<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 1, 1999
REGISTRATION NO.: 333-91159
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SILICON VALLEY BANCSHARES
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 91-1962278
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
<TABLE>
<S> <C>
JOHN C. DEAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SILICON VALLEY BANCSHARES
3003 TASMAN DRIVE 3003 TASMAN DRIVE
SANTA CLARA, CALIFORNIA 95054 SANTA CLARA, CALIFORNIA 95054
TELEPHONE: (408) 654-7400 TELEPHONE: (408) 654-7400
(Address including zip code, and telephone number, (Name, address, including zip code, and telephone
including area code, of registrant's principal executive number, including area code, of agent for service)
office)
</TABLE>
------------------------------
COPIES TO:
<TABLE>
<S> <C>
TODD H. BAKER, ESQ. RICHARD A. BOEHMER, ESQ.
GIBSON, DUNN & CRUTCHER LLP O'MELVENY & MYERS LLP
ONE MONTGOMERY STREET, 26TH FLOOR 400 SOUTH HOPE STREET, SUITE 1060
SAN FRANCISCO, CA 94104 LOS ANGELES, CA 90071
TELEPHONE: (415) 393-8200 TELEPHONE: (213) 430-6643
FACSIMILE: (415) 986-5309 FACSIMILE: (213) 430-6407
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following box.
/ /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The information in this prospectus is not complete and may be changed. We cannot
sell these securities until the Securities and Exchange Commission declares our
registration statement effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 1, 1999
PROSPECTUS
1,250,000 SHARES
[LOGO]
COMMON STOCK
----------------
Silicon Valley Bancshares is offering 1,250,000 shares of common stock.
Silicon Valley Bancshares' common stock is listed on the Nasdaq National Market
under the symbol "SIVB." On November 30, 1999, the last reported sale price on
the Nasdaq National Market was $36 13/16 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE RISK
FACTORS SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
---------------------
PRICE $ PER SHARE
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Public offering price............................. $ $
Underwriting discount............................. $ $
Proceeds, before expenses, to Silicon Valley
Bancshares...................................... $ $
</TABLE>
The underwriters may purchase up to 187,500 additional shares from Silicon
Valley Bancshares at the public offering price, less the underwriting discount,
within 30 days from the date of the prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful and complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery on or about December ,
1999.
------------------------
DAIN RAUSCHER WESSELS
KEEFE, BRUYETTE & WOODS, INC.
HOEFER & ARNETT
INCORPORATED
---------------
, 1999
<PAGE>
ABOUT THIS PROSPECTUS
You should rely only on the information provided or incorporated by
reference in this prospectus. We are not making an offer of the common stock in
any state where an offer is not permitted. The information in this prospectus is
accurate only as of the dates of this prospectus, regardless of the time of
delivery of this prospectus or any sale of the common stock. Unless we indicate
otherwise, this prospectus assumes that the underwriters will not exercise the
option granted to them to purchase additional shares of common stock to cover
over-allotments.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary..................................................... 3
Risk Factors................................................ 9
Use of Proceeds............................................. 14
Capitalization.............................................. 14
Regulatory Capital Ratios................................... 15
Price Range of Common Stock and Dividend Policy............. 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Management.................................................. 50
Underwriting................................................ 53
Validity of Securities...................................... 54
Experts..................................................... 54
Available Information....................................... 54
Information Incorporated by Reference....................... 55
</TABLE>
FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" as that term is used
in the securities laws. All statements regarding our expected financial
position, business and strategies are forward-looking statements. In addition,
in those and other portions of this prospectus, the words "anticipates,"
"believes," "estimates," "seeks," "expects," "plans," "intends" and similar
expressions, as they relate to us or our management, are intended to identify
forward-looking statements. Although we believe that the expectations reflected
in these forward-looking statements are reasonable, and have based these
expectations on our beliefs as well as assumptions we have made, such
expectations may prove to be incorrect. Important factors that could cause
actual results to differ materially from such expectations include, without
limitation, factors such as failure of a significant number of borrowers to
repay their loans, a decrease in the amount of capital available to emerging
growth companies and restrictions imposed on us by regulations or regulators of
the banking industry. For information about factors that could cause our actual
results to differ from the expectations stated in the forward-looking
statements, see the text under the caption "Risk Factors." We urge you to
consider these factors carefully in evaluating the forward-looking statements
contained in this prospectus. All subsequent written or oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by these cautionary statements. The forward-looking
statements included in this prospectus are made only as of the date of this
prospectus. We do not intend, and undertake no obligation, to update these
forward-looking statements.
2
<PAGE>
SUMMARY
THE FOLLOWING INFORMATION SUMMARY CONTAINS BASIC INFORMATION ABOUT THIS
OFFERING. IT LIKELY DOES NOT INCLUDE ALL THE INFORMATION IMPORTANT TO YOU AND
SHOULD BE READ IN CONJUNCTION WITH THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
We provide innovative banking products and services to emerging growth and
middle-market companies, focusing primarily on companies in the technology and
life sciences industries that are backed by venture capital investors. A key
component of our business strategy is to develop relationships with our clients
at a very early stage, and to offer them banking products and services which
meet their needs throughout their life cycle. We have cultivated strong
relationships with venture capital firms, many of whom are our clients, which
provide us with access to many potential banking clients.
Our unique business strategy and focus has resulted in significant growth.
Our banking operations have expanded from a single location in Santa Clara,
California to a national network of 22 offices located in Arizona, California,
Colorado, Georgia, Illinois, Massachusetts, Minnesota, Oregon, Pennsylvania,
Texas, Virginia, and Washington.
Since December 31, 1994, our total assets, loans and deposits have increased
at compound annual growth rates of 27.8%, 19.9% and 27.5%, respectively. In
response to recent regulatory concerns expressed in a memorandum of
understanding with our primary regulators, we have slowed our deposit growth by
marketing off-balance sheet investment products to our clients. The growth of
our loan portfolio has also slowed recently due to public offerings and mergers
and acquisitions involving our clients. As of September 30, 1999, we had
$3.7 billion in total assets, $3.4 billion in total deposits, $1.7 billion in
loans, net of unearned income, and $243.5 million in stockholders' equity.
TECHNOLOGY AND LIFE SCIENCES NICHE
Our technology and life sciences niche serves primarily venture
capital-backed companies within a variety of technology and life sciences
industries and markets throughout the United States. Because these companies'
primary source of funding is equity from venture capitalists, they generally
keep large cash balances in their deposit accounts with us and often do not
borrow large amounts under their credit facilities. Lending to this niche
typically involves working capital lines of credit, equipment financing, asset
acquisition loans, and bridge financing. Our technology and life sciences niche
includes the following practices:
- Our COMMUNICATIONS AND ON-LINE SERVICES practice serves companies in the
networking, telecommunications and on-line services industries. The
networking industry includes companies supplying the equipment and
services that facilitate distributed enterprise networks such as local and
wide area networks. The telecommunications industry encompasses the
suppliers of equipment and services to companies and consumers for the
transmission of voice, data and video. Companies included in the on-line
services industry supply access, content, services, and support to
individuals and businesses participating on the internet, or in other
on-line activities.
- Our COMPUTERS AND PERIPHERALS practice focuses on companies that are
engaged in the support and manufacturing of computers, electronic
components and related peripheral products. Specific markets these
companies serve include personal computers, specialty computer systems,
add-in boards, printers, storage devices, networking equipment, and
contract manufacturing.
- Our SEMICONDUCTORS practice serves companies involved in the design,
manufacturing and marketing of integrated circuits. This includes
companies involved in the manufacturing of semiconductor production
equipment and semiconductors, testing and related services, electronic
parts wholesaling, computer-aided design and computer-aided manufacturing.
3
<PAGE>
- Our SOFTWARE practice primarily serves companies that design integrated
computer systems, provide computer programming services and develop and
market commercial and industrial applications as well as prepackaged
software.
- Our LIFE SCIENCES practice serves companies in the biotechnology, medical
devices and health care services industries. The biotechnology industry
includes companies involved in research and development of therapeutics
and diagnostics for the medical and pharmaceuticals industries. The
medical devices industry encompasses companies involved in the design,
manufacturing and distribution of surgical instruments and medical
equipment. Companies included in the health care services industry deal
with patients, either in a primary care or secondary care role.
In addition to the industry-related practices discussed above, we provide
commercial lending and other financial products and services to other clients
associated with the technology and life sciences industries. Through our PACIFIC
RIM practice, we serve U.S.-based technology and life sciences companies that
receive equity funding from Asian or Asian-based venture capital sources.
Through our VENTURE CAPITAL practice, we provide venture capital firms with
financing and other specialized products and services. Lastly, through our
EMERGING TECHNOLOGIES practice, we target non-venture-backed technology
companies in northern California, with a primary focus on the software industry.
SPECIAL INDUSTRY NICHES
We have always served a variety of commercial enterprises unrelated to our
technology and life sciences niche. We serve these clients through several
special industry niche practices. We continue to follow this strategy by
identifying industries whose financial services needs we believe are
underserved. The following is a brief summary of our special industry niche
practices.
- Our REAL ESTATE practice makes real estate construction and term loans
whose primary source of repayment is cash flow or sales proceeds from real
property collateral. We focus on construction loans for residential and
commercial projects, and construction and mini-permanent loans on retail,
industrial and office projects in northern California.
- Our PREMIUM WINERIES practice focuses on wineries which produce select or
exclusive vintages of up to 150,000 cases annually. Our lending in this
niche consists of both short-term inventory loans and term loans related
to vineyard acquisition and development, equipment financing and
cooperage.
- Our MEDIA PRACTICE focuses on acquisition, recapitalization and plant
upgrade financings of less than $10 million for radio, television, outdoor
advertising and cable television operators.
In addition to serving the special industry niches listed above, we serve a
broad array of industries in northern California through our DIVERSIFIED
INDUSTRIES practice. This practice allows us to continue to evaluate potential
niches by initially identifying and serving a few clients in related industries
or markets.
SPECIALIZED PRODUCTS AND SERVICES
We offer a variety of specialized lending products and other financial
products and services to clients in various stages of development. These
services allow us to begin serving companies in their start-up phases, and then
gradually expand the services we provide as the companies grow.
From the time companies receive their initial funding, we seek to serve
their cash management needs. Initially, we provide investment services to assist
our clients with managing their short-term investments. On behalf of clients, we
purchase investment securities that include U.S. Treasury securities, U.S.
agency securities, commercial paper, Eurodollar deposits, and bankers'
acceptances. We also offer our clients access to private label mutual fund
products as an alternative to our deposit products.
4
<PAGE>
In addition, our new Internet site, eSource-TM-, provides our early stage
clients with an on-line resource providing access to various services that
technology and life sciences entrepreneurs require. In eSource-TM- we have
formed a broad national and global network of service providers in a variety of
areas important to our clients, including financial and administrative services,
office set-up services, human resources, staffing services, risk management
services and industry specific research.
As our clients conduct research and development and prepare for production,
we offer equipment leasing services as well as vendor financing for many types
of technology purchases, including software, hardware, maintenance and
professional services. We structure these arrangements to suit the risk profile
of the client in its stage of growth.
Once our clients enter production, many experience rapid growth and
consequently require banking products which augment their cash flow. We offer
factoring services, which involves purchasing clients' accounts receivable at a
discount, making operating funds immediately available to the clients, and then
managing the collection of these receivables.
As our clients mature, we may offer more advanced cash management products,
providing services to help our customers manage cash collections and
disbursements efficiently and cost effectively. These services include wholesale
lockbox services, electronic information reporting and controlled disbursement
services. In addition, we also provide real estate loans, typically to finance
commercial real estate to be owned and operated by our clients.
We also assist our many clients who do business internationally by providing
foreign exchange, import and export letters of credit, documentary collections,
and a number of other trade finance products and services. We have been granted
delegated authority by the Export-Import Bank of the U.S. and the California
Export Finance Office. This enables us to provide our clients with working
capital loans guaranteed by the Export-Import Bank and California Export Finance
Office to finance foreign receivables and inventory intended for export, as well
as to provide purchase order financing.
If our clients experience periods when their profit performance has been
interrupted or where they need greater financial flexibility, we may assist them
by providing asset-based credit facilities that involve frequent monitoring of
the underlying collateral, which generally consists of accounts receivable,
inventory and equipment.
For clients in the more advanced stages of growth, we pursue opportunities
in mezzanine lending and will provide private equity and debt placement
services, high yield debt services and mergers and acquisitions advice. We also
assist our clients through investment bank referrals for public offerings,
equity research, sales and trading services, asset securitizations, and fixed
income services.
For clients in all stages of their growth cycle, we focus on serving the
personal banking needs of senior executives and owners of our client companies.
In addition, we serve the personal banking needs of partners and senior
executives of venture capital firms and other professionals whose businesses are
related to our niche practices.
GENERAL
Silicon Valley Bancshares is a bank holding company incorporated in
Delaware. Silicon Valley Bank is a California state-chartered bank and a member
of the Federal Reserve System and its deposits are insured by the Federal
Deposit Insurance Corporation. Our principal offices are located at 3003 Tasman
Drive, Santa Clara, California 95054 and our telephone number is
(408) 654-7400. When we refer to "Silicon Valley Bancshares," or "we" or similar
words, we intend to include Silicon Valley Bancshares and its subsidiaries
collectively, including Silicon Valley Bank. When we refer to "Silicon," we are
referring only to Silicon Valley Bancshares.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Shares offered............................... 1,250,000
Shares outstanding after the offering........ 22,177,367
Use of proceeds.............................. Silicon will contribute substantially all of
the net proceeds of this offering to its
subsidiary Silicon Valley Bank. Silicon
Valley Bank will use the proceeds for general
corporate purposes.
Nasdaq National Market symbol................ SIVB
</TABLE>
6
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
The following summary presents our selected consolidated financial data as
of, and for the years ended December 31, 1998, 1997, 1996, 1995 and 1994. That
financial data has been derived from our audited consolidated financial
statements. The following summary also presents selected consolidated financial
data for the three and nine months ended September 30, 1999 and 1998. That
financial data has been derived from our unaudited consolidated quarterly
financial statements which, in our opinion, include all adjustments (consisting
of only normal, recurring adjustments) considered necessary for a fair
presentation. The summary selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the related notes
which have been incorporated by reference in this prospectus. The summary
selected consolidated financial data for the three and nine months ended
September 30, 1999 is not necessarily predictive of our operating results for
the entire year.
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------- ----------------------- -------------------------------------------------
1999 1998 1999 1998 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS AND NUMBERS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
SUMMARY:
Net interest income..... $ 54,389 $ 38,456 $ 142,564 $ 105,792 $ 146,615 $ 110,824 $ 87,275 $ 73,952
Provision for loan
losses................ 21,563 10,557 40,334 20,061 37,159 10,067 10,426 8,737
Noninterest income...... 13,414 7,716 25,125 17,542 23,162 13,265 11,609 12,565
Noninterest expense..... 29,716 21,063 83,050 61,740 83,645 66,301 52,682 47,925
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before taxes..... 16,524 14,552 44,305 41,533 48,973 47,721 35,776 29,855
Income tax expense...... 6,015 6,002 17,006 17,202 20,117 20,043 14,310 11,702
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.............. $ 10,509 $ 8,550 $ 27,299 $ 24,331 $ 28,856 $ 27,678 $ 21,466 $ 18,153
========== ========== ========== ========== ========== ========== ========== ==========
COMMON SHARE SUMMARY:
Diluted earnings per
share................. $ 0.50 $ 0.41 $ 1.30 $ 1.16 $ 1.38 $ 1.36 $ 1.11 $ 0.99
Book value per share.... 11.66 10.19 10.42 8.75 7.26 5.86
Weighted average diluted
shares outstanding.... 21,227 20,980 20,991 20,948 20,923 20,338 19,382 18,288
PERIOD-END BALANCE SHEET
SUMMARY:
Assets.................. $3,721,755 $3,216,182 $3,545,452 $2,625,123 $1,924,544 $1,407,587
Loans, net of unearned
income................ 1,661,016 1,438,231 1,611,921 1,174,645 863,492 738,405
Investment securities,
at fair value......... 1,745,262 940,893 1,397,502 1,013,904 625,022 321,309
Noninterest-bearing
deposits.............. 1,359,017 839,713 921,790 788,442 599,257 451,318
Total deposits.......... 3,404,801 2,943,870 3,269,753 2,432,407 1,774,304 1,290,060
Stockholders' equity.... 243,496 210,238 215,865 174,481 135,400 104,974
OTHER DATA:
Off-balance sheet client
funds................. $3,810,400 $1,051,521 $1,096,300 N/A N/A N/A
CAPITAL RATIOS:
Total risk-based capital
ratio................. 12.7% 12.5% 11.5% 11.5% 11.5% 11.9%
Tier 1 risk-based
capital ratio......... 11.5% 11.2% 10.3% 10.2% 10.2% 10.6%
Tier 1 leverage ratio... 6.7% 7.7% 7.6% 7.1% 7.7% 8.0%
Stockholders' equity to
assets................ 6.5% 6.5% 6.1% 6.6% 7.0% 7.5%
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------
1994
----------
(DOLLARS AND NUMBERS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C>
INCOME STATEMENT
SUMMARY:
Net interest income..... $ 60,260
Provision for loan
losses................ 3,087
Noninterest income...... 4,922
Noninterest expense..... 45,599
----------
Income before taxes..... 16,496
Income tax expense...... 7,430
----------
Net income.............. $ 9,066
==========
COMMON SHARE SUMMARY:
Diluted earnings per
share................. $ 0.53
Book value per share.... 4.54
Weighted average diluted
shares outstanding.... 17,066
PERIOD-END BALANCE SHEET
SUMMARY:
Assets.................. $1,161,539
Loans, net of unearned
income................ 703,809
Investment securities,
at fair value......... 156,489
Noninterest-bearing
deposits.............. 401,455
Total deposits.......... 1,075,373
Stockholders' equity.... 77,257
OTHER DATA:
Off-balance sheet client
funds................. N/A
CAPITAL RATIOS:
Total risk-based capital
ratio................. 10.1%
Tier 1 risk-based
capital ratio......... 8.9%
Tier 1 leverage ratio... 8.3%
Stockholders' equity to
assets................ 6.7%
</TABLE>
7
<PAGE>
The following summary presents our selected consolidated asset quality data
and selected financial ratios for the years ended December 31, 1998, 1997, 1996,
1995 and 1994. That data has been derived from our audited consolidated
financial statements. The following summary also presents selected consolidated
asset quality data and selected financial ratios for the quarterly periods ended
March 31, June 30 and September 30, 1999. That data has been derived from our
unaudited consolidated quarterly financial statements which, in our opinion,
include all adjustments (consisting of only normal, recurring adjustments)
considered necessary for a fair presentation. The summary selected consolidated
data should be read in conjunction with our consolidated financial statements
and the related notes which have been incorporated by reference in this
prospectus. The summary selected consolidated financial data for the quarterly
periods is not necessarily predictive of our operating results for the entire
year.
<TABLE>
<CAPTION>
1999 YEAR ENDED DECEMBER 31,
------------------------------ ----------------------------------------------------
SEPT 30 JUNE 30 MAR 31 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED ASSET QUALITY DATA:
Loans past due 90 days or more and still
accruing interest....................... $ 1,553 $ 678 $ 740 $ 441 $ 1,016 $ 8,556 $ 906 $ 444
Nonaccrual loans.......................... 33,959 46,678 50,993 19,444 24,476 14,581 27,867 11,269
------- ------- ------- ------- ------- ------- ------- -------
Total nonperforming loans................. 35,512 47,356 51,733 19,885 25,492 23,137 28,773 11,713
Other real estate owned and other
foreclosed assets....................... 694 750 1,370 1,800 1,858 1,948 4,955 7,089
------- ------- ------- ------- ------- ------- ------- -------
Total nonperforming assets................ $36,206 $48,106 $53,103 $21,685 $27,350 $25,085 $33,728 $18,802
======= ======= ======= ======= ======= ======= ======= =======
Allowance for loan losses................. $70,800 $56,300 $47,600 $46,000 $37,700 $32,700 $29,700 $20,000
======= ======= ======= ======= ======= ======= ======= =======
SELECTED FINANCIAL RATIOS:
Return on average assets(1)............... 1.0% 0.9% 0.9% 1.0% 1.3% 1.4% 1.6% 0.9%
Return on average stockholders'
equity(1)............................... 18.0% 16.0% 14.5% 14.5% 18.2% 17.9% 19.8% 12.3%
Efficiency ratio(2)....................... 48.2% 53.6% 55.3% 53.8% 55.9% 55.9% 60.6% 68.3%
Net interest margin(1).................... 5.4% 5.0% 5.0% 5.2% 5.6% 6.1% 7.1% 7.2%
Allowance for loan losses as a percentage
of:
total loans............................. 4.2% 3.6% 2.9% 2.8% 3.2% 3.8% 4.0% 2.8%
total nonperforming loans............... 199.4% 118.9% 92.0% 231.3% 147.9% 141.3% 103.2% 170.8%
Nonperforming loans to total loans........ 2.1% 3.0% 3.2% 1.2% 2.2% 2.7% 3.9% 1.7%
Nonperforming assets to total assets...... 1.0% 1.2% 1.4% 0.6% 1.0% 1.3% 2.4% 1.6%
Net charge-offs (recoveries) to average
loans(1)................................ 1.8% 0.5% 1.6% 2.2% 0.5% 1.0% (0.1)% 1.4%
</TABLE>
- ------------------------------
(1) Annualized for the three-month periods ended March 31, June 30 and
September 30, 1999.
(2) Noninterest expense (excluding other real estate owned, or OREO, costs)
divided by the sum of net interest income plus noninterest income (excluding
warrant income and securities gains/losses).
8
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE YOU DECIDE
TO BUY OUR COMMON STOCK. YOU SHOULD ALSO CONSIDER THE OTHER INFORMATION IN THIS
PROSPECTUS, AS WELL AS IN OTHER DOCUMENTS
INCORPORATED BY REFERENCE.
IF A SIGNIFICANT NUMBER OF CLIENTS FAIL TO PERFORM UNDER THEIR LOANS, OUR
BUSINESS, PROFITABILITY AND FINANCIAL CONDITION WOULD BE ADVERSELY AFFECTED.
As a lender, the largest risk we face is the possibility that a significant
number of our client borrowers will fail to pay their loans when due. If
borrower defaults cause losses in excess of our allowance for loan losses, it
could have an adverse affect on our business, profitability and financial
condition. We have established an evaluation process designed to determine the
adequacy of the allowance for loan losses. While this evaluation process uses
historical and other objective information, the classification of loans and the
establishment of loan losses is dependent to a great extent on our experience
and judgement. We cannot assure you that our loan loss reserves will be
sufficient to absorb future loan losses or prevent a material adverse effect on
our business, profitability or financial condition.
BECAUSE OF THE CREDIT PROFILE OF OUR LOAN PORTFOLIO, OUR LEVELS OF NONPERFORMING
ASSETS AND CHARGE-OFFS CAN BE VOLATILE, AND WE MAY NEED TO MAKE MATERIAL
PROVISIONS FOR LOAN LOSSES IN ANY PERIOD, WHICH COULD CAUSE REDUCED NET INCOME
OR NET LOSSES IN THAT PERIOD.
Our loan portfolio has a credit profile different from that of most other
banking companies. Many of our loans are made to companies in the early stages
of development with negative cash flow and no established record of profitable
operations. In some cases, repayment of the loan is dependent upon receipt of
additional equity financing from venture capitalists or others. Collateral for
many of the loans often includes intellectual property, which is difficult to
value and may not be readily salable in the case of a default. Because of the
intense competition and rapid technological change which characterizes the
companies in our technology and life sciences niche, a borrower's financial
position can deteriorate rapidly. We also make loans which are larger relative
to the revenues of the borrower than those made by traditional small business
lenders, so the impact of any single borrower default may be more significant to
us.
Because of these characteristics, our level of nonperforming loans and loan
charge-offs can be volatile and can vary materially from period to period. For
example, our nonperforming loans totaled:
- $35.5 million, or 2.1% of total loans, at September 30, 1999
- $47.4 million, or 3.0% of total loans, at June 30, 1999
- $51.7 million, or 3.2% of total loans, at March 31, 1999
- $19.9 million, or 1.2% of total loans, at December 31, 1998
- $23.5 million, or 1.6% of total loans, at September 30, 1998
Our nonperforming loans at September 30, 1999 included one financial
services industry credit in our non-technology diversified industries practice
that had a balance of approximately $15.0 million, or approximately 42% of total
nonperforming loans, at September 30, 1999. We have classified this credit as
nonperforming since March 31, 1999.
Changes in our level of nonperforming loans may require us to make material
provisions for loan losses in any period, which could reduce our net income or
cause net losses in that period. For example, our provision for loan losses was
$21.6 million for the three months ended September 30, 1999 and $40.3 million
for the nine months ended September 30, 1999, as compared to $10.6 million and
$20.1 million, respectively, for the comparable 1998 periods.
9
<PAGE>
In the first nine months of 1999, we incurred $22.5 million in gross
charge-offs and had $7.0
million in recoveries on previously charged-off loans. The gross charge-offs in
the first nine months of 1999 were not concentrated in any particular niche.
Gross charge-offs for the third quarter of 1999 totaled $10.3 million and
included $5.8 million related to one commercial credit, which was classified as
nonperforming at June 30, 1999, in our computers and peripherals practice.
IF THE AMOUNT OF CAPITAL AVAILABLE TO START-UP AND EMERGING GROWTH COMPANIES
DECREASES, IT COULD ADVERSELY AFFECT OUR BUSINESS, PROFITABILITY AND GROWTH
PROSPECTS.
Our strategy has focused on providing banking products and services to
start-up and emerging growth companies receiving financial support from
sophisticated investors, including venture capital, "angel" and corporate
investors. In some cases, our lending credit decision is based on our analysis
of the likelihood that our venture capital or "angel"-backed client will receive
a second or third round of equity infusion from investors. If the amount of
capital available to start-up and emerging growth companies decreases, it is
likely that the number of our new clients and the financial support investors
provide to our existing borrowers would decrease which could have an adverse
effect on our business, profitability and growth prospects. Among the factors
that could affect the amount of capital available to start-up and emerging
growth companies is the receptivity of the capital markets to initial public
offerings or mergers and acquisitions of companies within our technology and
life sciences niche, the availability and return on alternative investments and
general economic conditions in the technology and life sciences industries.
WE ARE SUBJECT TO EXTENSIVE REGULATION THAT COULD LIMIT OR RESTRICT OUR
ACTIVITIES AND IMPOSE FINANCIAL REQUIREMENTS OR LIMITATIONS ON THE CONDUCT OF
OUR BUSINESS. WE ARE CURRENTLY PARTY TO A MEMORANDUM OF UNDERSTANDING WITH OUR
PRIMARY BANKING REGULATORS WHICH REQUIRES US TO INCREASE CAPITAL AND RESTRICTS
OUR ABILITY TO DECLARE DIVIDENDS AND TAKE OTHER ACTIONS WITHOUT REGULATORY
CONSENT.
Silicon and Silicon Valley Bank 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
stockholders or security holders. Federal laws and regulations limit the
activities in which Silicon may engage as a bank holding company. In addition,
both Silicon and Silicon Valley Bank are required to maintain certain minimum
levels of capital. Federal and state banking regulators possess broad powers to
take supervisory action as they deem appropriate with respect to Silicon Valley
Bank and Silicon. Supervisory actions (such as the memorandum of understanding
described in the next paragraph) can result in higher capital requirements,
higher insurance premiums and limitations on the activities of Silicon or
Silicon Valley Bank which could have a material adverse effect on our business
and profitability.
Silicon Valley Bank is currently addressing issues raised by the Federal
Reserve Bank of San Francisco and the California Department of Financial
Institutions. In an informal arrangement with these regulators pursuant to a
memorandum of understanding entered into in September 1999, Silicon Valley Bank
has agreed to maintain a Tier 1 leverage ratio of at least 7.25%. Silicon Valley
Bank's Tier 1 leverage ratio was 6.1% at September 30, 1999. Silicon Valley Bank
has also committed to further enhance its credit review and monitoring
procedures and submit regular reports to the regulators regarding credit
quality. We are pursuing various strategies to comply with the memorandum of
understanding, including emphasizing off-balance sheet private label mutual fund
products to slow growth in deposits, maintaining fourth quarter 1999 average
assets at third quarter 1999 period end levels and raising capital through this
offering. However, if we fail to comply with our understanding with the
regulators, we could be subject to additional regulatory action which could have
an adverse effect on our growth and profitability.
As part of the memorandum of understanding, Silicon Valley Bank has agreed
to seek regulatory approval before making dividend payments to Silicon. Silicon
has also been directed to seek regulatory approval before declaring cash
dividends or dividends in kind, or repurchasing outstanding stock. We
10
<PAGE>
have not paid dividends on our common stock since 1992 and do not anticipate
paying dividends on or repurchasing our common stock in the foreseeable future.
We have received regulatory approval to make the December 15, 1999 quarterly
distribution on our 8.25% cumulative trust preferred securities from cash which
is currently available at Silicon. If we do not receive approval to make future
distributions on these securities, we will be required to defer payment in
accordance with the terms of these securities. While the terms of the cumulative
trust preferred securities allow us to defer distributions for up to 20
consecutive quarters without triggering any event of default, we cannot predict
what effect any deferral would have on our future ability to raise funds in the
fixed income securities markets. Silicon will also need regulatory approval
before incurring debt, which could reduce our financial flexibility, and before
entering into agreements to acquire entities or portfolios. This latter
restriction could reduce our operational flexibility in the few cases where we
are not already legally required to seek prior regulatory approval for
acquisitions.
OUR CURRENTLY EXISTING UNREALIZED WARRANT AND VENTURE CAPITAL FUND PORTFOLIO
GAINS MAY NEVER BE REALIZED.
We have historically obtained rights to acquire stock, in the form of
warrants, in certain clients as part of negotiated credit facilities. We also
have made investments in venture capital funds from time to time. We may not be
able to realize gains from these equity instruments in future periods, or our
realized gains may be materially less than the current level of unrealized gains
disclosed in this prospectus, due to fluctuations in the market prices of the
underlying common stock of these companies. The timing and amount of income, if
any, from the disposition of client warrants and venture capital fund
investments typically depend upon factors beyond our control, including the
general condition of the public equity markets, levels of mergers and
acquisitions activity, and legal and contractual restrictions on our ability to
sell the underlying securities. Therefore, we cannot predict future gains with
any degree of accuracy and any gains are likely to vary materially from period
to period. In addition, a significant portion of the income we realize from the
disposition of client warrants and venture capital fund investments may be
offset by expenses related to our efforts to build an infrastructure sufficient
to support our present and future business activities, as well as by expenses
incurred in evaluating and pursuing new business opportunities, or by increases
to our provision for loan losses.
PUBLIC OFFERINGS AND MERGERS AND ACQUISITIONS INVOLVING OUR CLIENTS CAN CAUSE
LOANS TO BE PAID OFF EARLY, WHICH COULD ADVERSELY AFFECT OUR BUSINESS AND
PROFITABILITY. WE HAVE EXPERIENCED ONLY MODEST LOAN GROWTH IN 1999, PRIMARILY AS
A RESULT OF THIS PHENOMENON.
While an active market for public equity offerings and mergers and
acquisitions generally has positive implications for our business, one negative
consequence is that our clients may pay off or reduce their loans with us if
they complete a public equity offering or are acquired or merge with another
company. Any significant reduction in our outstanding loans could have a
material adverse effect on our business and profitability. Our total loans, net
of unearned income, at September 30, 1999, were $1.7 billion, a $49.1 million,
or 3.0%, increase compared to $1.6 billion at December 31, 1998. While we
continue to generate new loans in most of our technology and life sciences and
special industry niche practices, as well as in specialized lending products,
many of our clients, primarily in the technology and life sciences niche
practice, have received significant cash inflows from the capital markets and
venture capital community. Consequently, we have experienced higher than normal
loan paydowns and payoffs, which has caused our total loans to remain relatively
unchanged during the first nine months of 1999.
11
<PAGE>
OUR CURRENT LEVEL OF INTEREST RATE SPREAD MAY DECLINE IN THE FUTURE. ANY
MATERIAL REDUCTION IN OUR INTEREST SPREAD COULD HAVE A MATERIAL IMPACT ON OUR
BUSINESS AND PROFITABILITY.
A major portion of our net income comes from our interest rate spread, which
is the difference between the interest rates paid by us on interest-bearing
liabilities, such as deposits and other borrowings, and the interest rates we
receive on interest-earning assets, such as loans extended to our clients and
securities held in our investment portfolio. Interest rates are highly sensitive
to many factors that are beyond our control, such as inflation, recession,
global economic disruptions, and unemployment. We have recently reduced the
interest rates which we pay on deposits, despite a generally increasing trend in
domestic interest rates, and our rates are now lower than those of some of our
competitors. We reduced our rates as part of our balance sheet management
efforts. In the future, we may be required to increase our deposit rates to
attract deposits. We cannot assure you that our current level of interest rate
spread will not decline in the future. Any material decline would have a
material adverse effect on our business and profitability.
ADVERSE CHANGES IN DOMESTIC OR GLOBAL ECONOMIC CONDITIONS, ESPECIALLY IN THE
TECHNOLOGY SECTOR, COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, GROWTH
AND PROFITABILITY.
If conditions worsen in the domestic or global economy, especially in the
technology sector, our business, growth and profitability are likely to be
materially adversely affected. Our technology clients would be harmed by any
global economic slowdown, as their businesses are often dependent upon
international suppliers and international sales. They would also be harmed if
the U.S. economy were to decline, as most of their sales generally are made
domestically. They may be particularly sensitive to any disruption in the growth
of the technology sector of the U.S. economy. To the extent that our clients'
underlying business is harmed, they are more likely to default on their loans.
IF WE FAIL TO RETAIN OUR KEY EMPLOYEES, OUR GROWTH AND PROFITABILITY COULD BE
ADVERSELY AFFECTED.
We rely on experienced client relationship managers and on officers and
employees with strong relationships with the venture capital community to
generate new business. If a significant number of these employees were to leave
us, our growth and profitability could be adversely affected. We believe that
our employees currently frequently have opportunities for alternative employment
with competing financial institutions and with our clients.
WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO MAINTAIN OUR HISTORICAL LEVELS OF
PROFITABILITY IN THE FACE OF SUSTAINED COMPETITIVE PRESSURES.
We cannot assure you that we will be able to maintain our historical levels
of profitability in the face of sustained competitive pressures. Other banks and
specialty and diversified financial services companies, many of which are larger
and better capitalized than we are, offer lending, leasing and other financial
products to our customer base. In some cases, our competitors focus their
marketing on our niche practice areas and seek to increase their lending and
other financial relationships with technology companies, early stage growth
companies or special industries such as wineries or real estate. In other cases,
our competitors may offer a financial product which provides an alternative to
one of the products we offer to all our customers. When new competitors seek to
enter one of our markets, or when existing market participants seek to increase
their market share, they sometimes undercut the pricing and/or credit terms
prevalent in that market. Our pricing and credit terms could deteriorate if we
act to meet these competitive challenges.
IF WE FAIL TO ADDRESS ADEQUATELY THE YEAR 2000 ISSUE, IT COULD ADVERSELY AFFECT
OUR BUSINESS AND PROFITABILITY AND WE COULD FACE REGULATORY ENFORCEMENT ACTIONS.
The Year 2000 issues arise in industries of all types because many existing
computer programs use only two digits to refer to a year. This results in
computer programs that do not recognize a year that begins with "20" instead of
"19." If we do not adequately address our internal Year 2000 issues, or if
12
<PAGE>
significant third parties with whom we deal, including our clients, do not
adequately address their own Year 2000 issues, our business and profitability
could be materially adversely affected. Failure of our vendors to be Year 2000
compliant could result in disruption of important services upon which we depend,
including services such as telecommunications, electrical power and data
processing. The failure of our 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 losses at this time. Notwithstanding our efforts, we cannot assure you that
we or significant third party vendors or other significant third parties will
adequately address their Year 2000 issues. We are continuing to assess the
Year 2000 readiness of third parties but do not know at this time whether the
failure of third parties to be Year 2000 compliant will have a material effect
on our business, profitability and growth prospects.
The Federal Financial Institutions Examination Council, 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.
Any failure by us to appropriately address the Year 2000 issue could result in
supervisory action against us, including the reduction of our supervisory
ratings, the denial of applications for mergers or acquisitions, or the
imposition of civil monetary penalties.
THE PRICE OF OUR COMMON STOCK MAY DECREASE RAPIDLY AND PREVENT YOU FROM SELLING
SHARES YOU BUY IN THIS OFFERING AT A PROFIT.
The market price of our common stock could decrease in price rapidly at any
time and prevent you from selling shares you buy in this offering at a profit.
The market price of our common stock has fluctuated in recent years. Since
January 1, 1998, the market price of our common stock has ranged from a low of
$10.31 per share to a high of $40.94 per share. Fluctuations may occur, among
other reasons, in response to:
- operating results;
- announcements by competitors;
- economic changes;
- general market conditions; and
- legislative and regulatory changes.
The trading price of our common stock may continue to be subject to wide
fluctuations in response to the factors set forth above and other factors, many
of which are beyond our control. The stock market in recent years has
experienced extreme price and trading volume fluctuations that often have been
unrelated or disproportionate to the operating performance of individual
companies. You should consider the likelihood of these market fluctuations
before investing in our common stock.
13
<PAGE>
USE OF PROCEEDS
Silicon will contribute substantially all of the net proceeds of the
offering to Silicon Valley Bank. Silicon Valley Bank intends to use the net
proceeds for general corporate purposes.
CAPITALIZATION
The following table sets forth our consolidated capitalization at
September 30, 1999 and our adjusted consolidated capitalization to give effect
to the issuance of 1,250,000 shares of our common stock at an assumed offering
price of $35.00 per share less the estimated underwriting discount and offering
expenses.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Company obligated mandatorily redeemable trust preferred
securities of subsidiary trust holding solely junior
subordinated debentures(1)................................ $ 38,524 $ 38,524
-------- --------
Stockholders' equity:
Preferred stock, par value $.001 per share: 20,000,000
shares authorized, none issued.......................... -- --
Common stock, par value $.001 per share: 60,000,000 shares
authorized, 20,877,388 outstanding actual, 22,127,388
outstanding, as adjusted(2)............................. 21 22
Additional paid-in capital................................ 96,024 136,957
Retained earnings......................................... 151,154 151,154
Unearned compensation..................................... (2,734) (2,734)
Accumulated other comprehensive income:
Net unrealized loss on available-for-sale investments... (969) (969)
-------- --------
Total stockholders' equity.............................. 243,496 284,430
-------- --------
Total capitalization........................................ $282,020 $322,954
======== ========
</TABLE>
- ------------------------
(1) Our consolidated capitalization, actual and as adjusted, includes
$40 million of mandatorily redeemable trust preferred securities of SVB
Capital I, a subsidiary trust, issued in 1998. SVB Capital I holds the 8.25%
Junior Subordinated Deferrable Interest Debentures due June 15, 2028 of
Silicon as its sole asset. See Note 9 of the notes to our consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 1998 which has been incorporated by reference in this
prospectus.
(2) Excludes 1,971,491 shares issuable upon the exercise of options outstanding
on September 30, 1999 with a weighted average exercise price of $14.84 per
share and 95,196 shares reserved for issuance under our 1997 equity
incentive plan.
14
<PAGE>
REGULATORY CAPITAL RATIOS
Our consolidated regulatory capital ratios and Silicon Valley Bank's
regulatory capital ratios are shown on the following table. The table shows both
the actual ratios at September 30, 1999 and the ratios as adjusted to give
effect to the issuance of 1,250,000 shares of our common stock at an assumed
offering price of $35.00, less the estimated underwriting discount and offering
expenses, with contribution of all the net proceeds to Silicon Valley Bank.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
Silicon Valley Bancshares
- ------------------------------------------------------------
Total risk-based capital.................................... 12.7% 14.3%
Tier 1 risk-based capital................................... 11.5% 13.1%
Tier 1 leverage ratio....................................... 6.7% 7.6%
<CAPTION>
SEPTEMBER 30, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
Silicon Valley Bank
- ------------------------------------------------------------
Total risk-based capital.................................... 11.7% 13.4%
Tier 1 risk-based capital................................... 10.5% 12.1%
Tier 1 leverage ratio....................................... 6.1% 7.1%(1)
</TABLE>
- ------------------------------
(1) Tier 1 leverage, as adjusted, was calculated based on average assets for the
three months ended September 30, 1999. If we had calculated this ratio based
on total assets at September 30, 1999 rather than based on quarterly average
assets, Silicon Valley Bank's Tier 1 leverage ratio, as adjusted, would have
been 7.9%.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is traded over the counter on the Nasdaq National Market
under the symbol "SIVB."
The following table shows high and low sales prices for our common stock for
each quarterly period since January 1, 1997 as reported by the Nasdaq National
Market.
<TABLE>
<CAPTION>
FISCAL 1997 LOW HIGH
- ----------- -------- --------
<S> <C> <C>
First Quarter............................................... $15.88 $20.00
Second Quarter.............................................. 16.63 23.88
Third Quarter............................................... 20.88 29.88
Fourth Quarter.............................................. 24.44 29.38
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1998 LOW HIGH
- ----------- -------- --------
<S> <C> <C>
First Quarter............................................... $24.75 $32.25
Second Quarter.............................................. 30.25 36.50
Third Quarter............................................... 12.25 39.00
Fourth Quarter.............................................. 10.31 27.31
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1999 LOW HIGH
- ----------- -------- --------
<S> <C> <C>
First Quarter............................................... $15.00 $21.00
Second Quarter.............................................. 16.38 25.34
Third Quarter............................................... 20.75 28.50
Fourth Quarter (through November 30, 1999).................. 22.88 40.94
</TABLE>
As of November 1, 1999, there were 646 stockholders of record of our common
stock.
We have not paid cash dividends on our common stock since 1992 and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Our ability to pay dividends is limited by generally applicable
corporate and banking laws and regulations. In addition, our memorandum of
understanding with our regulators requires us to seek regulatory consent before
paying dividends.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS--COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
EARNINGS SUMMARY
We reported net income of $10.5 million, or $0.50 per diluted share, for the
third quarter of 1999, compared with net income of $8.6 million, or $0.41 per
diluted share, for the third quarter of 1998. Net income totaled $27.3 million,
or $1.30 per diluted share, for the nine months ended September 30, 1999, versus
$24.3 million, or $1.16 per diluted share, for the comparable 1998 period. The
annualized return on average assets, or ROA, was 1.0% in the third quarter of
1999 versus 1.1% in the third quarter of 1998. The annualized return on average
equity, or ROE, for the third quarter of 1999 was 18.0%, compared to 16.6% in
the 1998 third quarter. For the first nine months of 1999, ROA was 0.9% and ROE
was 16.2% versus 1.1% and 16.9%, respectively, for the comparable 1998 period.
The increase in net income during the three and nine month periods ended
September 30, 1999, as compared with the prior year respective periods, was
attributable to increases in net interest income and noninterest income,
partially offset by an increase in both the provision for loan losses and
noninterest expense. The major components of net income and changes in these
components are summarized in the following table for the three and nine month
periods ended September 30, 1999 and 1998, and are discussed in more detail
below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) (UNAUDITED)
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net interest income................... $54,389 $38,456 $142,564 $105,792
Provision for loan losses............. 21,563 10,557 40,334 20,061
Noninterest income.................... 13,414 7,716 25,125 17,542
Noninterest expense................... 29,716 21,063 83,050 61,740
------- ------- -------- --------
Income before income taxes............ 16,524 14,552 44,305 41,533
Income tax expense.................... 6,015 6,002 17,006 17,202
------- ------- -------- --------
Net income............................ $10,509 $ 8,550 $ 27,299 $ 24,331
======= ======= ======== ========
</TABLE>
NET INTEREST INCOME AND MARGIN
Net interest income is defined as the difference between interest earned,
primarily on loans and investments, and interest paid on funding sources,
primarily deposits. Net interest income is our principal source of revenue. Net
interest margin is defined as the amount of net interest income, on a fully
taxable-equivalent basis, expressed as a percentage of average interest-earning
assets. The average yield earned on interest-earning assets is the amount of
fully taxable-equivalent interest income expressed as a percentage of average
interest-earning assets. The average rate paid on funding sources is defined as
interest expense as a percentage of average interest-earning assets.
16
<PAGE>
The following tables set forth average assets, liabilities and stockholders'
equity, interest income and interest expense, average yields and rates, and the
composition of our net interest margin for the three and nine months ended
September 30, 1999 and 1998.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
1999 1998
(UNAUDITED) (UNAUDITED)
------------------------------------- -------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
---------- ----------- ---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and securities purchased
under agreement to resell(1).................. $ 730,271 $ 9,415 5.1% $ 423,316 $ 5,941 5.6%
Investment securities:
Taxable....................................... 1,589,229 22,798 5.7 1,135,695 16,835 5.9
Non-taxable(2)................................ 136,994 2,092 6.1 79,872 1,418 7.0
Loans:
Commercial.................................... 1,373,122 37,193 10.7 1,194,522 31,992 10.6
Real estate construction and term............. 132,975 3,310 9.9 124,789 3,394 10.8
Consumer and other............................ 59,531 1,310 8.7 48,380 1,108 9.1
---------- ------- ---------- -------
Total loans..................................... 1,565,628 41,813 10.6 1,367,691 36,494 10.6
---------- ------- ---------- -------
Total interest-earning assets................... 4,022,122 76,118 7.5 3,006,574 60,688 8.0
------- -------
Cash and due from banks......................... 211,045 143,921
Allowance for loan losses....................... (63,725) (43,295)
Other real estate owned......................... -- 681
Other assets.................................... 71,735 57,447
---------- ----------
Total assets.................................... $4,241,177 $3,165,328
========== ==========
Funding sources:
Interest-bearing liabilities:
NOW deposits.................................. $ 37,776 193 2.0 $ 21,742 101 1.8
Regular money market deposits................. 386,360 2,546 2.6 353,241 2,434 2.7
Bonus money market deposits................... 2,095,554 15,900 3.0 1,622,710 17,763 4.3
Time deposits................................. 229,823 2,358 4.1 126,075 1,438 4.5
---------- ------- ---------- -------
Total interest-bearing liabilities.............. 2,749,513 20,997 3.0 2,123,768 21,736 4.1
Portion of noninterest-bearing funding
sources....................................... 1,272,609 -- -- 882,806 -- --
---------- ------- ---------- -------
Total funding sources........................... 4,022,122 20,997 2.1 3,006,574 21,736 2.9
------- -------
Noninterest-bearing funding sources:
Demand deposits................................. 1,188,773 773,506
Other liabilities............................... 32,694 25,644
Trust preferred securities(3)................... 38,513 38,460
Stockholders' equity............................ 231,684 203,950
Portion used to fund interest-earning assets.... (1,272,609) (882,806)
---------- ----------
Total liabilities and stockholders' equity...... $4,241,177 $3,165,328
========== ==========
Net interest income and margin.................. $55,121 5.4% $38,952 5.1%
======= ==== ======= ====
Total deposits.................................. $3,938,286 $2,897,274
========== ==========
</TABLE>
- ------------------------------
(1) Includes average interest-bearing deposits in other financial institutions
of $227 and $232 for the three months ended September 30, 1999 and 1998,
respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in 1999 and
1998. These adjustments were $732 and $496 for the three months ended
September 30, 1999 and 1998, respectively.
(3) The 8.25% annual distribution to SVB Capital I is recorded as a component of
noninterest expense.
17
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
1999 1998
(UNAUDITED) (UNAUDITED)
------------------------------------- -------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
---------- ----------- ---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and securities purchased
under agreement to resell(1).................. $ 607,892 $ 22,340 4.9% $ 364,544 $ 15,149 5.6%
Investment securities:
Taxable....................................... 1,426,444 61,158 5.7 1,027,295 45,699 5.9
Non-taxable(2)................................ 134,827 6,298 6.2 68,419 3,477 6.8
Loans:
Commercial.................................... 1,382,358 104,738 10.1 1,113,177 89,257 10.7
Real estate construction and term............. 136,276 10,351 10.2 112,299 9,097 10.8
Consumer and other............................ 58,004 3,783 8.7 43,943 3,002 9.1
---------- -------- ---------- --------
Total loans..................................... 1,576,638 118,872 10.1 1,269,419 101,356 10.7
---------- -------- ---------- --------
Total interest-earning assets................... 3,745,801 208,668 7.4 2,729,677 165,681 8.1
-------- --------
Cash and due from banks......................... 182,238 134,861
Allowance for loan losses....................... (54,982) (41,364)
Other real estate owned......................... 242 686
Other assets.................................... 66,837 52,901
---------- ----------
Total assets.................................... $3,940,136 $2,876,761
========== ==========
Funding sources:
Interest-bearing liabilities:
NOW deposits.................................. $ 27,396 353 1.7 $ 19,463 283 1.9
Regular money market deposits................. 357,115 7,124 2.7 339,056 6,900 2.7
Bonus money market deposits................... 2,041,519 50,564 3.3 1,416,124 47,171 4.5
Time deposits................................. 188,618 5,859 4.2 127,913 4,315 4.5
Other borrowings.............................. -- -- -- 73 3 5.5
---------- -------- ---------- --------
Total interest-bearing liabilities.............. 2,614,648 63,900 3.3 1,902,629 58,672 4.1
Portion of noninterest-bearing funding
sources....................................... 1,131,153 -- -- 827,050 -- --
---------- -------- ---------- --------
Total funding sources........................... 3,745,801 63,900 2.3 2,729,679 58,672 2.9
-------- --------
Noninterest-bearing funding sources:
Demand deposits................................. 1,034,637 741,798
Other liabilities............................... 27,410 20,666
Trust preferred securities(3)................... 38,501 18,615
Stockholders' equity............................ 224,940 193,051
Portion used to fund interest-earning assets.... (1,131,153) (827,048)
---------- ----------
Total liabilities and stockholders' equity...... $3,940,136 $2,876,761
========== ==========
Net interest income and margin.................. $144,768 5.2% $107,009 5.2%
======== ==== ======== ====
Total deposits.................................. $3,649,285 $2,644,355
========== ==========
</TABLE>
- ------------------------------
(1) Includes average interest-bearing deposits in other financial institutions
of $199 and $248 for the nine months ended September 30, 1999 and 1998,
respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in 1999 and
1998. The tax equivalent adjustments were $2,204 and $1,217 for the nine
months ended September 30, 1999 and 1998, respectively.
(3) The 8.25% annual distribution to SVB Capital I is recorded as a component of
noninterest expense.
18
<PAGE>
Net interest income is affected by changes in the amount and mix of
interest-earning 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 periods indicated. Changes
relating to investments in non-taxable municipal securities are presented on a
fully taxable-equivalent basis using the federal statutory rate of 35% in 1999
and 1998.
<TABLE>
<CAPTION>
1999 COMPARED TO 1998
---------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) (UNAUDITED)
------------------------------ ------------------------------
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................ $ 3,958 $ (484) $ 3,474 $ 8,943 $ (1,752) $ 7,191
Investment securities...................... 7,364 (727) 6,637 20,115 (1,835) 18,280
Loans...................................... 5,286 33 5,319 23,164 (5,648) 17,516
------- ------- ------- ------- -------- -------
Increase (decrease) in interest income....... 16,608 (1,178) 15,430 52,222 (9,235) 42,987
------- ------- ------- ------- -------- -------
Interest expense:
NOW deposits............................... 83 9 92 101 (31) 70
Regular money market deposits.............. 218 (106) 112 361 (137) 224
Bonus money market deposits................ 3,589 (5,452) (1,863) 15,491 (12,098) 3,393
Time deposits.............................. 1,064 (144) 920 1,886 (342) 1,544
Other borrowings........................... -- -- -- -- (3) (3)
------- ------- ------- ------- -------- -------
Increase (decrease) in interest expense...... 4,954 (5,693) (739) 17,839 (12,611) 5,228
------- ------- ------- ------- -------- -------
Increase in net interest income.............. $11,654 $ 4,515 $16,169 $34,383 $ 3,376 $37,759
======= ======= ======= ======= ======== =======
</TABLE>
Net interest income, on a fully taxable-equivalent basis, totaled
$55.1 million for the third quarter of 1999, an increase of $16.2 million, or
41.5%, from the $39.0 million total for the third quarter of 1998. The increase
in net interest income was the result of a $15.4 million, or 25.4%, increase in
interest income, combined with a $0.7 million, or 3.4%, decrease in interest
expense over the comparable prior year period.
The $15.4 million increase in interest income for the third quarter of 1999,
as compared to the third quarter of 1998, was the result of a $16.6 million
favorable volume variance partially offset by a $1.2 million unfavorable rate
variance. The favorable volume variance resulted from a $1.0 billion, or 33.8%,
increase in average interest-earning assets over the comparable prior year
period. The increase in average interest-earning assets resulted from strong
growth in our deposits, which increased $1.0 billion, or 35.9%, compared to the
third quarter of 1998. The increase in average interest-earning assets consisted
of loans, which were up $197.9 million, plus a combination of highly liquid,
lower-yielding federal funds sold, securities purchased under agreement to
resell and investment securities, which collectively increased $817.6 million,
accounting for 80.5% of the total increase in average interest-earning assets.
Average loans increased $197.9 million, or 14.5%, in the third quarter of
1999 as compared to the 1998 third quarter, resulting in a $5.3 million
favorable volume variance. This growth was widely
19
<PAGE>
distributed throughout the loan portfolio, as reflected by increased loan
balances in most of our technology and life sciences and special industry niche
practices, in specialized lending products, and throughout our loan offices
located across the nation.
Average investment securities for the third quarter of 1999 increased
$510.7 million, or 42.0%, as compared to the 1998 third quarter, resulting in a
$7.4 million favorable volume variance. The aforementioned strong growth in
average deposits exceeded the growth in average loans over the past year, and
generated excess funds that were largely invested in U.S. agency securities,
mortgage-backed securities and municipal securities.
Average federal funds sold and securities purchased under agreement to
resell in the third quarter of 1999 increased a combined $307.0 million, or
72.5%, over the prior year third quarter, resulting in a $4.0 million favorable
volume variance. This increase was also a result of the aforementioned strong
growth in average deposits during the past year.
Unfavorable rate variances associated with federal funds sold, securities
purchased under agreement to resell and investment securities in the third
quarter of 1999 resulted in a decrease in interest income of $1.2 million as
compared to the respective prior year period. Short-term market interest rates
have declined on an overall basis during the past year. As a result of this
decline, we have earned lower yields on federal funds sold, securities purchased
under agreement to resell and our investment securities, a significant portion
of which were short-term in nature, resulting in this unfavorable rate variance
as compared to the third quarter of 1998.
The yield on average interest-earning assets decreased 50 basis points in
the third quarter of 1999 from the comparable prior year period. This decrease
resulted from a shift in the composition of average interest-earning assets
towards a higher percentage of highly liquid, lower-yielding federal funds sold,
securities purchased under agreement to resell and investment securities. This
shift in the composition of average interest-earning assets resulted from the
aforementioned strong growth in deposits which continued to outpace the growth
in loans.
Total interest expense in the 1999 third quarter decreased $0.7 million from
the third quarter of 1998. This decrease was due to a favorable rate variance of
$5.7 million, partially offset by an unfavorable volume variance of
$5.0 million. The unfavorable volume variance resulted from a $625.7 million, or
29.5%, increase in average interest-bearing liabilities in the third quarter of
1999 as compared with the third quarter of 1998. This increase was largely
concentrated in our bonus money market deposit product, which increased
$472.8 million, or 29.1%, and was explained by high levels of client liquidity
attributable to a strong inflow of investment capital into the venture capital
community during the past year, and by growth in the number of clients we
served.
Changes in the average rates paid on interest-bearing liabilities had a
$5.7 million favorable impact on interest expense in the third quarter of 1999
as compared to the respective period in 1998. This decrease in interest expense
largely resulted from a reduction in the average rate paid on our bonus money
market deposit product, from 4.3% in the third quarter of 1998 to 3.0% in the
third quarter of 1999. The reduction during 1999 in the average rate paid on our
bonus money market deposit product, was largely attributable to a decline in
short-term market interest rates during the second half of 1998, and to our
lowering rates paid on the bonus money market deposit an additional 123 basis
points during the third quarter of 1999.
The average cost of funds paid on average interest-bearing liabilities
decreased 110 basis points in the third quarter of 1999 versus the comparable
prior year period. This decrease in the average cost of funds was largely due to
a decrease of 130 basis points in the average rate paid on our bonus money
market deposit product.
Net interest income, on a fully taxable-equivalent basis, totaled
$144.8 million for the first nine months of 1999, an increase of $37.8 million,
or 35.3%, from the $107.0 million total for the first nine
20
<PAGE>
months of 1998. The increase in net interest income was the result of a
$43.0 million, or 25.9%, increase in interest income, partially offset by a
$5.2 million, or 8.9%, increase in interest expense over the comparable prior
year period.
The $43.0 million increase in interest income for the first nine months of
1999, as compared to the first nine months of 1998, was the result of a
$52.2 million favorable volume variance partially offset by a $9.2 million
unfavorable rate variance. The favorable volume variance was attributable to
growth in average interest-earning assets, which increased $1.0 billion, or
37.2%, from the comparable prior year period. The increase in average
interest-earning assets resulted from strong growth in our deposits, which
increased $1.0 billion, or 38.0%, compared to the first nine months of 1998, and
consisted of increases in all components of interest-earning assets. The growth
in average loans was widely distributed throughout the loan portfolio, as
reflected by increased loan balances in most of our technology and life sciences
and special industry niche practices, in specialized lending products, and
throughout our loan offices located across the nation. The growth in average
federal funds sold, securities purchased under agreement to resell and
investment securities resulted from the aforementioned strong growth in average
deposits, which exceeded the growth in average loans over the past year.
The $52.2 million favorable volume variance associated with interest-earning
assets was partially offset by a $9.2 million unfavorable rate variance in the
first nine months of 1999 as compared to the respective prior year period. This
unfavorable rate variance was largely attributable to a decline in short-term
market interest rates and a corresponding drop in the prime rate of 75 basis
points during the second half of 1998, partially offset by increases in
short-term market interest rates and the prime rate of 50 basis points in the
third quarter of 1999.
The yield on average interest-earning assets decreased 70 basis points in
the first nine months of 1999 as compared to the respective prior year period.
This decrease resulted from a decline in the average yield on loans, largely due
to a reduction in our prime rate during late 1998, as well as to a shift in the
composition of average interest-earning assets towards a higher percentage of
highly liquid, lower-yielding federal funds sold, securities purchased under
agreement to resell and investment securities. This shift in the composition of
average interest-earning assets resulted from the aforementioned strong growth
in deposits, which continued to outpace the growth in loans.
Total interest expense in the first nine months of 1999 increased
$5.2 million from the first nine months of 1998 due to a $17.8 million
unfavorable volume variance partially offset by a $12.6 million favorable rate
variance. The unfavorable volume variance resulted from a $712.0 million, or
37.4%, increase in average interest-bearing liabilities in the first nine months
of 1999 as compared with the first nine months of 1998. This increase was
largely concentrated in our bonus money market deposit product, which increased
$625.4 million, or 44.2%, and was explained by high levels of client liquidity
attributable to a strong inflow of investment capital into the venture capital
community during the past year, and by growth in the number of clients served by
us. The $12.6 million favorable rate variance was largely attributable to a 120
basis points decrease in the average rate paid on our bonus money market deposit
product, due to a decline in short-term market interest rates during the second
half of 1998 combined with our lowering the rates paid on the bonus money market
deposit product an additional 123 basis points during the third quarter of 1999.
The average cost of funds paid on interest-bearing liabilities decreased 80
basis points in the first nine months of 1999 versus the first nine months of
the prior year. The decrease in the average cost of funds was largely due to a
decrease of 120 basis points in the average rate paid on our bonus money market
deposit product.
In an informal arrangement with Silicon Valley Bank's primary banking
regulators, the Federal Reserve Bank of San Francisco and the California
Department of Financial Institutions, pursuant to a memorandum of understanding
entered into in late September 1999, Silicon Valley Bank has agreed to
21
<PAGE>
maintain a Tier 1 leverage ratio of at least 7.25%. See "--Regulatory Matters"
for further discussion. By maintaining fourth quarter 1999 average assets that
approximate total assets as of September 30, 1999, combined with increasing Tier
1 capital through internally generated capital, for example, net income, we
expect Silicon Valley Bank's Tier 1 leverage ratio to exceed 7.25% at
December 31, 1999. In addition, we will contribute substantially all of the
proceeds of this offering to Silicon Valley Bank for use in its business, which
will further increase Silicon Valley Bank's Tier 1 leverage ratio.
In recent periods, our deposit growth has driven the growth of our
interest-earning assets. However, as part of our plans to address the regulatory
concerns described above, we lowered the rate paid on our bonus money market
deposit product by 98 basis points in the last two weeks of September 1999 and
emphasized higher yielding off-balance sheet private label mutual fund products
to clients. As a result, our deposit balances decreased approximately
$700 million and we expect average interest-earning assets (primarily federal
funds sold) in the fourth quarter of 1999 to be less than the previous quarter's
total. Interest-earning assets totaled $3.5 billion at September 30, 1999, a
decrease of $512.4 million, compared to $4.0 billion in average interest-earning
assets for the third quarter of 1999.
Our net interest margin for the fourth quarter of 1999 is expected to
increase over the prior quarter's percentage due to an increase in the yield on
interest-earning assets (resulting from a shift in the composition of
interest-earning assets due to the anticipated decline in lower-yielding federal
funds sold) as well as to a decrease in the cost of funds paid on
interest-bearing liabilities (due to the lowering of deposit rates in late
September 1999).
PROVISION FOR LOAN LOSSES
The provision for loan losses is based on our evaluation of the adequacy of
the existing allowance for loan losses in relation to total loans, and on our
periodic assessment of the inherent and identified risk dynamics of the loan
portfolio resulting from reviews of selected individual loans and loan
commitments.
Our provision for loan losses totaled $21.6 million for the third quarter of
1999, an $11.0 million, or 104.3%, increase compared to the $10.6 million
provision for the third quarter of 1998. The provision for loan losses increased
$20.3 million, or 101.1%, to a total of $40.3 million for the first nine months
of 1999, versus $20.1 million for the comparable 1998 period.
NONINTEREST INCOME
The following table summarizes the components of noninterest income for the
three and nine month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) (UNAUDITED)
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Letter of credit and foreign exchange income......... $ 4,304 $1,795 $10,448 $ 5,137
Disposition of client warrants....................... 6,177 705 8,687 4,979
Client investment fees............................... 1,241 137 1,719 315
Deposit service charges.............................. 729 432 2,073 1,277
Investment gains (losses)............................ -- 4,149 (243) 4,626
Other................................................ 963 498 2,441 1,208
------- ------ ------- -------
Total noninterest income............................. $13,414 $7,716 $25,125 $17,542
======= ====== ======= =======
</TABLE>
Noninterest income increased $5.7 million, or 73.8%, to a total of
$13.4 million in the third quarter of 1999 versus $7.7 million in the prior year
third quarter. Noninterest income totaled
22
<PAGE>
$25.1 million for the first nine months of 1999, an increase of $7.6 million, or
43.2%, from the $17.5 million recorded in the comparable 1998 period. The
increase in noninterest income was largely due to increases in income from the
disposition of client warrants, letter of credit fees, foreign exchange fees and
other trade finance income, and client investment fees, partially offset by a
decline in gains on sales of investment securities.
Letter of credit fees, foreign exchange fees and other trade finance income
totaled $4.3 million in the third quarter of 1999, an increase of $2.5 million,
or 139.8%, from the $1.8 million reported in the third quarter of 1998. For the
first nine months of 1999, letter of credit fees, foreign exchange fees and
other trade finance income totaled $10.5 million, an increase of $5.3 million,
or 103.4%, compared to the $5.1 million in the first nine months of 1998. The
growth in this category of noninterest income reflects a concerted effort by our
management to expand the penetration of trade finance-related products and
services among our growing client base, a large percentage of which provide
products and services in international markets.
We have 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 we employ to mitigate the risk of a loan becoming
nonperforming, and collateral requirements on loans with warrants are similar to
lending arrangements where we do not obtain warrants. The timing and amount of
income from the disposition of client warrants typically depend upon factors
beyond our control, including the general condition of the public equity markets
as well as the mergers and acquisitions environment. We therefore cannot predict
the timing and amount of this income with any degree of accuracy and it is
likely to vary materially from period to period. We obtained 262 client warrants
in the nine months ended September 30, 1999. During the first nine months of
1999, as well as throughout 1998, a significant portion of the income we
realized from the disposition of client warrants was offset by expenses related
to our efforts to build an infrastructure sufficient to support present and
future business activities, as well as expenses incurred in evaluating and
pursuing new business opportunities and increases to the provision for loan
losses during those periods.
We realized pre-tax income of $14.5 million from the disposition of client
warrants in October 1999. Based on October 31, 1999 market valuations, we had
additional potential pre-tax warrant gains totaling over $29.2 million, of which
over $22.9 million related to four clients. We are restricted from exercising
many of these warrants until late in the fourth quarter of 1999 and first
quarter of 2000. We have also made equity investments in Garage.com,
Startups.com and various venture capital funds. Based on October 31, 1999 market
valuations, we had a potential pre-tax gain on a venture capital fund investment
of over $14.3 million. We are restricted from selling this publicly-traded
equity instrument until the first quarter of the year 2000. Additionally, we are
precluded from using any type of derivative instrument to secure the current
unrealized gains associated with these equity instruments. Hence, the amount of
income we realize from these equity instruments in future periods may vary
materially from the current unrealized amount due to fluctuations in the market
prices of the underlying common stock of these companies. Furthermore, we may
reinvest some or all of the income realized from the disposition of these equity
instruments in pursuing our business strategies.
Deposit service charges totaled $0.7 million for the three months ended
September 30, 1999, an increase of $0.3 million, or 68.8%, from the
$0.4 million reported in the third quarter of 1998. For the first nine months of
1999 and 1998 deposit service charges totaled $2.1 million and $1.3 million,
respectively. Clients compensate us for depository services either through
earnings credits computed on their demand deposit balances, or via explicit
payments recognized as deposit service charges income. The increase in deposit
service charges income was due to both a reduction in earnings credits resulting
from a decrease in short-term money market rates during the second half of 1998
and growth in our client base.
23
<PAGE>
Client investment fees totaled $1.2 million in the third quarter of 1999
compared to $0.1 million in the 1998 third quarter. For the nine months ended
September 30, 1999, client investment fees totaled $1.7 million versus
$0.3 million in the comparable 1998 period. Prior to June 1999, we only earned
client investment fees on off-balance sheet funds that were invested by clients
in investment securities such as U.S. Treasuries, U.S. agencies and commercial
paper. Off-balance sheet client funds totaled $1.1 billion at December 31, 1998.
Beginning in June 1999, we began offering off-balance sheet private label mutual
fund products to clients. We earn approximately 35 basis points on the average
balance in these products. At September 30, 1999, $3.8 billion in client funds
were invested off-balance sheet, including $1.9 billion in the mutual fund
products. The significant growth in the amount of off-balance sheet client funds
was explained by high levels of client liquidity attributable to a strong inflow
of investment capital into the venture capital community during the past year,
by growth in the number of clients we served and by increased marketing of
off-balance sheet private label mutual fund products.
We realized a $0.2 million loss on investment securities during the first
nine months of 1999, versus a $4.6 million gain on sales of investment
securities during the comparable prior year period. All investment securities
sold were classified as available-for-sale, and all sales were conducted as a
normal component of our asset/liability and liquidity management activities.
Other noninterest income largely consists of service-based fee income, and
increased $0.5 million, or 93.4%, to $1.0 million in the third quarter of 1999
from $0.5 million in the third quarter of 1998. For the nine month period ended
September 30, 1999, other noninterest income increased $1.2 million, or 102.1%,
to $2.4 million from $1.2 million in the comparable 1998 period. The increase
during 1999 was primarily due to a higher volume of cash management and loan
documentation services related to our growing client base.
NONINTEREST EXPENSE
Noninterest expense in the third quarter of 1999 totaled $29.7 million, an
$8.7 million, or 41.1%, increase from the $21.1 million incurred in the
comparable 1998 period. Noninterest expense totaled $83.1 million for the first
nine months of 1999, an increase of $21.3 million, or 34.5%, over the
$61.7 million total for the comparable 1998 period. We closely monitor our level
of noninterest expense using a variety of financial ratios, including the
efficiency ratio. The efficiency ratio is calculated by dividing the amount of
noninterest expense, excluding costs associated with other real estate owned, by
adjusted revenues, defined as the total of net interest income and noninterest
income, excluding income from the disposition of client warrants and gains or
losses related to sales of investment securities. This ratio reflects the level
of operating expense required to generate $1 of operating revenue. Our
efficiency ratio for the 1999 third quarter was 48.2% versus 50.9% for the third
quarter of 1998. Our efficiency ratio for the first nine months of 1999 was
52.0% versus 55.4% for the comparable 1998
24
<PAGE>
period. The following tables present the detail of noninterest expense and the
incremental contribution of each line item to our efficiency ratio:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------
1999 1998
--------------------- ---------------------
PERCENT OF PERCENT OF
ADJUSTED ADJUSTED
AMOUNT REVENUES AMOUNT REVENUES
-------- ---------- -------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Compensation and benefits............................ $18,150 29.5% $10,773 26.1%
Professional services................................ 2,531 4.1 2,361 5.7
Net occupancy expense................................ 1,713 2.8 1,394 3.4
Business development and travel...................... 1,500 2.4 1,460 3.5
Furniture and equipment.............................. 1,368 2.2 1,320 3.2
Trust preferred securities distributions............. 825 1.3 825 2.0
Postage and supplies................................. 618 1.0 635 1.5
Telephone............................................ 522 0.8 481 1.2
Advertising and promotion............................ 474 0.8 643 1.6
Other................................................ 2,015 3.3 1,152 2.8
------- ---- ------- ----
Total excluding cost of other real estate owned...... 29,716 48.2% 21,044 50.9%
==== ====
Cost of other real estate owned...................... -- 19
------- -------
Total noninterest expense............................ $29,716 $21,063
======= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------
1999 1998
--------------------- ---------------------
PERCENT OF PERCENT OF
ADJUSTED ADJUSTED
AMOUNT REVENUES AMOUNT REVENUES
-------- ---------- -------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Compensation and benefits............................ $49,071 30.8% $34,877 30.7%
Professional services................................ 8,426 5.3 6,390 5.6
Net occupancy expense................................ 4,750 3.0 3,451 3.0
Business development and travel...................... 4,356 2.7 4,422 3.9
Furniture and equipment.............................. 4,159 2.6 5,051 4.4
Trust preferred securities distributions............. 2,475 1.6 1,187 1.0
Postage and supplies................................. 1,850 1.2 1,545 1.4
Advertising and promotion............................ 1,808 1.1 1,553 1.4
Telephone............................................ 1,361 0.9 1,600 1.4
Other................................................ 4,526 2.8 2,893 2.5
------- ---- ------- ----
Total excluding cost of other real estate owned...... 82,782 52.0% 62,969 55.4%
==== ====
Cost of other real estate owned...................... 268 (1,229)
------- -------
Total noninterest expense............................ $83,050 $61,740
======= =======
</TABLE>
Compensation and benefits expenses totaled $18.2 million in the third
quarter of 1999, a $7.4 million, or 68.5%, increase over the $10.8 million
incurred in the third quarter of 1998. For the first nine months of 1999,
compensation and benefits expenses totaled $49.1 million, an increase of
$14.2 million, or 40.7%, compared to $34.9 million for the comparable 1998
period. The increase in compensation and benefits expenses was largely the
result of an increase in the number of average full-time equivalent personnel we
employed combined with the lowering of our performance-based
25
<PAGE>
compensation in the third quarter of 1998 in response to an increase in
charge-offs during that quarter. Average full-time equivalent personnel were 641
and 623 for the three and nine month periods ended September 30, 1999, versus
537 and 504 for the respective prior year periods. The increase in full-time
equivalent personnel was primarily due to a combination of our efforts to
develop and support new markets through geographic expansion, to develop and
expand products, services and niches, and to build an infrastructure sufficient
to support present and prospective business activities. Further growth in our
full-time equivalent personnel is likely to occur during future years as a
result of the continued expansion of our business activities.
Professional services expenses, which consist of costs associated with
corporate legal services, litigation settlements, accounting and auditing
services, consulting, and our board of directors, totaled $2.5 million and
$8.4 million for the three and nine months ended September 30, 1999, an increase
of $0.2 million, or 7.2%, and $2.0 million, or 31.9%, compared to $2.4 million
and $6.4 million in the comparable 1998 periods. The increase in professional
services expenses primarily related to an increase in consulting fees associated
with several business initiatives, including the Year 2000 remediation project.
The level of professional services expenses during 1999 and 1998 reflects the
extensive efforts we have undertaken to continue to build and support our
infrastructure, as well as evaluate and pursue new business opportunities. It
also reflects our efforts in outsourcing several corporate functions, such as
internal audit, facilities management and credit review, where we believe we can
achieve a combination of cost savings and increased quality of service.
Occupancy, furniture and equipment expenses totaled $3.1 million and
$8.9 million for the three and nine months ended September 30, 1999, an increase
of $0.4 million, or 13.5%, and $0.4 million, or 4.8%, from the $2.7 million and
$8.5 million for the three and nine months ended September 30, 1998,
respectively. The increase in occupancy, furniture and equipment expenses in
1999 as compared to 1998 was primarily the result of our continued geographic
expansion to develop and support new markets.
Trust preferred securities distributions totaled $0.8 million for the three
months ended September 30, 1999 and 1998. For the first nine months of 1999,
trust preferred securities distributions totaled $2.5 million, an increase of
$1.3 million, or 108.5%, compared to $1.2 million for the comparable 1998
period. These distributions resulted from the issuance of $40.0 million in
cumulative trust preferred securities during the second quarter of 1998. The
trust preferred securities pay a fixed rate quarterly distribution of 8.25% and
have a maximum maturity of 30 years.
During the second quarter of 1998, we realized a net gain of $1.3 million in
connection with a sale of an OREO property that consisted of multiple
undeveloped lots.
Other noninterest expense totaled $2.0 million and $4.5 million for the
three and nine months ended September 30, 1999, an increase of $0.9 million, or
74.9%, and $1.6 million, or 56.5%, compared to $1.2 million and $2.9 million for
the respective 1998 periods. This increase was primarily attributable to
increased data processing services related to both the overall growth in our
business and several new business initiatives.
INCOME TAXES
Our effective tax rate was 36.4% for the third quarter of 1999 and 38.4% for
the first nine months of 1999, compared to 41.3% in the comparable three month
period and 41.4% in the comparable nine month period in 1998. The decrease in
our effective income tax rate was principally attributable to an increase in the
amount of the tax exempt interest income we received, as well as to a change in
our multi-state income tax rate.
26
<PAGE>
RESULTS OF OPERATIONS--COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
EARNINGS SUMMARY
We reported net income in 1998 of $28.9 million, compared with net income of
$27.7 million in 1997 and $21.5 million in 1996. 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,
------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net interest income......................................... $146,615 $110,824 $87,275
Provision for loan losses................................... 37,159 10,067 10,426
Noninterest income.......................................... 23,162 13,265 11,609
Noninterest expense......................................... 83,645 66,301 52,682
-------- -------- -------
Income before income taxes.................................. 48,973 47,721 35,776
Income tax expense.......................................... 20,117 20,043 14,310
-------- -------- -------
Net income.................................................. $ 28,856 $ 27,678 $21,466
======== ======== =======
</TABLE>
27
<PAGE>
NET INTEREST INCOME AND MARGIN
The following table sets forth average assets, liabilities and stockholders'
equity, interest income and interest expense, average yields and rates, and the
composition of our net interest margin for the years ended December 31, 1998,
1997 and 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
---------- -------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <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%
Investment securities:
Taxable................ 1,044,918 61,515 5.9 671,390 40,360 6.0
Non-taxable(2)......... 78,234 5,034 6.4 33,801 2,320 6.9
Loans:(3),(4),(5)
Commercial............. 1,157,949 122,708 10.6 858,459 95,304 11.1
Real estate
construction and
term................. 115,743 12,364 10.7 78,311 8,063 10.3
Consumer and other..... 45,134 4,064 9.0 36,867 3,473 9.4
---------- -------- ---------- --------
Total loans.............. 1,318,826 139,136 10.6 973,637 106,840 11.0
---------- -------- ---------- --------
Total interest-earning
assets................. 2,838,466 226,990 8.0 1,991,226 166,784 8.4
-------- --------
Cash and due from
banks.................. 137,096 148,044
Allowance for loan
losses................. (40,055) (37,568)
Other real estate
owned.................. 681 1,192
Other assets............. 54,360 37,736
---------- ----------
Total assets............. $2,990,548 $2,140,630
========== ==========
Funding sources:
Interest-bearing
liabilities:
NOW deposits........... $ 18,702 348 1.9 $ 15,814 308 1.9
Regular money market
deposits............. 338,585 9,189 2.7 345,828 9,368 2.7
Bonus money market
deposits............. 1,487,240 63,155 4.3 895,259 40,885 4.6
Time deposits.......... 131,530 5,917 4.5 107,742 4,587 4.3
Other borrowings....... 66 4 6.0 5 -- 5.0
---------- -------- ---------- --------
Total interest-bearing
liabilities............ 1,976,123 78,613 4.0 1,364,648 55,148 4.0
Portion of noninterest-
bearing funding
sources................ 862,343 -- -- 626,578 -- --
---------- -------- ---------- --------
Total funding sources.... 2,838,466 78,613 2.8 1,991,226 55,148 2.8
-------- --------
Noninterest-bearing
funding sources:
Demand deposits.......... 769,984 608,475
Other liabilities........ 22,146 15,389
Trust preferred
securities(6).......... 23,620 --
Stockholders' equity..... 198,675 152,118
Portion used to fund
interest-earning
assets................. (862,343) (626,578)
---------- ----------
Total liabilities and
stockholders' equity... $2,990,548 $2,140,630
========== ==========
Net interest income and
margin................. $148,377 5.2% $111,636 5.6%
======== ==== ======== ====
Total deposits........... $2,746,041 $1,973,118
========== ==========
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996
----------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE
---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold and
securities purchased
under agreement to
resell(1).............. $ 244,408 $ 13,106 5.4%
Investment securities:
Taxable................ 411,743 23,587 5.7
Non-taxable(2)......... 8,112 749 9.2
Loans:(3),(4),(5)
Commercial............. 658,316 75,750 11.5
Real estate
construction and
term................. 81,358 8,471 10.4
Consumer and other..... 39,981 3,672 9.2
---------- --------
Total loans.............. 779,655 87,893 11.3
---------- --------
Total interest-earning
assets................. 1,443,918 125,335 8.7
--------
Cash and due from
banks.................. 126,830
Allowance for loan
losses................. (30,429)
Other real estate
owned.................. 3,582
Other assets............. 30,002
----------
Total assets............. $1,573,903
==========
Funding sources:
Interest-bearing
liabilities:
NOW deposits........... $ 10,256 223 2.2
Regular money market
deposits............. 312,841 8,460 2.7
Bonus money market
deposits............. 588,235 26,312 4.5
Time deposits.......... 69,975 2,801 4.0
Other borrowings....... 30 2 5.5
---------- --------
Total interest-bearing
liabilities............ 981,337 37,798 3.9
Portion of noninterest-
bearing funding
sources................ 462,581 -- --
---------- --------
Total funding sources.... 1,443,918 37,798 2.6
--------
Noninterest-bearing
funding sources:
Demand deposits.......... 460,053
Other liabilities........ 12,725
Trust preferred
securities(6).......... --
Stockholders' equity..... 119,788
Portion used to fund
interest-earning
assets................. (462,581)
----------
Total liabilities and
stockholders' equity... $1,573,903
==========
Net interest income and
margin................. $ 87,537 6.1%
======== ====
Total deposits........... $1,441,360
==========
</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.
(6) The 8.25% annual distribution to SVB Capital I is recorded as a component of
noninterest expense.
28
<PAGE>
<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 borrowing............................. 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 our 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 our technology and life sciences and special industry niche
practices, in specialized lending products, and throughout our loan offices
located across the nation.
In December 1998, we announced that we had discontinued new loan
originations associated with our religious financial resources division. We 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 our ability to generate our anticipated loan yield and provide returns
that exceed our required return on capital. The credit quality of the portfolio
was not a factor in our decision to discontinue new religious
29
<PAGE>
financial resources loan origination. Since inception, we have not incurred any
losses associated with the religious financial resources portfolio. The
discontinuation of new religious financial resources loan origination could have
an effect on our future loan growth.
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 our 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 our portfolio of
short-term investments.
Unfavorable rate variances associated with each component of
interest-earning assets in 1998 resulted in a decrease in interest income of
$5.5 million as compared to the prior year. Short-term market interest rates
declined during the second half of 1998. As a result of this decline, we earned
lower yields in 1998 on federal funds sold, securities purchased under agreement
to resell and our investment securities, a significant portion of which were
short-term in nature, resulting in a $1.4 million unfavorable rate variance as
compared to the prior year. The average yield on loans in 1998 decreased 40
basis points from 1997, accounting for the remaining $4.1 million of the total
unfavorable rate variance. This decrease was primarily attributable to both
increased competition and a decline in the average prime rate we charged during
the second half of 1998, as a substantial portion of our loans are prime
rate-based.
The yield on average interest-earning assets decreased 40 basis points in
1998 from the comparable prior year period. This decrease resulted from a
decline in the average yield on loans, largely due to both increased competition
and a decline in our prime rate, as well as to a continuing shift in the
composition of interest-earning assets towards a higher percentage of highly
liquid, lower-yielding federal funds sold, securities purchased under agreement
to resell and investment securities. This shift in the composition of average
interest-earning assets resulted from the aforementioned strong growth in
deposits continuing to outpace the growth in our average loans during 1998.
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 our 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 our niches
and products, as well as our 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 our portfolio of longer-term securities in an effort
to obtain available higher yields, and to increase as well as to further
diversify our portfolio of short-term investments in response to a significant
increase in liquidity. Average federal funds sold and securities purchased under
agreement to
30
<PAGE>
resell increased $68.0 million, or 27.8%, in 1997, and was also a result of the
aforementioned strong growth in deposits coupled with our actions to further
diversify our 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 our actions to increase
our 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 agreement to resell and investment securities. This shift in the
composition of average interest-earning assets resulted from the aforementioned
strong growth in average deposits outpacing growth in our 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 our bonus money market deposit product, which increased $592.0 million, or
66.1%, and was explained by high levels of client liquidity attributable to a
strong inflow of investment capital into the venture capital community during
1998, and by growth in the number of clients we served.
Changes in the average rates paid on interest-bearing liabilities had a
$2.6 million favorable impact on interest expense in 1998 as compared to 1997.
This decrease in interest expense largely resulted from a reduction in the
average rate paid on our bonus money market deposit product from 4.6% in 1997 to
4.3% in 1998. The reduction during 1998 in the average rate paid on our bonus
money market deposit product was largely attributable to a decline in short-term
market interest rates during the second half of 1998.
The average cost of funds paid in 1998 of 2.8% was flat with the prior year.
Although the average rate paid on our bonus money market deposit product
decreased during 1998 as compared to 1997, this was offset by a continuing shift
in the composition of average interest-bearing liabilities towards a higher
percentage of deposits in that product.
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
our 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 we
served. The year-over-year $0.7 million unfavorable rate variance was largely
attributable to an increase during 1997 in the average rate paid on our 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.
31
<PAGE>
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 our 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.
PROVISION FOR LOAN LOSSES
The provision for loan losses is based on our evaluation of the adequacy of
the existing allowance for loan losses in relation to total loans, and on our
periodic assessment of the inherent and identified risk dynamics of the loan
portfolio resulting from reviews of selected individual loans and loan
commitments.
Our provision for loan losses totaled $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 our provision for loan losses in 1998 was in
response to our incurrence of $28.9 million in net charge-offs in 1998, versus
$5.1 million and $7.4 million in 1997 and 1996, respectively.
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 our management to expand the penetration of trade
finance-related products and services among our growing client base, a large
percentage of which provide products and services in international markets.
Income from the disposition of client warrants totaled $6.7 million,
$5.5 million and $5.4 million in 1998, 1997 and 1996, respectively. 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
our efforts to build an infrastructure sufficient to support present and
prospective business activities, and was also offset by increases to the
provision for loan losses during those years. We obtained 258 client warrants in
1998 compared to 157 in 1997.
We 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 our asset/liability and liquidity management activities.
32
<PAGE>
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 us for depository services either through earnings credits computed
on their demand deposit balances, or via explicit payments we recognize 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 our 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. Our management closely monitors our level
of noninterest expense using a variety of financial ratios, including the
efficiency ratio. The efficiency ratio is calculated by dividing the amount of
noninterest expense, excluding costs associated with other real estate owned, by
adjusted revenues, defined as the total of net interest income and noninterest
income, excluding income from the disposition of client warrants and gains or
losses related to sales of investment securities. This ratio reflects the level
of operating expense required to generate $1 of operating revenue. Our
efficiency ratio was 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 our 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 personnel we employed, from 417 in 1997 to 521 in 1998,
partially offset by a decrease in variable-based compensation expenses
associated with our incentive bonus pool and employee stock ownership plan due
to lower than expected net income. Compensation and benefits 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 full-time equivalent personnel we
employed. Average full-time equivalent
33
<PAGE>
personnel were 417 in 1997 compared with 363 in 1996. The increase in full-time
equivalent personnel from 1996 through 1998 was primarily due to a combination
of our efforts to develop and support new markets through geographic expansion,
to develop and expand products, services and niches, and to build an
infrastructure sufficient to support present and prospective business
activities. Further growth in our full-time equivalent personnel is likely to
occur during future years as a result of the continued expansion of our business
activities.
Professional services expenses, which consist of costs associated with
corporate legal services, litigation settlements, accounting and auditing
services, consulting, and our board of directors, totaled $9.9 million in 1998,
a $3.2 million, or 47.2%, increase from the $6.7 million total in 1997. We
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 we have undertaken to continue to build
and support our infrastructure, as well as evaluate and pursue new business
opportunities. It also reflects our efforts in outsourcing several corporate
functions, such as internal audit, facilities management and credit review,
where we believe we can achieve a combination of cost savings and increased
quality of service.
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 our incurrence of certain non-recurring costs in
connection with the expansion of our existing headquarters facility during the
second quarter of 1998 and an increase in recurring expenses associated with
that additional office space. Occupancy, furniture and equipment expenses were
also impacted by costs related to furniture, computer equipment and other
related costs associated with our opening new loan offices in West Los Angeles,
California and Rosemont, Illinois in early 1998. We intend to continue our
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.
We 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 our business, including
both an increase in the number of full-time equivalent personnel 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 our business, including
both an increase in the number of full-time equivalent personnel 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 our concerted
effort to increase our 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.
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
34
<PAGE>
1997, was primarily due to an increase in data processing costs related to both
the aforementioned overall growth in our 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 our
client base. 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 our client base.
We realized a net gain of $1.3 million in connection with the sale of an
OREO property during 1998. In 1997, we 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 we owned. Our net costs
associated with OREO include: maintenance expenses, property taxes, marketing
costs, net operating expense or income associated with income-producing
properties, property write-downs, and gains or losses on the sales of such
properties.
INCOME TAXES
Our effective income tax rate was 41.1% in 1998, compared to 42.0% in 1997
and 40.0% in 1996. The slight decrease in our effective income tax rate for
1998, as compared to 1997, was attributable to an increase in the amount of
tax-exempt interest income we received. The increase in our effective income tax
rate from 1996 to 1997 was due to adjustments in our estimate of our income tax
liabilities.
FINANCIAL CONDITION
Our total assets were $3.7 billion at September 30, 1999, an increase of
$176.3 million, or 5.0%, compared to $3.5 billion at December 31, 1998. Our
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. The
minimal growth in period-end assets from December 31, 1998 to September 30, 1999
resulted from our lowering deposit rates and marketing of higher yielding
off-balance sheet private label mutual fund products to clients in order to
decrease deposits in response to regulatory concerns about capital levels.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell
totaled a combined $103.4 million at September 30, 1999, a decrease of
$295.8 million, or 74.1%, compared to the $399.2 million outstanding at the
prior year end. This decrease was attributable to a decrease in our deposits of
approximately $700.0 million during the last two weeks of September 1999.
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 December 31, 1997. This
increase was attributable to our 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.
35
<PAGE>
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
September 30, 1999 and December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
SEPTEMBER 30, ------------------------------------
1999 1998 1997 1996
-------------- ---------- ---------- ----------
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities.................. $ 29,987 $ 41,049 $ 217,685 $ 75,547
U.S. agencies and corporations:
Discount notes and bonds................ 871,111 498,016 462,405 298,488
Mortgage-backed securities.............. 243,066 125,059 144,437 8,168
Collateralized mortgage obligations..... 194,865 155,149 41,051 58,038
Obligations of states and political
subdivisions............................ 331,656 515,770 60,436 22,787
Commercial paper.......................... -- 9,993 41,829 143,086
Bankers' acceptances...................... -- -- 16,140 --
Other debt securities..................... 16,989 38,471 25,007 13,000
Money market funds........................ 4,849 -- -- --
Other equity securities................... 52,739 13,995 4,914 5,908
---------- ---------- ---------- --------
Total..................................... $1,745,262 $1,397,502 $1,013,904 $625,022
========== ========== ========== ========
</TABLE>
Investment securities totaled $1.7 billion at September 30, 1999, an
increase of $347.8 million, or 24.9%, from the December 31, 1998 balance of
$1.4 billion. This increase resulted from excess funds that were generated by
growth in our deposits outpacing the growth in loans during the first nine
months of 1999, and primarily consisted of U.S. agency securities and
mortgage-backed securities.
The increase in short-term market interest rates during the first nine
months of 1999 resulted in a pre-tax unrealized loss on our available-for-sale
fixed income securities investment portfolio of $31.5 million as of
September 30, 1999. This unrealized loss was offset by a pre-tax unrealized gain
of $30.5 million associated with equity securities, which includes our warrant
portfolio and venture capital fund investments. Because of the level of
liquidity we maintain, we do not anticipate having to sell fixed income
investment securities and incurring material losses on sales in future periods
for liquidity purposes. Additionally, we are restricted from exercising many of
the warrants until later in the fourth quarter of 1999 and first quarter of
2000. We are also precluded from using any type of derivative instrument to
secure the current unrealized gains associated with these equity instruments.
Hence, the amount of income we recognize in future periods from the disposition
of these equity instruments may vary materially from the current unrealized
amount due to fluctuations in the market prices of the underlying common stock
of these companies.
Investment securities totaled $1.4 billion at December 31, 1998. 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 our deposits outpacing the growth in loans during
1998, and primarily consisted of U.S. agency securities, collateralized mortgage
obligations and municipal securities.
The significant increase in municipal securities was composed of both
taxable and non-taxable municipal obligations, and was largely attributable to
our obtaining slightly higher yields on these investments as compared to U.S.
agency discount notes and bonds and other short-term securities. The decreases
in U.S. Treasury securities, mortgage-backed securities and commercial paper was
primarily due to sales and maturities. The overall growth in the investment
portfolio reflected management's
36
<PAGE>
actions to increase as well as to further diversify our portfolio of short-term
investments in response to a continued significant increase in liquidity.
At September 30, 1999, there were no investment securities we held which
were issued by a single party, excluding securities issued by the U.S.
Government or by U.S. Government agencies and corporations, and which exceeded
10.0% of our stockholders' equity.
LOANS
The composition of our loan portfolio, net of unearned income, as of
September 30, 1999 and each of the past five years is as follows:
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
SEPTEMBER 30, --------------------------------------------------------
1999 1998 1997 1996 1995 1994
-------------- ---------- ---------- -------- -------- --------
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial................. $1,443,667 $1,429,980 $1,051,218 $755,699 $622,488 $613,469
Real estate construction... 80,533 74,023 53,583 27,540 17,194 10,512
Real estate term........... 71,465 60,841 33,395 44,475 56,845 58,977
Consumer and other......... 65,351 47,077 36,449 35,778 41,878 20,851
---------- ---------- ---------- -------- -------- --------
Total loans................ $1,661,016 $1,611,921 $1,174,645 $863,492 $738,405 $703,809
========== ========== ========== ======== ======== ========
</TABLE>
Total loans, net of unearned income, at September 30, 1999, were
$1.7 billion, a $49.1 million, or 3.0%, increase compared to the $1.6 billion
total at December 31, 1998. While we continue to generate new loans in most of
our technology and life sciences and special industry niche practices, as well
as in specialized lending products, many of our clients, primarily in the
technology and life sciences niche, have received significant cash inflows from
the capital markets and venture capital community. Consequently, we have
experienced higher than normal loan paydowns and payoffs, which has caused total
loans to remain relatively unchanged between September 30, 1999 and the prior
year end.
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 our loan portfolio, as
evidenced by increased loan balances in most of our market niches, specialized
lending products and loan offices.
In December 1998, we announced that we had discontinued new loan
originations associated with our religious financial resources division. We 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 our ability to generate our anticipated loan yield and provide returns
that exceed our required return on capital. The credit quality of the religious
financial resources portfolio was not a factor in our decision to discontinue
new religious financial resources. Since inception, we have not incurred any
losses associated with the religious financial resources portfolio.
37
<PAGE>
The following table sets forth the remaining contractual maturity
distribution of our loans, reported on a gross basis, at September 30, 1999 for
fixed and variable rate commercial and real estate construction loans:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------------------------------------
AFTER ONE YEAR
ONE YEAR OR AND THROUGH AFTER FIVE
LESS FIVE YEARS YEARS TOTAL
----------- -------------- ---------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed rate loans:
Commercial................................... $ 38,487 $218,760 $121,327 $ 378,574
Real estate construction..................... -- 3,193 -- 3,193
-------- -------- -------- ----------
Total fixed rate loans....................... $ 38,487 $221,953 $121,327 $ 381,767
======== ======== ======== ==========
Variable rate loans:
Commercial................................... $693,797 $349,637 $ 33,152 $1,076,586
Real estate construction..................... 57,560 6,993 13,345 77,898
-------- -------- -------- ----------
Total variable rate loans.................... $751,357 $356,630 $ 46,497 $1,154,484
======== ======== ======== ==========
</TABLE>
Upon maturity, loans satisfying our credit quality standards may be eligible
for renewal. Such renewals are subject to the normal underwriting and credit
administration practices associated with new loans. We do not grant loans with
unconditional extension terms.
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 we follow underwriting and credit monitoring procedures
which we believe are appropriate in growing and managing the loan portfolio, in
the event of nonperformance by these other parties, our potential exposure to
credit losses could significantly affect our 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, our
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.
We regularly review and monitor 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. We identify potential problem credits and, based
upon known information, we develop action plans.
We have 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: our 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
38
<PAGE>
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 uses
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 our management.
An analysis of the allowance for loan losses for the three and nine months
ended September 30, 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ ------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period.................... $ 56,300 $ 46,000
Charge-offs:
Commerical...................................... (10,253) (22,295)
Real estate..................................... -- --
Consumer and other.............................. -- (196)
-------- --------
Total charge-offs................................. (10,253) (22,491)
-------- --------
Recoveries:
Commerical...................................... 3,181 6,942
Real estate..................................... -- --
Consumer and other.............................. 9 15
-------- --------
Total recoveries.................................. 3,190 6,957
-------- --------
Net charge-offs................................... (7,063) (15,534)
-------- --------
Provision for loan losses......................... 21,563 40,334
-------- --------
Balance at end of period.......................... $ 70,800 $ 70,800
======== ========
Annualized net charge-offs (recoveries) to average
total loans..................................... 1.8% 1.3%
======== ========
</TABLE>
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>
39
<PAGE>
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>
DECEMBER 31,
------------------------------
1995 1994
-------- -------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
LOANS AMOUNT LOANS
-------- -------- --------
(DOLLARS IN THOUSANDS)
<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 $70.8 million at September 30, 1999,
an increase of $24.8 million, or 53.9%, compared to the $46.0 million balance at
December 31, 1998. This increase was due to $40.3 million in additional
provisions to the allowance for loan losses, partially offset by $15.5 million
of net charge-offs for the nine months ended September 30, 1999. The
$40.3 million in loan loss provisions during the first nine months of 1999 was
in response to a recent trend of increased quarterly charge-offs.
We incurred $10.3 million and $22.5 million in gross charge-offs during the
three and nine months ended September 30, 1999, respectively. Gross charge-offs
for the 1999 third quarter included $5.8 million related to one commercial
credit, which was classified as nonperforming at June 30, 1999, in our computers
and peripherals niche. We realized recoveries of $3.2 million and $7.0 million
for the three and nine months ended September 30, 1999, respectively.
Pursuant to a memorandum of understanding with our primary regulators,
Silicon Valley Bank has committed to further enhance its credit monitoring and
review policies and submit reports to the regulators regarding credit quality.
We believe our allowance for loan losses is adequate as of September 30,
1999. However, future changes in circumstances, economic conditions or other
factors could cause us to increase or decrease the allowance for loan losses as
deemed necessary.
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 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.
We incurred $7.2 million in gross charge-offs during the fourth quarter of
1998, primarily centered in our 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. Our
QuickStart product was 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
40
<PAGE>
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 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 our decision to further bolster the allowance for loan
losses and maintain strong coverage ratios based on the economic uncertainty
surrounding many of our 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 our technology
and life sciences niche and the other in one of our special industry niches.
Gross recoveries of $4.2 million in 1997 included $1.1 million related to a
commercial credit in one of our 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 our 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.
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 data and ratios between
nonperforming loans, nonperforming assets and the allowance for loan losses.
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1999 1999
-------------- --------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonperforming assets:
Loans past due 90 days or more and still accruing
interest................................................ $ 1,553 $ 678 $ 740
Nonaccrual loans.......................................... 33,959 46,678 50,993
------- ------- -------
Total nonperforming loans................................. 35,512 47,356 51,733
OREO and other foreclosed assets.......................... 694 750 1,370
------- ------- -------
Total nonperforming assets.................................. $36,206 $48,106 $53,103
======= ======= =======
Nonperforming loans as a percentage of total loans.......... 2.1% 3.0% 3.2%
Nonperforming assets as a percentage of total assets........ 1.0% 1.2% 1.4%
Allowance for loan losses:.................................. $70,800 $56,300 $47,600
As a percentage of total loans............................ 4.2% 3.6% 2.9%
As a percentage of nonaccrual loans....................... 208.5% 120.6% 93.4%
As a percentage of nonperforming loans.................... 199.4% 118.9% 92.0%
</TABLE>
Nonperforming loans totaled $35.5 million, or 2.1% of total loans, at
September 30, 1999, compared to $19.9 million, or 1.2% of total loans, at
December 31, 1998. The increase in nonperforming loans from the prior year end
was primarily due to one credit in our non-technology financial services niche
in our diversified industries practice which had a balance of approximately
$15.0 million at September 30, 1999. This credit had been previously classified
as nonperforming at March 31, 1999. As of September 30, 1999, we believe this
credit is adequately secured with collateral
41
<PAGE>
and reserves, and that any future charge-offs associated with this loan will not
have a material impact on our future net income.
In addition to the loans disclosed in the foregoing analysis, we have
identified three loans with principal amounts aggregating approximately
$14.2 million, that, on the basis of our information, were judged to have a
higher than normal risk of becoming nonperforming. We are 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 $0.7 million at
September 30, 1999, a $1.1 million decrease from the $1.8 million balance at
December 31, 1998. This decrease was primarily due to the sale of our only OREO
property during the second quarter of 1999. The OREO and other foreclosed assets
balance at September 30, 1999, consisted of one asset which was acquired through
foreclosure. This asset consists of a favorable leasehold right under a master
lease which we acquired upon foreclosure of a loan during the third quarter of
1997.
Nonperforming loans totaled $51.7 million, or 3.2%, of total loans at
March 31, 1999 and $47.4 million, or 3.0%, of total loans at June 30, 1999,
compared to $19.9 million, or 1.2%, of total loans at December 31, 1998. This
increase in nonperforming loans was primarily due to four commercial credits.
The first credit, totaling approximately $7.0 million, was in our communications
practice, and was repaid in full during July 1999. The second credit was in
excess of $7.0 million and was in our health care services practice. We have
received payments on this credit totaling over $5.0 million during the second
and third quarters of 1999. The third credit is in our non-technology financial
services niche in our diversified industries practice. As discussed above, this
credit had a balance of approximately $15.0 million at September 30, 1999. The
fourth credit, in excess of $8.0 million, was classified as nonperforming during
the second quarter of 1999 and is in our computers and peripherals practice. We
charged-off $5.8 million of this credit during the third quarter of 1999.
The table below sets forth certain data and ratios between nonperforming
loans, nonperforming assets and the allowance for loan losses.
<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 and still
accruing interest............................ $ 441 $ 1,016 $ 8,556 $ 906 $ 444
Nonaccrual loans............................... 19,444 24,476 14,581 27,867 11,269(1)
------- ------- ------- ------- -------
Total nonperforming loans...................... 19,885 25,492 23,137 28,773 11,713
OREO and other foreclosed assets............... 1,800 1,858 1,948 4,955 7,089(1)
------- ------- ------- ------- -------
Total nonperforming assets....................... $21,685 $27,350 $25,085 $33,728 $18,802
======= ======= ======= ======= =======
Nonperforming loans as a percentage of total
loans.......................................... 1.2% 2.2% 2.7% 3.9% 1.7%
Nonperforming assets as a percentage 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 percentage of total loans................. 2.8% 3.2% 3.8% 4.0% 2.8%
As a percentage of nonaccrual loans............ 236.6% 154.0% 224.3% 106.6% 177.5%
As a percentage 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.
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
42
<PAGE>
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
were 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 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. provided Silicon Valley Bank with a guarantee of
this credit facility, and Silicon Valley Bank received the guarantee payment
related to this credit from the Export-Import Bank 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.
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
consisted of multiple undeveloped lots and was acquired prior to June 1993. The
OREO balance, which totaled $1.8 million at the end of 1998, decreased
$0.1 million during 1998 due to the sale of one of the OREO properties in 1998
at a gain of $1.3 million. The one other asset acquired through foreclosure,
which totaled $1.1 million at December 31, 1998, consisted of a favorable
leasehold right under a master lease which we acquired upon foreclosure of a
loan during 1997.
DEPOSITS
Our deposits are largely obtained from companies within the technology and
life sciences niche, and, to a lesser extent, from businesses within our special
industry niches and from individuals served by our executive banking division.
We do not obtain deposits from conventional retail sources and do not accept
brokered deposits.
The following table presents the composition of our deposits as of
September 30, 1999 and the five years ended December 31, 1998:
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
SEPTEMBER 30, --------------------------------------------------------------
1999 1998 1997 1996 1995 1994
------------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand.... $1,359,017 $ 921,790 $ 788,442 $ 599,257 $ 451,318 $ 401,455
NOW........................... 46,977 19,978 21,348 8,443 10,956 11,636
Regular money market.......... 355,474 350,110 351,921 326,661 288,619 328,115
Bonus money market............ 1,405,316 1,835,249 1,146,075 754,730 473,717 245,420
Time.......................... 238,017 142,626 124,621 85,213 65,450 88,747
---------- ---------- ---------- ---------- ---------- ----------
Total deposits................ $3,404,801 $3,269,753 $2,432,407 $1,774,304 $1,290,060 $1,075,373
========== ========== ========== ========== ========== ==========
</TABLE>
Total deposits were $3.4 billion at September 30, 1999, an increase of
$135.0 million, or 4.1%, from the prior year-end total of $3.3 billion. A
significant portion of the increase in deposits during the first
43
<PAGE>
nine months of 1999 was concentrated in the noninterest-bearing demand deposit
product, which increased $437.2 million, or 47.4%, to a total of $1.4 billion at
September 30, 1999. This increase was explained by high levels of client
liquidity attributable to a strong inflow of investment capital into the venture
capital community, and by growth during the first nine months of 1999 in the
number of clients we served.
Despite the high levels of client liquidity, our money market deposits at
September 30, 1999 decreased $424.6 million from December 31, 1998, and
decreased $615.6 million from June 30, 1999. The decrease in money market
deposits was the result of our lowering bonus money market deposit rates 123
basis points during the third quarter of 1999 and marketing higher-yielding
off-balance sheet private label mutual fund products to clients. We took these
actions in order to lower total assets and thereby increase Silicon Valley
Bank's Tier 1 leverage ratio. See "--Regulatory Matters" for further discussion.
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
our highest-rate paying deposit product, our bonus money market deposit product,
which increased $689.2 million, or 60.1%, and in our noninterest-bearing demand
deposits, which increased $133.3 million, or 16.9%, from the prior year end.
Increased balances during 1998 in most of our 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 we served.
YEAR 2000 READINESS DISCLOSURE
The Federal Financial Institutions Examination Council, or 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.
Following an initial awareness phase, we are 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
Silicon Valley Bank's information technology systems are off-the-shelf software,
remediation efforts have focused on obtaining Year 2000 compliant application
upgrades. Silicon Valley 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 Silicon Valley Bank. The
Year 2000 releases for all of Silicon Valley Bank's other internal mission
critical systems have also been received, forward date tested and certified.
Furthermore, testing of mission critical service providers has been completed as
of June 30, 1999. During the final phase, the Implementation Phase, remediated
and validated code was tested in interfaces with customers, business partners,
government institutions, and others. As of June 30, 1999, all mission critical
testing and implementation of mission
44
<PAGE>
critical systems into the production environment was completed. June 30, 1999
marked the final FFIEC milestone.
Although we have attempted to make every effort to be prepared for the
century date change, we may be affected by the Year 2000 compliance issues of
governmental agencies, businesses and other entities that provide data to, or
receive data from, us, and by entities, such as borrowers, vendors, customers,
and business partners, whose financial condition or operational capability is
significant to us. Therefore, our 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, we are 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 our ability to perform certain functions. Contingency
planning and testing of critical business processes was complete as of June 30,
1999.
If Year 2000 issues are not adequately addressed by us and significant third
parties, our 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 we depend,
including, but not limited to, such services as telecommunications, electrical
power and data processing. Failure of our 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 our efforts, there can be no
assurance that we or significant third party vendors or other significant third
parties will adequately address their Year 2000 issues. We are continuing to
assess the Year 2000 readiness of third parties but do not know at this time
whether the failure of third parties to be Year 2000 compliant will have a
material effect on our results of operations, liquidity and financial condition.
We currently estimate that our total cost for the Year 2000 project will
approximate $3.0 million. During the first nine months of 1999, we incurred
$1.4 million, bringing the total incurred in 1998 and 1999 for charges related
to our Year 2000 remediation effort to $2.9 million of expenses. We expect to
incur approximately $0.1 million during the remainder of 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. We do not believe that the redeployment of internal staff has or
will have a material impact on our financial condition or results of operations.
MARKET RISK MANAGEMENT
Interest rate risk is the most significant market risk impacting us. Our
monitoring activities related to managing interest rate risk include both
interest rate sensitivity "gap" analysis and the use of a simulation model to
measure the impact of market interest rate changes on the net present value of
estimated cash flows from our assets, liabilities and off-balance sheet items,
defined as our market value of portfolio equity. See our 1998 Annual Report on
Form 10-K which is incorporated into this prospectus by reference for disclosure
of the quantitative and qualitative information regarding the interest rate risk
inherent in interest rate risk sensitive instruments as of December 31, 1998.
Since December 31, 1998, there have been no changes in the assumptions we used
in monitoring interest rate risk, and we are in compliance with all material
interest rate risk policy guidelines as of September 30, 1999. Other types of
market risk affecting us in the normal course of our business activities include
foreign currency exchange risk and equity price risk. We do not consider the
impact on us resulting from these other two types of market risks to be
material. We do not maintain a portfolio of trading securities and do not intend
to engage in such activity in the immediate future.
45
<PAGE>
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.
We regularly assess 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 business activities.
Our asset/liability committee provides oversight to the liquidity management
process and recommends policy guidelines, subject to approval of our board of
directors, and courses of action to address our actual and projected liquidity
needs.
The ability to attract a stable, low-cost base of deposits is our primary
source of liquidity. Other sources of liquidity available to us include
short-term borrowings, which consist of federal funds purchased, security
repurchase agreements and other short-term borrowing arrangements. We can also
meet our liquidity requirements through the use of our portfolio of liquid
assets. We define liquid assets to 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 September 30, 1999, Silicon Valley
Bank's ratio of liquid assets to total deposits was 49.0%. This ratio is well in
excess of Silicon Valley Bank's minimum policy guidelines and is slightly lower
than the comparable ratio of 52.5% as of December 31, 1998. In addition to
monitoring the level of liquid assets relative to total deposits, Silicon Valley
Bank also utilizes other internal policy measures in its liquidity management
activities. As of September 30, 1999 and as of December 31, 1998 and 1997,
Silicon Valley Bank was in compliance with all of these policy measures.
CAPITAL RESOURCES
Our management seeks to maintain adequate capital to support anticipated
asset growth and credit risks, and to ensure that Silicon and Silicon Valley
Bank are in compliance with all regulatory capital guidelines. The primary
source of new capital for us has been the retention of earnings. Aside from
current earnings, an additional source of new capital for us has been the
issuance of common stock under our employee benefit plans, including our stock
option plans, defined contribution plans and employee stock purchase plan.
During the second quarter of 1998 we 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 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. We received proceeds
of $38.5 million related to the sale of these securities, net of underwriting
commissions and other offering expenses. The trust preferred securities are
presented as a separate line item in the consolidated balance sheet under the
caption "Company obligated mandatorily redeemable trust preferred securities of
subsidiary trust holding solely junior subordinated debentures."
Stockholders' equity totaled $243.5 million at September 30, 1999, an
increase of $27.6 million, or 12.8%, from the $215.9 million balance at
December 31, 1998. This increase resulted from net income of $27.3 million
combined with capital generated primarily through our employee benefit plans of
46
<PAGE>
$3.4 million, partially offset by a decrease in the after-tax net unrealized
gain on available-for-sale investments of $3.0 million from the prior year end.
See "--Investment Securities" for additional discussion on the net unrealized
loss on available-for-sale investments as of September 30, 1999.
Stockholders' equity was $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 our
employee benefit plans. We have not paid a cash dividend on our common stock
since 1992, and did not have any material commitments for capital expenditures
as of September 30, 1999.
Both Silicon and Silicon Valley Bank are subject to capital adequacy
guidelines of 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.
Both Silicon's and Silicon Valley Bank's capital ratios were in excess of
regulatory guidelines for a well capitalized depository institution as of
September 30, 1999 and December 31, 1998, 1997 and 1996.
Capital ratios for Silicon are set forth below:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------------------
1999 1998 1997 1996
------------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total risk-based capital ratio................ 12.7% 11.5% 11.5% 11.5%
Tier 1 risk-based capital ratio............... 11.5% 10.3% 10.2% 10.2%
Tier 1 leverage ratio......................... 6.7% 7.6% 7.1% 7.7%
</TABLE>
Capital ratios for Silicon Valley Bank are set forth below:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------------------
1999 1998 1997 1996
------------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total risk-based capital ratio................ 11.7% 10.2% 10.8% 10.8%
Tier 1 risk-based capital ratio............... 10.5% 9.0% 9.6% 9.6%
Tier 1 leverage ratio......................... 6.1% 6.6% 6.6% 7.2%
</TABLE>
The improvement in our total risk-based capital ratio and Tier 1 risk-based
capital ratio from December 31, 1998, to September 30, 1999, was attributable to
an increase in Tier 1 capital and an increase in our investments in low or zero
risk-weighted assets. The increase in Tier 1 capital resulted from the
aforementioned net income for the first nine months of 1999. The decrease in the
Tier 1 leverage ratio from December 31, 1998, to September 30, 1999, was
primarily attributable to an increase in average total assets due to strong
growth in deposits during the first nine months of 1999.
In an informal arrangement with Silicon Valley Bank's primary banking
regulators, pursuant to a memorandum of understanding entered into in late
September 1999, Silicon Valley Bank has agreed to maintain a Tier 1 leverage
ratio of at least 7.25%. By maintaining fourth quarter 1999 average assets that
approximate total assets as of September 30, 1999, combined with increasing Tier
1 capital through internally generated capital, primarily net income, we expect
Silicon Valley Bank's Tier 1 leverage ratio to exceed 7.25% at December 31,
1999. In addition, we plan to contribute substantially all of the
47
<PAGE>
proceeds of this offering to Silicon Valley Bank for use in Silicon Valley
Bank's business, which will further increase its Tier 1 leverage ratio.
Our total risk-based capital ratio at the end of 1998 was unchanged from the
prior year end and the 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 our strong deposit growth exceeding our loan growth
during 1998. Our Tier 1 leverage ratio increased to 7.6% from 7.1% at
December 31, 1997. This increase, together with the maintenance of our other
regulatory ratios were partially achieved through the aforementioned issuance of
$40.0 million in cumulative trust preferred securities during 1998 through SVB
Capital I. Our total risk-based capital ratio and Tier 1 risk-based capital
ratio were unchanged at the end of 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.
REGULATORY MATTERS
MEMORANDUM OF UNDERSTANDING
In late September 1999, Silicon Valley Bank entered into an informal
arrangement with the Federal Reserve Bank of San Francisco and the California
Department of Financial Institutions, Silicon Valley Bank's primary banking
regulators. Under the informal arrangement (pursuant to a memorandum of
understanding), Silicon Valley Bank has committed to maintain a Tier 1 leverage
ratio of at least 7.25%; obtain the regulators' consent prior to payment of
dividends; further enhance our credit monitoring and review policies and submit
reports to the regulators regarding credit quality. The Federal Reserve Bank of
San Francisco has also directed Silicon to obtain its approval before incurring
debt, paying dividends, repurchasing capital stock or entering into agreements
to acquire any entities or portfolios.
All of our capital ratios are in excess of regulatory guidelines for a well
capitalized depository institution. Silicon Valley Bank's Tier 1 leverage ratio
has declined since December 31, 1998, largely as a result of the rapid growth in
deposits experienced by Silicon Valley Bank during 1999. Silicon Valley Bank's
deposit growth in 1999 has been driven by high levels of client liquidity
attributable to a strong inflow of investment capital into the venture capital
community, and by growth in the number of clients served by Silicon Valley Bank.
In order to slow the growth in deposits due to the Tier 1 leverage ratio capital
constraints, Silicon Valley Bank implemented a program during the third quarter
of 1999 to market off-balance sheet products, such as mutual fund products, to
clients. This has allowed Silicon Valley Bank to continue serving its clients'
needs while restraining balance sheet growth driven by deposits.
By maintaining fourth quarter 1999 average assets that approximate total
assets as of September 30, 1999, combined with increasing Tier 1 capital through
internally generated capital, we expect Silicon Valley Bank's Tier 1 leverage
ratio to exceed 7.25% at December 31, 1999. In addition, we plan to contribute
substantially all of the proceeds of this offering to Silicon Valley Bank for
use in Silicon Valley Bank's business, which will further increase its Tier 1
leverage ratio.
FINANCIAL MODERNIZATION ACT
On November 12, 1999, the President signed into law the Gramm-Leach-Bliley
Act, or GLB Act, which significantly changed the regulatory structure and
oversight of the financial services industry. The GLB Act revises the Bank
Holding Company Act of 1956 and repeals the affiliation provisions of the
Glass-Steagall Act of 1933, permitting a qualifying holding company, called a
financial holding company, to engage in a full range of financial activities,
including banking, insurance, and securities activities, as well as merchant
banking and additional activities that are "financial in nature" or
48
<PAGE>
"incidental" to such financial activities. The GLB Act thus provides expanded
financial affiliation opportunities for existing bank holding companies and
permits various non-bank financial services providers to acquire banks by
allowing bank holding companies to engage in activities such as securities
underwriting, and underwriting and brokering of insurance products. The GLB Act
also expands passive investments by financial holding companies in any type of
company, financial or nonfinancial, through merchant banking and insurance
company investments. In order for a bank holding company to qualify as a
financial holding company, its subsidiary depository institutions must be
"well-capitalized" and "well-managed" and have at least a "satisfactory"
Community Reinvestment Act rating.
The GLB Act also reforms the regulatory framework of the financial services
industry. Under the GLB Act, financial holding companies are subject to primary
supervision by the Federal Reserve Board while current federal and state
regulators of financial holding company regulated subsidiaries such as insurers,
broker-dealers, investment companies and banks generally retain their
jurisdiction and authority. In order to implement its underlying purposes, the
GLB Act preempts state laws restricting the establishment of financial
affiliations authorized or permitted under the GLB Act, subject to specified
exceptions for state insurance regulators. With regard to securities laws, the
GLB Act removes the current blanket exemption for banks from the broker-dealer
registration requirements under the Securities Exchange Act of 1934, amends the
Investment Company Act of 1940 with respect to bank common trust fund and mutual
fund activities, and amends the Investment Advisers Act of 1940 to require
registration of banks that act as investment advisers for mutual funds. The GLB
Act also includes provisions concerning subsidiaries of national banks,
permitting a national bank to engage in most financial activities through a
financial subsidiary, provided that the bank and its depository institution
affiliates are "well capitalized" and "well managed" and meet certain other
qualification requirements relating to total assets, subordinated debt, capital,
risk management, and affiliate transactions. With respect to subsidiaries of
state banks, new activities as "principal" would be limited to those permissible
for a national bank financial subsidiary. The GLB Act requires a state bank with
a financial subsidiary permitted under the GLB Act as well as its depository
institution affiliates to be "well capitalized," and also subjects the bank to
the same capital, risk management and affiliate transaction rules as applicable
to national banks. The provisions of the GLB Act relating to financial holding
companies become effective 120 days after its enactment, or about March 15,
2000, excluding the federal preemption provisions, which became effective on the
date of enactment.
Silicon expects that it will elect financial holding company status at some
point after the effective date of the financial holding company provisions,
although it would not currently be permitted to do so.
49
<PAGE>
MANAGEMENT
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information about our directors and executive
officers of the Company, their ages (at February 16, 1999, the date of our proxy
statement), and their positions and offices with us.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ -------- ------------------------------------------
<S> <C> <C>
Daniel J. Kelleher........................ 56 Chairman of the Board of Silicon
John C. Dean.............................. 51 President, Chief Executive Officer and
Director; Chairman of the Board and Chief
Executive Officer of Silicon Valley Bank
Gary K. Barr.............................. 54 Director
James F. Burns, Jr........................ 61 Director
David M. deWilde.......................... 58 Director
Stephen E. Jackson........................ 53 Director
James R. Porter........................... 63 Director
Ann R. Wells.............................. 55 Director
James E. Anderson......................... 45 Executive Vice President
L. Blake Baldwin.......................... 47 Executive Vice President
David A. Jones............................ 41 Executive Vice President
Barbara B. Kamm........................... 47 Executive Vice President
Harry W. Kellogg, Jr...................... 55 Executive Vice President; Vice Chairman of
the Board of Silicon Valley Bank
Christopher T. Lutes...................... 31 Executive Vice President and Chief
Financial Officer
A. Catherine Ngo.......................... 38 Executive Vice President and General
Counsel
Marc J. Verissimo......................... 43 Executive Vice President
Kenneth P. Wilcox......................... 50 Executive Vice President; President and
Chief Operating Officer of Silicon Valley
Bank
</TABLE>
DANIEL J. KELLEHER. Mr. Kelleher is a private investor.
JOHN C. DEAN. Mr. Dean has been President of Silicon and Chief Executive
Officer of Silicon and Silicon Valley Bank since May 1993. He was appointed
Chairman of the Board of Silicon Valley Bank in May 1999. From May 1993 to
May 1999, he served as President of Silicon Valley Bank. He also has been an
Advisory Member of the Board of Directors of American Central Gas
Companies, Inc., Tulsa, Oklahoma, since August 1994. Prior to joining Silicon
and Silicon Valley Bank in May 1993, Mr. Dean served as President and Chief
Executive Officer of Pacific First Bank, a $6.5 billion federal savings bank,
headquartered in Seattle, Washington, from December 1991 until April 1993. From
1990 to 1991, Mr. Dean served as Chairman and Chief Executive Officer of First
Interstate Bank of Washington, and from 1986 to 1990, Chairman and Chief
Executive Officer of First Interstate Bank of Oklahoma.
GARY K. BARR. Mr. Barr has been President and Chief Executive Officer of
Pacific Coast Capital (a real estate investment and management company),
Carbondale, Colorado, since August 1992. He also has served as Chief Financial
Officer of Import/Export Time Advisor (an information software company) since
April 1997.
JAMES F. BURNS, JR. Mr. Burns has been a Trustee of CBR Liquidating Trust
since October 1996, and was Executive Vice President and Chief Financial Officer
of CBR Information Group (a credit and mortgage reporting company), Houston,
Texas, from September 1993 to October 1996. He was Executive Vice President and
Chief Financial Officer of Integratec, Inc. (a company providing credit
50
<PAGE>
origination, servicing and collection services, and the parent company of CBR
Information Group prior to the spin-off of CBR in 1993) from 1988 to 1993.
DAVID M. DEWILDE. Mr. deWilde has been Managing Partner of L.A.I. (an
executive search firm) since January 1998. He was Founder and Chief Executive
Officer of Chartwell Partners International, Inc. (an executive search firm)
from 1989 to January 1998. Mr. deWilde has been a Director of Berkshire Realty
Company, Inc. (a real estate investment trust), Boston, Massachusetts, since
1993.
STEPHEN E. JACKSON. Mr. Jackson has been President and Chief Executive
Officer of American Central Gas, Inc. (a gas pipeline company), Tulsa, Oklahoma
since April 1996. Mr. Jackson was the founder and has served as President and
Chief Executive Officer of American Land Development Company (a developer of
residential homesites), Tulsa, Oklahoma, since 1988. He was the co-founder and
has served as Chairman of the Board of Bristol Resources Corporation (an oil and
gas exploration and production company) since 1985.
JAMES R. PORTER. Mr. Porter has been Chairman of CCI/Triad (a computer
services company) since February 1997. He was President, Chief Executive Officer
and Director of Triad Systems Corporation (a computer software company),
Livermore, California, from September 1985 to February 1997. Mr. Porter has been
a member of the Board of Directors of Firstwave Technologies (a sales automation
company), Atlanta, Georgia, since April 1993, and a member of the Board of
Directors of Cellular Technical Services (a cellular device company), Seattle,
Washington, since July 1997.
ANN R. WELLS. Ms. Wells is retired. She was the President of Ann Wells
Personnel Services Division of Personnel Group of America (a personnel agency)
from January 1998 to December 1998. She was Chief Executive Officer of Ann Wells
Personnel Services, Inc. (a personnel agency), Sunnyvale, California, from
January 1980 to January 1998.
JAMES E. ANDERSON. Prior to joining Silicon Valley Bank in January 1999,
Mr. Anderson served as Managing Director in the Technology Investment Banking
Group of CIBC Oppenheimer, a U.S. investment banking and brokerage subsidiary of
the Canadian Imperial Bank of Commerce from December 1997 to December 1998. From
1995 to 1997, Mr. Anderson served as the Managing Director of the Information
Technology Group of CIBC Wood Gundy Securities, an investment banking affiliate
of the Canadian Imperial Bank of Commerce. From 1991 to 1995, Mr. Anderson
served as Managing Director of the Electronics Industry Group of CIBC, Inc.
L. BLAKE BALDWIN. Mr. Baldwin joined Silicon Valley Bank in July 1988 as
Vice President of Silicon Valley Bank's real estate division. Mr. Baldwin was
promoted to Senior Vice President and Division Manager of the Real Estate Group
in December 1992. In March 1996, Mr. Baldwin was appointed Executive Vice
President and Manager of Silicon Valley Bank's Special Industries Group. In
September 1998, Mr. Baldwin was appointed Manager of the Human Resources Group
and in November 1998 was appointed Manager of the Client and Corporate Resources
Group.
DAVID A. JONES. Mr. Jones joined Silicon Valley Bank in August 1997 as
Executive Vice President and Chief Credit Officer. Prior to joining Silicon
Valley Bank, Mr. Jones served as Senior Vice President of Wells Fargo Bank in
Portland, Oregon, from April 1996 to August 1997. From January 1982 to
April 1996, Mr. Jones was a Senior Vice President with First Interstate Bank in
Oklahoma, Texas and Oregon.
BARBARA B. KAMM. Ms. Kamm joined Silicon Valley Bank in January 1991 as
Vice President and Senior Loan Officer of Silicon Valley Bank's Southern
California Technology Group. Ms. Kamm served as Senior Vice President and
Manager of Silicon Valley Bank's Southern California Group from August 1993 to
September 1996 (having been promoted to Executive Vice President in
51
<PAGE>
November 1995). Prior to being appointed Manager of Silicon Valley Bank's
Products and Services Group in November 1998, Ms. Kamm served as Chief
Administrative Officer from September 1996 to November 1998.
HARRY W. KELLOGG, JR. Mr. Kellogg joined Silicon Valley Bank in
October 1986 as Senior Vice President of Silicon Valley Bank's Technology
Division. Mr. Kellogg served as Executive Vice President and Chief Marketing
Officer from September 1993 to April 1994 (when he left Silicon Valley Bank for
ten months, during which time, he served as Executive Vice President for the
Emerging Growth Industries Division of Cupertino Bank). Mr. Kellogg returned to
Silicon Valley Bank in February 1995 as Executive Vice President and Chief
Marketing Officer. From December 1997 to November 1998, he served as the Manager
of Silicon Valley Bank's Products and Services Group. Mr. Kellogg was appointed
Manager of Silicon Valley Bank's Strategic Marketing Group in November 1998, and
as the Vice Chairman of the Board of Silicon Valley Bank in May 1999.
CHRISTOPHER T. LUTES. Mr. Lutes joined Silicon Valley Bank's Treasury
Department in November 1994 as a Senior Treasury Analyst. In June 1995, he was
named Senior Vice President and Controller. Mr. Lutes was appointed Executive
Vice President and Chief Financial Officer in May 1998. Prior to joining Silicon
Valley Bank, Mr. Lutes served in various positions within the finance department
of Household Credit Services, a banking services company, in Salinas, California
from March 1993 to November 1994. Prior to that he served as an auditor with
Coopers & Lybrand LLP in Phoenix, Arizona.
A. CATHERINE NGO. Ms. Ngo joined Silicon Valley Bank in April 1993 as Vice
President and was appointed Manager of the Legal Department in November 1993.
Ms. Ngo held increasingly responsible positions with Silicon Valley Bank from
November 1993 to February 1997, when she was appointed Executive Vice President
and named Manager of the Legal and Loan Services Group. Prior to joining Silicon
Valley Bank, Ms. Ngo served as a senior associate for Hopkins & Carley, a law
corporation, from June 1989 to April 1993.
MARC J. VERISSIMO. Mr. Verrisimo joined Silicon Valley Bank in May 1993 as
Team Leader in the Northern California Technology Division. Mr. Verissimo was
promoted to Manager of the Silicon Valley Lending Division in September 1993.
Prior to joining Silicon Valley Bank, Mr. Verissimo served as Vice President in
the High Technology Group of Bank of America.
KENNETH P. WILCOX. Mr. Wilcox joined Silicon Valley Bank in April 1990 as
Regional Vice President of Silicon Valley Bank's East Coast Technology Group.
Prior to becoming Executive Vice President and Manager of the East Coast
Technology Group in November 1995, Mr. Wilcox held increasingly responsible
positions with Silicon Valley Bank (having served as Manager of the East Coast
Technology Group since June 1993). Mr. Wilcox was appointed Chief Banking
Officer in December 1997 and was named President and Chief Operating Officer of
Silicon Valley Bank in May 1999.
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement,
the underwriters named below have severally agreed to purchase from us an
aggregate of 1,250,000 shares of common stock in the amounts set forth opposite
their respective names.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Dain Rauscher Incorporated..................................
Keefe, Bruyette & Woods, Inc................................
Hoefer & Arnett Incorporated................................
----------
Total....................................................... 1,250,000
==========
</TABLE>
The underwriting agreement provides that the underwriters' obligations are
subject to certain conditions precedent and that the underwriters are committed
to purchase all of the shares of common stock offered hereby if the underwriters
purchase any of such shares of common stock.
The underwriters have advised us that they propose to offer the shares of
common stock to the public at the public offering price set forth on the cover
page of this prospectus and to selected dealers at such price less a concession
not in excess of $ per share. The underwriters may allow and such dealers may
reallow a discount not in excess of $ per share to certain other brokers and
dealers. After the offering, the public offering price, concession, discount and
other selling terms may be changed by the underwriters.
We have granted to the underwriters an option, exercisable for 30 days after
the date of this prospectus, to purchase up to 187,500 additional shares of
common stock to cover overallotments, if any, at the same price per share to be
paid by the underwriters for the other shares of common stock offered hereby.
The underwriters' commissions are shown in the following table. These
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per Share............................................ $ $
Total................................................ $ $
</TABLE>
In connection with the offering of the shares of common stock, the
underwriters and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the shares of common stock. Such
transactions may include over-allotment transactions in which an underwriter
creates a short position for its own account by selling more shares of common
stock than it is committed to purchase from us. In such a case, to cover all or
part of the short position, the underwriters may purchase shares of common stock
in the open market following completion of the initial offering of the shares of
common stock. The underwriters also may engage in stabilizing transactions in
which they bid for, and purchase, shares of common stock at a level above that
which might otherwise prevail in the open market for the purpose
53
<PAGE>
of preventing or retarding a decline in the market price of the shares of common
stock. The underwriters also may reclaim any selling concession allowed to a
dealer if the underwriters repurchase shares distributed by that dealer. Any of
the foregoing transactions may result in the maintenance of a price for the
shares of common stock at a level above that which might otherwise prevail in
the open market. Neither Silicon nor the underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the shares of common
stock. The underwriters are not required to engage in any of the foregoing
transactions and, if commenced, such transactions may be discontinued at any
time without notice.
Silicon has agreed to indemnify the underwriters and their controlling
persons against certain liabilities, including liabilities under the Securities
Act of 1933, as amended, or to contribute to payments the underwriters may be
required to make in respect thereof.
We and our executive officers and directors have agreed not to dispose of
any shares of our common stock, or securities exchangeable or exerciseable for
shares of our common stock, for a period of 120 days after the date of this
prospectus without the prior written consent of Dain Rauscher Incorporated.
From time to time, certain of the underwriters have provided, and expect to
provide in the future, investment banking services to us for which the
underwriters have received, and will receive, customary fees and commissions.
VALIDITY OF SECURITIES
The validity of the shares of common stock will be passed upon for us by our
counsel, Gibson, Dunn & Crutcher LLP, San Francisco, California. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by O'Melveny & Myers LLP, Los Angeles, California.
EXPERTS
Our consolidated financial statements as of December 31, 1998 and 1997, and
for each of the years in the three-year period ended December 31, 1998, have
been incorporated by reference herein and in the registration statement in
reliance upon the report of KPMG LLP, independent auditors, incorporated by
reference in this prospectus, and upon the authority of said firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
We have filed with the Commission a registration statement on Form S-3 under
the Securities Act of 1933, as amended, with respect to the shares of common
stock offered by this prospectus. This prospectus does not contain all the
information set forth in the registration statement and the exhibits and
schedules thereto. For further information about us and the shares of common
stock, we refer you to the registration statement and to the exhibits and
schedules filed with it. Statements contained in this prospectus as to the
contents of any contract or other documents referred to are not necessarily
complete. We refer you to those copies of contracts or other documents that have
been filed as exhibits to the registration statement, and statements relating to
such documents are qualified in all aspects by such reference. Anyone may
inspect a copy of the registration statement without charge at the Commission's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain copies of all or any portion of the registration statement by writing to
the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C.
20549, and paying prescribed fees. You may obtain information on the operation
of the Public Reference Room by calling the Commission at 1-800-SEC-0300. In
addition, the Commission maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding companies such as Silicon that file electronically with the
Commission.
54
<PAGE>
We are subject to the information requirements of the Exchange Act and
therefore we file reports, proxy statements and other information with the
Commission. You can inspect and copy the reports, proxy statements and other
information that we file at the public reference facilities maintained by the
Commission at the Public Reference Room, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices at 7 World Trade Center,
Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You can also obtain copies of such material from the
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission also makes electronic filings
publicly available on its Web site. Reports, proxy and information statements
and other information about us may be inspected at the National Association of
Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
INFORMATION INCORPORATED BY REFERENCE
The following documents, which we have filed with the SEC, are incorporated
by reference into this prospectus:
(1) our annual report on Form 10-K for the fiscal year ended December 31, 1998;
(2) our current reports on Form 8-K dated April 22, 1999 and November 18, 1999;
(3) our reports on Form 10-Q for the quarters ended March 31, 1999, June 30,
1999 and September 30, 1999; and
(4) our Proxy Statement dated April 15, 1999
All documents that we file with the Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and
before the termination of the offering of the shares of common stock shall be
deemed incorporated by reference into this prospectus and to be a part of this
prospectus from the respective dates of filing such documents.
We will provide without charge to each person to whom a copy of this
prospectus is delivered, upon such person's written or oral request, a copy of
any and all of the information incorporated by reference in this prospectus,
other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the information that this prospectus
incorporates. Requests should be directed to Investor Relations Department, 3003
Tasman Drive, Santa Clara, California 85054, telephone number (408) 654-7400.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus shall be deemed modified,
superseded or replaced for purposes of this prospectus to the extent that a
statement contained in this prospectus or in any subsequently filed document
that also is or is deemed to be incorporated by reference in this prospectus
modifies, supersedes or replaces such statement. Any statement so modified,
superseded or replaced shall not be deemed, except as so modified, superseded or
replaced, to constitute a part of this prospectus.
55
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,250,000 SHARES
[LOGO]
COMMON STOCK
----------------
PRICE $ PER SHARE
------------------------
DAIN RAUSCHER WESSELS
KEEFE, BRUYETTE & WOODS, INC.
HOEFER & ARNETT
INCORPORATED
---------------
, 1999
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 14,115
NASD fee.................................................... 5,576
Nasdaq fee.................................................. 17,500
Legal fees and expenses..................................... 150,000
Blue Sky fees and expenses.................................. 5,000
Accounting fees and expenses................................ 50,000
Printing expenses........................................... 70,000
Miscellaneous expenses...................................... 87,809
--------
Total..................................................... $400,000
========
</TABLE>
All of the above items except the registration fee, NASD fee and Nasdaq fee
are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Bylaws provide that the Registrant shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Registrant) by reason of the fact that he is or was a director,
officer, employee or agent of the Registrant, or is or was serving at the
request of the Registrant as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
The Registrant's Bylaws also provide that the Registrant shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Registrant to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the Registrant, or is or was
serving at the request of the Registrant as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Registrant; except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Registrant unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Any indemnification made under the previous two paragraphs will be made by
the Registrant only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent in proper in the
circumstances because he has met the applicable standard of conduct as set forth
above.
The Registrant's Certificate of Incorporation provides that a director of
the Registrant shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary
II-1
<PAGE>
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Registrant or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, as the same exists or hereafter may be amended, or (iv) for any transaction
from which the director derived an improper personal benefit. If the Delaware
General Corporation Law is amended to authorize the further elimination or
limitation of the liability of directors, then the liability of a director of
the Registrant, in addition to the limitation on personal liability provided
herein, shall be limited to the fullest extent permitted by the amended Delaware
General Corporation Law.
Pursuant to Section 7(b) of the Underwriting Agreement, the form of which is
filed as Exhibit 1.1 hereto, the Underwriters have agreed to indemnify the
directors and certain officers of the Registrant against certain liabilities.
ITEM 16. EXHIBITS
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
5.1 Opinion and Consent of Gibson, Dunn & Crutcher LLP.
23.1 Consent of KPMG LLP.
23.2 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit
5.1 above).
*24.1 A power of attorney is set forth on the signature page of
the Registration Statement.
</TABLE>
* Previously field.
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(2) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(3) The Registrant hereby undertakes that:
(A) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(B) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Santa Clara, State of California, on November 30,
1999.
<TABLE>
<S> <C>
Silicon Valley Bancshares
By */s/ JOHN C. DEAN
--------------------------------------------
John C. Dean
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
*/s/ DANIEL J. KELLEHER
- ------------------------------------ Chairman of the Board November 30, 1999
Daniel J. Kelleher
*/s/ JOHN C. DEAN President, Chief Executive Officer and
- ------------------------------------ Director November 30, 1999
John C. Dean (Principal Executive Officer)
*/s/ CHRISTOPHER T. LUTES Executive Vice President, Chief Financial
- ------------------------------------ Officer November 30, 1999
Christopher T. Lutes (Principal Financial Officer)
*/s/ DONAL DELANEY
- ------------------------------------ Senior Vice President, Controller November 30, 1999
Donal Delaney (Principal Accounting Officer)
*/s/ GARY K. BARR
- ------------------------------------ Director November 30, 1999
Gary K. Barr
*/s/ JAMES F. BURNS, JR.
- ------------------------------------ Director November 30, 1999
James F. Burns, Jr.
*/s/ DAVID M. DEWILDE
- ------------------------------------ Director November 30, 1999
David M. deWilde
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
*/s/ STEPHEN E. JACKSON
- ------------------------------------ Director November 30, 1999
Stephen E. Jackson
*/s/ JAMES R. PORTER
- ------------------------------------ Director November 30, 1999
James R. Porter
*/s/ ANN R. WELLS
- ------------------------------------ Director November 30, 1999
Ann R. Wells
/s/ A. CATHERINE NGO
- ------------------------------------ Attorney-in-fact November 30, 1999
A. Catherine Ngo
</TABLE>
* A. Catherine Ngo, by signing her name hereto, does sign this document on
behalf of the persons noted above, pursuant to a power of attorney duly
executed by such persons and previously filed.
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
5.1 Opinion and Consent of Gibson, Dunn & Crutcher LLP.
23.1 Consent of KPMG LLP.
23.2 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit
5.1 above).
*24.1 A power of attorney is set forth on the signature page of
the Registration Statement.
</TABLE>
* Previously filed.
<PAGE>
Exhibit 1.1
1,250,000 SHARES
SILICON VALLEY BANCSHARES
COMMON STOCK
PAR VALUE $0.001 PER SHARE
UNDERWRITING AGREEMENT
November __, 1999
Dain Rauscher Incorporated
As Representative of the several Underwriters
Dain Rauscher Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
Ladies and Gentlemen:
Silicon Valley Bancshares, a Delaware corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the several Underwriters named in Schedule A hereto (the
"Underwriters"), for which you are acting as representative (the
"Representative"), an aggregate of 1,250,000 shares (the "Firm Shares") of
Common Stock, par value $0.001 per share, of the Company (the "Common Stock"),
and, at the election of the Underwriters, up to 187,500 additional shares of
Common Stock (the "Option Shares"). The Firm Shares and the Option Shares are
herein collectively called the "Shares."
The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-3 (File No.
333-_______) and a related preliminary prospectus for the registration of the
Shares under the Securities Act of 1933, as amended (the "Act"). The
registration statement, as amended at the time it was declared effective,
including the information (if any) deemed to be part thereof pursuant to Rule
430A under the Act, is herein referred to as the "Registration Statement." The
form of prospectus first filed by the Company with the Commission pursuant to
Rules 424(b) and 430A under the Act is referred to herein as the "Prospectus."
Each preliminary prospectus included in the registration statement prior to the
time it becomes effective or filed with the Commission pursuant to Rule 424(a)
under the Act is referred to herein as a "Preliminary Prospectus." Copies of the
Registration Statement, including all exhibits and schedules thereto, any
amendments thereto and all Preliminary Prospectuses have been delivered to you.
The Company hereby confirms its agreements with respect to the
purchase of the Shares by the Underwriters as follows:
<PAGE>
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company represents and warrants to, and agrees with,
each of the Underwriters that:
(i) The Registration Statement has been declared effective
under the Act, and no post-effective amendment to the
Registration Statement has been filed as of the date of this
Agreement. No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceeding for
that purpose has been instituted or threatened by the
Commission.
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and
each Preliminary Prospectus, at the time of filing thereof,
conformed, in all material respects, to the requirements of
the Act and the rules and regulations of the Commission
promulgated thereunder (collectively, the "Regulations"), and
did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
provided, however, the Company makes no representation or
warranty as to information contained in or omitted in reliance
upon, and in conformity with, written information furnished to
the Company by or on behalf of any Underwriter through the
Representative expressly for use in the preparation thereof.
(iii) The Registration Statement conforms, and the Prospectus
and any amendments or supplements thereto will conform, in all
material respects to the requirements of the Act and the
Regulations. Neither the Registration Statement nor any
amendment thereto, and neither the Prospectus nor any
amendment or supplement thereto, contains or will contain, as
the case may be, any untrue statement of a material fact or
omits or will omit to state any material fact required to be
stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading; provided, however, that the Company makes no
representation or warranty as to information contained in or
omitted from the Registration Statement or the Prospectus, or
any such amendment or supplement, in reliance upon, and in
conformity with, written information furnished to the Company
by or on behalf of any Underwriter through the Representative,
expressly for use in the preparation thereof.
(iv) The Company has been duly organized, is validly existing
as a corporation in good standing under the laws of Delaware,
has the corporate power and authority to own or lease its
properties and conduct its business as described in the
Prospectus and is duly qualified to transact business in all
jurisdictions in which the failure so to qualify would have a
material adverse effect on the business or
2
<PAGE>
condition, financial or otherwise, of the Company and its
subsidiaries, taken as a whole.
(v) The Company does not directly or indirectly own any stock
or other equity interest in any corporation, partnership,
joint venture, unincorporated association or other entity
other than (a) Silicon Valley Bank, a California banking
corporation (the "Subsidiary Bank"), SVB Capital I, Silicon
Valley Real Estate Investment Corporation, SVB Securities,
Inc. and SVB Leasing Company (the Subsidiary Bank and such
other entities being collectively referred to herein as, the
"subsidiaries") and (b) rights to acquire stock, in the form
of warrants, in certain entities as part of negotiated credit
facilities and investments in venture capital funds from time
to time, which in each case does not constitute more than 5%
of the outstanding capital stock of such entity or partnership
interest. Each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own or
lease its properties and conduct its business as described in
the Prospectus, and is duly qualified to transact business in
all jurisdictions in which the failure so to qualify would
have a material adverse effect on the business or condition,
financial or otherwise, of the Company and its subsidiaries,
taken as a whole. All outstanding shares of capital stock of
each of the subsidiaries of the Company have been duly
authorized and validly issued, are fully paid and
non-assessable, and are owned, directly or indirectly, by the
Company free and clear of all liens, encumbrances and security
interests, except as disclosed in the Prospectus. No options,
warrants or other rights to purchase, agreements or other
obligations to issue, or other rights to convert any
obligations into, shares of capital stock or ownership
interests in any of the subsidiaries of the Company are
outstanding.
(vi) The Company and each of its subsidiaries holds and is
operating in material compliance with all licenses, approvals,
certificates and permits from governmental and regulatory
authorities, foreign and domestic, which are necessary to the
conduct of its business as described in the Prospectus and the
failure to comply with which would have a material adverse
effect on the business or condition, financial or otherwise,
of the Company and its subsidiaries, taken as a whole. Without
limiting the generality of the foregoing, the Company has all
necessary approvals of the Board of Governors of the Federal
Reserve System to own the stock of its subsidiaries. Neither
the Company nor any subsidiary has received notice of or has
actual knowledge of any basis for any proceeding or action
relating specifically to the Company or its subsidiaries for
the revocation or suspension of any such approval, license,
certificate or permit or any other action or proposed action
by any regulatory authority having jurisdiction over the
Company or its subsidiaries that would, if determined
adversely to the Company, have a material adverse effect on
the Company or any subsidiary.
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(vii) The Company is registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended. The
Subsidiary Bank is a member of the Federal Reserve System and
its deposit accounts are insured by the Federal Deposit
Insurance Corporation (the "FDIC") to the fullest extent
provided by law. No proceeding for the termination of such
insurance is pending or, to the Company's knowledge, is
threatened. Except as disclosed in the Prospectus, neither the
Company nor the Subsidiary Bank is subject to any cease and
desist order, written agreement or memorandum of understanding
with, or is a party to any commitment letter or similar
undertaking to, or is subject to any order or directive (other
than orders or directives applicable to the banking industry
as a whole) by, or is a recipient of any extraordinary
supervisory agreement letter from, or has adopted any board
resolutions (other than board resolutions required by law or
regulation and applicable to the banking industry as a whole)
at the request of, federal or state governmental authorities
charged with the supervision or regulation of national banking
associations, savings banks, banks, savings and loan companies
or associations, bank holding companies or savings and loan
holding companies or engaged in the insurance of bank deposits
(collectively, the "Bank Regulators"), neither the Company nor
the Subsidiary Bank has been advised by any Bank Regulator
that it is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any
such order, directive or extraordinary supervisory letter, and
neither the Company nor the Subsidiary Bank is contemplating
(A) becoming a party to any such written agreement, memorandum
of understanding, commitment letter or similar undertaking
with any Bank Regulator or (B) adopting any such board
resolutions at the request of any Bank Regulator.
(viii) The outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully
paid and nonassessable. All offers and sales by the Company of
outstanding shares of capital stock and other securities of
the Company prior to the date hereof, were made in material
compliance with the Act and all applicable state securities or
blue sky laws. The Shares to be issued and sold by the Company
to the Underwriters pursuant to this Agreement have been duly
authorized and, when issued and paid for as contemplated
herein, will be validly issued, fully paid and nonassessable.
There are no preemptive rights or, except as described in the
Prospectus, other rights to subscribe for or to purchase, or
any restriction upon the voting or transfer of, any shares of
capital stock of the Company pursuant to the Company's
Certificate of Incorporation, Bylaws or any agreement or other
instrument to which the Company is a party or by which the
Company is bound. Neither the filing of the Registration
Statement nor the offering or the sale of the Shares as
contemplated by this Agreement gives rise to any rights for,
or relating to, the registration of any shares of capital
stock or other securities of the Company, except such rights
which have been validly waived or satisfied. Except as
described in the Prospectus, there are no outstanding options,
warrants, agreements, contracts or other rights to purchase or
acquire from the Company shares of its capital stock. The
Company has the
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authorized and outstanding capital stock as set forth under
the heading "Capitalization" in the Prospectus. The
outstanding capital stock of the Company, including the
Shares, conforms, and the Shares to be issued by the Company
to the Underwriters will conform, to the description thereof
incorporated by reference into the Prospectus.
(ix) The financial statements, together with the related notes
and schedules as set forth in the Registration Statement,
present fairly the consolidated financial position, results of
operations and changes in financial position of the Company
and its subsidiaries on the basis stated in the Registration
Statement at the indicated dates and for the indicated
periods. Such financial statements have been prepared in
accordance with generally accepted accounting principles
consistently applied throughout the periods involved, and all
adjustments necessary for a fair presentation of results for
such periods have been made, except as otherwise stated
therein and except that the unaudited financial statements
included therein have been prepared in accordance with
generally accepted accounting principles applicable to
unaudited interim financial statements. The summary and
selected financial and statistical data included in the
Registration Statement present fairly the information shown
therein on the basis stated in the Registration Statement and
have been compiled on a basis consistent with the financial
statements presented therein. No other financial statements or
schedules are required to be included in the Registration
Statement or Prospectus. The allowance for loan losses of the
Bank is adequate based on management's assessment of various
factors affecting the loan portfolio, including a review of
problem loans, business conditions, historical loss
experience, evaluation of the quality of the underlying
collateral and holding and disposal costs.
(x) There is no action or proceeding pending or, to the
knowledge of the Company, threatened or contemplated against
the Company or any of its subsidiaries before any court or
administrative or regulatory agency which, if determined
adversely to the Company or any of its subsidiaries, would,
individually or in the aggregate, result in a material adverse
change in the business or condition (financial or otherwise)
or prospects of the Company and its subsidiaries, taken as a
whole, except as set forth in the Registration Statement.
(xi) The Company has good and marketable title to all
properties and assets reflected as owned in the financial
statements hereinabove described (or described as owned in the
Prospectus), in each case free and clear of all liens,
encumbrances and defects, except such as are described in the
Prospectus or do not materially affect the value of such
properties and assets and do not materially interfere with the
use made and proposed to be made of such properties and assets
by the Company and its subsidiaries. Any real property and
buildings held under lease by the Company and its subsidiaries
are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not
interfere
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with the use made and proposed to be made of such property
and buildings by the Company and its subsidiaries.
(xii) Since the respective dates as of which information is
given in the Registration Statement, (A) there has not been
any material adverse change, or any development involving a
prospective material adverse change, in or affecting the
condition, financial or otherwise, of the Company and its
subsidiaries, taken as a whole, or the business affairs,
management, financial position, shareholders' equity or
results of operations of the Company and its subsidiaries,
taken as a whole, whether or not occurring in the ordinary
course of business, including, without limitation, any
material decrease in the volume of loan originations, the
amount of deposits or the amount of loans, (B) there has not
been any transaction not in the ordinary course of business
entered into by the Company or any of its subsidiaries which
is material to the Company and its subsidiaries, taken as a
whole, other than transactions described or contemplated in
the Registration Statement, (C) the Company and its
subsidiaries have not incurred any material liabilities or
obligations, which are not in the ordinary course of business
or which could result in a material reduction in the future
earnings of the Company and its subsidiaries, (D) the Company
and its subsidiaries have not sustained any material loss or
interference with their respective businesses or properties
from fire, flood, windstorm, accident or other calamity,
whether or not covered by insurance, (E) there has not been
any change in the capital stock of the Company (other than
upon the exercise of options described in the Registration
Statement), or any material increase in the total borrowings
of the Company (as calculated under the heading
"Capitalization" in the Prospectus), (F) there has not been
any declaration or payment of any dividends or any
distributions of any kind with respect to the capital stock of
the Company, other than any dividends or distributions
described or contemplated in the Registration Statement, or
(G) there has not been any issuance of warrants, options,
convertible securities or other rights to purchase or acquire
capital stock of the Company.
(xiii) Neither the Company nor any of its subsidiaries is in
violation of, or in default under, its Charter or Bylaws, or
any statute, or any rule, regulation, order, judgment, decree
or authorization of any court or governmental or
administrative agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties,
or any indenture, mortgage, deed of trust, loan agreement,
lease, franchise, license or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by
which it or any of them are bound or to which any property or
assets of the Company or any of its subsidiaries is subject,
which violation or default would have a material adverse
effect on the business, condition (financial or otherwise) or
prospects of the Company and its subsidiaries, taken as a
whole.
(xiv) The issuance and sale of the Shares by the Company and
the compliance by the Company with all of the provisions of
this Agreement and the consummation
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<PAGE>
of the transactions contemplated herein will not violate any
provision of the Charter or Bylaws of the Company or any of
its subsidiaries or any statute or any order, judgment,
decree, rule, regulation or authorization of any court or
governmental or administrative agency or body having
jurisdiction over the Company or any of its subsidiaries or
any of their properties, and will not conflict with, result in
a breach or violation of, or constitute, either by itself or
upon notice or passage of time or both, a default under any
indenture, mortgage, deed of trust, loan agreement, lease,
franchise, license or other agreement or instrument to which
the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries is bound or to which
any property or assets of the Company or any of its
subsidiaries is subject. No approval, consent, order,
authorization, designation, declaration or filing by or with
any court or governmental agency or body is required for the
execution and delivery by the Company of this Agreement and
the consummation of the transactions herein contemplated,
except as may be required under the Act or any state
securities or blue sky laws.
(xv) The Company has the power and authority to enter into
this Agreement and to authorize, issue and sell the Shares it
will sell hereunder as contemplated hereby. This Agreement
have been duly and validly authorized, executed and delivered
by the Company.
(xvi) KPMG Peat Marwick has certified certain of the financial
statements filed with the Commission as part of the
Registration Statement and is an independent public accountant
as required by the Act and the Regulations.
(xvii) The accountant's reports on the financial statements of
the Company for each of the past two fiscal years did not
contain in adverse opinion or a disclaimer of opinion, and was
not qualified as to uncertainty, audit scope, or accounting
principles. During the two most recent fiscal years, there
were no disagreements between the Company and KPMG Peat
Marwick LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope
or procedure.
(xviii) The Company has not taken and will not take, directly
or indirectly, any action designed to, or which has
constituted, or which might reasonably be expected to cause or
result in, stabilization or manipulation of the price of the
Common Stock.
(xix) The Shares have been approved for designation upon
notice of issuance on the Nasdaq National Market.
(xx) The Company has obtained and delivered to the
Representative written agreements, in form and substance
satisfactory to the Representative, of each of its directors
and executive officers that no offer, sale, assignment,
transfer,
7
<PAGE>
encumbrance, contract to sell, grant of an option to purchase
or other disposition of any Common Stock or other capital
stock of the Company will be made for a period of 120 days
after the date of the Prospectus, directly or indirectly,
by such holder otherwise than hereunder or with the prior
written consent of the Representative.
(xxi) The Company has not distributed and will not distribute
any prospectus or other offering material in connection with
the offering and sale of the Shares other than any Preliminary
Prospectus or the Prospectus or other materials permitted by
the Act to be distributed by the Company.
(xxii) The Company is in compliance with all provisions of
Florida Statutes Section 517.075 (Chapter 92-198, laws of
Florida). The Company does not do any business, directly or
indirectly, with the government of Cuba or with any person or
entity located in Cuba.
(xxiii) The Company and its subsidiaries have filed all
federal, state, local and foreign tax returns or reports
required to be filed, and have paid in full all taxes
indicated by said returns or reports and all assessments
received by it or any of them to the extent that such taxes
have become due and payable, except where the Company and its
subsidiaries are contesting in good faith such taxes and
assessments. The Company and the Subsidiary Bank have also
filed all required applications, reports, returns and other
documents and information with all Bank Regulators, and no
such application, report, return or other document or
information contained, as of the date it was filed, an untrue
statement of a material fact required to be stated therein or
necessary to make the statements therein not misleading when
made or failed to comply with the applicable requirements of
the Bank Regulator with which such application, report,
return, document or information was filed.
(xxiv) The Company and each of its subsidiaries owns or
licenses all patents, patent applications, trademarks, service
marks, tradenames, trademark registrations, service mark
registrations, copyrights, licenses, inventions, trade secrets
and other similar rights necessary for the conduct of its
business as described in the Prospectus. The Company has no
knowledge of any infringement by it or its subsidiaries of any
patents, patent applications, trademarks, service marks,
tradenames, trademark registrations, service mark
registrations, copyrights, licenses, inventions, trade secrets
or other similar rights of others, and neither the Company nor
any of its subsidiaries has received any notice or claim of
conflict with the asserted rights of others with respect any
of the foregoing.
(xxv) The Company is not, and upon completion of the sale of
Shares contemplated hereby will not be, required to register
as an "investment company" under the Investment Company Act of
1940, as amended.
8
<PAGE>
(xxvi) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (A)
transactions are executed in accordance with management's
general or specific authorization; (B) transactions are
recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting
principles and the rules of Bank Regulators, and to maintain
accountability for assets; (C) access to records is permitted
only in accordance with management's general or specific
authorization; and (D) the recorded accountability for assets
is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxvii) Other than as contemplated by this Agreement, the
Company has not incurred any liability for any finder's or
broker's fee or agent's commission in connection with the
execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby.
(xxviii) The minute books and stock record books of the
Company and the subsidiaries are complete and correct and
accurately reflect all material actions taken at meetings of
the shareholders and directors of the Company and the
subsidiaries, and of all committees thereof, including,
without limitation, the loan committees and the audit
committees of the Subsidiary Bank, since September 1, 1994,
and all issuances and transfers of any shares of the capital
stock of the Company and the subsidiaries since September 1,
1994.
(xxix) No material labor dispute with the employees of the
Company or any of its subsidiaries exists or, to the Company's
knowledge, is imminent.
(xxx) The Company and its subsidiaries maintain insurance of
the types and in the amounts generally deemed adequate in
their respective businesses and consistent with insurance
coverage maintained by similar companies and businesses, and
as required by the rules and regulations of all governmental
agencies having jurisdiction over the Company or the
Subsidiary Bank, all of which insurance is in full force and
effect.
(xxxi) Neither the Company nor its subsidiaries have, directly
or indirectly, at any time during the past five years (A) made
any unlawful contribution to any candidate for public office,
or failed to disclose fully any contribution in violation of
law, or (B) made any payment to any federal or state
governmental officer or official, or other person charged with
similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any
jurisdiction thereof.
(b) Any certificate signed by any officer of the Company and
delivered to the Representative or counsel to the Underwriters shall be
deemed to be a representation and warranty of the Company to each
Underwriter as to the matters covered thereby.
9
<PAGE>
2. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and covenants contained herein, and subject to the
terms and conditions herein set forth, the Company agrees to sell to each
Underwriter and each Underwriter agrees, severally and not jointly, to purchase
from the Company, at a price of $____ per share, the number of Firm Shares set
forth opposite the name of each Underwriter in Schedule A hereto, subject to
adjustments in accordance with Section 8 hereof.
In addition, on the basis of the representations, warranties
and covenants herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants to the several Underwriters an option to
purchase, at their election, up to 187,500 Option Shares at a price of $______
per share, for the sole purpose of covering overallotments in the sale of the
Firm Shares. The option granted hereby may be exercised in whole or in part, but
only once, and at any time upon written notice given within 30 days after the
date of this Agreement, by you, as Representative of the several Underwriters,
to the Company setting forth the number of Option Shares as to which the several
Underwriters are exercising the option and the time and date at which
certificates are to be delivered. If any Option Shares are purchased, each
Underwriter agrees, severally and not jointly, to purchase that portion of the
number of Option Shares as to which such election shall have been exercised
(subject to adjustment to eliminate fractional shares) determined by multiplying
such number of Option Shares by a fraction the numerator of which is the maximum
number of Option Shares which such Underwriter is entitled to purchase as set
forth opposite the name of such Underwriter in Schedule A hereto and the
denominator of which is the maximum number of Option Shares which all of the
Underwriters are entitled to purchase hereunder. The time and date at which
certificates for Option Shares are to be delivered shall be determined by the
Representative but shall not be earlier than two or later than ten full business
days after the exercise of such option, and shall not in any event be prior to
the Closing Date. If the date of exercise of the option is three or more full
days before the Closing Date, the notice of exercise shall set the Closing Date
as the Option Closing Date.
Certificates in definitive form for the Shares to be purchased
by each Underwriter hereunder, and in such denominations and registered in such
names as Dain Rauscher Incorporated may request upon at least 48 hours' prior
notice to the Company, shall be delivered by or on behalf of the Company to you
for the account of such Underwriter at such time and place as shall hereafter be
designated by the Representative, against payment by such Underwriter or on its
behalf of the purchase price therefor by certified or official bank check or
checks, payable to the order of the Company in next day funds. The time and date
of such delivery and payment shall be, with respect to the Firm Shares, 6:30
a.m. Palo Alto time, at the offices of Gibson, Dunn & Crutcher LLP, One
Montgomery Street, 26th Floor, San Francisco, California 94104 on December __,
1999, or such other time and date as you and the Company may agree upon in
writing, such time and date being herein referred to as the "Closing Date," and,
with respect to the Option Shares, at the time and on the date specified by you
in the written notice given by you of the Underwriters' election to purchase the
Option Shares, or such other time and date as you and the Company may agree upon
in writing, such time and date being referred to herein as the "Option Closing
Date." Such certificates will be made available for
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checking and packaging at least twenty-four hours prior to the Closing Date or
the Option Closing Date, as the case may be, at a location as may be designated
by you.
3. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to make a public offering of the Firm Shares as soon as the
Representative deems it advisable to do so. The Firm Shares are to be initially
offered to the public at the initial public offering price of $______ per share.
To the extent, if at all, that any Option Shares are purchased pursuant to
Section 2 hereof, the Underwriters will offer such Option Shares to the public
on the foregoing terms.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees
with the several Underwriters that:
(a) The Company will prepare and timely file with the
Commission under Rule 424(b) under the Act a Prospectus
containing information previously omitted at the time of
effectiveness of the Registration Statement in reliance on
Rule 430A under the Act, and will not file any amendment to
the Registration Statement or supplement to the Prospectus of
which the Representative shall not previously have been
advised and furnished with a copy or as to which the
Representative shall have objected in writing promptly after
reasonable notice thereof or which is not in compliance with
the Act or the Regulations.
(b) The Company will advise the Representative
promptly of any request of the Commission for amendment of the
Registration Statement or for any supplement to the Prospectus
or for any additional information, or of the issuance by the
Commission of any stop order suspending the effectiveness of
the Registration Statement or the use of the Prospectus, of
the suspension of the qualification of the Shares for offering
or sale in any jurisdiction, or of the institution or
threatening of any proceedings for that purpose, and the
Company will use its best efforts to prevent the issuance of
any such stop order preventing or suspending the use of the
Prospectus or suspending such qualification and to obtain as
soon as possible the lifting thereof, if issued.
(c) To the extent required of issuers listed on the
Nasdaq National Market, the Company will endeavor to qualify
the Shares for sale under the securities laws of such
jurisdictions as the Representative may reasonably have
designated in writing and will, or will cause counsel to, make
such applications, file such documents, and furnish such
information as may be reasonably requested by the
Representative, provided that the Company shall not be
required to qualify as a foreign corporation or to file a
general consent to service of process in any jurisdiction
where it is not now so qualified or required to file such a
consent. The Company will, from time to time, prepare and file
such statements, reports and other documents as are or may be
required to continue such qualifications in effect for so long
a period as the Representative may reasonably request for
distribution of the Shares.
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(d) The Company will furnish the Underwriters with as
many copies of any Preliminary Prospectus as the
Representative may reasonably request and, during the period
when delivery of a prospectus is required under the Act, the
Company will furnish the Underwriters with as many copies of
the Prospectus in final form, or as thereafter amended or
supplemented, as the Representative may, from time to time,
reasonably request. The Company will deliver to the
Representative, at or before the Closing Date, two signed
copies of the Registration Statement and all amendments
thereto, including all exhibits filed therewith, and will
deliver to the Representative such number of copies of the
Registration Statement, without exhibits, and of all
amendments thereto, as the Representative may reasonably
request.
(e) If, during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer,
any event shall occur as a result of which the Prospectus as
then amended or supplemented would include an untrue statement
of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of
the circumstances existing at the time the Prospectus is
delivered to a purchaser, not misleading, or if for any other
reason it shall be necessary at any time to amend or
supplement the Prospectus to comply with any law, the Company
promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or
supplement to the Prospectus so that the Prospectus as so
amended or supplemented will not include an untrue statement
of a material fact or omit to state any material fact
necessary in order to make the statements therein in light of
the circumstances existing when it is so delivered, not
misleading, or so that the Prospectus will comply with law. In
case any Underwriter is required to deliver a prospectus in
connection with sales of any Shares at any time nine months or
more after the effective date of the Registration Statement,
upon the request of the Representative but at the expense of
such Underwriter, the Company will prepare and deliver to such
Underwriter as many copies as the Representative may request
of an amended or supplemented Prospectus complying with
Section 10(a)(3) of the Act.
(f) The Company will make generally available to its
security holders, as soon as it is practicable to do so, but
in any event not later than 18 months after the effective date
of the Registration Statement, an earnings statement (which
need not be audited) in reasonable detail, covering a period
of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earnings
statement shall satisfy the requirements of Section 11(a) of
the Act and Rule 158 thereunder and will advise you in writing
when such statement has been so made available.
(g) The Company will, for a period of five years from
the Closing Date, deliver to the Representative copies of its
annual report and copies of all other documents, reports and
information furnished by the Company to its
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security holders or filed with any securities exchange
pursuant to the requirements of such exchange or with the
Commission pursuant to the Act or the Securities Exchange Act
of 1934, as amended.
(h) No offering, sale or other disposition of any
Common Stock or other capital stock of the Company, or
warrants, options, convertible securities or other rights to
acquire such Common Stock or other capital stock (other than
pursuant to employee stock option plans, outstanding options
or on the conversion of convertible securities outstanding on
the date of this Agreement) will be made for a period of 180
days after the date of this Agreement, directly or indirectly,
by the Company otherwise than hereunder or with the prior
written consent of the Representative.
(i) The Company will apply the net proceeds from the
sale of the Shares to be sold by it hereunder substantially in
accordance with the purposes set forth under "Use of Proceeds"
in the Prospectus. The Company will invest such proceeds
pending their use in such a manner that, upon completion of
such investment, the Company will not be an "investment
company" as defined in the Investment Company Act of 1940, as
amended.
(j) The Company will use its best efforts to maintain
the designation of the Common Stock on the Nasdaq National
Market.
(k) The Company will file with the Commission such
information with respect to the use of proceeds from the sale
of the shares as may be required pursuant to Rule 463 under
the Act.
5. COSTS AND EXPENSES. Whether or not the transactions
contemplated by this Agreement are consummated, the Company will pay (directly
or by reimbursement) all costs, expenses and fees incident to the performance of
the obligations of the Company under this Agreement, including, without limiting
the generality of the foregoing, the following: accounting fees of the Company;
the fees and disbursements of counsel for the Company; the cost of preparing,
printing and filing of the Registration Statement, Preliminary Prospectuses and
the Prospectus and any amendments and supplements thereto and the printing,
mailing and delivery to the Underwriters and dealers of copies thereof and of
this Agreement, the Master Agreement Among Underwriters, any Master Selected
Dealers Agreement, the Blue Sky Memorandum and any supplements or amendments
thereto; the filing fees of the Commission; the filing fees and expenses
(including legal fees and disbursements of counsel for the Underwriters)
incident to securing any required review by the NASD of the terms of the sale of
the Shares; transfer taxes and the expenses, including the fees and
disbursements of counsel for the Underwriters incurred in connection with the
qualification of the Shares under state securities or Blue Sky laws; the fees
and expenses incurred in connection with the designation of the Shares on the
Nasdaq National Market; the costs of preparing stock certificates; the costs and
fees of any registrar or transfer agent and all other costs and expenses
incident to the performance of its obligations hereunder which are not otherwise
specifically provided for in this
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Section 5. In addition, the Company will pay all travel and lodging expenses
incurred by management of the Company in connection with any informational "road
show" meetings held in connection with the offering and will also pay for the
preparation of all materials used in connection with such meetings. The Company
shall not, however, be required to pay for any of the Underwriters' expenses
(other than those related to qualification of the Shares under state securities
or Blue Sky laws and those incident to securing any required review by the NASD
of the terms of the sale of the Shares) except that, if this Agreement shall not
be consummated because the conditions in Section 6 hereof are not satisfied, or
because this Agreement is terminated by the Representative pursuant to Section
10(a) hereof, or by reason of any failure, refusal or inability on the part of
the Company to perform any undertaking or satisfy any condition of this
Agreement or to comply with any of the terms hereof on its part to be performed,
unless such failure to satisfy said condition or to comply with said terms shall
be due to the default or omission of any Underwriter, then the Company shall
promptly upon request by the Representative reimburse the several Underwriters
for all appropriately itemized out-of-pocket accountable expenses, including
fees and disbursements of counsel, incurred in connection with investigating,
marketing and proposing to market the Shares or in contemplation of performing
their obligations hereunder; but the Company shall not in any event be liable to
any of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The several
obligations of the Underwriters to purchase the Firm Shares on the Closing Date
and the Option Shares, if any, on the Option Closing Date, are subject to the
condition that all representations and warranties of the Company contained
herein are true and correct, at and as of the Closing Date or the Option Closing
Date, as the case may be, the condition that the Company shall have performed
all of its covenants and obligations hereunder and to the following additional
conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed
for such filing by the Regulations and in accordance with Section 4(a)
hereof; no stop order suspending the effectiveness of the Registration
Statement, as amended from time to time, or any part thereof shall have
been issued, and no proceedings for that purpose shall have been
initiated or threatened, by the Commission; and all requests for
additional information on the part of the Commission shall have been
complied with to the reasonable satisfaction of the Representative.
(b) The Representative shall have received on the Closing Date
or the Option Closing Date, as the case may be, the opinion of Gibson,
Dunn & Crutcher LLP, counsel for the Company, dated the Closing Date or
the Option Closing Date, as the case may be, addressed to the
Underwriters, to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of
Delaware, with corporate power and authority to own or lease
its properties and conduct its business as described in the
Prospectus.
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(ii) The Company does not own any stock or other equity
interest in any corporation, partnership, joint venture,
unincorporated association or other entity other than (a) the
Subsidiary Bank, SVB Capital I, Silicon Valley Real Estate
Investment Corporation, SVB Securities, Inc. and SVB Leasing
Company and (b) rights to acquire stock, in the form of
warrants, in certain entities as part of negotiated credit
facilities and investments in venture capital funds from time
to time, which in each case does not constitute more than 5%
of the outstanding capital stock of such entity or partnership
interest. Each subsidiary of the Company has been duly
organized and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, with corporate power and authority to own or
lease its properties and conduct its business as described in
the Prospectus. The Company owns all of the issued and
outstanding capital stock of the Subsidiary Bank, SVB Capital
I, Silicon Valley Real Estate Investment Corporation, SVB
Securities, Inc. and SVB Leasing Company. The outstanding
shares of capital stock of each such subsidiary have been duly
authorized and validly issued, are fully paid and
nonassessable and are owned, directly or indirectly, by the
Company, free and clear of all liens, encumbrances and
security interests, other than security interests specifically
disclosed in the Prospectus. No options, warrants or other
rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into any shares of
capital stock or ownership interests in each such subsidiary
are outstanding.
(iii) The Company has authorized and outstanding capital stock
as described in the Prospectus. The outstanding shares of the
Company's capital stock have been duly authorized and validly
issued and are fully paid and nonassessable. The form of
certificate for the Shares is in due and proper form and
complies with all applicable statutory requirements. The
Shares to be issued and sold by the Company pursuant to this
Agreement have been duly authorized and, when issued and paid
for as contemplated herein, will be validly issued, fully paid
and nonassessable. To the knowledge of such counsel, no
preemptive or other similar subscription rights of
shareholders of the Company, or of holders of warrants,
options, convertible securities or other rights to acquire
shares of capital stock of the Company, exist with respect to
any of the Shares or the issue and sale thereof. To the
knowledge of such counsel, no rights to register outstanding
shares of the Company's capital stock, or shares issuable upon
the exercise of outstanding warrants, options, convertible
securities or other rights to acquire shares of such capital
stock, exist which have not been validly exercised or waived
with respect to the Registration Statement. The capital stock
of the Company, including the Shares, conforms in all material
respects to the description thereof incorporated by reference
into the Prospectus.
(iv) The Registration Statement has become effective under the
Act and, to the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are
pending or threatened by the Commission.
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(v) The Registration Statement, the Prospectus, and each
amendment or supplement thereto comply as to form in all
material respects with the requirements of the Act and the
Regulations (except that such counsel need express no opinion
as to the financial statements and related schedules included
therein).
(vi) The statements in the Prospectus under the caption "MD&A
- Regulatory Matters" insofar as such statements constitute a
summary of matters of law, are, in all material respects,
accurate summaries and fairly present the information called
for with respect to such matters.
(vii) Such counsel does not know of any contracts, agreements,
documents or instruments required to be filed as exhibits to
the Registration Statement, incorporated by reference into the
Prospectus, or described in the Registration Statement or the
Prospectus which are not so filed, incorporated by reference
or described as required; and insofar as any statements in the
Registration Statement or the Prospectus constitute summaries
of any contract, agreement, document or instrument to which
the Company is a party, such statements are, in all material
respects, accurate summaries and fairly present the
information called for with respect to such matters.
(viii) Such counsel knows of no legal or governmental
proceeding, pending or threatened, before any court or
administrative body or regulatory agency, to which the Company
or any of its subsidiaries is a party or to which any of the
properties of the Company or any of its subsidiaries is
subject that are required to be described in the Registration
Statement or Prospectus and are not so described, or statutes
or regulations that are required to be described in the
Registration Statement or the Prospectus that are not so
described.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not
and will not conflict with or result in a violation of or
default under the charter or bylaws of the Company or any of
its subsidiaries, or under any statute, permit, judgment,
decree, order, rule or regulation known to such counsel of any
court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their
properties, or under any lease, contract, indenture, mortgage,
loan agreement or other agreement or other instrument or
obligation known to such counsel to which the Company or any
of its subsidiaries is a party or by which the Company or any
of its subsidiaries is bound or to which any property or
assets of the Company or any of its subsidiaries is subject,
except such agreements, instruments or obligations with
respect to which valid consents or waivers have been obtained
by the Company or any of its subsidiaries.
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(x) The Company has the corporate power and authority to enter
into this Agreement and to authorize, issue and sell the
Shares as contemplated hereby. This Agreement has been duly
and validly authorized, executed and delivered by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory,
administrative or other governmental body is necessary in
connection with the execution and delivery of this Agreement
and the consummation of the transactions herein contemplated
(other than as may be required by state securities and blue
sky laws, as to which such counsel need express no opinion)
except such as have been obtained or made, specifying the
same.
(xii) The Company is not, and immediately upon completion of
the sale of Shares contemplated hereby will not be, required
to register as an "investment company" under the Investment
Company Act of 1940, as amended.
(xiii) Such counsel has no reason to believe that, as of its
effective date, the Registration Statement or any further
amendment thereto made by the Company prior to the Closing
Date or the Option Closing Date, as the case may be (other
than the financial statements and related schedules therein,
as to which such counsel need express no opinion), contained
an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading or that, as of its
date, the Prospectus or any further amendment or supplement
thereto made by the Company prior to the Closing Date or the
Option Closing Date, as the case may be (other than the
financial statements and related schedules therein, as to
which such counsel need express no opinion), contained an
untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in
light of the circumstances in which they were made, not
misleading or that, as of the Closing Date or the Option
Closing Date, as the case may be, either the Registration
Statement or the Prospectus or any further amendment or
supplement thereto made by the Company prior to the Closing
Date or the Option Closing Date, as the case may be (other
than the financial statements and related schedules therein,
as to which such counsel need express no opinion), contains an
untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein, in
light of the circumstances in which they were made, not
misleading; and they do not know of any amendment to the
Registration Statement required to be filed.
(xiv) The Subsidiary Bank has been duly organized and is
validly existing as a corporation in good standing under the
laws of California, with corporate power and authority to own
or lease its properties and conduct its business as described
in the Prospectus. The Company has all necessary power and
authority to own the Subsidiary Bank. The Subsidiary Bank is a
member of the Federal Reserve
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System and the deposits of the depositors in the Subsidiary
Bank are insured by the FDIC. The Company and the Subsidiary
Bank have all necessary consents and approvals under
applicable federal and state laws and regulations relating to
banks and bank holding companies to own their respective
assets and carry on their respective businesses as currently
conducted.
(xv) The Company is duly registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended.
(xvi) The Company has all necessary approvals of the Board of
Governors to own the stock of its subsidiaries. Except as
disclosed in the Prospectus, based on such counsel's
reasonable reliance on the Company's certification, neither
the Company nor the Subsidiary Bank is subject to any cease
and desist order, written agreement or memorandum of
understanding with, or are a party to any commitment letter or
similar undertaking to, or are subject to any order or
directive (other than orders or directives applicable to the
banking industry as a whole) by, or is a recipient of any
extraordinary supervisory agreement letter from, or has
adopted any board resolutions (other than board resolutions
required by law or regulation and applicable to the banking
industry as a whole) at the request of any of the Bank
Regulators, and based on such counsel's reasonable reliance at
the Company's certification, neither the Company nor the
Subsidiary Bank has been advised by any of the Bank Regulators
that it is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any
such order, directive, or extraordinary supervisory letter,
and neither the Company nor the Subsidiary Bank is
contemplating (A) becoming a party to any such written
agreement, memorandum of understanding, commitment letter or
similar undertaking with any Bank Regulator or (B) adopting
any such board resolutions at the request of any Bank
Regulator. Based on such Counsel's reasonable reliance on the
Company's certification, neither the Company nor any
subsidiary has received notice of or has knowledge of any
basis for any proceeding or action relating specifically to
the Company or its subsidiaries for the revocation or
suspension of any consent, authorization, approval, order,
license, certificate or permit issued by, or any other action
or proposed action by, any regulatory authority having
jurisdiction over the Company or its subsidiaries that would
have a material effect on the Company or any subsidiary.
(xvii) For purposes of the opinion of counsel described in
this Section 6(b), "based on such counsel's reasonable
reliance upon the Company's certification" means that such
counsel has relied solely upon a certification signed by a
duly authorized officer of the Company and to which such
counsel has no actual knowledge to the contrary.
(c) The Representative shall have received from O'Melveny & Myers LLP,
counsel for the Underwriters, an opinion dated the Closing Date or the
Option Closing Date, as the case may be, with respect to the
incorporation of the Company, the validity of the
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Shares, the Registration Statement, the Prospectus, and other related
matters as the Representative may reasonably request, and such counsel
shall have received such papers and information as they may reasonably
request to enable them to pass upon such matters.
(d) The Representative shall have received on each of the date hereof,
the Closing Date and the Option Closing Date, as the case may be, a
signed letter, dated as of the date hereof, the Closing Date or the
Option Closing Date, as the case may be, in form and substance
satisfactory to the Representative, from KPMG Peat Marwick LLP, to the
effect that they are independent public accountants with respect to the
Company and its subsidiaries within the meaning of the Act and the
Regulations and containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus.
(e) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date or the Option Closing Date, as the case may
be, there shall not have been any change or any development involving a
prospective change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of
the Company and its subsidiaries, otherwise than as set forth or
contemplated in the Prospectus, the effect of which, in the judgment of
the Representative, is material and adverse to the Company and makes it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at the Closing Date or the
Option Closing Date, as the case may be, on the terms and in the manner
contemplated in the Prospectus.
(f) The Representative shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates
of the chief executive officer and the chief financial officer of the
Company to the effect that, as of the Closing Date or the Option
Closing Date, as the case may be, each of them severally represents as
follows:
(i) The Prospectus was filed with the Commission pursuant to
Rule 424(b) within the applicable period prescribed for such
filing by the Regulations and in accordance with Section 4 of
this Agreement; no stop order suspending the effectiveness of
the Registration Statement has been issued, and no proceedings
for such purpose have been initiated or are, to the knowledge
of such officers, threatened by the Commission.
(ii) The representations and warranties of the Company set
forth in Section 1 of this Agreement are true and correct at
and as of the Closing Date or the Option Closing Date, as the
case may be, and the Company has performed all of its
obligations under this Agreement to be performed at or prior
to the Closing Date or the Option Closing Date, as the case
may be.
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(g) The Company shall have furnished to the Representative such further
certificates and documents as the Representative may reasonably have
requested.
The opinions and certificates mentioned in this Agreement
shall be deemed to be in compliance with the provisions hereof only if they are
in all material respects reasonably satisfactory to the Representative and to
O'Melveny & Myers LLP, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this
Section 6 shall not have been fulfilled when and as required by this Agreement
to be fulfilled, the obligations of the Underwriters hereunder may be terminated
by the Representative by notifying the Company of such termination in writing or
by telegram at or prior to the Closing Date or the Option Closing Date, as the
case may be. In such event, the Company and the Underwriters shall not be under
any obligation to each other (except to the extent provided in Sections 5 and 7
hereof).
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, each officer and director thereof, and each person, if
any, who controls any Underwriter within the meaning of the Act,
against any losses, claims, damages or liabilities to which such
Underwriter or such persons may became subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based
upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus or the Prospectus, including any amendments or supplements
thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the
statements therein not misleading in light of the circumstances under
which they were made, or (iii) any act or failure to act or any alleged
act or failure to act by any Underwriter in connection with or relating
in any manner to, the Common Stock or the offering contemplated hereby,
which is made in reliance upon any statement or omission of the type
referred to in clause (i) or (ii) above, and will reimburse each
Underwriter and each such controlling person for any legal or other
expenses reasonably incurred by such Underwriter or such controlling
person in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that the
Company shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement, or omission or alleged
omission, made in the Registration Statement, any Preliminary
Prospectus or the Prospectus, including any amendments or supplements
thereto, in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representative
specifically for use therein; and provided, further, that the Company
shall not be liable in the case of any matter covered by clause (iii)
above to the extent that it is determined in a final judgment by a
court of competent jurisdiction that such losses, claims, damages or
liabilities resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such Underwriter through its gross
negligence or willful misconduct.
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(b) Each Underwriter agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed
the Registration Statement and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims,
damages or liabilities to which the Company or any such director,
officer or controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or
arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of
the circumstances under which they were made, and will reimburse any
legal or other expenses reasonably incurred by the Company or any such
director, officer or controlling person in connection with
investigating or defending any such action or claim as such expenses
are incurred; provided, however, that each Underwriter will be liable
in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission
has been made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to
the Company by any Underwriter through the Representative specifically
for use therein.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity or contribution may be sought pursuant to this Section
7, such person (the "indemnified party") shall promptly notify the
person against whom such indemnity may be sought (the "indemnifying
party") in writing. No indemnification provided for in Section 7(a) or
(b) or contribution provided for in Section 7(d) shall be available
with respect to a proceeding to any party who shall fail to give notice
of such proceeding as provided in this Section 7(c) if the party to
whom notice was not given was unaware of the proceeding to which such
notice would have related and was prejudiced by the failure to give
such notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may
have to the indemnified party otherwise than on account of the
provisions of Section 7(a), (b) or (d). In case any such proceeding
shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate therein and, to the extent that it
shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In
any such proceeding, any indemnified party shall have the right to
retain its own counsel at its own expense. Notwithstanding the
foregoing, the indemnifying party shall pay promptly as incurred the
reasonable fees and expenses of the counsel retained by the indemnified
party in the event (i) the indemnifying party and the indemnified party
shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and the
indemnified party shall have
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reasonably concluded that there may be a conflict between the
positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal
defenses available to it or other indemnified parties which are
different from or additional to those available to the indemnifying
party. It is understood that the indemnifying party shall not, in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one
separate firm at any time for all such indemnified parties. Such firm
shall be designated in writing by the Representative and shall be
reasonably satisfactory to the Company in the case of parties
indemnified pursuant to Section 7(a) and shall be designated in
writing by the Company and shall be reasonably satisfactory to the
Representative in the case of parties indemnified pursuant to Section
7(b). The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent, but if settled
with such consent or if there be a final judgment for the plaintiff,
the indemnifying party agrees to indemnify the indemnified party from
and against any loss or liability by reason of such settlement or
judgment.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions or proceedings in respect
thereof) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not
permitted by applicable law, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in
such proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities
(or actions or proceedings in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by
the Company on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bears to
the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page
of the Prospectus. The relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one
hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Underwriters agree that
it would not be just and equitable if contributions pursuant to this
Section 7(d) were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to above in this Section 7(d). The amount paid
or payable by an
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indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereto) referred to
above in this Section 7(d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7(d), no Underwriter
shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter; and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Underwriters' obligations in
this Section 7(d) to contribute are several in proportion to their
respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section 7 shall
be in addition to any liability which the Company may otherwise have,
and the obligations of the Underwriters under this Section 7 shall be
in addition to any liability which the Underwriters may otherwise have.
8. DEFAULT BY UNDERWRITERS. If on the Closing Date or the
Option Closing Date, as the case may be, any Underwriter shall fail to purchase
and pay for the portion of the Shares which such Underwriter has agreed to
purchase and pay for on such date (otherwise than by reason of any default on
the part of the Company), you, as Representative of the Underwriters, shall use
your best efforts to procure within 36 hours thereafter one or more of the other
Underwriters, or any others, to purchase from the Company such amounts as may be
agreed upon, and upon the terms set forth herein, of the Firm Shares or Option
Shares, as the case may be, which the defaulting Underwriter or Underwriters
failed to purchase. If during such 36 hours, you, as Representative, shall not
have procured such other Underwriters, or any others, to purchase the Firm
Shares or Option Shares, as the case may be, agreed to be purchased by the
defaulting Underwriter or Underwriters, then (a) if the aggregate number of
Shares with respect to which such default shall occur does not exceed 10% of the
Firm Shares or Option Shares, as the case may be, covered hereby, the other
Underwriters shall be obligated, severally, in proportion to the respective
numbers of Firm Shares or Option Shares, as the case may be, which they are
obligated to purchase hereunder, to purchase the Firm Shares or Option Shares,
as the case may be, which such defaulting Underwriter or Underwriters failed to
purchase, or (b) if the aggregate number of shares of Firm Shares or Option
Shares, as the case may be, with respect to which such default shall occur
exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered
hereby, the Company or you as the Representative of the Underwriters will have
the right, by written notice given within the next 36-hour period to the parties
to this Agreement, to terminate this Agreement without liability on the part of
the non-defaulting Underwriters or of the Company except for expenses to be
borne by the Company and the Underwriters as provided in Section 5 hereof and
the indemnity and contribution agreements in Section 7 hereof. In the event of a
default by any Underwriter or Underwriters, as set forth in this Section 8, the
Closing Date or Option Closing Date, as the case may be, may be postponed for
such period, not exceeding seven days, as you, as Representative, may determine
in order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The term
"Underwriter" includes any person
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substituted for a defaulting Underwriter. Any action taken under this Section 8
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
9. NOTICES. All communications hereunder shall be in writing
and, except as otherwise provided herein, will be mailed, delivered or
telegraphed and confirmed as follows: if to the Underwriters, to Dain Rauscher
Incorporated, 60 South Sixth Street, Minneapolis, MN 55402, fax: (612) 371-2763,
Attention: David Welch, with a copy to O'Melveny & Myers LLP, 400 South Hope
Street, Los Angeles, California, fax: (213) 430-6407, Attention: Richard A.
Boehmer, Esq.; and if to the Company, to Silicon Valley Bancshares, 3003 Tasman
Drive, Santa Clara, California 95054, fax: (408) 654-7401, Attention: A.
Catherine Ngo, with a copy to Gibson, Dunn & Crutcher LLP, One Montgomery
Street, 26th Floor, San Francisco, California 94104, fax: (415) 986-5309,
Attention: Todd H. Baker, Esq.
10. TERMINATION. This Agreement may be terminated by the
Representative by notice to the Company as follows:
(a) at any time prior to the Closing Date if any of the
following has occurred: (i) since the respective dates as of which
information is given in the Registration Statement and the Prospectus,
any material adverse change in or affecting the condition, financial or
otherwise, of the Company and the Subsidiary Bank taken as a whole or
the business affairs, management, financial position, stockholders'
equity or results of operations of the Company and the Subsidiary Bank
taken as a whole, whether or not arising in the ordinary course of
business, (ii) any outbreak or escalation of hostilities or declaration
of war or national emergency after the date hereof or other national or
international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, escalation, declaration,
emergency, calamity, crisis or change on the financial markets of the
United States would, in your judgment, make the offering or delivery of
the Shares impracticable or inadvisable, (iii) suspension of trading in
securities on the New York Stock Exchange or the American Stock
Exchange or limitation on prices (other than limitations on hours or
numbers of days of trading) for securities on either such Exchange, or
a halt or suspension of trading in securities generally which are
quoted on Nasdaq National Market System, or (iv) declaration of a
banking moratorium by either federal or New York State authorities; or
(b) as provided in Sections 6 and 8 of this Agreement.
This Agreement also may be terminated by the Representative,
by notice to the Company, as to any obligation of the Underwriters to purchase
the Option Shares, upon the occurrence at any time prior to the Option Closing
Date of any of the events described in subparagraph (b) above or as provided in
Sections 6 and 8 of this Agreement.
11. WRITTEN INFORMATION. For all purposes under this Agreement
(including, without limitation, Section 1, Section 2 and Section 7 hereof), the
Company understands and agrees with each of the Underwriters that the following
constitutes the only written information
24
<PAGE>
furnished to the Company by or through the Representative specifically for use
in preparation of the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto: (i) the per share "Price to
Public" and per share "Underwriting Discounts and Commissions" set forth on the
cover page of the Prospectus and (ii) the information set forth under the
caption "Underwriting" in the Preliminary Prospectus and the Prospectus.
12. SUCCESSORS. This Agreement has been and is made solely for
the benefit of and shall be binding upon the Underwriters, the Company and their
respective successors, executors, administrators, heirs and assigns, and the
officers, directors and controlling persons referred to herein, and no other
person will have any right or obligation hereunder. The term "successors" shall
not include any purchaser of the Shares merely because of such purchase.
13. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation made
by or on behalf of any Underwriter or controlling person thereof, or by or on
behalf of the Company or its directors and officers and (c) delivery of and
payment for the Shares under this Agreement.
Each provision of this Agreement shall be interpreted in such
a manner as to be effective and valid under applicable law, but if any provision
of this Agreement is held to be invalid, illegal or unenforceable under any
applicable law or rule in any jurisdiction, such provision will be ineffective
only to the extent of such invalidity, illegality or unenforceability in such
jurisdiction or any provision hereof in any other jurisdiction
This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Minnesota, without regard to
conflicts of law principles.
25
<PAGE>
If the foregoing letter is in accordance with your
understanding of our agreement, please sign and return to us the enclosed
duplicates hereof, whereupon it will become a binding agreement among the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
SILICON VALLEY BANCSHARES
By:
---------------------------
John C. Dean
Chief Executive Officer
The foregoing Underwriting Agreement
is hereby confirmed
and accepted as of the date
first above written.
DAIN RAUSCHER INCORPORATED
As Representative of the several Underwriters
By:
--------------
J. David Welch
Its Managing Director
26
<PAGE>
SCHEDULE A
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Maximum Number
Underwriter Shares to be Purchased of Option Shares
----------- ---------------------- ----------------
<S> <C> <C>
Dain Rauscher Incorporated....................................
Keefe, Bruyette & Woods ......................................
Hoefer & Arnett, Incorporated ................................
Total....................................... 1,250,000 187,500
</TABLE>
27
<PAGE>
Exhibit 5.1
November 22, 1999
(212) 351-4000
Silicon Valley Bancshares
3003 Tasman Drive
Santa Clara, CA 95054
Re: Registration Statement on Form S-3
Registration No. 333-91159
--------------------------------------
Ladies and Gentlemen:
We have acted as counsel for Silicon Valley Bancshares, a Delaware
corporation (the "Company"), in connection with the registration by the Company
of shares of the Company's Common Stock, $0.001 par value per share (the "Common
Stock"), pursuant to the above-referenced Registration Statement on Form S-3
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"Act"). The Company proposes to issue and sell up to 1,437,500 shares of Common
Stock (the "Shares") to a group of underwriters (the "Underwriters"), including
Dain Rauscher Incorporated, Keefe, Bruyette & Woods, Inc. and Hoefer & Arnett
Incorporated, for offering to the public.
For the purpose of the opinion set forth below, we have examined and are
familiar with the proceedings taken and proposed to be taken by the Company in
connection with the authorization and issuance of the Shares, including, among
other things, such corporate records of the Company and certificates of officers
of the Company and of public officials and such other documents as we have
deemed relevant and necessary as the basis for the opinion set forth below. In
such examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
the originals of all documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such copies.
On the basis of such investigation as we have deemed necessary, we are of
the opinion that (i) the Shares have been duly authorized and (ii) when issued
and sold pursuant to the Registration Statement and in accordance with the terms
of the underwriting agreement between the Company and the Underwriters,
substantially in the form filed as an exhibit to the Registration Statement, the
Shares will be validly issued, fully paid and nonassessable.
The Company is a Delaware corporation. We are not admitted to practice in
Delaware. However, we are familiar with the Delaware General Corporation Law and
have made such review thereof as we consider necessary for the purpose of this
opinion. Therefore, this opinion is limited to the current laws of the State of
Delaware and the State of California, and to the current federal laws of the
United States of America.
We consent to the filing of this opinion as an exhibit to the Registration
Statement, and we further consent to the use of our name under the caption
"Validity of Securities" in the Registration Statement and the prospectus which
forms a part thereof. In giving these consents, we do not thereby admit that we
are within the category of persons whose consent is required under Section 7 of
the Securities Act or the Rules and Regulations of the Commission.
Very truly yours,
GIBSON, DUNN & CRUTCHER LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Silicon Valley Bancshares:
We consent to the incorporation by reference in Amendment No. 1 to the
registration statement 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, and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Mountain View, California
November 29, 1999
