this agreement, the Company
will receive fixed interest payments at a rate of 7.765% and will pay variable
rate interest payments, based on the average three-month U.S. Prime Rate. The
U.S. Prime Rate at December 31, 1998 was 7.75%. Interest rate differentials paid
or received under this agreement are recognized as an adjustment to interest
income. The notional amount does not represent the amount exchanged by the
parties, and thus is not a measure of exposure of the Company. The amounts
exchanged are based on the notional amount and other terms of the swap. The
average variable rates are subject to change over time as the U.S. Prime Rate
fluctuates. The counterparty to the swap agreement is Bank of America National
Trust and Savings Association. The Company is exposed to credit losses from
counterparty nonperformance, but does not anticipate any losses from this
agreement. The Company does not hold interest rate swap agreements for trading
purposes.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair values for its financial
instruments. Fair value estimates, methods and assumptions, set forth below for
the Company's financial instruments, are made solely to comply with the
requirements of SFAS No. 107 and should be read in conjunction with the
Company's consolidated financial statements and related notes.
Fair values are based on estimates or calculations at the transaction level
using present value techniques in instances where quoted market prices are not
available. Because broadly traded markets do not exist for most of the Company's
financial instruments, the fair value calculations attempt to incorporate the
effect of current market conditions at a specific time. Fair valuations are
Management's estimates of the values, and they are often calculated based on
current pricing policies, the economic and competitive environment, the
characteristics of the financial instruments, expected losses, and other such
factors. These calculations are subjective in nature, involve uncertainties and
matters of significant judgment, and do not include tax ramifications;
therefore, the results cannot be determined with precision, substantiated by
comparison to independent markets, and may not be realized in an actual sale or
immediate settlement of the instruments. There may be inherent weaknesses in any
calculation technique, and changes in the underlying assumptions used, including
discount rates and estimates of future cash flows, could significantly affect
the results. For all of these reasons, the aggregation of the fair value
calculations presented herein does not represent, and should not be construed to
represent, the underlying value of the Company.
The following methods and assumptions have been used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate the value.
Cash and cash equivalents: This category includes cash and due from banks,
interest-bearing deposits in other financial institutions, federal funds sold,
and securities purchased under agreement to resell. The cash equivalents are
readily convertible to known amounts of cash and present insignificant risk of
changes in value due to maturity dates of 90 days or less. For these short-term
financial instruments, the carrying amount is a reasonable estimate of fair
value.
Investment securities: For investment securities classified as
available-for-sale, fair values are based on quoted market prices or dealer
quotes.
Loans: The fair value of performing fixed and variable rate loans is
calculated by discounting contractual cash flows using discount rates that
reflect the Company's current pricing for loans with similar credit ratings
61
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
and for the same remaining maturities. Nonperforming fixed and variable rate
loans and loans classified as special mention, substandard or doubtful are
valued by discounting estimated cash flows at the effective interest rates on
the loans, and using assumptions as to the expected timing and extent of
principal recovery with no recovery assumed for contractual interest owed.
Deposits: The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, NOW accounts and money market deposits is
equal to the amount payable on demand at the reporting date. The fair value of
time deposits is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered by the Company for
time deposits with similar remaining maturities. The fair value of deposits does
not include the benefit that results from the low cost of funding provided by
the Company's deposits as compared to the cost of borrowing funds in the market.
Off-balance sheet financial instruments: The Company has not estimated the
fair value of off-balance sheet commitments to extend credit, commercial letters
of credit and standby letters of credit. Because of the uncertainty involved in
attempting to assess the likelihood and timing of a commitment being drawn upon,
coupled with the lack of an established market for these financial instruments,
Management does not believe it is meaningful or practicable to provide an
estimate of fair value. The fair value of foreign exchange forward contracts and
interest rate swaps are based on the estimated amounts the Company would receive
or pay to terminate the contracts at the reporting date.
Limitations: The information presented herein is based on pertinent
information available to the Company as of December 31, 1998 and 1997,
respectively. Although Management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued since the most recent year end and the estimated
fair values of these financial instruments may have changed significantly since
that point in time.
The estimated fair values of the Company's financial instruments at December
31, 1998 and 1997 are presented below. Bracketed amounts in the estimated fair
value columns represent estimated cash outflows required to settle the
obligations at market rates as of the respective reporting dates.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1998 1997
-------------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks............................. $ 123,001 $ 123,001 $ 105,059 $ 105,059
Federal funds sold and securities purchased under
agreement to resell............................... 399,202 399,202 321,773 321,773
Investment securities, at fair value................ 1,397,502 1,397,502 1,013,904 1,013,904
Net loans........................................... 1,565,921 1,598,052 1,136,945 1,151,273
Financial Liabilities:
Noninterest-bearing demand deposits................. 921,790 921,790 788,442 788,442
NOW deposits........................................ 19,978 19,978 21,348 21,348
Money market deposits............................... 2,185,359 2,185,359 1,497,996 1,497,996
Time deposits....................................... 142,626 142,770 124,621 124,922
Off-Balance Sheet Financial Instruments:
Foreign exchange forward contracts--receive......... -- 40,193 -- 13,798
Foreign exchange forward contracts--pay............. -- (40,193) -- (13,798)
Interest rate swap agreement........................ -- 19 -- --
</TABLE>
62
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. LEGAL MATTERS
Certain lawsuits and claims arising in the ordinary course of business have
been filed or are pending against the Company and/or the Bank. Based upon
information available to the Company, its review of such claims to date and
consultation with its legal counsel, Management believes the liability relating
to these actions, if any, will not have a material adverse effect on the
Company's liquidity, consolidated financial position or results of operations.
17. REGULATORY MATTERS
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without the prior approval of the Federal Reserve Board and the
California Department of Financial Institutions. At December 31, 1998,
approximately $68.3 million of the Bank's retained earnings were available for
dividend declaration to the Company without prior regulatory approval.
The Company and the Bank are subject to capital adequacy guidelines issued
by the Federal Reserve Board. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a material impact on the Company's
and/or the Bank's financial condition and results of operations. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's balance sheet items, as
well as certain off-balance sheet items, as calculated under regulatory
accounting practices. The Company's and the Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Under these capital guidelines, the minimum total risk-based capital ratio
and Tier 1 risk-based capital ratio requirements are 10.0% and 6.0%,
respectively, of risk-weighted assets and certain off-balance sheet items for a
well capitalized depository institution.
The Federal Reserve Board has also established minimum capital leverage
ratio guidelines for state member banks. The ratio is determined using Tier 1
capital divided by quarterly average total assets. The guidelines require a
minimum of 5.0% for a well capitalized depository institution.
Management believes, as of December 31, 1998, that the Company and the Bank
meet all capital adequacy requirements to which they are subject. As of December
31, 1998, the most recent notifications from the Federal Reserve Board
categorized the Company and the Bank as well capitalized under the regulatory
framework for prompt corrective action.
63
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. REGULATORY MATTERS (CONTINUED)
The following table presents the capital ratios for the Company and the
Bank, compared to the minimum regulatory capital requirements for an adequately
capitalized depository institution, as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
MINIMUM
ACTUAL ACTUAL MINIMUM CAPITAL
RATIO AMOUNT RATIO REQUIREMENT
---------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
As of December 31, 1998:
Total risk-based capital ratio
Company................................................... 11.5% $ 283,159 8.0% $ 196,423
Bank...................................................... 10.2% $ 247,832 8.0% $ 193,896
Tier 1 risk-based capital ratio
Company................................................... 10.3% $ 252,279 4.0% $ 98,212
Bank...................................................... 9.0% $ 217,342 4.0% $ 96,948
Tier 1 leverage ratio
Company................................................... 7.6% $ 252,279 4.0% $ 133,128
Bank...................................................... 6.6% $ 217,342 4.0% $ 131,664
As of December 31, 1997:
Total risk-based capital ratio
Company................................................... 11.5% $ 193,256 8.0% $ 134,325
Bank...................................................... 10.8% $ 181,472 8.0% $ 134,056
Tier 1 risk-based capital ratio
Company................................................... 10.2% $ 172,061 4.0% $ 67,163
Bank...................................................... 9.6% $ 160,319 4.0% $ 67,028
Tier 1 leverage ratio
Company................................................... 7.1% $ 172,061 4.0% $ 97,411
Bank...................................................... 6.6% $ 160,319 4.0% $ 97,107
</TABLE>
18. SHAREHOLDERS' RIGHTS PLAN
On October 22, 1998, the Company's Board of Directors adopted a shareholders
rights plan (the "Rights Plan") designed to protect the Company's shareholders
from various abusive takeover tactics, including attempts to acquire control of
the Company without offering a fair price to all shareholders. Under the Rights
Plan, each shareholder received a dividend of one right for each outstanding
share of common stock of the Company. The rights are attached to, and presently
only traded with, the common stock and are currently not exercisable. Except as
specified below, upon becoming exercisable, all rights holders will be entitled
to purchase from the Company 1/1000th of a share of the Company's preferred
stock at a price of $120.00.
The rights become exercisable and will begin to trade separately from the
common stock of the Company upon the earlier of (i) the tenth day after a person
or group has acquired beneficial ownership of 10% or more of the outstanding
common stock of the Company or (ii) the tenth business day after a person or
group announces a tender or exchange offer, the consummation of which would
result in ownership by a person or group of 10% or more of the Company's common
stock. Each right will entitle the holder to purchase common stock of the
Company having a current market value of twice the exercise price of the right.
If the Company is acquired through a merger or other business combination
transaction or there is a sale of more than 50% of the Company's assets or
earning power, each right will entitle the holder (other than rights held by the
acquiring person) to purchase, at the exercise price, common stock of the
acquiring entity having a value of twice the exercise price at the time.
64
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SHAREHOLDERS' RIGHTS PLAN (CONTINUED)
The Company's Board of Directors has the option any time after a person or
group becomes a 10% holder of the outstanding common stock of the Company to
exchange all or part of the rights (other than rights held by the acquiring
person) for shares of common stock of the Company provided that the Company may
not make such an exchange after the person becomes the beneficial owner of 50%
or more of the Company's outstanding common stock.
The Company may redeem the rights for $0.001 each at any time on, or prior
to, public announcement that a person has acquired beneficial ownership of 10%
or more of the Company's common stock. The rights will expire on October 22,
2008, unless earlier redeemed or exchanged. The rights will not have any voting
rights, but will have the benefit of certain customary anti-dilution provisions.
The dividend distribution of the rights was not taxable to the Company or its
shareholders.
19. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The condensed balance sheets of Silicon Valley Bancshares (parent company
only) at December 31, 1998 and 1997, and the related condensed statements of
income and condensed statements of cash flows for the years ended December 31,
1998, 1997 and 1996 are presented below. Certain reclassifications have been
made to the parent company's 1997 and 1996 financial information to conform to
the 1998 presentations. Such reclassifications had no effect on the results of
operations or shareholders' equity.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Assets:
Cash on deposit with bank subsidiary.................................................. $ 2,496 $ 8,584
Investment securities, at fair value.................................................. 32,598 3,433
Loans to related parties.............................................................. 955 250
Other assets.......................................................................... 324 516
Investment in subsidiaries:
Bank subsidiary..................................................................... 219,019 162,218
Nonbank subsidiary.................................................................. 1,237 --
---------- ----------
Total assets............................................................................ $ 256,629 $ 175,001
---------- ----------
---------- ----------
Short-term liabilities.................................................................. $ 900 $ 520
Indebtedness to nonbank subsidiary...................................................... 39,864 --
Shareholders' equity.................................................................... 215,865 174,481
---------- ----------
Total liabilities and shareholders' equity.............................................. $ 256,629 $ 175,001
---------- ----------
---------- ----------
</TABLE>
65
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest income................................................................ $ 1,050 $ 630 $ 345
Interest expense............................................................... (2,070) -- --
Income from the disposition of client warrants................................. 6,657 5,480 5,389
General and administrative expenses............................................ (285) (229) (175)
Income tax expense............................................................. (2,248) (2,470) (2,364)
--------- --------- ---------
Income before equity in net income of bank subsidiary.......................... 3,104 3,411 3,195
Equity in net income of bank subsidiary........................................ 25,752 24,267 18,271
--------- --------- ---------
Net income..................................................................... $ 28,856 $ 27,678 $ 21,466
--------- --------- ---------
--------- --------- ---------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income................................................................. $ 28,856 $ 27,678 $ 21,466
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in net income of bank subsidiary.................................. (25,752) (24,267) (18,271)
Decrease (increase) in other assets...................................... 192 (304) (196)
Increase (decrease) in short-term liabilities............................ 467 (876) 924
Other, net............................................................... 1 14 27
--------- --------- ---------
Net cash provided by operating activities.................................... 3,764 2,245 3,950
--------- --------- ---------
Cash flows from investing activities:
Net (increase) decrease in investment securities........................... (29,377) 3,074 (5,626)
Net increase in loans to related parties................................... (705) (250) --
Investment in bank subsidiary.............................................. (26,039) (7,115) (2,956)
Investment in nonbank subsidiary........................................... (1,237) -- --
--------- --------- ---------
Net cash applied to investing activities..................................... (57,358) (4,291) (8,582)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from borrowings from nonbank subsidiary, net of costs............. 39,864 -- --
Proceeds from issuance of common stock, net of issuance costs.............. 7,642 6,405 4,298
--------- --------- ---------
Net cash provided by financing activities.................................... 47,506 6,405 4,298
--------- --------- ---------
Net (decrease) increase in cash.............................................. (6,088) 4,359 (334)
Cash on deposit with bank subsidiary at January 1,........................... 8,584 4,225 4,559
--------- --------- ---------
Cash on deposit with bank subsidiary at December 31,......................... $ 2,496 $ 8,584 $ 4,225
--------- --------- ---------
--------- --------- ---------
</TABLE>
66
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------- ----------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net interest income.......... $ 31,937 $ 35,399 $ 38,456 $ 40,823 $ 23,857 $ 27,082 $ 29,054 $ 30,831
Provision for loan losses.... 5,480 4,024 10,557 17,098 3,348 2,618 1,716 2,385
Noninterest income........... 5,391 4,435 7,716 5,620 4,830 2,977 2,806 2,652
Noninterest expense.......... 18,904 21,773 21,063 21,905 14,667 15,754 17,618 18,262
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes... 12,944 14,037 14,552 7,440 10,672 11,687 12,526 12,836
Income tax expense........... 5,365 5,836 6,002 2,914 4,482 4,908 5,261 5,392
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income................... $ 7,579 $ 8,201 $ 8,550 $ 4,526 $ 6,190 $ 6,779 $ 7,265 $ 7,444
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Basic earnings per share..... $ 0.38 $ 0.40 $ 0.42 $ 0.22 $ 0.33 $ 0.35 $ 0.37 $ 0.38
Diluted earnings per share... $ 0.36 $ 0.39 $ 0.41 $ 0.22 $ 0.31 $ 0.34 $ 0.35 $ 0.36
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
67
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the sections titled "Proposal No.
1--Election of Directors," "Information on Executive Officers" and "Section
16(a) Beneficial Ownership Reporting Compliance" contained in the definitive
proxy statement for the Company's 1999 Annual Meeting of Shareholders is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the sections titled "Information on
Executive Officers," "Report of the Executive Committee of the Board on
Executive Compensation," "Table 1--Summary Compensation Table," "Option Grants
in Last Fiscal Year," "Table 2--Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values," "Termination Arrangements," "Return to
Shareholders Performance Graph," and "Director Compensation" contained in the
definitive proxy statement for the Company's 1999 Annual Meeting of Shareholders
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the sections titled "Security Ownership of
Directors and Executive Officers" and "Security Ownership of Principal
Shareholders" contained in the definitive proxy statement for the Company's 1999
Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the section titled "Certain Relationships
and Related Transactions" in the definitive proxy statement for the Company's
1999 Annual Meeting of Shareholders is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2.
The financial statements and supplementary data contained in Item 8 of this
report are filed as part of this report.
All schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included in the
financial statements or related notes.
(a) 3.
Exhibits are listed in the Index to Exhibits beginning on page 71 of this
report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1998.
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
SILICON VALLEY BANCSHARES
By: /s/ JOHN C. DEAN
----------------------------------------
John C. Dean
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Dated: March 19, 1999
69
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ DANIEL J. KELLEHER
- ------------------------------ Chairman of the Board of March 19, 1999
Daniel J. Kelleher Directors and Director
President, Chief Executive
/s/ JOHN C. DEAN Officer and Director
- ------------------------------ (Principal Executive March 19, 1999
John C. Dean Officer)
Executive Vice President,
/s/ CHRISTOPHER T. LUTES Chief Financial Officer
- ------------------------------ (Principal Financial March 19, 1999
Christopher T. Lutes Officer)
/s/ LYDIA A. BURKE Senior Vice President,
- ------------------------------ Controller (Principal March 19, 1999
Lydia A. Burke Accounting Officer)
/s/ GARY K. BARR
- ------------------------------ Director March 19, 1999
Gary K. Barr
/s/ JAMES F. BURNS, JR.
- ------------------------------ Director March 19, 1999
James F. Burns, Jr.
/s/ DAVID DEWILDE
- ------------------------------ Director March 19, 1999
David deWilde
/s/ CLARENCE J. FERRARI, JR.
- ------------------------------ Director March 19, 1999
Clarence J. Ferrari, Jr.
/s/ HENRY M. GAY
- ------------------------------ Director March 19, 1999
Henry M. Gay
/s/ STEPHEN E. JACKSON
- ------------------------------ Director March 19, 1999
Stephen E. Jackson
/s/ JAMES R. PORTER
- ------------------------------ Director March 19, 1999
James R. Porter
/s/ ANN R. WELLS
- ------------------------------ Director March 19, 1999
Ann R. Wells
</TABLE>
70
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- --------- ----------------------------------------------------------------------------------- -------------------
<C> <S> <C>
3.1 Articles of Incorporation of the Company, as amended(9)............................ --
3.2 Bylaws of the Company, amendment and restatement effective as of August 21,
1997(7).......................................................................... --
3.3 Certificate of Amendment of Bylaws of Silicon Valley Bancshares as of October 22,
1998............................................................................. 73
4.1 Article Three of Articles of Incorporation (included in Exhibit 3.1)(1)............ --
4.2 Form of Subordinated Indenture(10)................................................. --
4.3 Form of Junior Subordinated Debenture(10).......................................... --
4.6 Form of Amended and Restated Trust Agreement of SVB Capital I(10).................. --
4.7 Form of Trust Preferred Certificate of SVB Capital I (included as an exhibit to
Exhibit 4.6)(10)................................................................. --
4.8 Form of Guarantee Agreement(10).................................................... --
4.9 Form of Agreement as to Expenses and Liabilities (included as an exhibit to Exhibit
4.6)(10)......................................................................... --
4.10 Form of Common Securities Certificate of SVB Capital I (included as an exhibit to
Exhibit 4.6)(10)................................................................. --
4.11 Form of Officers' Certificate and Company Order(10)................................ --
10.3 Employment Agreement between Silicon Valley Bancshares and John C. Dean(2)......... --
10.17 Lease Agreement between Silicon Valley Bank and WRC Properties, Inc.; 3003 Tasman
Drive, Santa Clara, CA 95054(3).................................................. --
10.17(a) First amendment to lease outlined in Exhibit 10.17(6).............................. --
10.28 Amendment and Restatement of the Silicon Valley Bancshares 1989 Stock Option
Plan(4).......................................................................... --
10.29 Silicon Valley Bank Money Purchase Pension Plan(4)................................. --
10.30 Amendment and Restatement of the Silicon Valley Bank Money Purchase Pension
Plan(4).......................................................................... --
10.31 Amendment and Restatement of the Silicon Valley Bank 401(k) and Employee Stock
Ownership Plan(4)................................................................ --
10.32 Executive Change in Control Severance Benefits Agreement(5)........................ --
10.33 Change in Control Severance Policy For Non-executives(5)........................... --
10.34 Silicon Valley Bancshares 1997 Equity Incentive Plan(6)............................ --
10.35 Silicon Valley Bancshares 1988 Employee Stock Purchase Plan Effective June 22,
1988, revised October 17, 1997(7)................................................ --
10.36 Relocation Agreement between Silicon Valley Bancshares and Kenneth P. and Ruth
Wilcox, as of December 18, 1997(8)............................................... --
10.37 Bonus Agreement between Silicon Valley Bank and Kenneth P. Wilcox, as of December
18, 1997(8)...................................................................... --
10.38 Promissory Note between Silicon Valley Bancshares and Christopher T. Lutes, as of
June 10, 1998(10)................................................................ --
10.39 The 1998 Venture Capital Retention Program, Amended June 18, 1998(10).............. --
10.40 Severance Agreement between Silicon Valley Bancshares and John C. Dean related to
garage.com-TM-, as of August 12, 1998(11)........................................ --
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- --------- ----------------------------------------------------------------------------------- -------------------
<C> <S> <C>
10.41 Severance Agreement between Silicon Valley Bancshares and Harry W. Kellogg related
to garage.com-TM-, as of August 12, 1998(11)..................................... --
10.42 Form of Executive Change In Control Severance Benefits, as of August 12,
1998(11)......................................................................... --
10.43 Preferred Shares Rights Agreement, as of October 22, 1998.......................... 76
21.1 Subsidiaries of Silicon Valley Bancshares.......................................... 136
23.1 Independent Auditors' Consent...................................................... 137
27.1 Financial Data Schedule............................................................ 138
</TABLE>
- ------------------------
(1) Incorporated by reference to Exhibit 4.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988.
(2) Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.
(3) Incorporated by reference to Exhibit 10.17 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994.
(4) Incorporated by reference to Exhibits 10.28, 10.29, 10.30, and 10.31 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.
(5) Incorporated by reference to Exhibits 10.32 and 10.33 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
(6) Incorporated by reference to Exhibits 10.17(a) and 10.34 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(7) Incorporated by reference to Exhibits 3.2 and 10.35 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
(8) Incorporated by reference to Exhibits 10.36 and 10.37 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
(9) Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998.
(10) Incorporated by reference to Exhibits 4.2, 4.3, 4.6, 4.7, 4.8, 4.9, 4.10,
4.11, 10.38, and 10.39 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998.
(11) Incorporated by reference to Exhibits 10.40, 10.41 and 10.42 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.
72
<PAGE>
Exhibit 3.3
CERTIFICATE OF AMENDMENT
OF BYLAWS OF
SILICON VALLEY BANCSHARES
The undersigned Secretary of Silicon Valley Bancshares, hereby certifies
that Sections 2.3, 2.8(b)(ii) and 2.11 of the Bylaws of this corporation were
amended on October 22, 1998, by the Board of Directors of this corporation such
that such Sections now read in their entirety as follows:
" Section 2.3 SPECIAL MEETINGS. Special meetings of the
shareholders, for the purpose of taking any action permitted by the shareholders
under the California General Corporation Law, may be called at any time by the
Board or, subject to the provisions of this Section 2.3, by the Chair of the
Board, the President, or one or more shareholders holding not less than ten
percent (10%) of the votes entitled to be cast at the meeting. For a special
meeting of the shareholders to be properly brought by any person or persons
other than the Board pursuant to the preceding sentence, the person or persons
calling the meeting must have given timely notice thereof in writing to the
Secretary of the Corporation and the business proposed to be conducted at such
meeting must otherwise be a proper matter for shareholder action. To be timely,
such notice shall be delivered to the Secretary at the principal executive
offices of the Corporation not later than the close of business on the 60th day
nor earlier than the close of business on the 90th day prior to the date of the
meeting proposed by the person or persons calling the meeting. Such notice
shall set forth (a) the proposed date and time of the meeting, (b) as to each
person whom the person or persons calling the meeting propose to nominate for
election or reelection as a director all information relating to such nominee
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(or any successor thereto) and Rule 14a-11 thereunder (or any successor thereto)
(including such nominee's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (c) as to any other
business that the person or persons calling the meeting proposes to bring before
the meeting, a brief description of the business desired to be brought before
the meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such person or persons and any other
person or entity, if any, on whose behalf the proposal is made; and (d) as to
any shareholders giving the notice (i) the name and address of such
shareholders, as they appear on the Corporation's books and (ii) the class and
number of shares of the Corporation which are owned beneficially and of record
by such shareholders. Upon notice meeting the requirements of this Section 2.3
by any person or persons entitled to call a special meeting of shareholders, the
Corporation shall cause notice to be given to shareholders entitled to vote that
a meeting will be held. Except in special cases where other express provision
is made by statute, notice of special meetings shall be given in the same manner
as for annual meetings of shareholders. In addition, to the matters required by
items (i), and, if applicable, (ii) and (iii) of the preceding Section, notice
of any special meeting shall specify the general nature of the business to be
transacted, and no other business may be transacted at such meeting."
" 2.8(b)(ii) Prompt notice shall be given at the taking of any
other corporate action approved by shareholders without a meeting by less than
unanimous written
<PAGE>
consent, to those shareholders entitled to vote who have not consented in
writing. Such notices shall be given as provided in Section 2.2(c) of these
Bylaws.
Any shareholder of record or other person or entity seeking to
have the shareholders authorize or take corporate action by written consent
shall, by written notice to the Secretary, request the Board of Directors to fix
a record date pursuant to Section 5.1 hereof. The Board of Directors may, at
any time within ten (10) days after the date on which such a request is
received, adopt a resolution fixing the record date (unless a record date has
previously been fixed pursuant to Section 5.1 hereof). If no record date has
been fixed by the Board of Directors pursuant to Section 5.1 hereof or otherwise
within ten (10) days of the date on which such a request is received, the record
date for determining shareholders entitled to consent to corporate action in
writing without a meeting, when no prior action by the Board of Directors is
required by applicable law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the Corporation by delivery to its principal place of business or to any officer
or agent of the Corporation having custody of the book in which proceedings of
meetings of shareholders are recorded. Delivery shall be by hand or by
certified or registered mail, return receipt requested. If no record date has
been fixed by the Board of Directors and prior action by the Board of Directors
is required by applicable law, the record date for determining shareholders
entitled to consent to corporate action in writing without a meeting shall be at
the close of business on the date on which the Board of Directors adopts the
resolution taking such prior action.
In the event of the delivery, in the manner provided by this
Section 2.8(b)(ii), to the Corporation of the requisite written consent or
consents to take corporate action and/or any related revocation or revocations,
the Corporation may engage independent inspectors of elections for the purpose
of performing promptly a ministerial review of the validity of the consents and
revocations. For the purpose of permitting the inspectors to perform such
review, in the event such inspectors are appointed, no action by written consent
without a meeting shall be effective until such date as such appointed
independent inspectors certify to the Corporation that the consents delivered to
the Corporation in accordance herewith represent at least the minimum number of
votes that would be necessary to take the corporate action. Nothing contained
in this Section 2.8 shall in any way be construed to suggest or imply that the
Board of Directors or any shareholder shall not be entitled to contest the
validity of any consent or revocation thereof, whether before or after any
certification by any independent inspectors, or to take any other action
(including, without limitation, the commencement, prosecution or defense of any
litigation with respect thereto, and the seeking of injunctive relief in such
litigation).
Every written consent shall bear the date of signature of each
shareholder who signs the consent and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the earliest dated written consent received in accordance with this Section 2.8,
a written consent or consents signed by a sufficient number of holders to take
such action are delivered to the Corporation in the manner prescribed herein.
Any shareholder giving a written consent, or the shareholder's
proxyholder, or a transferee of the shares, or a personal representative of the
shareholder or their respective proxyholders, may revoke the consent by a
writing received by the Corporation prior to the time that written consents by
the number of shares required to authorize the proposed action have been filed
with the Secretary of the Corporation, but may not do so thereafter. Such
revocation is effective upon its receipt by the Secretary of the Corporation."
<PAGE>
" 2.11 NOMINATIONS AND PROPOSALS.
Nominations of persons for election to the Board of Directors of
the Corporation and the proposal of business to be considered by the
shareholders may be made at any meeting of shareholders only (a) pursuant
to the Corporation's notice of meeting, (b) by or at the direction of the
Board of Directors or (c) by any shareholder of the Corporation who was a
shareholder of record at the time of giving of notice provided for in these
bylaws, who is entitled to vote at the meeting and who complies with the
notice procedures set forth in this Section 2.11.
For nominations or other business to be properly brought before a
shareholders meeting by a shareholder pursuant to clause (c) of the
preceding sentence, the shareholder must have given timely notice thereof
in writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for shareholder action. To be timely, a
shareholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business
on the 60th day nor earlier than the close of business on the 90th day
prior to the meeting; provided, however, that in the event that less than
65 days notice of the meeting is given to shareholders, notice by the
shareholder to be timely must be so delivered not earlier than the close of
business on the seventh (7th) day following the day on which the notice of
meeting was mailed. In no event shall the public announcement of an
adjournment of a shareholders meeting commence a new time period for the
giving of a shareholder's notice as described above. Such shareholder's
notice shall set forth (a) as to each person whom the shareholder proposes
to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations
of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (or any successor thereto) and
Rule 14a-11 thereunder (or any successor thereto) (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (b) as to any other business that the
shareholder proposes to bring before the meeting, a brief description of
the business desired to be brought before the meeting, the reasons for
conducting such business at the meeting and any material interest in such
business of such shareholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the shareholder giving the
notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made (i) the name and address of such shareholder, as they
appear on the Corporation's books, and of such beneficial owner, and (ii)
the class and number of shares of the Corporation which are owned
beneficially and of record by such shareholder and such beneficial owner.
Notwithstanding any provision herein to the contrary, no business shall be
conducted at a shareholders meeting except in accordance with the
procedures set forth in this Section 2.11."
This Certificate of Amendment of Bylaws shall be effective as of this 22nd
day of October, 1998.
- -----------------------------
A. Catherine Ngo, Secretary
<PAGE>
SILICON VALLEY BANCSHARES
AND
NORWEST BANK MINNESOTA, N.A.
RIGHTS AGENT
PREFERRED SHARES RIGHTS AGREEMENT
DATED AS OF OCTOBER 22, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 1. Certain Definitions . . . . . . . . . . . . . . . . . . . . .-1-
Section 2. Appointment of Rights Agent . . . . . . . . . . . . . . . . .-7-
Section 3. Issuance of Rights Certificates . . . . . . . . . . . . . . .-7-
Section 4. Form of Rights Certificates . . . . . . . . . . . . . . . . .-9-
Section 5. Countersignature and Registration . . . . . . . . . . . . . -11-
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights
Certificates. . . . . . . . . . . . . . . . . . . . . . . . -11-
Section 7. Exercise of Rights; Exercise Price; Expiration Date
of Rights . . . . . . . . . . . . . . . . . . . . . . . . . -12-
Section 8. Cancellation and Destruction of Rights Certificates . . . . -14-
Section 9. Reservation and Availability of Preferred Shares. . . . . . -14-
Section 10. Record Date . . . . . . . . . . . . . . . . . . . . . . . . -15-
Section 11. Adjustment of Exercise Price, Number of Shares
or Number of Rights . . . . . . . . . . . . . . . . . . . . -16-
Section 12. Certificate of Adjusted Exercise Price or Number of Shares -22-
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power . . . . . . . . . . . . . . . . . . . . . . . -22-
Section 14. Fractional Rights and Fractional Shares . . . . . . . . . . -26-
Section 15. Rights of Action. . . . . . . . . . . . . . . . . . . . . . -27-
Section 16. Agreement of Rights Holders . . . . . . . . . . . . . . . . -27-
Section 17. Rights Certificate Holder Not Deemed a Shareholder. . . . . -28-
Section 18. Concerning the Rights Agent . . . . . . . . . . . . . . . . -28-
Section 19. Merger or Consolidation or Change of Name of Rights Agent . -29-
-i-
<PAGE>
Section 20. Duties of Rights Agent. . . . . . . . . . . . . . . . . . . -29-
Section 21. Change of Rights Agent. . . . . . . . . . . . . . . . . . . -31-
Section 22. Issuance of New Rights Certificates . . . . . . . . . . . . -32-
Section 23. Redemption. . . . . . . . . . . . . . . . . . . . . . . . . -32-
Section 24. Exchange. . . . . . . . . . . . . . . . . . . . . . . . . . -33-
Section 25. Notice of Certain Events. . . . . . . . . . . . . . . . . . -35-
Section 26. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
Section 27. Supplements and Amendments. . . . . . . . . . . . . . . . . -36-
Section 28. Successors. . . . . . . . . . . . . . . . . . . . . . . . . -37-
Section 29. Determinations and Actions by the Board of Directors, etc.. -37-
Section 30. Benefits of this Agreement. . . . . . . . . . . . . . . . . -37-
Section 31. Severability. . . . . . . . . . . . . . . . . . . . . . . . -38-
Section 32. Governing Law . . . . . . . . . . . . . . . . . . . . . . . -38-
Section 33. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . -38-
Section 34. Descriptive Headings. . . . . . . . . . . . . . . . . . . . -38-
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<CAPTION>
PAGE
<S> <C>
EXHIBITS
Exhibit A Form of Certificate of Determination
Exhibit B Form of Rights Certificate
Exhibit C Summary of Rights
</TABLE>
-iii-
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT 10.43
RIGHTS AGREEMENT
Agreement, dated as of October 22, 1998, between Silicon Valley Bancshares,
a California corporation, and Norwest Bank Minnesota, N.A.
On October 22, 1998 (the "RIGHTS DIVIDEND DECLARATION DATE"), the Board of
Directors of the Company authorized and declared a dividend of one Preferred
Share Purchase Right (a "RIGHT") for each Common Share (as hereinafter defined)
of the Company outstanding as of the Close of Business (as hereinafter defined)
on November 9, 1998 (the "RECORD DATE"), each Right representing the right to
purchase one one-thousandth of a share of Series A Participating Preferred Stock
(as such number may be adjusted pursuant to the provisions of this Agreement),
having the rights, preferences and privileges set forth in the form of
Certificate of Determination attached hereto as Exhibit A, upon the terms and
subject to the conditions herein set forth, and further authorized and directed
the issuance of one Right (as such number may be adjusted pursuant to the
provisions of this Agreement) with respect to each Common Share that shall
become outstanding between the Record Date and the earlier of the Distribution
Date and the Expiration Date (as such terms are hereinafter defined), and in
certain circumstances after the Distribution Date.
NOW, THEREFORE, in consideration of the promises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "ACQUIRING PERSON" shall mean any Person who or which, together
with all Affiliates and Associates of such Person, shall be the Beneficial Owner
of 10% or more of the Common Shares then outstanding, but shall not include the
Company, any Subsidiary of the Company or any employee benefit plan of the
Company or of any Subsidiary of the Company, or any entity holding Common Shares
for or pursuant to the terms of any such plan. Notwithstanding the foregoing,
no Person shall be deemed to be an Acquiring Person as the result of an
acquisition of Common Shares by the Company which, by reducing the number of
shares outstanding, increases the proportionate number of shares beneficially
owned by such Person to 10% or more of the Common Shares of the Company then
outstanding; PROVIDED, HOWEVER, that if a Person shall become the Beneficial
Owner of 10% or more of the Common Shares of the Company then outstanding by
reason of share purchases by the Company and shall, after such share purchases
by the Company, become the Beneficial Owner of any additional Common Shares of
the Company (other than pursuant to a dividend or distribution paid or made by
the Company on the outstanding Common Shares in Common Shares or pursuant to a
split or subdivision of the outstanding Common Shares), then such Person shall
be deemed to be an Acquiring Person unless upon becoming the Beneficial Owner of
such additional Common Shares of the Company such Person does not beneficially
own 10% or more of the Common Shares of the Company then outstanding.
Notwithstanding the foregoing, (i) if the Company's Board of Directors
determines in good faith that a Person who would otherwise be an "Acquiring
Person," as defined pursuant to the foregoing provisions
<PAGE>
of this paragraph (a), has become such inadvertently (including, without
limitation, because (A) such Person was unaware that it beneficially owned a
percentage of the Common Shares that would otherwise cause such Person to be an
"Acquiring Person," as defined pursuant to the foregoing provisions of this
paragraph (a), or (B) such Person was aware of the extent of the Common Shares
it beneficially owned but had no actual knowledge of the consequences of such
beneficial ownership under this Agreement) and without any intention of changing
or influencing control of the Company, and if such Person divested or divests as
promptly as practicable a sufficient number of Common Shares so that such Person
would no longer be an "Acquiring Person," as defined pursuant to the foregoing
provisions of this paragraph (a), then such Person shall not be deemed to be or
to have become an "Acquiring Person" for any purposes of this Agreement; and
(ii) if, as of the date hereof, any Person is the Beneficial Owner of 10% or
more of the Common Shares outstanding, such Person shall not be or become a
"Acquiring Person," as defined pursuant to the foregoing provisions of this
paragraph (a), unless and until such time as such Person shall become the
Beneficial Owner of additional Common Shares (other than pursuant to a dividend
or distribution paid or made by the Company on the outstanding Common Shares in
Common Shares or pursuant to a split or subdivision of the outstanding Common
Shares), unless, upon becoming the Beneficial Owner of such additional Common
Shares, such Person is not then the Beneficial Owner of 10% or more of the
Common Shares then outstanding.
(b) "ADJUSTMENT FRACTION" shall have the meaning set forth in
Section 11(a)(i) hereof.
(c) "AFFILIATE" and "ASSOCIATE" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act, as in effect on the date of this Agreement.
(d) A Person shall be deemed the "BENEFICIAL OWNER" of and shall be
deemed to "BENEFICIALLY OWN" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly, for purposes of
Section 13(d) of the Exchange Act and Rule 13d-3 thereunder (or any comparable
or successor law or regulation);
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities), or upon the exercise of conversion rights, exchange
rights, rights (other than the Rights), warrants or options, or otherwise;
PROVIDED, HOWEVER, that a Person shall not be deemed pursuant to this
Section 1(d)(ii)(A) to be the Beneficial Owner of, or to beneficially own,
(1) securities tendered pursuant to a tender or exchange offer made by or on
behalf of such Person or any of such Person's Affiliates or Associates until
such tendered securities are accepted for purchase or exchange, or
(2) securities which a Person or any of such Person's Affiliates or Associates
may be deemed to have the right to acquire pursuant to any merger or other
acquisition agreement between the Company and such Person (or one
-2-
<PAGE>
or more of its Affiliates or Associates) if such agreement has been approved by
the Board of Directors of the Company prior to there being an Acquiring Person;
or (B) the right to vote pursuant to any agreement, arrangement or
understanding; PROVIDED, HOWEVER, that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own, any security under this
Section 1(d)(ii)(B) if the agreement, arrangement or understanding to vote such
security (1) arises solely from a revocable proxy or consent given to such
Person in response to a public proxy or consent solicitation made pursuant to,
and in accordance with, the applicable rules and regulations of the Exchange Act
and (2) is not also then reportable on Schedule 13D under the Exchange Act (or
any comparable or successor report); or
(iii) which are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate thereof) with
which such Person or any of such Person's Affiliates or Associates has any
agreement, arrangement or understanding, whether or not in writing (other than
customary agreements with and between underwriters and selling group members
with respect to a bona fide public offering of securities) for the purpose of
acquiring, holding, voting (except to the extent contemplated by the proviso to
Section 1(d)(ii)(B)) or disposing of any securities of the Company; PROVIDED,
HOWEVER, that in no case shall an officer or director of the Company be deemed
(x) the Beneficial Owner of any securities beneficially owned by another officer
or director of the Company solely by reason of actions undertaken by such
persons in their capacity as officers or directors of the Company or (y) the
Beneficial Owner of securities held of record by the trustee of any employee
benefit plan of the Company or any Subsidiary of the Company for the benefit of
any employee of the Company or any Subsidiary of the Company, other than the
officer or director, by reason of any influence that such officer or director
may have over the voting of the securities held in the plan.
(e) "BUSINESS DAY" shall mean any day other than a Saturday, Sunday
or a day on which banking institutions in New York are authorized or obligated
by law or executive order to close.
(f) "CLOSE OF BUSINESS" on any given date shall mean 5:00 P.M., New
York time, on such date; PROVIDED, HOWEVER, that if such date is not a Business
Day it shall mean 5:00 P.M., New York time, on the next succeeding Business Day.
(g) "COMMON SHARES" when used with reference to the Company shall
mean the shares of Common Stock of the Company. Common Shares when used with
reference to any Person other than the Company shall mean the capital stock (or
equity interest) with the greatest voting power of such other Person or, if such
other Person is a Subsidiary of another Person, the Person or Persons which
ultimately control such first-mentioned Person.
(h) "COMMON STOCK EQUIVALENTS" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(i) "COMPANY" shall mean Silicon Valley Bancshares, a California
corporation, subject to the terms of Section 13(a)(iii)(C) hereof.
-3-
<PAGE>
(j) "CURRENT PER SHARE MARKET PRICE" of any security (a "Security"
for purposes of this definition), for all computations other than those made
pursuant to Section 11(a)(iii) hereof, shall mean the average of the daily
closing prices per share of such Security for the thirty (30) consecutive
Trading Days immediately prior to such date, and for purposes of computations
made pursuant to Section 11(a)(iii) hereof, the Current Per Share Market Price
of any Security on any date shall be deemed to be the average of the daily
closing prices per share of such Security for the ten (10) consecutive Trading
Days immediately prior to such date; PROVIDED, HOWEVER, that in the event that
the Current Per Share Market Price of the Security is determined during a period
following the announcement by the issuer of such Security of (i) a dividend or
distribution on such Security payable in shares of such Security or securities
convertible into such shares or (ii) any subdivision, combination or
reclassification of such Security, and prior to the expiration of the applicable
thirty (30) Trading Day or ten (10) Trading Day period, after the ex-dividend
date for such dividend or distribution, or the record date for such subdivision,
combination or reclassification, then, and in each such case, the Current Per
Share Market Price shall be appropriately adjusted to reflect the current market
price per share equivalent of such Security. The closing price for each day
shall be the last sale price, regular way, or, in case no such sale takes place
on such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New York
Stock Exchange or, if the Security is not listed or admitted to trading on the
New York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Security is listed or admitted to trading or,
if the Security is not listed or admitted to trading on any national securities
exchange, the last sale price or, if such last sale price is not reported, the
average of the high bid and low asked prices in the over-the-counter market, as
reported by Nasdaq or such other system then in use, or, if on any such date the
Security is not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
the Security selected by the Board of Directors of the Company. If on any such
date no market maker is making a market in the Security, the fair value of such
shares on such date as determined in good faith by the Board of Directors of the
Company shall be used. If the Preferred Shares are not publicly traded, the
Current Per Share Market Price of the Preferred Shares shall be conclusively
deemed to be the Current Per Share Market Price of the Common Shares as
determined pursuant to this Section 1(j), as appropriately adjusted to reflect
any stock split, stock dividend or similar transaction occurring after the date
hereof, multiplied by 1000. If the Security is not publicly held or so listed
or traded, Current Per Share Market Price shall mean the fair value per share as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes.
(k) "CURRENT VALUE" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(l) "DISTRIBUTION DATE" shall mean the earlier of (i) the Close of
Business on the tenth day after the Shares Acquisition Date (or, if the tenth
day after the Shares Acquisition Date occurs before the Record Date, the Close
of Business on the Record Date) or (ii) the Close of Business on the tenth
Business Day (or such later date as may be determined by action of the Company's
Board of Directors) after the date that a tender or exchange offer by any Person
(other than the Company, any
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Subsidiary of the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company, or any Person or entity organized, appointed or
established by the Company for or pursuant to the terms of any such plan) is
first published or sent or given within the meaning of Rule 14d-2(a) of the
General Rules and Regulations under the Exchange Act, if, assuming the
successful consummation thereof, such Person would be an Acquiring Person.
(m) "EQUIVALENT SHARES" shall mean Preferred Shares and any other
class or series of capital stock of the Company which is entitled to the same
rights, privileges and preferences as the Preferred Shares.
(n) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
(o) "EXCHANGE RATIO" shall have the meaning set forth in
Section 24(a) hereof.
(p) "EXERCISE PRICE" shall have the meaning set forth in Section 4(a)
hereof.
(q) "EXPIRATION DATE" shall mean the earliest to occur of: (i) the
Close of Business on the Final Expiration Date, (ii) the Redemption Date, or
(iii) the time at which the Board of Directors orders the exchange of the Rights
as provided in Section 24 hereof.
(r) "FINAL EXPIRATION DATE" shall mean October 22, 2008.
(s) "INTERESTED PERSON" with respect to a Transaction shall mean any
Person who (i) is or will become an Acquiring Person if the Transaction were to
be consummated or an Affiliate or Associate of such a Person, and (ii) is, or
directly or indirectly proposed, nominated or financially supported a director
of the Company in office at the time of consideration of the Transaction in
question who was elected by written consent of shareholders.
(t) "NASDAQ" shall mean the National Association of Securities
Dealers, Inc. Automated Quotations System.
(u) "PERSON" shall mean any individual, firm, corporation or other
entity, and shall include any successor (by merger or otherwise) of such entity.
(v) "POST-EVENT TRANSFEREE" shall have the meaning set forth in
Section 7(e) hereof.
(w) "PREFERRED SHARES" shall mean shares of Series A Participating
Preferred Stock of the Company.
(x) "PRE-EVENT TRANSFEREE" shall have the meaning set forth in
Section 7(e) hereof.
(y) "PRINCIPAL PARTY" shall have the meaning set forth in
Section 13(b) hereof.
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(z) "RECORD DATE" shall have the meaning set forth in the recitals at
the beginning of this Agreement.
(aa) "REDEMPTION DATE"shall have the meaning set forth in
Section 23(a) hereof.
(bb) "REDEMPTION PRICE" shall have the meaning set forth in
Section 23(a) hereof.
(cc) "RIGHTS AGENT" shall mean Norwest Bank Minnesota, N.A. or its
successor or replacement as provided in Sections 19 and 21 hereof.
(dd) "RIGHTS CERTIFICATE" shall mean a certificate substantially in
the form attached hereto as Exhibit B.
(ee) "RIGHTS DIVIDEND DECLARATION DATE" shall have the meaning set
forth in the recitals at the beginning of this Agreement.
(ff) "SECTION 11(a)(ii) TRIGGER DATE" shall have the meaning set forth
in Section 11(a)(iii) hereof.
(gg) "SECTION 13 EVENT" shall mean any event described in clause (i),
(ii) or (iii) of Section 13(a) hereof.
(hh) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
(ii) "SHARES ACQUISITION DATE" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by
the Company or an Acquiring Person that an Acquiring Person has become such;
PROVIDED THAT, if such Person is determined not to have become an Acquiring
Person pursuant to Section 1(a) hereof, then no Shares Acquisition Date shall be
deemed to have occurred.
(jj) "SPREAD" shall have the meaning set forth in Section 11(a)(iii)
hereof.
(kk) "SUBSIDIARY" of any Person shall mean any corporation or other
entity of which an amount of voting securities sufficient to elect a majority of
the directors or Persons having similar authority of such corporation or other
entity is beneficially owned, directly or indirectly, by such Person, or any
corporation or other entity otherwise controlled by such Person.
(ll) "SUBSTITUTION PERIOD" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(mm) "SUMMARY OF RIGHTS" shall mean a summary of this Agreement
substantially in the form attached hereto as Exhibit C.
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(nn) "TOTAL EXERCISE PRICE" shall have the meaning set forth in
Section 4(a) hereof.
(oo) "TRADING DAY" shall mean a day on which the principal national
securities exchange on which a referenced security is listed or admitted to
trading is open for the transaction of business or, if a referenced security is
not listed or admitted to trading on any national securities exchange, a
Business Day.
(pp) "TRANSACTION" shall mean any merger, consolidation or sale of
assets described in Section 13(a) hereof or any acquisition of Common Shares
which would result in a Person becoming an Acquiring Person.
(qq) A "TRIGGERING EVENT" shall be deemed to have occurred upon any
Person, becoming an Acquiring Person.
Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints
the Rights Agent to act as agent for the Company and the holders of the Rights
(who, in accordance with Section 3 hereof, shall prior to the Distribution Date
also be the holders of the Common Shares) in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such co-Rights Agents as it may deem
necessary or desirable.
Section 3. ISSUANCE OF RIGHTS CERTIFICATES.
(a) Until the Distribution Date, (i) the Rights will be evidenced
(subject to the provisions of Sections 3(b) and 3(c) hereof) by the certificates
for Common Shares registered in the names of the holders thereof (which
certificates shall also be deemed to be Rights Certificates) and not by separate
Rights Certificates and (ii) the right to receive Rights Certificates will be
transferable only in connection with the transfer of Common Shares. Until the
earlier of the Distribution Date or the Expiration Date, the surrender for
transfer of certificates for Common Shares shall also constitute the surrender
for transfer of the Rights associated with the Common Shares represented
thereby. As soon as practicable after the Distribution Date, the Company will
prepare and execute, the Rights Agent will countersign, and the Company will
send or cause to be sent (and the Rights Agent will, if requested, send) by
first-class, postage-prepaid mail, to each record holder of Common Shares as of
the Close of Business on the Distribution Date, at the address of such holder
shown on the records of the Company, a Rights Certificate evidencing one Right
for each Common Share so held, subject to adjustment as provided herein. In the
event that an adjustment in the number of Rights per Common Share has been made
pursuant to Section 11 hereof, then at the time of distribution of the Rights
Certificates, the Company shall make the necessary and appropriate rounding
adjustments (in accordance with Section 14(a) hereof) so that Rights
Certificates representing only whole numbers of Rights are distributed and cash
is paid in lieu of any fractional Rights. As of the Distribution Date, the
Rights will be evidenced solely by such Rights Certificates and may be
transferred by the transfer of the Rights Certificates as permitted hereby,
separately and apart from any transfer of Common Shares, and the
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holders of such Rights Certificates as listed in the records of the Company or
any transfer agent or registrar for the Rights shall be the record holders
thereof.
(b) On the Record Date or as soon as practicable thereafter, the
Company will send a copy of the Summary of Rights by first-class,
postage-prepaid mail, to each record holder of Common Shares as of the Close of
Business on the Record Date, at the address of such holder shown on the records
of the Company's transfer agent and registrar. With respect to certificates for
Common Shares outstanding as of the Record Date, until the Distribution Date,
the Rights will be evidenced by such certificates registered in the names of the
holders thereof together with the Summary of Rights. Until the Distribution
Date (or, if earlier, the Expiration Date), the surrender for transfer of any
certificate for Common Shares outstanding on the Record Date, with or without a
copy of the Summary of Rights, shall also constitute the transfer of the Rights
associated with the Common Shares represented thereby.
(c) Unless the Board of Directors by resolution adopted at or before
the time of the issuance of any Common Shares specifies to the contrary, Rights
shall be issued in respect of all Common Shares that are issued after the Record
Date but prior to the earlier of the Distribution Date or the Expiration Date
or, in certain circumstances provided in Section 22 hereof, after the
Distribution Date. Certificates representing such Common Shares shall also be
deemed to be certificates for Rights, and shall bear the following legend:
THIS CERTIFICATE ALSO EVIDENCES AND ENTITLES THE HOLDER HEREOF TO
CERTAIN RIGHTS AS SET FORTH IN A RIGHTS AGREEMENT BETWEEN SILICON
VALLEY BANCSHARES AND NORWEST BANK MINNESOTA, N.A., AS THE RIGHTS
AGENT, DATED AS OF OCTOBER 22, 1998, (THE "RIGHTS AGREEMENT"), THE
TERMS OF WHICH ARE HEREBY INCORPORATED HEREIN BY REFERENCE AND A COPY
OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF SILICON
VALLEY BANCSHARES. UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE
RIGHTS AGREEMENT, SUCH RIGHTS WILL BE EVIDENCED BY SEPARATE
CERTIFICATES AND WILL NO LONGER BE EVIDENCED BY THIS CERTIFICATE.
SILICON VALLEY BANCSHARES WILL MAIL TO THE HOLDER OF THIS CERTIFICATE
A COPY OF THE RIGHTS AGREEMENT WITHOUT CHARGE AFTER RECEIPT OF A
WRITTEN REQUEST THEREFOR. UNDER CERTAIN CIRCUMSTANCES SET FORTH IN
THE RIGHTS AGREEMENT, RIGHTS ISSUED TO, OR HELD BY, ANY PERSON WHO IS,
WAS OR BECOMES AN ACQUIRING PERSON OR ANY AFFILIATE OR ASSOCIATE
THEREOF (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT), WHETHER
CURRENTLY HELD BY OR ON BEHALF OF SUCH PERSON OR BY ANY SUBSEQUENT
HOLDER, MAY BECOME NULL AND VOID.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Shares represented by such certificates shall be
evidenced by such certificates alone, and the surrender for transfer of any such
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<PAGE>
certificate shall also constitute the transfer of the Rights associated with the
Common Shares represented thereby.
(d) In the event that the Company purchases or acquires any Common
Shares after the Record Date but prior to the Distribution Date, any Rights
associated with such Common Shares shall be deemed canceled and retired so that
the Company shall not be entitled to exercise any Rights associated with the
Common Shares which are no longer outstanding.
Section 4. FORM OF RIGHTS CERTIFICATES.
(a) The Rights Certificates (and the forms of election to purchase
Common Shares and of assignment to be printed on the reverse thereof) shall be
substantially in the form of Exhibit B hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange or automated quotation system, on which
the Rights may from time to time be listed or included, or to conform to usage.
Subject to the provisions of Section 11 and Section 22 hereof, the Rights
Certificates, whenever distributed, shall be dated as of the Record Date (or in
the case of Rights issued with respect to Common Shares issued by the Company
after the Record Date, as of the date of issuance of such Common Shares) and on
their face shall entitle the holders thereof to purchase such number of
one-thousandths of a Preferred Share as shall be set forth therein at the price
set forth therein (such exercise price per one one-thousandth of a Preferred
Share being hereinafter referred to as the "EXERCISE PRICE" and the aggregate
Exercise Price of all Preferred Shares issuable upon exercise of one Right being
hereinafter referred to as the "TOTAL EXERCISE PRICE"), but the number and type
of securities purchasable upon the exercise of each Right and the Exercise Price
shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or
Section 22 hereof that represents Rights beneficially owned by: (i) an
Acquiring Person or any Associate or Affiliate of an Acquiring Person, (ii) a
transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee after the Acquiring Person becomes such or (iii) a
transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee prior to or concurrently with the Acquiring Person becoming
such and receives such Rights pursuant to either (A) a transfer (whether or not
for consideration) from the Acquiring Person to holders of equity interests in
such Acquiring Person or to any Person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which the Company's Board of Directors has determined
is part of a plan, arrangement or understanding which has as a primary purpose
or effect avoidance of Section 7(e) hereof, and any Rights Certificate issued
pursuant to Section 6 or Section 11 hereof upon transfer, exchange, replacement
or adjustment of any other Rights Certificate referred to in this sentence,
shall contain (to the extent feasible) the following legend:
THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE
BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN
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ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON
(AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS
RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND
VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF THE RIGHTS
AGREEMENT.
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Section 5. COUNTERSIGNATURE AND REGISTRATION.
(a) The Rights Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its Chief Executive Officer, its Chief
Financial Officer, its President or any Vice President, either manually or by
facsimile signature, and by the Secretary or an Assistant Secretary of the
Company, either manually or by facsimile signature, and shall have affixed
thereto the Company's seal (if any) or a facsimile thereof. The Rights
Certificates shall be manually countersigned by the Rights Agent and shall not
be valid for any purpose unless countersigned. In case any officer of the
Company who shall have signed any of the Rights Certificates shall cease to be
such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Rights Certificates, nevertheless,
may be countersigned by the Rights Agent and issued and delivered by the Company
with the same force and effect as though the person who signed such Rights
Certificates on behalf of the Company had not ceased to be such officer of the
Company; and any Rights Certificate may be signed on behalf of the Company by
any person who, at the actual date of the execution of such Rights Certificate,
shall be a proper officer of the Company to sign such Rights Certificate,
although at the date of the execution of this Rights Agreement any such person
was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its office designated for such purposes, books for
registration and transfer of the Rights Certificates issued hereunder. Such
books shall show the names and addresses of the respective holders of the Rights
Certificates, the number of Rights evidenced on its face by each of the Rights
Certificates and the date of each of the Rights Certificates.
Section 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHTS
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES.
(a) Subject to the provisions of Sections 7(e), 14 and 24 hereof, at
any time after the Close of Business on the Distribution Date, and at or prior
to the Close of Business on the Expiration Date, any Rights Certificate or
Rights Certificates may be transferred, split up, combined or exchanged for
another Rights Certificate or Rights Certificates, entitling the registered
holder to purchase a like number of one-thousandths of a Preferred Share (or,
following a Triggering Event, other securities, cash or other assets, as the
case may be) as the Rights Certificate or Rights Certificates surrendered then
entitled such holder to purchase. Any registered holder desiring to transfer,
split up, combine or exchange any Rights Certificate or Rights Certificates
shall make such request in writing delivered to the Rights Agent, and shall
surrender the Rights Certificate or Rights Certificates to be transferred, split
up, combined or exchanged at the principal office of the Rights Agent. Neither
the Rights Agent nor the Company shall be obligated to take any action
whatsoever with respect to the transfer of any such surrendered Rights
Certificate until the registered holder shall have completed and signed the
certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request. Thereupon the
Rights Agent shall, subject to Sections 7(e), 14 and 24 hereof, countersign and
deliver to the person entitled thereto a Rights Certificate or Rights
Certificates, as the case may be, as so requested. The Company
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may require payment of a sum sufficient to cover any tax or governmental charge
that may be imposed in connection with any transfer, split up, combination or
exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Rights Certificate if mutilated, the Company will make and deliver a new
Rights Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Rights Certificate so lost, stolen, destroyed
or mutilated.
Section 7. EXERCISE OF RIGHTS; EXERCISE PRICE; EXPIRATION DATE OF
RIGHTS.
(a) Subject to Sections 7(e), 23(b), 23(c), 24(g), 27(a), 27(b) and
24(b) hereof, the registered holder of any Rights Certificate may exercise the
Rights evidenced thereby (except as otherwise provided herein) in whole or in
part at any time after the Distribution Date and prior to the Close of Business
on the Expiration Date by surrender of the Rights Certificate, with the form of
election to purchase on the reverse side thereof duly executed, to the Rights
Agent at the principal office of the Rights Agent, together with payment of the
Exercise Price for each one-thousandth of a Preferred Share (or, following a
Triggering Event, other securities, cash or other assets as the case may be) as
to which the Rights are exercised.
(b) The Exercise Price for each one-thousandth of a Preferred Share
issuable pursuant to the exercise of a Right shall initially be One Hundred and
Twenty Dollars ($120.00), shall be subject to adjustment from time to time as
provided in Sections 11 and 13 hereof and shall be payable in lawful money of
the United States of America in accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase duly executed, accompanied by
payment of the Exercise Price for the number of one-thousandths of a Preferred
Share (or, following a Triggering Event, other securities, cash or other assets
as the case may be) to be purchased and an amount equal to any applicable
transfer tax required to be paid by the holder of such Rights Certificate in
accordance with Section 9(e) hereof, the Rights Agent shall, subject to
Section 20(k) hereof, thereupon promptly (i) (A) requisition from any transfer
agent of the Preferred Shares (or make available, if the Rights Agent is the
transfer agent for the Preferred Shares) a certificate or certificates for the
number of one-thousandths of a Preferred Share (or, following a Triggering
Event, other securities, cash or other assets as the case may be) to be
purchased and the Company hereby irrevocably authorizes its transfer agent to
comply with all such requests or (B) if the Company shall have elected to
deposit the total number of one-thousandths of a Preferred Share (or, following
a Triggering Event, other securities, cash or other assets as the case may be)
issuable upon exercise of the Rights hereunder with a depositary agent,
requisition from the depositary agent depositary receipts representing such
number of one-thousandths of a Preferred Share (or, following a Triggering
Event, other securities, cash or other assets as the case may be) as are to be
purchased (in which case certificates for the Preferred Shares (or, following a
Triggering Event, other
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securities, cash or other assets as the case may be) represented by such
receipts shall be deposited by the transfer agent with the depositary agent) and
the Company hereby directs the depositary agent to comply with such request,
(ii) when appropriate, requisition from the Company the amount of cash to be
paid in lieu of issuance of fractional shares in accordance with Section 14
hereof, (iii) after receipt of such certificates or depositary receipts, cause
the same to be delivered to or upon the order of the registered holder of such
Rights Certificate, registered in such name or names as may be designated by
such holder and (iv) when appropriate, after receipt thereof, deliver such cash
to or upon the order of the registered holder of such Rights Certificate. The
payment of the Exercise Price (as such amount may be reduced (including to zero)
pursuant to Section 11(a)(iii) hereof) and an amount equal to any applicable
transfer tax required to be paid by the holder of such Rights Certificate in
accordance with Section 9(e) hereof, may be made in cash or by certified bank
check, cashier's check or bank draft payable to the order of the Company. In
the event that the Company is obligated to issue securities of the Company other
than Preferred Shares, pay cash and/or distribute other property pursuant to
Section 11(a) hereof, the Company will make all arrangements necessary so that
such other securities, cash and/or other property are available for distribution
by the Rights Agent, if and when appropriate.
(d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Rights Certificate or to
his or her duly authorized assigns, subject to the provisions of Section 14
hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of a Triggering Event, any Rights beneficially
owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring
Person, (ii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee after the Acquiring Person becomes such (a
"POST-EVENT TRANSFEREE"), (iii) a transferee of an Acquiring Person (or of any
such Associate or Affiliate) who becomes a transferee prior to or concurrently
with the Acquiring Person becoming such and receives such Rights pursuant to
either (A) a transfer (whether or not for consideration) from the Acquiring
Person to holders of equity interests in such Acquiring Person or to any Person
with whom the Acquiring Person has any continuing agreement, arrangement or
understanding regarding the transferred Rights or (B) a transfer which the
Company's Board of Directors has determined is part of a plan, arrangement or
understanding which has as a primary purpose or effect the avoidance of this
Section 7(e) (a "PRE-EVENT TRANSFEREE") or (iv) any subsequent transferee
receiving transferred Rights from a Post-Event Transferee or a Pre-Event
Transferee, either directly or through one or more intermediate transferees,
shall become null and void without any further action and no holder of such
Rights shall have any rights whatsoever with respect to such Rights, whether
under any provision of this Agreement or otherwise. The Company shall use all
reasonable efforts to ensure that the provisions of this Section 7(e) and
Section 4(b) hereof are complied with, but shall have no liability to any holder
of Rights Certificates or to any other Person as a result of its failure to make
any determinations with respect to an Acquiring Person or any of such Acquiring
Person's Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder
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upon the occurrence of any purported exercise as set forth in this Section 7
unless such registered holder shall, in addition to having complied with the
requirements of Section 7(a), have (i) completed and signed the certificate
contained in the form of election to purchase set forth on the reverse side of
the Rights Certificate surrendered for such exercise and (ii) provided such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company shall
reasonably request.
Section 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any Rights Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
canceled Rights Certificates to the Company, or shall, at the written request of
the Company, destroy such canceled Rights Certificates, and in such case shall
deliver a certificate of destruction thereof to the Company.
Section 9. RESERVATION AND AVAILABILITY OF PREFERRED SHARES.
(a) The Company covenants and agrees that it will use its best
efforts to cause to be reserved and kept available out of its authorized and
unissued Preferred Shares not reserved for another purpose (and, following the
occurrence of a Triggering Event, out of its authorized and unissued Common
Shares and/or other securities), the number of Preferred Shares (and, following
the occurrence of the Triggering Event, Common Shares and/or other securities)
that will be sufficient to permit the exercise in full of all outstanding
Rights.
(b) If the Company shall hereafter list any of its Preferred Shares
on a national securities exchange, then so long as the Preferred Shares (and,
following the occurrence of a Triggering Event, Common Shares and/or other
securities) issuable and deliverable upon exercise of the Rights may be listed
on such exchange, the Company shall use its best efforts to cause, from and
after such time as the Rights become exercisable (but only to the extent that it
is reasonably likely that the Rights will be exercised), all shares reserved for
such issuance to be listed on such exchange upon official notice of issuance
upon such exercise.
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(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a
Triggering Event in which the consideration to be delivered by the Company upon
exercise of the Rights is described in Section 11(a)(ii) or Section 11(a)(iii)
hereof, or as soon as is required by law following the Distribution Date, as the
case may be, a registration statement under the Securities Act with respect to
the securities purchasable upon exercise of the Rights on an appropriate form,
(ii) cause such registration statement to become effective as soon as
practicable after such filing and (iii) cause such registration statement to
remain effective (with a prospectus at all times meeting the requirements of the
Securities Act) until the earlier of (A) the date as of which the Rights are no
longer exercisable for such securities and (B) the date of expiration of the
Rights. The Company may temporarily suspend, for a period not to exceed ninety
(90) days after the date set forth in clause (i) of the first sentence of this
Section 9(c), the exercisability of the Rights in order to prepare and file such
registration statement and permit it to become effective. Upon any such
suspension, the Company shall issue a public announcement stating, and notify
the Rights Agent, that the exercisability of the Rights has been temporarily
suspended, as well as a public announcement and notification to the Rights Agent
at such time as the suspension is no longer in effect. The Company will also
take such action as may be appropriate under, or to ensure compliance with, the
securities or "blue sky" laws of the various states in connection with the
exercisability of the Rights. Notwithstanding any provision of this Agreement
to the contrary, the Rights shall not be exercisable in any jurisdiction, unless
the requisite qualification in such jurisdiction shall have been obtained, or an
exemption therefrom shall be available, and until a registration statement has
been declared effective.
(d) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all Preferred Shares (or other
securities of the Company) delivered upon exercise of Rights shall, at the time
of delivery of the certificates for such securities (subject to payment of the
Exercise Price), be duly and validly authorized and issued and fully paid and
nonassessable shares.
(e) The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges which
may be payable in respect of the original issuance or delivery of the Rights
Certificates or of any Preferred Shares (or other securities of the Company)
upon the exercise of Rights. The Company shall not, however, be required to pay
any transfer tax which may be payable in respect of any transfer or delivery of
Rights Certificates to a person other than, or the issuance or delivery of
certificates or depositary receipts for the Preferred Shares (or other
securities of the Company) in a name other than that of, the registered holder
of the Rights Certificate evidencing Rights surrendered for exercise or to issue
or to deliver any certificates or depositary receipts for Preferred Shares (or
other securities of the Company) upon the exercise of any Rights until any such
tax shall have been paid (any such tax being payable by the holder of such
Rights Certificate at the time of surrender) or until it has been established to
the Company's satisfaction that no such tax is due.
Section 10. RECORD DATE. Each Person in whose name any certificate for
a number of one-thousandths of a Preferred Share (or other securities of the
Company) is issued upon the exercise of Rights shall for all purposes be deemed
to have become the holder of record of the Preferred Shares (or other securities
of the Company) represented thereby on, and such certificate shall be dated, the
date
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upon which the Rights Certificate evidencing such Rights was duly surrendered
and payment of the Exercise Price with respect to which the Rights have been
exercised (and any applicable transfer taxes) was made; PROVIDED, HOWEVER, that
if the date of such surrender and payment is a date upon which the transfer
books of the Company are closed, such Person shall be deemed to have become the
record holder of such shares on, and such certificate shall be dated, the next
succeeding Business Day on which the transfer books of the Company are open.
Prior to the exercise of the Rights evidenced thereby, the holder of a Rights
Certificate shall not be entitled to any rights of a holder of Preferred Shares
(or other securities of the Company) for which the Rights shall be exercisable,
including, without limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided herein.
Section 11. ADJUSTMENT OF EXERCISE PRICE, NUMBER OF SHARES OR NUMBER OF
RIGHTS. The Exercise Price, the number and kind of shares or other property
covered by each Right and the number of Rights outstanding are subject to
adjustment from time to time as provided in this Section 11.
(a) (i) Anything in this Agreement to the contrary notwithstanding,
in the event the Company shall at any time after the date of this Agreement
(A) declare a dividend on the Preferred Shares payable in Preferred Shares,
(B) subdivide the outstanding Preferred Shares, (C) combine the outstanding
Preferred Shares (by reverse stock split or otherwise) into a smaller number of
Preferred Shares, or (D) issue any shares of its capital stock in a
reclassification of the Preferred Shares (including any such reclassification in
connection with a consolidation or merger in which the Company is the continuing
or surviving corporation), then, in each such event, except as otherwise
provided in this Section 11 and Section 7(e) hereof: (1) the Exercise Price in
effect at the time of the record date for such dividend or of the effective date
of such subdivision, combination or reclassification shall be adjusted so that
the Exercise Price thereafter shall equal the result obtained by dividing the
Exercise Price in effect immediately prior to such time by a fraction (the
"ADJUSTMENT FRACTION"), the numerator of which shall be the total number of
Preferred Shares (or shares of capital stock issued in such reclassification of
the Preferred Shares) outstanding immediately following such time and the
denominator of which shall be the total number of Preferred Shares outstanding
immediately prior to such time; PROVIDED, HOWEVER, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of such Right; and (2) the number of one-thousandths of a Preferred
Share (or share of such other capital stock) issuable upon the exercise of each
Right shall equal the number of one-thousandths of a Preferred Share (or share
of such other capital stock) as was issuable upon exercise of a Right
immediately prior to the occurrence of the event described in clauses (A)-(D) of
this Section 11(a)(i), multiplied by the Adjustment Fraction; provided, however,
that, no such adjustment shall be made pursuant to this Section 11(a)(i) to the
extent that there shall have simultaneously occurred an event described in
clause (A), (B), (C) or (D) of Section 11(n) with a proportionate adjustment
being made thereunder. Each Common Share that shall become outstanding after an
adjustment has been made pursuant to this Section 11(a)(i) shall have associated
with it the number of Rights, exercisable at the Exercise Price and for the
number of one-thousandths of a Preferred Share (or shares of such other capital
stock) as one Common Share has associated with it immediately following the
adjustment made pursuant to this Section 11(a)(i).
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(ii) Subject to Section 24 of this Agreement, in the event a
Triggering Event shall have occurred, then promptly following such Triggering
Event each holder of a Right, except as provided in Section 7(e) hereof, shall
thereafter have the right to receive for each Right, upon exercise thereof in
accordance with the terms of this Agreement and payment of the Exercise Price in
effect immediately prior to the occurrence of the Triggering Event, in lieu of a
number of one-thousandths of a Preferred Share, such number of Common Shares
of the Company as shall equal the result obtained by multiplying the Exercise
Price in effect immediately prior to the occurrence of the Triggering Event by
the number of one-thousandths of a Preferred Share for which a Right was
exercisable (or would have been exercisable if the Distribution Date had
occurred) immediately prior to the first occurrence of a Triggering Event, and
dividing that product by 50% of the Current Per Share Market Price for Common
Shares on the date of occurrence of the Triggering Event; provided, however,
that the Exercise Price and the number of Common Shares of the Company so
receivable upon exercise of a Right shall be subject to further adjustment as
appropriate in accordance with Section 11(e) hereof to reflect any events
occurring in respect of the Common Shares of the Company after the occurrence of
the Triggering Event.
(iii) In lieu of issuing Common Shares in accordance with
Section 11(a)(ii) hereof, the Company may, if the Company's Board of Directors
determines that such action is necessary or appropriate and not contrary to the
interest of holders of Rights and, in the event that the number of Common Shares
which are authorized by the Company's Articles of Incorporation but not
outstanding or reserved for issuance for purposes other than upon exercise of
the Rights are not sufficient to permit the exercise in full of the Rights, or
if any necessary regulatory approval for such issuance has not been obtained by
the Company, the Company shall: (A) determine the excess of (1) the value of
the Common Shares issuable upon the exercise of a Right (the "CURRENT VALUE")
over (2) the Exercise Price (such excess, the "SPREAD") and (B) with respect to
each Right, make adequate provision to substitute for such Common Shares, upon
exercise of the Rights, (1) cash, (2) a reduction in the Exercise Price,
(3) other equity securities of the Company (including, without limitation,
shares or units of shares of any series of preferred stock which the Company's
Board of Directors has deemed to have the same value as Common Shares (such
shares or units of shares of preferred stock are herein called "COMMON STOCK
EQUIVALENTS")), except to the extent that the Company has not obtained any
necessary shareholder or regulatory approval for such issuance, (4) debt
securities of the Company, except to the extent that the Company has not
obtained any necessary shareholder or regulatory approval for such issuance,
(5) other assets or (6) any combination of the foregoing, having an aggregate
value equal to the Current Value, where such aggregate value has been determined
by the Company's Board of Directors based upon the advice of a nationally
recognized investment banking firm selected by the Company's Board of Directors;
PROVIDED, HOWEVER, if the Company shall not have made adequate provision to
deliver value pursuant to clause (B) above within thirty (30) days following the
later of (x) the first occurrence of a Triggering Event and (y) the date on
which the Company's right of redemption pursuant to Section 23(a) expires (the
later of (x) and (y) being referred to herein as the "SECTION 11(a)(ii) TRIGGER
DATE"), then the Company shall be obligated to deliver, upon the surrender for
exercise of a Right and without requiring payment of the Exercise Price, Common
Shares (to the extent available), except to the extent that the Company has not
obtained any necessary shareholder or regulatory approval for such issuance, and
then, if necessary, cash, which shares and/or cash have an aggregate value equal
to the Spread. If
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the Company's Board of Directors shall determine in good faith that it is likely
that sufficient additional Common Shares could be authorized for issuance upon
exercise in full of the Rights or that any necessary regulatory approval for
such issuance will be obtained, the thirty (30) day period set forth above may
be extended to the extent necessary, but not more than ninety (90) days after
the Section 11(a)(ii) Trigger Date, in order that the Company may seek
shareholder approval for the authorization of such additional shares or take
action to obtain such regulatory approval (such period, as it may be extended,
the "SUBSTITUTION PERIOD"). To the extent that the Company determines that some
action need be taken pursuant to the first and/or second sentences of this
Section 11(a)(iii), the Company (x) shall provide, subject to Section 7(e)
hereof, that such action shall apply uniformly to all outstanding Rights and
(y) may suspend the exercisability of the Rights until the expiration of the
Substitution Period in order to seek any authorization of additional shares, to
take any action to obtain any required regulatory approval and/or to decide the
appropriate form of distribution to be made pursuant to such first sentence and
to determine the value thereof. In the event of any such suspension, the
Company shall issue a public announcement stating that the exercisability of the
Rights has been temporarily suspended, as well as a public announcement at such
time as the suspension is no longer in effect. For purposes of this
Section 11(a)(iii), the value of the Common Shares shall be the Current Per
Share Market Price of the Common Shares on the Section 11(a)(ii) Trigger Date
and the value of any Common Stock Equivalent shall be deemed to have the same
value as the Common Shares on such date.
(b) In case the Company shall, at any time after the date of this
Agreement, fix a record date for the issuance of rights, options or warrants to
all holders of Preferred Shares entitling such holders (for a period expiring
within forty-five (45) calendar days after such record date) to subscribe for or
purchase Preferred Shares or Equivalent Shares or securities convertible into
Preferred Shares or Equivalent Shares at a price per share (or having a
conversion price per share, if a security convertible into Preferred Shares or
Equivalent Shares) less than the then Current Per Share Market Price of the
Preferred Shares or Equivalent Shares on such record date, then, in each such
case, the Exercise Price to be in effect after such record date shall be
determined by multiplying the Exercise Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the number of
Preferred Shares and Equivalent Shares (if any) outstanding on such record date,
plus the number of Preferred Shares or Equivalent Shares, as the case may be,
which the aggregate offering price of the total number of Preferred Shares or
Equivalent Shares, as the case may be, to be offered or issued (and/or the
aggregate initial conversion price of the convertible securities to be offered
or issued) would purchase at such current market price, and the denominator of
which shall be the number of Preferred Shares and Equivalent Shares (if any)
outstanding on such record date, plus the number of additional Preferred Shares
or Equivalent Shares, as the case may be, to be offered for subscription or
purchase (or into which the convertible securities so to be offered are
initially convertible); PROVIDED, HOWEVER, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Company's
Board of Directors, whose determination shall be described in a statement filed
with the Rights Agent and shall be binding on the Rights Agent and the holders
of the Rights. Preferred Shares and Equivalent Shares owned by or held for the
account of the Company shall not be deemed outstanding for the purpose of
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any such computation. Such adjustment shall be made successively whenever such
a record date is fixed, and in the event that such rights, options or warrants
are not so issued, the Exercise Price shall be adjusted to be the Exercise Price
which would then be in effect if such record date had not been fixed.
(c) In case the Company shall, at any time after the date of this
Agreement, fix a record date for the making of a distribution to all holders of
the Preferred Shares or of any class or series of Equivalent Shares (including
any such distribution made in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation) of evidences of
indebtedness or assets (other than a regular quarterly cash dividend, if any, or
a dividend payable in Preferred Shares) or subscription rights, options or
warrants (excluding those referred to in Section 11(b)), then, in each such
case, the Exercise Price to be in effect after such record date shall be
determined by multiplying the Exercise Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the Current Per Share
Market Price of a Preferred Share or an Equivalent Share on such record date,
less the fair market value per Preferred Share or Equivalent Share (as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent) of
the portion of the cash, assets or evidences of indebtedness so to be
distributed or of such subscription rights or warrants applicable to a Preferred
Share or Equivalent Share, as the case may be, and the denominator of which
shall be such Current Per Share Market Price of a Preferred Share or Equivalent
Share on such record date; PROVIDED, HOWEVER, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. Such adjustments shall be made successively whenever
such a record date is fixed, and in the event that such distribution is not so
made, the Exercise Price shall be adjusted to be the Exercise Price which would
have been in effect if such record date had not been fixed.
(d) Anything herein to the contrary notwithstanding, no adjustment in
the Exercise Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Exercise Price; PROVIDED, HOWEVER,
that any adjustments which by reason of this Section 11(d) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest ten-thousandth of a Common Share or other share or one
hundred-thousandth of a Preferred Share, as the case may be. Notwithstanding
the first sentence of this Section 11(d), any adjustment required by this
Section 11 shall be made no later than the earlier of (i) three (3) years from
the date of the transaction which requires such adjustment or (ii) the
Expiration Date.
(e) If as a result of an adjustment made pursuant to Section 11(a) or
13(a) hereof, the holder of any Right thereafter exercised shall become entitled
to receive any shares of capital stock other than Preferred Shares, thereafter
the number of such other shares so receivable upon exercise of any Right and, if
required, the Exercise Price thereof, shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Preferred Shares contained in Sections 11(a),
11(b), 11(c), 11(d), 11(g), 11(h), 11(i), 11(j), 11(k) and 11(l), and the
provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Shares
shall apply on like terms to any such other shares.
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(f) All Rights originally issued by the Company subsequent to any
adjustment made to the Exercise Price hereunder shall evidence the right to
purchase, at the adjusted Exercise Price, the number of one-thousandths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(g) Unless the Company shall have exercised its election as provided
in Section 11(h), upon each adjustment of the Exercise Price as a result of the
calculations made in Section 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Exercise Price, that number of Preferred Shares
(calculated to the nearest one hundred-thousandth of a share) obtained by
(i) multiplying (x) the number of Preferred Shares covered by a Right
immediately prior to this adjustment, by (y) the Exercise Price in effect
immediately prior to such adjustment of the Exercise Price, and (ii) dividing
the product so obtained by the Exercise Price in effect immediately after such
adjustment of the Exercise Price.
(h) The Company may elect on or after the date of any adjustment of
the Exercise Price as a result of the calculations made in Section 11(b) or (c)
to adjust the number of Rights, in substitution for any adjustment in the number
of Preferred Shares purchasable upon the exercise of a Right. Each of the
Rights outstanding after such adjustment of the number of Rights shall be
exercisable for the number of one-thousandths of a Preferred Share for which a
Right was exercisable immediately prior to such adjustment. Each Right held of
record prior to such adjustment of the number of Rights shall become that number
of Rights (calculated to the nearest one hundred-thousandth) obtained by
dividing the Exercise Price in effect immediately prior to adjustment of the
Exercise Price by the Exercise Price in effect immediately after adjustment of
the Exercise Price. The Company shall make a public announcement of its
election to adjust the number of Rights, indicating the record date for the
adjustment, and, if known at the time, the amount of the adjustment to be made.
This record date may be the date on which the Exercise Price is adjusted or any
day thereafter, but, if the Rights Certificates have been issued, shall be at
least ten (10) days later than the date of the public announcement. If Rights
Certificates have been issued, upon each adjustment of the number of Rights
pursuant to this Section 11(h), the Company shall, as promptly as practicable,
cause to be distributed to holders of record of Rights Certificates on such
record date Rights Certificates evidencing, subject to Section 14 hereof, the
additional Rights to which such holders shall be entitled as a result of such
adjustment, or, at the option of the Company, shall cause to be distributed to
such holders of record in substitution and replacement for the Rights
Certificates held by such holders prior to the date of adjustment, and upon
surrender thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein (and may bear, at the option
of the Company, the adjusted Exercise Price) and shall be registered in the
names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
(i) Irrespective of any adjustment or change in the Exercise Price or
the number of Preferred Shares issuable upon the exercise of the Rights, the
Rights Certificates theretofore and thereafter issued may continue to express
the Exercise Price per one one-thousandth of a Preferred Share
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and the number of one-thousandths of a Preferred Share which were expressed in
the initial Rights Certificates issued hereunder.
(j) Before taking any action that would cause an adjustment reducing
the Exercise Price below the par or stated value, if any, of the number of
one-thousandths of a Preferred Share issuable upon exercise of the Rights, the
Company shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue as
fully paid and nonassessable shares such number of one-thousandths of a
Preferred Share at such adjusted Exercise Price.
(k) In any case in which this Section 11 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the number of one-thousandths of a Preferred Share and other capital stock or
securities of the Company, if any, issuable upon such exercise over and above
the number of one-thousandths of a Preferred Share and other capital stock or
securities of the Company, if any, issuable upon such exercise on the basis of
the Exercise Price in effect prior to such adjustment; PROVIDED, HOWEVER, that
the Company shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares
(fractional or otherwise) upon the occurrence of the event requiring such
adjustment.
(l) Anything in this Section 11 to the contrary notwithstanding,
prior to the Distribution Date, the Company shall be entitled to make such
reductions in the Exercise Price, in addition to those adjustments expressly
required by this Section 11, as and to the extent that it in its sole discretion
shall determine to be advisable in order that any (i) consolidation or
subdivision of the Preferred or Common Shares, (ii) issuance wholly for cash of
any Preferred or Common Shares at less than the current market price,
(iii) issuance wholly for cash of Preferred or Common Shares or securities which
by their terms are convertible into or exchangeable for Preferred or Common
Shares, (iv) stock dividends or (v) issuance of rights, options or warrants
referred to in this Section 11, hereafter made by the Company to holders of its
Preferred or Common Shares shall not be taxable to such shareholders.
(m) The Company covenants and agrees that, after the Distribution
Date, it will not, except as permitted by Sections 23, 24 or 27 hereof, take (or
permit to be taken) any action if at the time such action is taken it is
reasonably foreseeable that such action will diminish substantially or otherwise
eliminate the benefits intended to be afforded by the Rights.
(n) In the event the Company shall at any time after the date of this
Agreement (A) declare a dividend on the Common Shares payable in Common Shares,
(B) subdivide the outstanding Common Shares, (C) combine the outstanding Common
Shares (by reverse stock split or otherwise) into a smaller number of Common
Shares, or (D) issue any shares of its capital stock in a reclassification of
the Common Shares (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation), then, in each such event, except as otherwise provided in this
Section 11(a) and Section 7(e) hereof: (1) each Common
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Share (or shares of capital stock issued in such reclassification of the Common
Shares) outstanding immediately following such time shall have associated with
it the number of Rights as were associated with one Common Share immediately
prior to the occurrence of the event described in clauses (A)-(D) above; (2) the
Exercise Price in effect at the time of the record date for such dividend or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that the Exercise Price thereafter shall equal the result obtained
by multiplying the Exercise Price in effect immediately prior to such time by a
fraction, the numerator of which shall be the total number of Common Shares
outstanding immediately prior to the event described in clauses (A)-(D) above,
and the denominator of which shall be the total number of Common Shares
outstanding immediately after such event; PROVIDED, HOWEVER, that in no event
shall the consideration to be paid upon the exercise of one Right be less than
the aggregate par value of the shares of capital stock of the Company issuable
upon exercise of such Right; and (3) the number of one-thousandths of a
Preferred Share (or shares of such other capital stock) issuable upon the
exercise of each Right outstanding after such event shall equal the number of
one-thousandths of a Preferred Share (or shares of such other capital stock) as
were issuable with respect to one Right immediately prior to such event. Each
Common Share that shall become outstanding after an adjustment has been made
pursuant to this Section 11(n) shall have associated with it the number of
Rights, exercisable at the Exercise Price and for the number of one-thousandths
of a Preferred Share (or shares of such other capital stock) as one Common Share
has associated with it immediately following the adjustment made pursuant to
this Section 11(n). If an event occurs which would require an adjustment under
both this Section 11(n) and Section 11(a)(ii) hereof, the adjustment provided
for in this Section 11(n) shall be in addition to, and shall be made prior to,
any adjustment required pursuant to Section 11(a)(ii) hereof.
Section 12. CERTIFICATE OF ADJUSTED EXERCISE PRICE OR NUMBER OF SHARES.
Whenever an adjustment is made as provided in Sections 11 and 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment
and a brief statement of the facts accounting for such adjustment, (b) file with
the Rights Agent and with each transfer agent for the Preferred Shares a copy of
such certificate and (c) mail a brief summary thereof to each holder of a Rights
Certificate in accordance with Section 26 hereof. Notwithstanding the foregoing
sentence, the failure of the Company to make such certification or give such
notice shall not affect the validity of such adjustment or the force or effect
of the requirement for such adjustment. The Rights Agent shall be fully
protected in relying on any such certificate and on any adjustment contained
therein and shall not be deemed to have knowledge of such adjustment unless and
until it shall have received such certificate.
Section 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR
EARNING POWER.
(a) In the event that, following a Triggering Event, directly or
indirectly:
(i) the Company shall consolidate with, or merge with and
into, any other Person (other than a wholly-owned Subsidiary of the Company in a
transaction the principal purpose of which is to change the state of
incorporation of the Company and which complies with Section 11(m) hereof);
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(ii) any Person shall consolidate with the Company, or
merge with and into the Company and the Company shall be the continuing or
surviving corporation of such consolidation or merger and, in connection with
such merger, all or part of the Common Shares shall be changed into or exchanged
for stock or other securities of any other person (or the Company); or
(iii) the Company shall sell or otherwise transfer (or one
or more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person or Persons (other than the Company or one or more of its wholly
owned Subsidiaries in one or more transactions, each of which individually (and
together) complies with Section 11(m) hereof),
then, concurrent with and in each such case,
(A) each holder of a Right (except as provided in
Section 7(e) hereof) shall thereafter have the right to receive, upon the
exercise thereof at a price equal to the Total Exercise Price applicable
immediately prior to the occurrence of the Section 13 Event in accordance with
the terms of this Agreement, such number of validly authorized and issued, fully
paid, nonassessable and freely tradeable Common Shares of the Principal Party
(as hereinafter defined), free of any liens, encumbrances, rights of first
refusal or other adverse claims, as shall be equal to the result obtained by
dividing such Total Exercise Price by 50% of the Current Per Share Market Price
of the Common Shares of such Principal Party on the date of consummation of such
Section 13 Event, PROVIDED, HOWEVER, that the Exercise Price and the number of
Common Shares of such Principal Party so receivable upon exercise of a Right
shall be subject to further adjustment as appropriate in accordance with
Section 11(e) hereof;
(B) such Principal Party shall thereafter be liable
for, and shall assume, by virtue of such Section 13 Event, all the obligations
and duties of the Company pursuant to this Agreement;
(C) the term "Company" shall thereafter be deemed to
refer to such Principal Party, it being specifically intended that the
provisions of Section 11 hereof shall apply only to such Principal Party
following the first occurrence of a Section 13 Event;
(D) such Principal Party shall take such steps
(including, but not limited to, the reservation of a sufficient number of its
Common Shares) in connection with the consummation of any such transaction as
may be necessary to ensure that the provisions hereof shall thereafter be
applicable, as nearly as reasonably may be, in relation to its Common Shares
thereafter deliverable upon the exercise of the Rights; and
(E) upon the subsequent occurrence of any
consolidation, merger, sale or transfer of assets or other extraordinary
transaction in respect of such Principal Party, each holder of a Right shall
thereupon be entitled to receive, upon exercise of a Right and payment of the
Total
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Exercise Price as provided in this Section 13(a), such cash, shares, rights,
warrants and other property which such holder would have been entitled to
receive had such holder, at the time of such transaction, owned the Common
Shares of the Principal Party receivable upon the exercise of such Right
pursuant to this Section 13(a), and such Principal Party shall take such steps
(including, but not limited to, reservation of shares of stock) as may be
necessary to permit the subsequent exercise of the Rights in accordance with the
terms hereof for such cash, shares, rights, warrants and other property.
(F) For purposes hereof, the "earning power" of the
Company and its Subsidiaries shall be determined in good faith by the Company's
Board of Directors on the basis of the operating earnings of each business
operated by the Company and its Subsidiaries during the three fiscal years
preceding the date of such determination (or, in the case of any business not
operated by the Company or any Subsidiary during three full fiscal years
preceding such date, during the period such business was operated by the Company
or any Subsidiary).
(b) For purposes of this Agreement, the term "PRINCIPAL PARTY" shall
mean:
(i) in the case of any transaction described in clause (i) or
(ii) of Section 13(a) hereof: (A) the Person that is the issuer of the
securities into which the Common Shares are converted in such merger or
consolidation, or, if there is more than one such issuer, the issuer the Common
Shares of which have the greatest aggregate market value of shares outstanding,
or (B) if no securities are so issued, (x) the Person that is the other party to
the merger, if such Person survives said merger, or, if there is more than one
such Person, the Person the Common Shares of which have the greatest aggregate
market value of shares outstanding or (y) if the Person that is the other party
to the merger does not survive the merger, the Person that does survive the
merger (including the Company if it survives) or (z) the Person resulting from
the consolidation; and
(ii) in the case of any transaction described in clause
(iii) of Section13(a) hereof, the Person that is the party receiving the
greatest portion of the assets or earning power transferred pursuant to such
transaction or transactions, or, if more than one Person that is a party to such
transaction or transactions receives the same portion of the assets or earning
power so transferred and each such portion would, were it not for the other
equal portions, constitute the greatest portion of the assets or earning power
so transferred, or if the Person receiving the greatest portion of the assets or
earning power cannot be determined, whichever of such Persons is the issuer of
Common Shares having the greatest aggregate market value of shares outstanding;
PROVIDED, HOWEVER, that in any such case described in the foregoing clause
(b)(i) or (b)(ii), if the Common Shares of such Person are not at such time or
have not been continuously over the preceding 12-month period registered under
Section 12 of the Exchange Act, then (1) if such Person is a direct or indirect
Subsidiary of another Person the Common Shares of which are and have been so
registered, the term "Principal Party" shall refer to such other Person, or (2)
if such Person is a Subsidiary, directly or indirectly, of more than one Person,
the Common Shares of which are and have been so registered, the term "Principal
Party" shall refer to whichever of such Persons is the issuer of Common Shares
having the greatest aggregate market value of shares outstanding, or (3) if such
Person is owned, directly or
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indirectly, by a joint venture formed by two or more Persons that are not owned,
directly or indirectly by the same Person, the rules set forth in clauses (1)
and (2) above shall apply to each of the owners having an interest in the
venture as if the Person owned by the joint venture was a Subsidiary of both or
all of such joint venturers, and the Principal Party in each such case shall
bear the obligations set forth in this Section 13 in the same ratio as its
interest in such Person bears to the total of such interests.
(c) The Company shall not consummate any Section 13 Event unless the
Principal Party shall have a sufficient number of authorized Common Shares that
have not been issued or reserved for issuance to permit the exercise in full of
the Rights in accordance with this Section 13 and unless prior thereto the
Company and such issuer shall have executed and delivered to the Rights Agent a
supplemental agreement confirming that such Principal Party shall, upon
consummation of such Section 13 Event, assume this Agreement in accordance with
Sections 13(a) and 13(b) hereof, that all rights of first refusal or preemptive
rights in respect of the issuance of Common Shares of such Principal Party upon
exercise of outstanding Rights have been waived, that there are no rights,
warrants, instruments or securities outstanding or any agreements or
arrangements which, as a result of the consummation of such transaction, would
eliminate or substantially diminish the benefits intended to be afforded by the
Rights and that such transaction shall not result in a default by such Principal
Party under this Agreement, and further providing that, as soon as practicable
after the date of such Section 13 Event, such Principal Party will:
(i) prepare and file a registration statement under the
Securities Act with respect to the Rights and the securities purchasable upon
exercise of the Rights on an appropriate form, use its best efforts to cause
such registration statement to become effective as soon as practicable after
such filing and use its best efforts to cause such registration statement to
remain effective (with a prospectus at all times meeting the requirements of the
Securities Act) until the Expiration Date, and similarly comply with applicable
state securities laws;
(ii) use its best efforts to list (or continue the listing of)
the Rights and the securities purchasable upon exercise of the Rights on a
national securities exchange or to meet the eligibility requirements for
quotation on Nasdaq and list (or continue the listing of) the Rights and the
securities purchasable upon exercise of the Rights on Nasdaq; and
(iii) deliver to holders of the Rights historical financial
statements for such Principal Party which comply in all respects with the
requirements for registration on Form 10 (or any successor form) under the
Exchange Act.
In the event that at any time after the occurrence of a Triggering Event
some or all of the Rights shall not have been exercised at the time of a
transaction described in this Section 13, the Rights which have not theretofore
been exercised shall thereafter be exercisable in the manner described in
Section 13(a) (without taking into account any prior adjustment required by
Section 11(a)(ii)).
(d) In case the "Principal Party" for purposes of Section 13(b)
hereof has provision in any of its authorized securities or in its certificate
of incorporation or by-laws or other instrument
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governing its corporate affairs, which provision would have the effect of (i)
causing such Principal Party to issue (other than to holders of Rights pursuant
to Section 13 hereof), in connection with, or as a consequence of, the
consummation of a Section 13 Event, Common Shares or Equivalent Shares of such
Principal Party at less than the then Current Per Share Market Price thereof or
securities exercisable for, or convertible into, Common Shares or Equivalent
Shares of such Principal Party at less than such then Current Per Share Market
Price, or (ii) providing for any special payment, tax or similar provision in
connection with the issuance of the Common Shares of such Principal Party
pursuant to the provisions of Section 13 hereof, then, in such event, the
Company hereby agrees with each holder of Rights that it shall not consummate
any such transaction unless prior thereto the Company and such Principal Party
shall have executed and delivered to the Rights Agent a supplemental agreement
providing that the provision in question of such Principal Party shall have been
canceled, waived or amended, or that the authorized securities shall be
redeemed, so that the applicable provision will have no effect in connection
with or as a consequence of, the consummation of the proposed transaction.
(e) The Company covenants and agrees that it shall not, at any
time after the Distribution Date, effect or permit to occur any Section 13
Event, if (i) at the time or immediately after such Section 13 Event there are
any rights, warrants or other instruments or securities outstanding or
agreements in effect which would substantially diminish or otherwise eliminate
the benefits intended to be afforded by the Rights, (ii) prior to,
simultaneously with or immediately after such Section 13 Event, the shareholders
of the Person who constitutes, or would constitute, the "Principal Party" for
purposes of Section 13(b) hereof shall have received a distribution of Rights
previously owned by such Person or any of its Affiliates or Associates or (iii)
the form or nature of organization of the Principal Party would preclude or
limit the exercisability of the Rights.
(f) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers.
Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a The Company shall not be required to issue fractions of
Rights or to distribute Rights Certificates which evidence fractional Rights.
In lieu of such fractional Rights, there shall be paid to the registered holders
of the Rights Certificates with regard to which such fractional Rights would
otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole Right. For the purposes of this Section 14(a),
the current market value of a whole Right shall be the closing price of the
Rights for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable, as determined pursuant to
the second sentence of Section 1(j) hereof.
(b The Company shall not be required to issue fractions of
Preferred Shares (other than fractions that are integral multiples of one
one-thousandth of a Preferred Share) upon exercise of the Rights or to
distribute certificates which evidence fractional Preferred Shares (other than
fractions that are integral multiples of one one-thousandth of a Preferred
Share). Interests in fractions of Preferred Shares in integral multiples of one
one-thousandth of a Preferred Share may, at the election of the
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Company, be evidenced by depositary receipts, pursuant to an appropriate
agreement between the Company and a depositary selected by it; PROVIDED, that
such agreement shall provide that the holders of such depositary receipts shall
have all the rights, privileges and preferences to which they are entitled as
beneficial owners of the Preferred Shares represented by such depositary
receipts. In lieu of fractional Preferred Shares that are not integral
multiples of one one-thousandth of a Preferred Share, the Company shall pay to
the registered holders of Rights Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of the
current market value of a Preferred Share. For purposes of this Section 14(b),
the current market value of a Preferred Share shall be one thousand times the
closing price of a Common Share (as determined pursuant to the second sentence
of Section 1(j) hereof) for the Trading Day immediately prior to the date of
such exercise.
(c The Company shall not be required to issue fractions of
Common Shares or to distribute certificates which evidence fractional Common
Shares upon the exercise or exchange of Rights. In lieu of such fractional
Common Shares, the Company shall pay to the registered holders of Rights
Certificates at the time such Rights are exercised as herein provided an amount
in cash equal to the same fraction of the current market value of a Common
Share. For purposes of this Section 14(c), the current market value of a Common
Share shall be the closing price of a Common Share (as determined pursuant to
the second sentence of Section 1(j) hereof) for the Trading Day immediately
prior to the date of such exercise.
(d The holder of a Right by the acceptance of the Right
expressly waives his or her right to receive any fractional Rights or any
fractional shares (other than fractions that are integral multiples of one
one-thousandth of a Preferred Share) upon exercise of a Right.
Section 15. RIGHTS OF ACTION. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Rights Certificate (or, prior
to the Distribution Date, of the Common Shares), without the consent of the
Rights Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his or her own behalf and for
his or her own benefit, enforce, and may institute and maintain any suit, action
or proceeding against the Company to enforce, or otherwise act in respect of,
his or her right to exercise the Rights evidenced by such Rights Certificate in
the manner provided in such Rights Certificate and in this Agreement. Without
limiting the foregoing or any remedies available to the holders of Rights, it is
specifically acknowledged that the holders of Rights would not have an adequate
remedy at law for any breach of this Agreement and will be entitled to specific
performance of the obligations under, and injunctive relief against actual or
threatened violations of, the obligations of any Person subject to this
Agreement.
Section 16. AGREEMENT OF RIGHTS HOLDERS. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares;
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(b after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office of the Rights Agent, duly endorsed or accompanied by a
proper instrument of transfer and with the appropriate forms and certificates
fully executed; and
(c subject to Sections 6(a) and 7(f) hereof, the Company and
the Rights Agent may deem and treat the person in whose name the Rights
Certificate (or, prior to the Distribution Date, the associated Common Shares
certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Shares certificate made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent shall be affected by any notice to the
contrary.
Section 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A SHAREHOLDER. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose to be the holder of the Preferred Shares
or any other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Rights Certificate be construed to confer upon the holder of any
Rights Certificate, as such, any of the rights of a shareholder of the Company
or any right to vote for the election of directors or upon any matter submitted
to shareholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
shareholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Rights Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. CONCERNING THE RIGHTS AGENT.
(a The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The Company
also agrees to indemnify the Rights Agent for, and to hold it harmless against,
any loss, liability or expense, incurred without negligence, bad faith or
willful misconduct on the part of the Rights Agent, for anything done or omitted
by the Rights Agent in connection with the acceptance and administration of this
Agreement, including the costs and expenses of defending against any claim of
liability in the premises. In no event will the Rights Agent be liable for
special, indirect, incidental or consequential loss or damage of any kind
whatsoever, even if the Rights Agent has been advised of the possibility of such
loss or damage.
(b The Rights Agent shall be protected and shall incur no
liability for, or in respect of any action taken, suffered or omitted by it in
connection with, its administration of this Agreement in reliance upon any
Rights Certificate or certificate for the Preferred Shares or Common Shares or
for other securities of the Company, instrument of assignment or transfer, power
of attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement or other paper or document reasonably
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believed by it to be genuine and to be signed, executed and, where necessary,
verified or acknowledged, by the proper Person or Persons, or otherwise upon the
advice of counsel as set forth in Section 20 hereof.
Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT.
(a Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the corporate trust business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto; PROVIDED, HOWEVER, that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Rights Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor
Rights Agent or in the name of the successor Rights Agent; and in all such cases
such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
(b In case at any time the name of the Rights Agent shall be
changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Rights Certificates so countersigned; and in
case at that time any of the Rights Certificates shall not have been
countersigned, the Rights Agent may countersign such Rights Certificates either
in its prior name or in its changed name; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
Section 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a The Rights Agent may consult with legal counsel (who may be
legal counsel for the Company), and the written advice or opinion of such
counsel shall be full and complete authorization and protection to the Rights
Agent as to any action taken or omitted by it in good faith and in accordance
with such written advice or opinion.
(b Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter (including, without limitation, the identity of any Acquiring Person and
the determination of Current Per Share Market Price) be proved or established by
the Company prior to taking or suffering any action hereunder, such fact or
matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively
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proved and established by a certificate signed by any one of the Chairman of the
Board, the Chief Executive Officer, the President, any Vice President, the Chief
Financial Officer, the Secretary or any Assistant Secretary of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent for any action taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.
(c The Rights Agent shall be liable hereunder to the Company
and any other Person only for its own negligence, bad faith or willful
misconduct.
(d The Rights Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Agreement or in the
Rights Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.
(e The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Rights Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Rights Certificate;
nor shall it be responsible for any change in the exercisability of the Rights
or any adjustment in the terms of the Rights (including the manner, method or
amount thereof) provided for in Sections 3, 11, 13, 23 or 24, or the
ascertaining of the existence of facts that would require any such change or
adjustment (except with respect to the exercise of Rights evidenced by Rights
Certificates after receipt by the Rights Agent of a certificate furnished
pursuant to Section 12 describing such change or adjustment); nor shall it by
any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares to be issued pursuant to
this Agreement or any Rights Certificate or as to whether any Preferred Shares
will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
(g The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the Chief Executive Officer, the President,
any Vice President, the Chief Financial Officer, the Secretary or any Assistant
Secretary of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and it shall not be liable for any
action taken or suffered by it in good faith in accordance with instructions of
any such officer or for any delay in acting while waiting for those
instructions. Any application by the Rights Agent for written instructions from
the Company may, at the option of the Rights Agent, set forth in writing any
action proposed to be taken or omitted by the Rights Agent under this Rights
Agreement and the date on and/or after which such action shall be taken or such
omission shall be effective. The Rights Agent shall not be liable for any
action taken by, or omission of, the Rights Agent in accordance with a proposal
included in any such application on or after
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the date specified in such application (which date shall not be less than five
(5) Business Days after the date any officer of the Company actually receives
such application, unless any such officer shall have consented in writing to an
earlier date) unless, prior to taking any such action (or the effective date in
the case of an omission), the Rights Agent shall have received written
instructions in response to such application specifying the action to be taken
or omitted.
(h The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from
acting in any other capacity for the Company or for any other legal entity.
(i The Rights Agent may execute and exercise any of the rights
or powers hereby vested in it or perform any duty hereunder either itself or by
or through its attorneys or agents, and the Rights Agent shall not be answerable
or accountable for any act, default, neglect or misconduct of any such attorneys
or agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(j No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder or in the exercise of its
rights if there shall be reasonable grounds for believing that repayment of such
funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
(k If, with respect to any Rights Certificate surrendered to
the Rights Agent for exercise or transfer, the certificate attached to the form
of assignment or form of election to purchase, as the case may be, has either
not been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.
Section 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days' notice in writing mailed to the Company and to each
transfer agent of the Preferred Shares and the Common Shares by registered or
certified mail, and to the holders of the Rights Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent
upon thirty (30) days' notice in writing, mailed to the Rights Agent or
successor Rights Agent, as the case may be, and to each transfer agent of the
Preferred Shares and the Common Shares by registered or certified mail, and to
the holders of the Rights Certificates by first-class mail. If the Rights Agent
shall resign or be removed or shall otherwise become incapable of acting, the
Company shall appoint a successor to the Rights Agent. If the Company shall
fail to make such appointment within a period of thirty (30) days after giving
notice of such removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Rights Agent or by
the holder of a Rights Certificate (who shall, with such notice, submit his or
her Rights Certificate for inspection by the Company), then the registered
holder of any
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Rights Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether
appointed by the Company or by such a court, shall be a corporation organized
and doing business under the laws of the United States or of any state of the
United States, in good standing, which is authorized under such laws to exercise
corporate trust or shareholder services powers and is subject to supervision or
examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least $100
million. After appointment, the successor Rights Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment, the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Preferred
Shares and the Common Shares, and mail a notice thereof in writing to the
registered holders of the Rights Certificates. Failure to give any notice
provided for in this Section 21, however, or any defect therein, shall not
affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
Section 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Exercise Price and the number or kind or class of shares or other
securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of Common Shares following the Distribution Date and
prior to the redemption or expiration of the Rights, the Company (a) shall, with
respect to Common Shares so issued or sold pursuant to the exercise of stock
options or under any employee plan or arrangement or upon the exercise,
conversion or exchange of other securities of the Company outstanding at the
date hereof or upon the exercise, conversion or exchange of securities
hereinafter issued by the Company and (b) may, in any other case, if deemed
necessary or appropriate by the Board of Directors of the Company, issue Rights
Certificates representing the appropriate number of Rights in connection with
such issuance or sale; PROVIDED, HOWEVER, that (i) no such Rights Certificate
shall be issued and this sentence shall be null and void AB INITIO if, and to
the extent that, such issuance or this sentence would create a significant risk
of or result in material adverse tax consequences to the Company or the Person
to whom such Rights Certificate would be issued or would create a significant
risk of or result in such options' or employee plans' or arrangements' failing
to qualify for otherwise available special tax treatment and (ii) no such Rights
Certificate shall be issued if, and to the extent that, appropriate adjustment
shall otherwise have been made in lieu of the issuance thereof.
Section 23. REDEMPTION.
(a The Company may, at its option and with the approval of the
Board of Directors, at any time prior to the earlier of (i) the Distribution
Date or (ii) the Close of Business on the Final Expiration Date, redeem all but
not less than all the then outstanding Rights at a redemption price of $0.001
per Right, appropriately adjusted to reflect any stock split, stock dividend or
similar transaction
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occurring after the date hereof (such redemption price being herein referred to
as the "REDEMPTION PRICE") and the Company may, at its option, pay the
Redemption Price either in Common Shares (based on the Current Per Share Market
Price thereof at the time of redemption) or cash. Such redemption of the Rights
by the Company may be made effective at such time, on such basis and with such
conditions as the Board of Directors in its sole discretion may establish. The
date on which the Board of Directors elects to make the redemption effective
shall be referred to as the "REDEMPTION DATE."
(b Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights, evidence of which shall have been
filed with the Rights Agent, and without any further action and without any
notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price.
The Company shall promptly give public notice of any such redemption; PROVIDED,
HOWEVER, that the failure to give or any defect in, any such notice shall not
affect the validity of such redemption. Within ten (10) days after the action
of the Board of Directors ordering the redemption of the Rights, the Company
shall give notice of such redemption to the Rights Agent and the holders of the
then outstanding Rights by mailing such notice to all such holders at their last
addresses as they appear upon the registry books of the Rights Agent or, prior
to the Distribution Date, on the registry books of the transfer agent for the
Common Shares. Any notice which is mailed in the manner herein provided shall
be deemed given, whether or not the holder receives the notice. Each such
notice of redemption will state the method by which the payment of the
Redemption Price will be made. Neither the Company nor any of its Affiliates or
Associates may redeem, acquire or purchase for value any Rights at any time in
any manner other than that specifically set forth in this Section 23 or in
Section 24 hereof, and other than in connection with the purchase of Common
Shares prior to the Distribution Date.
(c Notwithstanding the provisions of Section 23(a), in the
event that a majority of the Board of Directors of the Company is elected by
shareholder action by written consent, then until the earlier to occur of (i)
180th day following the effectiveness of such election or (ii) the next regular
annual meeting of shareholders of the Company following the effectiveness of
such election (including any postponement or adjournment thereof), the Rights
shall not be redeemed if such redemption is reasonably likely to have the
purpose or effect of facilitating a Transaction with an Interested Person.
Section 24. EXCHANGE.
(a Subject to applicable laws, rules and regulations, and
subject to subsection 24(c) below, the Company may, at its option, by action of
the Board of Directors, at any time after the occurrence of a Triggering Event,
exchange all or part of the then outstanding and exercisable Rights (which shall
not include Rights that have become void pursuant to the provisions of
Section 7(e) hereof) for Common Shares at an exchange ratio of one Common Share
per Right, appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "EXCHANGE RATIO"). Notwithstanding the
foregoing, the Board of Directors shall not be empowered to effect such exchange
at any time after any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or any such Subsidiary, or any
entity holding Common Shares for or pursuant to the terms of any such
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plan), together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of 50% or more of the Common Shares then outstanding.
(b Immediately upon the action of the Board of Directors
ordering the exchange of any Rights pursuant to subsection 24(a) and without any
further action and without any notice, the right to exercise such Rights shall
terminate and the only right thereafter of a holder of such Rights shall be to
receive that number of Common Shares equal to the number of such Rights held by
such holder multiplied by the Exchange Ratio. The Company shall give public
notice of any such exchange; PROVIDED, HOWEVER, that the failure to give, or any
defect in, such notice shall not affect the validity of such exchange. The
Company shall mail a notice of any such exchange to all of the holders of such
Rights at their last addresses as they appear upon the registry books of the
Rights Agent. Any notice which is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice. Each such notice
of exchange will state the method by which the exchange of the Common Shares for
Rights will be effected and, in the event of any partial exchange, the number of
Rights which will be exchanged. Any partial exchange shall be effected pro rata
based on the number of Rights (other than Rights which have become void pursuant
to the provisions of Section 7(e) hereof) held by each holder of Rights.
(c In the event that there shall not be sufficient Common
Shares issued but not outstanding or authorized but unissued to permit any
exchange of Rights as contemplated in accordance with Section 24(a), the Company
shall either take such action as may be necessary to authorize additional Common
Shares for issuance upon exchange of the Rights or alternatively, at the option
of a majority of the Board of Directors, with respect to each Right (i) pay cash
in an amount equal to the Current Value (as hereinafter defined), in lieu of
issuing Common Shares in exchange therefor, or (ii) issue debt or equity
securities or a combination thereof, having a value equal to the Current Value,
in lieu of issuing Common Shares in exchange for each such Right, where the
value of such securities shall be determined by a nationally recognized
investment banking firm selected by majority vote of the Board of Directors, or
(iii) deliver any combination of cash, property, Common Shares and/or other
securities having a value equal to the Current Value in exchange for each Right.
For purposes of this Section 24(c) only, the Current Value shall mean the
product of the Current Per Share Market Price of Common Shares on the date of
the occurrence of the event described above in subparagraph (a), multiplied by
the number of Common Shares for which the Right otherwise would be exchangeable
if there were sufficient shares available. To the extent that the Company
determines that some action need be taken pursuant to clauses (i), (ii) or (iii)
of this Section 24(c), the Board of Directors may temporarily suspend the
exercisability of the Rights for a period of up to sixty (60) days following the
date on which the event described in Section 24(a) shall have occurred, in order
to seek any authorization of additional Common Shares and/or to decide the
appropriate form of distribution to be made pursuant to the above provision and
to determine the value thereof. In the event of any such suspension, the
Company shall issue a public announcement stating that the exercisability of the
Rights has been temporarily suspended.
(d The Company shall not be required to issue fractions of
Common Shares or to distribute certificates which evidence fractional Common
Shares. In lieu of such fractional Common Shares, there shall be paid to the
registered holders of the Rights Certificates with regard to which such
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<PAGE>
fractional Common Shares would otherwise be issuable, an amount in cash equal to
the same fraction of the current market value of a whole Common Share (as
determined pursuant to the second sentence of Section 1(j) hereof).
(e The Company may, at its option, by majority vote of the
Board of Directors, at any time before any Person has become an Acquiring
Person, exchange all or part of the then outstanding Rights for rights of
substantially equivalent value, as determined reasonably and with good faith by
the Board of Directors, based upon the advice of one or more nationally
recognized investment banking firms.
(f Immediately upon the action of the Board of Directors
ordering the exchange of any Rights pursuant to subsection 24(e) of this
Section 24 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of rights in exchange therefor as
has been determined by the Board of Directors in accordance with
subsection 24(e) above. The Company shall give public notice of any such
exchange; PROVIDED, HOWEVER, that the failure to give, or any defect in, such
notice shall not affect the validity of such exchange. The Company shall mail a
notice of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the transfer agent for the
Common Shares of the Company. Any notice which is mailed in the manner herein
provided shall be deemed given, whether or not the holder receives the notice.
Each such notice of exchange will state the method by which the exchange of the
Rights will be effected.
(g Notwithstanding the provisions of this Section 24, in the
event that a majority of the Board of Directors of the Company is elected by
shareholder action by written consent, then until the earlier to occur of (i)
the 180th day following the effectiveness of such election or (ii) the next
regular annual meeting of shareholders of the Company following the
effectiveness of such election (including any postponement or adjournment
thereof), this Rights shall not be exchanged pursuant hereto if such exchange
would be reasonably likely to have the purpose or effect of facilitating a
Transaction with an Interested Person.
Section 25. NOTICE OF CERTAIN EVENTS.
(a In case the Company shall propose to effect or permit to
occur any Triggering Event or Section 13 Event, the Company shall give notice
thereof to each holder of Rights in accordance with Section 26 hereof at least
twenty (20) days prior to occurrence of such Triggering Event or such Section 13
Event.
(b In case any Triggering Event or Section 13 Event shall
occur, then, in any such case, the Company shall as soon as practicable
thereafter give to each holder of a Rights Certificate, in accordance with
Section 26 hereof, a notice of the occurrence of such event, which shall specify
the event and the consequences of the event to holders of Rights under
Sections 11(a)(ii) and 13 hereof.
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Section 26. NOTICES. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Rights Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Silicon Valley Bancshares
3003 Tasman Drive
Santa Clara, California 95054-1191
Attention: General Counsel
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Larry Sonsini
Subject to the provisions of Section 21 hereof, any notice or demand
authorized by this Agreement to be given or made by the Company or by the holder
of any Rights Certificate to or on the Rights Agent shall be sufficiently given
or made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Company) as follows:
Norwest Bank Minnesota, N.A.
161 North Concord Exchange
South St. Paul, Minnesota 55075
Attention: Karri Van Dell
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. SUPPLEMENTS AND AMENDMENTS.
(a Prior to the occurrence of a Distribution Date, the
Company may supplement or amend this Agreement in any respect without the
approval of any holders of Rights and the Rights Agent shall, if the Company so
directs, execute such supplement or amendment. From and after the occurrence of
a Distribution Date, the Company and the Rights Agent may from time to time
supplement or amend this Agreement without the approval of any holders of Rights
in order to (i) cure any ambiguity, (ii) correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provisions herein, (iii) shorten or lengthen any time period hereunder or
(iv) to change or supplement the provisions hereunder in any manner that the
Company may deem necessary or desirable and that shall not adversely affect the
interests of the holders of Rights (other than an Acquiring Person
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<PAGE>
or an Affiliate or Associate of an Acquiring Person); PROVIDED, this Agreement
may not be supplemented or amended to lengthen, pursuant to clause (iii) of this
sentence, (A) a time period relating to when the Rights may be redeemed at such
time as the Rights are not then redeemable or (B) any other time period unless
such lengthening is for the purpose of protecting, enhancing or clarifying the
rights of, and/or the benefits to, the holders of Rights (other than an
Acquiring Person or an Affiliate or Associate of an Acquiring Person). Upon the
delivery of a certificate from an appropriate officer of the Company that states
that the proposed supplement or amendment is in compliance with the terms of
this Section 27, the Rights Agent shall execute such supplement or amendment.
Prior to the Distribution Date, the interests of the holders of Rights shall be
deemed coincident with the interests of the holders of Common Shares.
(b Notwithstanding the provisions of Section 27(a), in the
event that a majority of the Board of Directors of the Company is elected by
shareholder action by written consent, then until the earlier to occur of (i)
the 180th day following the effectiveness of such election or (ii) the next
regular annual meeting of shareholders of the Company following the
effectiveness of such election (including any postponement or adjournment
thereof), this Rights Agreement shall not be supplemented or amended in any
manner reasonably likely to have the purpose or effect of facilitating a
Transaction with an Interested Person.
Section 28. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS, ETC.
For all purposes of this Agreement, any calculation of the number of Common
Shares outstanding at any particular time, including for purposes of determining
the particular percentage of such outstanding Common Shares of which any Person
is the Beneficial Owner, shall be made in accordance with the last sentence of
Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act.
The Board of Directors of the Company shall have the exclusive power and
authority to administer this Agreement and to exercise all rights and powers
specifically granted to the Board, or the Company, or as may be necessary or
advisable in the administration of this Agreement, including, without
limitation, the right and power to (i) interpret the provisions of this
Agreement and (ii) make all determinations deemed necessary or advisable for the
administration of this Agreement (including a determination to redeem or not
redeem the Rights or to amend the Agreement). All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y) below,
all omissions with respect to the foregoing) which are done or made by the Board
in good faith, shall (x) be final, conclusive and binding on the Company, the
Rights Agent, the holders of the Rights Certificates and all other parties and
(y) not subject the Board to any liability to the holders of the Rights.
Section 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Rights Certificates (and, prior to the
Distribution Date, the Common Shares) any legal or equitable right, remedy or
claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit
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<PAGE>
of the Company, the Rights Agent and the registered holders of the Rights
Certificates (and, prior to the Distribution Date, the Common Shares).
Section 31. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
PROVIDED, HOWEVER, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the Close of Business on the
tenth day following the date of such determination by the Board of Directors.
Section 32. GOVERNING LAW. This Agreement and each Right and each
Rights Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of California and for all purposes shall be governed by
and construed in accordance with the laws of such State applicable to contracts
to be made and performed entirely within such State.
Section 33. COUNTERPARTS. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 34. DESCRIPTIVE HEADINGS. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
"COMPANY" SILICON VALLEY BANCSHARES
By: /s/
-----------------------------------
Name:
----------------------------------
Title:
----------------------------------
"RIGHTS AGENT" NORWEST BANK MINNESOTA, N.A.
By: /s/
-----------------------------------
Name:
----------------------------------
Title:
----------------------------------
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<PAGE>
CERTIFICATE OF DETERMINATION
OF SILICON VALLEY BANCSHARES
The undersigned, John C. Dean and A. Catherine Ngo do hereby certify:
1. That they are the duly elected and acting President and
Secretary, respectively, of Silicon Valley Bancshares, a California corporation
(the "CORPORATION").
2. That, pursuant to the resolutions set forth in Paragraph 4
hereof, the Board of Directors of the Corporation has authorized the issuance
of, and designated the rights, preferences, privileges and restrictions of
60,000 shares of Series A Participating Preferred Stock.
3. That none of the shares of Series A Participating Preferred Stock have
been issued by the Corporation.
4. That pursuant to the authority conferred upon the Board of
Directors by the Articles of Incorporation of the said Corporation, the said
Board of Directors on October 22, 1998 adopted the following resolution creating
a series of 60,000 shares of Preferred Stock designated as Series A
Participating Preferred Stock:
"RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Corporation by its Articles of Incorporation, the Board of Directors does
hereby provide for the issue of a series of Preferred Stock of the Corporation
and does hereby fix and herein state and express the designations, powers,
preferences and relative and other special rights and the qualifications,
limitations and restrictions of such series of Preferred Stock as follows:
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "SERIES A PARTICIPATING PREFERRED STOCK." The number of shares
constituting such series shall be 60,000.
Section 2. PROPORTIONAL ADJUSTMENT. In the event the Corporation shall
at any time after the issuance of any share or shares of Series A Participating
Preferred Stock (i) declare any dividend on Common Stock of the Corporation
("COMMON STOCK") payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the Corporation shall
simultaneously effect a proportional adjustment to the number of outstanding
shares of Series A Participating Preferred Stock.
Section 3. DIVIDENDS AND DISTRIBUTIONS.
<PAGE>
(a Subject to the prior and superior right of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series A Participating Preferred Stock with respect to dividends, the holders
of shares of Series A Participating Preferred Stock shall be entitled to receive
when, as and if declared by the Board of Directors out of funds legally
available for the purpose, quarterly dividends payable in cash on the last day
of January, April, July and October in each year (each such date being referred
to herein as a "QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series A Participating Preferred Stock, in an amount per share
(rounded to the nearest cent) equal to 1,000 times the aggregate per share
amount of all cash dividends, and 1,000 times the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions other than a
dividend payable in shares of Common Stock or a subdivision of the outstanding
shares of Common Stock (by reclassification or otherwise), declared on the
Common Stock since the immediately preceding Quarterly Dividend Payment Date,
or, with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Participating Preferred
Stock.
(b The Corporation shall declare a dividend or distribution on the
Series A Participating Preferred Stock as provided in paragraph (a) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock).
(c Dividends shall begin to accrue on outstanding shares of Series A
Participating Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Participating Preferred
Stock, unless the date of issue of such shares is prior to the record date for
the first Quarterly Dividend Payment Date, in which case dividends on such
shares shall begin to accrue from the date of issue of such shares, or unless
the date of issue is a Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of shares of Series A Participating
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Participating Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated pro
rata on a share-by-share basis among all such shares at the time outstanding.
The Board of Directors may fix a record date for the determination of holders of
shares of Series A Participating Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be no more
than 30 days prior to the date fixed for the payment thereof.
Section 4. VOTING RIGHTS. The holders of shares of Series A
Participating Preferred Stock shall have the following voting rights:
(a Each share of Series A Participating Preferred Stock shall
entitle the holder thereof to 1,000 votes on all matters submitted to a vote of
the shareholders of the Corporation.
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<PAGE>
(b Except as otherwise provided herein or by law, the holders
of shares of Series A Participating Preferred Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of shareholders of the Corporation.
(c Except as required by law, holders of Series A Participating
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
Section 5. CERTAIN RESTRICTIONS.
(a The Corporation shall not declare any dividend on, make any
distribution on, or redeem or purchase or otherwise acquire for consideration
any shares of Common Stock after the first issuance of a share or fraction of a
share of Series A Participating Preferred Stock unless concurrently therewith it
shall declare a dividend on the Series A Participating Preferred Stock as
required by Section 3 hereof.
(b Whenever quarterly dividends or other dividends or
distributions payable on the Series A Participating Preferred Stock as provided
in Section 3 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of Series A
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not
(i declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for consideration
any shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Participating Preferred Stock;
(ii declare or pay dividends on, make any other
distributions on any shares of stock ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding up) with Series A Participating
Preferred Stock, except dividends paid ratably on the Series A Participating
Preferred Stock and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all such
shares are then entitled;
(iii redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A Participating
Preferred Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such parity stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Participating Preferred
Stock;
(iv) purchase or otherwise acquire for consideration any
shares of Series A Participating Preferred Stock, or any shares of stock ranking
on a parity with the Series A Participating Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and
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<PAGE>
preferences of the respective series and classes, shall determine in good faith
will result in fair and equitable treatment among the respective series or
classes.
(c) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (a) of
this Section 5, purchase or otherwise acquire such shares at such time and in
such manner.
Section 6. REACQUIRED SHARES. Any shares of Series A Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein and, in the Articles of Incorporation, as then amended.
Section 7. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any
liquidation, dissolution or winding up of the Corporation, the assets of the
Corporation available for distribution shall be distributed as follows: First,
the holders of shares of Series A Participating Preferred Stock shall be
entitled to receive, prior and in preference to any payment to holders of Common
Stock, an aggregate amount per share equal to $1000.00 plus an amount equal to
any accrued and unpaid dividends on such shares of Series A Participating
Preferred Stock. Following such payment, the holders of shares of Common Stock
shall be entitled to receive an aggregate amount per share equal to $1.00 plus
an amount equal to any accrued and unpaid dividends on such shares of Common
Stock. Following the payment of the aforesaid preferential amounts, the
remaining assets of the Corporation available for distribution shall be
distributed to the holders of Common Stock and Series A Participating Preferred
Stock, with the holders of Series A Participating Preferred Stock entitled to
receive for each such share 1000 times the aggregate amount to be distributed
per share to holders of shares of Common Stock.
Section 8. CONSOLIDATION, MERGER, ETC. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Participating Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share equal to 1,000 times the aggregate
amount of stock, securities, cash and/or any other property (payable in kind),
as the case may be, into which or for which each share of Common Stock is
changed or exchanged.
Section 9. NO REDEMPTION. The shares of Series A Participating
Preferred Stock shall not be redeemable.
Section 10. RANKING. The Series A Participating Preferred Stock shall
rank junior to all other series of the Corporation's Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
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<PAGE>
Section 11. AMENDMENT. The Articles of Incorporation of the Corporation
shall not be further amended in any manner which would materially alter or
change the powers, preference or special rights of the Series A Participating
Preferred Stock so as to affect them adversely without the affirmative vote of
the holders of a majority of the outstanding shares of Series A Participating
Preferred Stock, voting separately as a class.
Section 12. FRACTIONAL SHARES. Series A Participating Preferred Stock
may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Participating Preferred Stock.
-5-
<PAGE>
RESOLVED FURTHER, that the President or any Vice President and the
Secretary or any Assistant Secretary of this corporation be, and they hereby
are, authorized and directed to prepare and file a Certificate of Determination
in accordance with the foregoing resolution and the provisions of California law
and to take such actions as they may deem necessary or appropriate to carry out
the intent of the foregoing resolution."
We further declare under penalty of perjury that the matters set forth in
the foregoing Certificate of Determination are true and correct of our own
knowledge and that the foregoing Certificate of Determination has been duly
approved by the Board of Directors of the Corporation.
Executed at Santa Clara, California, on October 22, 1998.
----------------------------------------
John C. Dean, President
----------------------------------------
A. Catherine Ngo, Secretary
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<PAGE>
EXHIBIT B
FORM OF RIGHTS CERTIFICATE
Certificate No. R- _________ Rights
NOT EXERCISABLE AFTER THE EARLIER OF (i) OCTOBER 22, 2008 (ii) THE
DATE TERMINATED BY THE COMPANY OR (iii) THE DATE THE COMPANY
EXCHANGES THE RIGHTS PURSUANT TO THE RIGHTS AGREEMENT. THE RIGHTS ARE
SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $0.001 PER
RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN
AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE
DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH
RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS
RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS
OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN
ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT).
ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY
MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN
SECTION 7(e) OF SUCH RIGHTS AGREEMENT.]*
RIGHTS CERTIFICATE
SILICON VALLEY BANCSHARES
This certifies that ______________________________, or registered assigns,
is the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement dated as of October 22, 1998, (the "RIGHTS AGREEMENT"),
between Silicon Valley Bancshares, a California corporation (the "COMPANY"), and
Norwest Bank Minnesota, N.A. ( the "RIGHTS AGENT"), to purchase from the Company
at any time after the Distribution Date (as such term is defined in the Rights
Agreement) and prior to 5:00 P.M., New York time, on October 22, 2008 at the
principal office of the Rights Agent, or at the office of its successor as
Rights Agent, one one-thousandth (1/1,000) of a fully paid non-assessable share
of Series A Participating Preferred Stock (the "PREFERRED SHARES"), of the
Company, at an Exercise Price of One Hundred and Twenty Dollars ($120.00) per
one-thousandth of a Preferred Share (the "EXERCISE PRICE"), upon presentation
and surrender of this Rights Certificate with the Form of Election to Purchase
and
- -----------------------------
* The portion of the legend in bracket shall be inserted only if applicable
and shall replace the preceding sentence.
<PAGE>
related Certificate duly executed. The number of Rights evidenced by this
Rights Certificate (and the number of one-thousandths of a Preferred Share which
may be purchased upon exercise hereof) set forth above are the number and
Exercise Price as of October 22, 1998 based on the Preferred Shares as
constituted at such date. As provided in the Rights Agreement, the Exercise
Price and the number and kind of Preferred Shares or other securities which may
be purchased upon the exercise of the Rights evidenced by this Rights
Certificate are subject to modification and adjustment upon the happening of
certain events.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the principal executive offices of
the Company and the above-mentioned office of the Rights Agent.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Rights Certificate (i) may be redeemed by the Company, at its
option, at a redemption price of $0.001 per Right or (ii) may be exchanged by
the Company in whole or in part for Common Shares, substantially equivalent
rights or other consideration as determined by the Company.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the principal office of the Rights Agent, may be exchanged for
another Rights Certificate or Rights Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate amount of
securities as the Rights evidenced by the Rights Certificate or Rights
Certificates surrendered shall have entitled such holder to purchase. If this
Rights Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Rights Certificate or Rights Certificates
for the number of whole Rights not exercised.
No fractional portion of less than one one-thousandth of a Preferred
Share will be issued upon the exercise of any Right or Rights evidenced hereby
but in lieu thereof a cash payment will be made, as provided in the Rights
Agreement.
No holder of this Rights Certificate, as such, shall be entitled to
vote or receive dividends or be deemed for any purpose the holder of the
Preferred Shares or of any other securities of the Company which may at any time
be issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting shareholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
-2-
<PAGE>
This Rights Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company and
its corporate seal. Dated as of _______________, 19____.
ATTEST: SILICON VALLEY BANCSHARES
By:
------------------------------------
A. Catherine Ngo, Secretary
Its:
------------------------------------
Countersigned:
NORWEST BANK MINNESOTA, N.A.
as Rights Agent
By:
-----------------------------------
Its:
-----------------------------------
-3-
<PAGE>
FORM OF REVERSE SIDE OF RIGHTS CERTIFICATE
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate)
FOR VALUE RECEIVED __________ hereby sells, assigns and transfers unto
- -------------------------------------------------------------------------------
(Please print name and address of transferee)
- -------------------------------------------------------------------------------
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint __________________________
Attorney, to transfer the within Rights Certificate on the books of the
within-named Company, with full power of substitution.
Dated: _______________, 19____
----------------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
<PAGE>
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned
and transferred by or on behalf of a Person who is or was an Acquiring Person,
or an Affiliate or Associate of any such Person (as such terms are defined in
the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned,
it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate
from any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of any such Person.
Dated: _______________, 19____
----------------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
<PAGE>
FORM OF REVERSE SIDE OF RIGHTS CERTIFICATE -- CONTINUED
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise the Rights Certificate)
To:
------------------------------
The undersigned hereby irrevocably elects to exercise
_________________________ Rights represented by this Rights Certificate to
purchase the number of one-thousandths of a Preferred Share issuable upon the
exercise of such Rights and requests that certificates for such number of
one-thousandths of a Preferred Share issued in the name of:
Please insert social security
or other identifying number
- -------------------------------------------------------------------------------
(Please print name and address)
- -------------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this Rights
Certificate, a new Rights Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
- -------------------------------------------------------------------------------
(Please print name and address)
- -------------------------------------------------------------------------------
Dated: ___________________ , 19____
----------------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
<PAGE>
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Person (as such terms are defined in the
Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it [ ]
did [ ] did not acquire the Rights evidenced by this Rights Certificate from any
Person who is, was or subsequently became an Acquiring Person or an Affiliate or
Associate of any such Person.
Dated: _______________, 19____
----------------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
<PAGE>
FORM OF REVERSE SIDE OF RIGHTS CERTIFICATE -- CONTINUED
NOTICE
The signature in the foregoing Forms of Assignment and Election must
conform to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
<PAGE>
EXHIBIT C
SHAREHOLDER RIGHTS PLAN
SILICON VALLEY BANCSHARES
SUMMARY OF RIGHTS
DISTRIBUTION AND
TRANSFER OF RIGHTS: The Board of Directors has declared a dividend of one
Right for eachshare of Silicon Valley Bancshares Common
RIGHTS CERTIFICATE: Stock outstanding. Prior to the Distribution Date
referred to below, the Rights will be evidenced by and
trade with the certificates for the Common Stock.
After the Distribution Date, Silicon Valley Bancshares
(the "COMPANY") will mail Rights certificates to the
Company's shareholders and the Rights will become
transferable apart from the Common Stock.
DISTRIBUTION DATE: Rights will separate from the Common Stock and
become exercisable following (a) the tenth day after
a person or group acquires beneficial ownership of
10% or more of the Company's Common Stock or (b) the
tenth business day (or such later date as may be
determined by the Company's Board of Directors)
after a person or group announces a tender or
exchange offer, the consummation of which would
result in ownership by a person or group of 10% or
more of the Company's Common Stock.
PREFERRED STOCK
PURCHASABLE UPON: After the Distribution Date, each Right will entitle
the holder to purchase for $120.00 (the "EXERCISE
PRICE"), a fraction of a share of the Company's
EXERCISE OF RIGHTS: Preferred Stock with economic terms similar to that
of one share of the Company's Common Stock.
FLIP-IN: If an acquiror (an "ACQUIRING PERSON") obtains 10%
or more of the Company's Common Stock THEN each
Right (other than Rights owned by an Acquiring
Person or its affiliates) will entitle the holder
thereof to purchase, for the Exercise Price, a
number of shares of the Company's Common Stock
having a then current market value of twice the
Exercise Price.
<PAGE>
FLIP-OVER: If, after an Acquiring Person obtains 10% or more of
the Company's Common Stock, (a) the Company merges
into another entity, (b) an acquiring entity merges
into the Company or (c) the Company sells more than
50% of the Company's assets or earning power, THEN
each Right (other than Rights owned by an Acquiring
Person or its affiliates) will entitle the holder
thereof to purchase, for the Exercise Price, a
number of shares of Common Stock of the person
engaging in the transaction having a then current
market value of twice the Exercise Price.
EXCHANGE PROVISION: At any time after the date an Acquiring Person obtains
10% or more of the Company's Common Stock and prior to
the acquisition by the Acquiring Person of 50% of the
outstanding Common Stock, the Company's Board of
Directors may exchange the Rights (other than Rights
owned by the Acquiring Person or its affiliates), in
whole or in part, for shares of Common Stock of the
Company at an exchange ratio of one share of Common
Stock per Right (subject to adjustment). However, if a
majority of the Company's Board of Directors is elected
by shareholder action by written consent, then for a
period of 180 days following such election the Rights
cannot be exchanged if such exchange is reasonably
likely to have the purpose or effect of facilitating an
acquisition of the Company by a person or entity who
proposed, nominated or supported a director of the
Company so elected by written consent (an "INTERESTED
PERSON").
REDEMPTION OF
THE RIGHTS: Rights will be redeemable at the Company's option for
$0.001 per Right at any time on or prior to public
announcement that a Person has acquired beneficial
ownership of 10% or more of the Company's Common
Stock (the "SHARES ACQUISITION DATE"). However, if
a majority of the Company's Board of Directors is
elected by shareholder action by written consent,
then for a period of 180 days following such
election the Rights cannot be redeemed if such
redemption is reasonably likely to have the purpose
or effect of facilitating an acquisition of the
Company by an Interested Person.
EXPIRATION OF
THE RIGHTS: The Rights expire on the earliest of (a) October 22,
2008 or (b) exchange or redemption of the Rights as
described above.
AMENDMENT OF
TERMS OF RIGHTS: The terms of the Rights and the Rights Agreement may be
amended in any respect without the consent of the
Rights holders on or prior to the Distribution Date;
thereafter, the terms of the Rights and the
<PAGE>
Rights Agreement may be amended without the consent of
the Rights holders in order to cure any ambiguities or
to make changes which do not adversely affect the
interests of Rights holders (other than the Acquiring
Person). However, if a majority of the Company's Board
of Directors is elected by shareholder action by
written consent, then for a period of 180 days
following such election the Rights Agreement cannot be
amended in any manner reasonably likely to have the
purpose or effect of facilitating an acquisition of the
Company by an Interested Person.
VOTING RIGHTS: Rights will not have any voting rights.
ANTI-DILUTION
PROVISIONS: Rights will have the benefit of certain customary
anti-dilution provisions.
TAXES: The Rights distribution should not be taxable for
federal income tax purposes. However, following an
event which renders the Rights exercisable or upon
redemption of the Rights, shareholders may recognize
taxable income.
The foregoing is a summary of certain principal terms of the Shareholder Rights
Plan only and is qualified in its entirety by reference to the detailed terms of
the Rights Agreement dated as of October 22, 1998, between the Company and the
Rights Agent.
THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES
SPECIFIED IN SECTION 7(e) OF THE RIGHTS AGREEMENT BETWEEN SILICON VALLEY
BANCSHARES AND NORWEST BANK MINNESOTA, N.A. DATED AS OF OCTOBER 22, 1998.
-3-
<PAGE>
SILICON VALLEY BANCSHARES ANNUAL REPORT ON FORM 10-K
EXHIBIT 21.1--SUBSIDIARIES OF SILICON VALLEY BANCSHARES
Silicon Valley Bancshares owns 100.0% of the outstanding voting securities
of the following corporations, both of which are included in Silicon Valley
Bancshares' consolidated financial statements:
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
- --------------------------------------------- ---------------------------------------------
<S> <C>
Silicon Valley Bank California
SVB Leasing Company (inactive) California
SVB Capital I Delaware
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Silicon Valley Bancshares:
We consent to incorporation by reference in the registration statements
(Nos. 2-90401, 33-60467, 333-68857, and 33-05489) on Form S-8 and registration
statement No. 333-51665 on Form S-3 of Silicon Valley Bancshares of our report
dated January 21, 1999, relating to the consolidated balance sheets of Silicon
Valley Bancshares and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, which report appears in the December 31, 1998,
annual report on Form 10-K of Silicon Valley Bancshares.
Mountain View, California
March 15, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS RELATED NOTES AND MANAGEMENT'S DISCUSSION AND
ANALYSIS CONTAINED IN THE REPORT ON FORM 10-K FILED BY SILICON VALLEY BANCSHARES
FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 123,001
<INT-BEARING-DEPOSITS> 202
<FED-FUNDS-SOLD> 399,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,397,502
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,611,921
<ALLOWANCE> 46,000
<TOTAL-ASSETS> 3,545,452
<DEPOSITS> 3,269,753
<SHORT-TERM> 0
<LIABILITIES-OTHER> 21,349
<LONG-TERM> 0
0
0
<COMMON> 89,938
<OTHER-SE> 125,927
<TOTAL-LIABILITIES-AND-EQUITY> 3,545,452
<INTEREST-LOAN> 139,136
<INTEREST-INVEST> 64,787
<INTEREST-OTHER> 21,305
<INTEREST-TOTAL> 225,228
<INTEREST-DEPOSIT> 78,609
<INTEREST-EXPENSE> 78,613
<INTEREST-INCOME-NET> 146,615
<LOAN-LOSSES> 37,159
<SECURITIES-GAINS> 5,240
<EXPENSE-OTHER> 83,645
<INCOME-PRETAX> 48,973
<INCOME-PRE-EXTRAORDINARY> 28,856
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,856
<EPS-PRIMARY> 1.42<F1>
<EPS-DILUTED> 1.38<F2>
<YIELD-ACTUAL> 5.2
<LOANS-NON> 19,444
<LOANS-PAST> 441
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 11,100
<ALLOWANCE-OPEN> 37,700
<CHARGE-OFFS> 31,123
<RECOVERIES> 2,264
<ALLOWANCE-CLOSE> 46,000
<ALLOWANCE-DOMESTIC> 29,663
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 16,337
<FN>
<F1>Represents basic earnings per share
<F2>Represents diluted earnings per share
</FN>
</TABLE>
