<PAGE>
As filed with the Securities and Exchange Commission on May 12, 2000
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ________.
Commission File Number: 33-41102
---------------------
SILICON VALLEY BANCSHARES
(Exact name of registrant as specified in its charter)
Delaware 91-1962278
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3003 Tasman Drive
Santa Clara, California 95054-1191
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 654-7400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
At April 30, 2000, 23,023,498 shares of the registrant's common stock
($0.001 par value) were outstanding.
===============================================================================
This report contains a total of 28 pages.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
------------------------------
<S> <C> <C>
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
<CAPTION>
PART II - OTHER INFORMATION
---------------------------
<S> <C> <C>
ITEM 1. LEGAL PROCEEDINGS 27
ITEM 2. CHANGES IN SECURITIES 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 27
ITEM 5. OTHER INFORMATION 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 27
SIGNATURES 28
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Dollars in thousands, except par value) (Unaudited)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 393,295 $ 278,061
Federal funds sold and securities purchased under
agreement to resell 1,070,542 898,041
Investment securities, at fair value 1,910,499 1,747,408
Loans, net of unearned income 1,631,442 1,623,005
Allowance for loan losses (72,900) (71,800)
- -----------------------------------------------------------------------------------------------------
Net loans 1,558,542 1,551,205
Premises and equipment 10,270 10,742
Accrued interest receivable and other assets 121,377 110,941
- -----------------------------------------------------------------------------------------------------
Total assets $5,064,525 $4,596,398
=====================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Deposits:
Noninterest-bearing demand $2,405,490 $1,928,100
NOW 81,941 43,643
Money market 1,597,660 1,845,377
Time 430,760 292,285
- -----------------------------------------------------------------------------------------------------
Total deposits 4,515,851 4,109,405
Other liabilities 109,440 79,606
- -----------------------------------------------------------------------------------------------------
Total liabilities 4,625,291 4,189,011
- -----------------------------------------------------------------------------------------------------
Company obligated mandatorily redeemable trust preferred securities
of subsidiary trust holding solely junior subordinated debentures
(trust preferred securities) 38,550 38,537
Stockholders' Equity:
Preferred stock, $0.001 par value, 20,000,000 shares authorized;
none outstanding
Common stock, $0.001 par value, 60,000,000 shares authorized;
23,004,090 and 22,400,368 shares outstanding at
March 31, 2000 and December 31, 1999, respectively 23 22
Additional paid-in capital 171,034 153,440
Retained earnings 230,708 176,053
Unearned compensation (4,136) (2,327)
Accumulated other comprehensive income:
Net unrealized gains on available-for-sale investments 3,055 41,662
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 400,684 368,850
- -----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $5,064,525 $4,596,398
=====================================================================================================
</TABLE>
See notes to interim consolidated financial statements.
3
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the three months ended
--------------------------
March 31, March 31,
2000 1999
(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans $44,293 $37,532
Investment securities 24,556 18,844
Federal funds sold and securities purchased under
agreement to resell 16,027 5,978
- ----------------------------------------------------------------------------------------------------
Total interest income 84,876 62,354
Interest expense 13,376 20,952
- ----------------------------------------------------------------------------------------------------
Net interest income 71,500 41,402
Provision for loan losses 12,572 7,968
- ----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 58,928 33,434
- ----------------------------------------------------------------------------------------------------
Noninterest income:
Disposition of client warrants 39,354 821
Investment gains 29,888 131
Client investment fees 5,619 232
Letter of credit and foreign exchange income 3,631 2,669
Deposit service charges 714 667
Other 1,928 732
- ----------------------------------------------------------------------------------------------------
Total noninterest income 81,134 5,252
- ----------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and benefits 24,371 14,881
Retention and warrant incentive plans 9,850 320
Professional services 2,446 2,343
Business development and travel 2,443 1,331
Furniture and equipment 2,014 1,388
Net occupancy 1,904 1,469
Trust preferred securities distributions 825 825
Postage and supplies 788 665
Advertising and promotion 499 600
Telephone 496 399
Cost of other real estate owned - 273
Other 1,883 1,043
- ----------------------------------------------------------------------------------------------------
Total noninterest expense 47,519 25,537
- ----------------------------------------------------------------------------------------------------
Income before income tax expense 92,543 13,149
Income tax expense 37,888 5,313
- ----------------------------------------------------------------------------------------------------
Net income $54,655 $ 7,836
====================================================================================================
Basic earnings per share $ 2.42 $ 0.38
Diluted earnings per share $ 2.30 $ 0.38
====================================================================================================
</TABLE>
See notes to interim consolidated financial statements.
4
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the three months ended
--------------------------
March 31, March 31,
2000 1999
(Dollars in thousands) (Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 54,655 $ 7,836
Other comprehensive loss, net of tax:
Change in unrealized gains (losses) on available-for-sale investments:
Unrealized holding gains (losses) arising during period 2,287 (721)
Less: Reclassification adjustment for gains included in net income (40,894) (552)
- ------------------------------------------------------------------------------------------------------
Other comprehensive loss (38,607) (1,273)
- ------------------------------------------------------------------------------------------------------
Comprehensive income $ 16,048 $ 6,563
======================================================================================================
</TABLE>
See notes to interim consolidated financial statements.
5
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the three months ended
----------------------------
March 31, March 31,
2000 1999
(Dollars in thousands) (Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 54,655 $ 7,836
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 12,572 7,968
Provision for other real estate owned - 264
Depreciation and amortization 923 784
Net gains on sales of investment securities (29,888) (131)
Net gains on disposition of client warrants (39,354) (821)
(Increase) decrease in prepaid expenses (315) 69
Decrease (increase) in accrued interest receivable 1,434 (6,072)
Increase in taxes payable 37,650 1,939
Increase in unearned income 1,785 607
Other, net 5,059 (916)
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 44,521 11,527
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and paydowns of
investment securities 260,911 356,878
Proceeds from sales of investment securities 131,116 520,226
Purchases of investment securities (548,401) (986,548)
Net increase in loans (26,475) (11,098)
Proceeds from recoveries of charged off loans 4,781 1,709
Purchases of premises and equipment (451) (1,063)
- -------------------------------------------------------------------------------------------------------
Net cash used in investing activities (178,519) (119,896)
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 406,446 384,534
Proceeds from issuance of common stock,
net of issuance costs 15,287 366
- -------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 421,733 384,900
- -------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 287,735 276,531
Cash and cash equivalents at January 1, 1,176,102 522,203
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at March 31, $1,463,837 $ 798,734
=======================================================================================================
Supplemental disclosures:
Interest paid $ 13,129 $ 21,030
Income taxes paid $ 311 $ 3,457
========================================================================================================
</TABLE>
See notes to interim consolidated financial statements.
6
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Silicon Valley Bancshares and its
subsidiaries (the "Company") conform with generally accepted accounting
principles and prevailing practices within the banking industry. Certain
reclassifications have been made to the Company's 1999 consolidated financial
statements to conform to the 2000 presentations. Such reclassifications had no
effect on the results of operations or stockholders' equity. The following is a
summary of the significant accounting and reporting policies used in preparing
the interim consolidated financial statements.
NATURE OF OPERATIONS
Silicon Valley Bancshares is a bank holding company whose principal subsidiary
is Silicon Valley Bank (the "Bank"), a California-chartered bank with
headquarters in Santa Clara, California. The Bank maintains regional banking
offices in California, and additionally has loan offices in Arizona, Colorado,
Georgia, Illinois, Massachusetts, Minnesota, Oregon, Pennsylvania, Texas,
Virginia, and Washington. The Bank serves emerging growth and middle-market
companies in targeted niches, focusing on the technology and life sciences
industries, while also identifying and capitalizing on opportunities to serve
companies in other industries whose financial services needs are underserved.
Substantially all of the assets, liabilities and earnings of the Company relate
to its investment in the Bank.
CONSOLIDATION
The interim consolidated financial statements include the accounts of Silicon
Valley Bancshares and those of its wholly owned subsidiaries, the Bank, SVB
Capital I and SVB Leasing Company (inactive). Intercompany accounts and
transactions have been eliminated.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of Management, the interim consolidated financial statements
contain all adjustments (consisting of only normal, recurring adjustments)
necessary to present fairly the Company's consolidated financial position at
March 31, 2000, the results of its operations and cash flows for the three month
periods ended March 31, 2000, and March 31, 1999. The December 31, 1999,
consolidated financial statements were derived from audited financial
statements, and certain information and footnote disclosures normally presented
in annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted.
The interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's 1999 Annual Report on Form 10-K. The results of operations for the
three months ended March 31, 2000, may not necessarily be indicative of the
Company's operating results for the full year.
7
<PAGE>
BASIS OF FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and judgments that
affect the reported amounts of assets and liabilities as of the balance sheet
date and the results of operations for the period. Actual results could differ
from those estimates. A material estimate that is particularly susceptible to
possible change in the near term relates to the determination of the allowance
for loan losses. An estimate of possible changes or range of possible changes
cannot be made.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents as reported in the consolidated statements of cash
flows includes cash on hand, cash balances due from banks, federal funds sold,
and securities purchased under agreement to resell. The cash equivalents are
readily convertible to known amounts of cash and present an insignificant risk
of changes in value due to maturity dates of 90 days or less.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell as
reported in the consolidated balance sheets includes interest-bearing deposits
in other financial institutions of $542,000 and $291,000 at March 31, 2000, and
December 31, 1999, respectively.
NONACCRUAL LOANS
Loans are placed on nonaccrual status when they become 90 days past due as to
principal or interest payments (unless the principal and interest are well
secured and in the process of collection), when the Company has determined,
based upon currently known information, that the timely collection of principal
or interest is doubtful, or when the loans otherwise become impaired under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan."
When a loan is placed on nonaccrual status, the accrued interest is reversed
against interest income and the loan is accounted for on the cash or cost
recovery method thereafter until qualifying for return to accrual status.
Generally, a loan will be returned to accrual status when all delinquent
principal and interest become current in accordance with the terms of the loan
agreement and full collection of the principal appears probable.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB
Opinion No. 25, compensation expense is based on the difference, if any, on the
date of the grant, between the fair value of the Company's stock and the
exercise price. The Company accounts for stock issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
Issue No. 96-18.
8
<PAGE>
SEGMENT REPORTING
Management views the Company as one operating segment, therefore, separate
reporting of financial segment information under SFAS No. 131 is not considered
necessary. Management approaches the Company's principal subsidiary, the Bank,
as one business enterprise which operates in a single economic environment,
since the products and services, types of customers and regulatory environment
all have similar economic characteristics.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued and was effective for all fiscal years beginning after
June 15, 1999. SFAS No. 133 was subsequently amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
Effective Date of FASB Statement No. 133" and will now be effective for fiscal
years beginning after June 15, 2000, with early adoption permitted. SFAS No.
133, as amended, requires the Company to recognize all derivatives as either
assets or liabilities and measure those instruments at fair value. It further
provides criteria for derivative instruments to be designated as fair value,
cash flow and foreign currency hedges and establishes respective accounting
standards for reporting changes in the fair value of the derivative instruments.
Upon adoption, the Company will be required to adjust hedging instruments to
fair value in the balance sheet and recognize the offsetting gains or losses as
adjustments to be reported in net income or other comprehensive income, as
appropriate. The Company has not completed its assessment of the impact of SFAS
No. 133, as amended, on its consolidated financial position or results of
operations. The Company expects to adopt this statement on January 1, 2001.
REINCORPORATION
At the Annual Meeting of Shareholders, held on April 15, 1999, the shareholders
of a majority of the Company's outstanding common stock approved a change in the
Company's state of incorporation from California to Delaware. The
reincorporation was effective April 23, 1999 and provided for 60,000,000
authorized shares of common stock with a $0.001 par value per share and for
20,000,000 authorized shares of preferred stock with a $0.001 par value per
share. The accompanying consolidated financial statements have been
retroactively restated to give effect to the reincorporation. Such
reclassifications had no effect on the results of operations or stockholders'
equity.
2. EARNINGS PER SHARE
The Company computes net income per share in accordance with SFAS No. 128,
"Earnings per Share." Under the provisions of SFAS No. 128, basic earnings per
share (EPS) excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
financial instruments or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
9
<PAGE>
The following is a reconciliation of basic EPS to diluted EPS for the three
month periods ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
Net Per Share
Income Shares Amount
(Dollars and shares in thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months ended March 31, 2000:
Basic EPS:
Income available to common stockholders $54,655 22,624 $2.42
Effect of Dilutive Securities:
Stock options and restricted stock - 1,140 -
- --------------------------------------------------------------------------------------------------------------------
Diluted EPS:
Income available to common stockholders
plus assumed conversions $54,655 23,764 $2.30
====================================================================================================================
Three months ended March 31, 1999:
Basic EPS:
Income available to common stockholders $ 7,836 20,488 $0.38
Effect of Dilutive Securities:
Stock options and restricted stock - 320 -
- --------------------------------------------------------------------------------------------------------------------
Diluted EPS:
Income available to common stockholders
plus assumed conversions $ 7,836 20,808 $0.38
====================================================================================================================
</TABLE>
3. LOANS
The detailed composition of loans, net of unearned income of $10.4 million and
$8.6 million at March 31, 2000, and December 31, 1999, respectively, is
presented in the following table:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Dollars in thousands) (Unaudited)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial $1,434,272 $1,414,728
Real estate construction 72,170 76,209
Real estate term 55,916 67,738
Consumer and other 69,084 64,330
- --------------------------------------------------------------------------------------------------------
Total loans $1,631,442 $1,623,005
========================================================================================================
</TABLE>
10
<PAGE>
4. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the quarters ended March 31,
2000 and 1999 was as follows:
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Balance at January 1, $ 71,800 $46,000
Provision for loan losses 12,572 7,968
Loans charged off (16,253) (8,077)
Recoveries 4,781 1,709
- ----------------------------------------------------------------------------------------------------------
Balance at March 31, $ 72,900 $47,600
==========================================================================================================
</TABLE>
The aggregate recorded investment in loans for which impairment has been
determined in accordance with SFAS No. 114 totaled $28.8 million and $51.0
million at March 31, 2000, and March 31, 1999, respectively. Allocations of the
allowance for loan losses related to impaired loans totaled $13.4 million at
March 31, 2000, and $10.2 million at March 31, 1999. Average impaired loans for
the first quarter of 2000 and 1999 totaled $24.1 million and $36.8 million,
respectively.
5. STOCK SPLIT
In March 2000, the Board of Directors approved a two-for-one stock split, in the
form of a stock dividend of the Company's common stock. Holders of the Company's
$0.001 par value common stock as of the record date, April 21, 2000 will receive
one additional share of $0.001 par value for every one share of common stock
they own as of the record date. The settlement date for this stock dividend will
be May 15, 2000, therefore, all common share and per share amounts included in
the accompanying financial statements do not reflect this stock split.
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Throughout the following management discussion and analysis 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.
You should read the following discussion and analysis of financial condition and
results of operations in conjunction with our consolidated financial statements
and supplementary data as presented in Item 1 of this report. This discussion
and analysis includes "forward-looking statements" as that term is used in the
securities laws. All statements regarding our expected financial position,
business and strategies are forward-looking statements. In addition, in this
discussion and analysis the words "anticipates," "believes," "estimates,"
"seeks," "expects," "plans," "intends" and similar expressions, as they relate
to Silicon or our management, are intended to identify forward-looking
statements. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, and have based these expectations on
our beliefs as well as our assumptions, such expectations may prove to be
incorrect.
For information with respect to factors that could cause actual results to
differ from the expectations stated in the forward-looking statements, see the
text under the caption "Risk Factors" included in Item 7 of our annual report on
Form 10-K dated March 17, 2000. We urge investors to consider these factors
carefully in evaluating the forward-looking statements contained in this
discussion and analysis. All subsequent written or oral forward-looking
statements attributable to our company or persons acting on our behalf are
expressly qualified in their entirety by these cautionary statements. The
forward-looking statements included in this filing are made only as of the date
of this filing. We do not intend, and undertake no obligation, to update these
forward-looking statements.
Certain reclassifications have been made to our prior years results to conform
with 2000 presentations. Such reclassifications had no effect on our results of
operations or stockholders' equity.
EARNINGS SUMMARY
We reported net income of $54.7 million, or $2.30 per diluted share, for the
first quarter of 2000, compared with net income of $7.8 million, or $0.38 per
diluted share, for the first quarter of 1999. The annualized return on average
assets (ROA) was 4.6% in the first quarter of 2000 compared with 0.9% in the
same period of 1999. The annualized return on average equity (ROE) for the first
quarter of 2000 was 55.7%, compared with 14.5% in the first quarter of 1999.
The large increase in net income for the first quarter of 2000, as compared with
the first quarter of 1999, was primarily attributable to significant growth in
both net interest income and noninterest income, partially offset by increases
in the provision for loan losses and in noninterest expense. The major
components of net income and changes in these components are summarized in the
following table for the quarters ended March 31, 2000 and 1999, and are
discussed in more detail below.
12
<PAGE>
<TABLE>
<CAPTION>
2000 1999 2000 to 1999
Quarter Ended March 31, (Unaudited) (Unaudited) Increase
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Net interest income $71,500 $41,402 $30,098
Provision for loan losses 12,572 7,968 4,604
Noninterest income 81,134 5,252 75,882
Noninterest expense 47,519 25,537 21,982
- --------------------------------------------------------------------------------------------
Income before income taxes 92,543 13,149 79,394
Income tax expense 37,888 5,313 32,575
- --------------------------------------------------------------------------------------------
Net income $54,655 $ 7,836 $46,819
============================================================================================
</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 recurring
revenue. Net interest margin is defined as the amount of net interest income, on
a fully taxable-equivalent basis, expressed as a percentage of average
interest-earning assets. The average yield earned on interest-earning assets is
the amount of taxable-equivalent interest income expressed as a percentage of
average interest-earning assets. The average rate paid on funding sources is
defined as interest expense as a percentage of average interest-earning assets.
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 months ended March 31, 2000
and 1999.
13
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES, RATES AND YIELDS
- ----------------------------------------------------------------------------------------------------------------------
For the three months ended March 31,
------------------------------------------------------------------------
2000 1999
(Unaudited) (Unaudited)
-------------------------------- -------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold and securities
purchased under agreement to
resell(1) $1,101,198 $16,027 5.9% $ 509,434 $ 5,978 4.8%
Investment securities:
Taxable 1,588,349 23,112 5.9 1,253,046 17,581 5.7
Non-taxable(2) 143,040 2,221 6.2 123,377 1,944 6.4
Loans:
Commercial 1,397,920 39,331 11.3 1,393,750 32,925 9.6
Real estate construction and term 135,975 3,480 10.3 138,101 3,568 10.5
Consumer and other 65,069 1,482 9.2 45,667 1,039 9.2
- ------------------------------------------ ----------------------------------- --------------------------------
Total loans 1,598,964 44,293 11.1 1,577,518 37,532 9.6
- ------------------------------------------ ----------------------------------- --------------------------------
Total interest-earning assets 4,431,551 85,653 7.8 3,463,375 63,035 7.4
- ------------------------------------------ ----------------------------------- --------------------------------
Cash and due from banks 283,142 153,377
Allowance for loan losses (71,312) (49,406)
Other real estate owned - 605
Other assets 186,009 62,609
- ------------------------------------------ ---------- ----------
Total assets $4,829,390 $3,630,560
========================================== ========== ==========
Funding Sources:
Interest-Bearing Liabilities:
NOW deposits $ 52,596 260 2.0 $ 22,346 76 1.4
Regular money market deposits 419,387 1,904 1.8 338,296 2,250 2.7
Bonus money market deposits 1,498,010 7,579 2.0 1,926,388 17,077 3.6
Time deposits 357,647 3,633 4.1 146,246 1,549 4.3
- ------------------------------------------ ----------------------------------- --------------------------------
Total interest-bearing liabilities 2,327,640 13,376 2.3 2,433,276 20,952 3.5
Portion of noninterest-bearing
funding sources 2,103,911 1,030,099
- ------------------------------------------ ----------------------------------- --------------------------------
Total funding sources 4,431,551 13,376 1.2 3,463,375 20,952 2.4
- ------------------------------------------ ----------------------------------- --------------------------------
Noninterest-Bearing Funding Sources:
Demand deposits 1,981,318 915,443
Other liabilities 86,945 24,404
Trust preferred securities(3) 38,539 38,488
Stockholders' equity 394,948 218,949
Portion used to fund
interest-earning assets (2,103,911) (1,030,099)
- ------------------------------------------ ----------- -----------
Total liabilities and stockholders' equity $4,829,390 $3,630,560
========================================== ========== ===========
Net interest income and margin $72,277 6.6% $42,083 5.0%
======= ==== ======= ====
Total deposits $4,308,958 $3,348,719
========================================== ========== ==========
</TABLE>
(1) Includes average interest-bearing deposits in other financial institutions
of $364 and $195 for the three months ended March 31, 2000 and 1999,
respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in 2000
and 1999. The tax equivalent adjustments were $777 and $680 for the three
months ended March 31, 2000 and 1999, respectively.
(3) The 8.25% annual distribution to SVB Capital I is recorded as a component
of noninterest expense.
14
<PAGE>
Net interest income is affected by changes in the amount and mix of
interest-earnings assets and interest-bearing liabilities, referred to as
"volume change." Net interest income is also affected by changes in yields
earned on interest-earning assets and rates paid on interest-bearing
liabilities, referred to as "rate change." The following table sets forth
changes in interest income and interest expense for each major category of
interest-earning assets and interest-bearing liabilities. The table also
reflects the amount of change attributable to both volume and rate changes for
the 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 2000 and 1999.
<TABLE>
<CAPTION>
First Quarter 2000 Compared to First Quarter 1999
-------------------------------------------------
Increase (Decrease)
Due to Change in
---------------------------------------
(Dollars in thousands) Volume Rate Total
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Federal funds sold and
securities purchased under
agreement to resell $ 8,388 $ 1,661 $10,049
Investment securities 5,511 297 5,808
Loans 546 6,215 6,761
- -------------------------------------------------------------------------------------------
Increase in interest income 14,445 8,173 22,618
- -------------------------------------------------------------------------------------------
Interest expense:
NOW deposits 138 46 184
Regular money market deposits 995 (1,341) (346)
Bonus money market deposits (3,218) (6,280) (9,498)
Time deposits 2,157 (73) 2,084
- -------------------------------------------------------------------------------------------
Increase (decrease) in interest expense 72 (7,648) (7,576)
- -------------------------------------------------------------------------------------------
Increase in net interest income $14,373 $15,821 $30,194
===========================================================================================
</TABLE>
Net interest income, on a fully taxable-equivalent basis, totaled $72.3 million
for the first quarter of 2000, an increase of $30.2 million, or 71.7%, from the
$42.1 million total for the first quarter of 1999. The increase in net interest
income was the result of a $22.6 million, or 35.9%, increase in interest income,
combined with a $7.6 million, or 36.2%, decrease in interest expense over the
comparable prior year period.
The $22.6 million increase in interest income for the first quarter of 2000, as
compared to the first quarter of 1999, was the result of a $14.4 million
favorable volume variance and a $8.2 million favorable rate variance. The
favorable volume variance resulted from a $968.2 million, or 28.0%, increase in
average interest-earning assets over the comparable period in the prior year.
The increase in average interest-earning assets resulted from strong growth in
our average deposits, which increased $960.2 million, or 28.7%, in the 2000
first quarter compared to the first quarter of 1999. The increase in average
interest-earning assets was primarily centered in highly liquid, federal funds
sold, securities purchased under agreement to resell and investment securities,
which collectively increased $946.7 million.
Average investment securities for the first quarter of 2000 increased $355.0
million, or 25.8%, as compared to the 1999 first quarter, resulting in a $5.5
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,
collateralized mortgage obligations and municipal securities. The growth in the
investment
15
<PAGE>
portfolio reflected our actions to continue to increase as well as further
diversify our portfolio of short-term investments in response to the continuing
increase in liquidity.
Average federal funds sold and securities purchased under agreement to resell in
the first quarter of 2000 increased a combined $591.8 million, or 116.2%, over
the prior year first quarter, resulting in a $8.4 million favorable volume
variance. This increase was a result of the aforementioned strong growth in
average deposits during the past year and reflected our actions to continue to
further diversify our portfolio of short-term investments.
Favorable rate variances associated with each component of interest-earning
assets combined to increase interest income by $8.2 million in first quarter of
2000, as compared to the respective prior year period. Short-term market
interest rates have increased on an overall basis during the past year. As a
result of this increase, we earned higher yields during the first quarter of
2000 on federal funds sold, securities purchased under agreements to resell and
our investment securities, a significant portion of which were short-term in
nature, resulting in a $2.0 million favorable rate variance as compared to the
prior year. The average yield on loans in first quarter 2000 also increased 150
basis points from the respective prior year first quarter, accounting for the
remaining $6.2 million of the total favorable rate variance. This increase was
primarily attributable to a 94 basis point increase in our weighted average
prime rate in the first quarter of 2000 as compared to the similar prior year
period. A significant portion of our loans continue to be prime rate-based as of
March 31, 2000.
The yield on average interest-earning assets increased 40 basis points in the
first quarter of 2000 from the comparable prior year period. This increase
primarily resulted from a rise in the average yield on loans, largely due to an
increase in our prime rate, as well as an increase in short-term market rates,
which resulted in increased yields on federal funds sold and securities
purchased under agreement to resell.
Total interest expense in the 2000 first quarter decreased $7.6 million from the
first quarter of 1999. This decrease was due to a favorable rate variance of
$7.6 million, partially offset by an unfavorable volume variance of $0.1
million. The favorable rate variance largely resulted from a reduction in the
average rate paid on our bonus money market deposit product, from 3.6% in first
quarter 1999 to 2.0% in first quarter 2000. The reduction in average rates paid
on interest-bearing liabilities during the first quarter of 2000 as compared to
the similar prior year period was primarily attributable to our lowering the
rate paid on our bonus money market deposit product by 188 basis points. We took
this action in order to lower total assets and thereby increase our Tier 1
leverage capital ratio. See " Item 2. Capital Resources."
We experienced a $0.1 million unfavorable volume variance on interest-bearing
liabilities despite a $105.6 million, or 4.3%, decrease in total
interest-bearing liabilities. This unfavorable variance was primarily due to a
shift in the composition of the deposit balances towards higher rate paying
deposit products, such as time deposits.
The average cost of funds paid on interest-bearing liabilities in the first
quarter of 2000 of 1.2% was down from the 2.4% paid in the first quarter of
1999. The decrease in the average cost of funds was largely due to a decrease of
160 basis points in the average rate paid on our bonus money market deposit
product.
16
<PAGE>
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 $12.6 million for the first quarter of
2000, a $4.6 million, or 57.8%, increase compared to the $8.0 million provision
for the first quarter of 1999. See "Financial Condition - Credit Quality and the
Allowance for Loan Losses" for additional related discussion.
NONINTEREST INCOME
The following table summarizes the components of noninterest income for the
quarters ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Quarter Ended March 31, 2000 1999
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Disposition of client warrants $39,354 $ 821
Investment gains 29,888 131
Client investment fees 5,619 232
Letter of credit and foreign exchange income 3,631 2,669
Deposit service charges 714 667
Other 1,928 732
- --------------------------------------------------------------------------------
Total noninterest income $81,134 $5,252
================================================================================
</TABLE>
Noninterest income increased $75.9 million to a total of $81.1 million in the
first quarter of 2000, versus $5.3 million in the prior year first quarter. This
increase was largely due to a $38.5 million increase in income from the
disposition of client warrants, combined with a $29.8 million increase in
investment gains and a $5.4 million increase in client investment fees.
Income from the disposition of client warrants totaled $39.4 million and $0.8
million in the first quarters of 2000 and 1999, respectively. We have
historically obtained rights to acquire stock, in the form of warrants, in
certain clients primarily as part of negotiated credit facilities. The receipt
of warrants does not change the loan covenants or other collateral control
techniques we employee to mitigate the risk of a loan becoming nonperforming.
The collateral requirements on loans with warrants are similar to lending
arrangements where warrants are not obtained. The timing and amount of income
from the disposition of client warrants typically depends upon factors beyond
our control, including the general condition of the public equity markets as
well as the merger and acquisition environment. We therefore cannot predict the
timing and amount of income with any degree of accuracy and it is likely to vary
materially from period to period. During the first quarter of 2000 and
throughout 1999, a portion of the income from the disposition of client warrants
was offset by expenses related to our efforts to build an infrastructure
sufficient to support present and prospective business activities, and was also
offset by increases to the provision for loan losses in those periods.
17
<PAGE>
We realized $29.9 million in gains on sale of investment securities during
the first quarter of 2000, related to venture capital fund and direct equity
investments. This represented an increase of $29.8 million compared to the
similar prior year period.
Client investment fees totaled $5.6 million in the first quarter of 2000
compared to $0.2 million in the similar prior year 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. Beginning in June 1999, we began offering
off-balance sheet private label mutual fund products to clients. We earn fees
ranging from 35 to 50 basis points on the average balance in these products. At
March 31, 2000, $9.5 billion in client funds were invested by clients
off-balance sheet, including $6.4 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. Additionally,
growth in off-balance sheet client funds was also attributable to the expansion
of our client base and increased marketing of off-balance sheet private label
mutual fund products.
Letter of credit fees, foreign exchange fees and other trade finance income
totaled $3.6 million in the first quarter of 2000, an increase of $1.0 million,
or 36.0%, from the $2.7 million earned in the first quarter of 1999. The growth
reflects a concerted effort by our management to expand the penetration of trade
finance-related products and services among our growing client base, a large
percentage of which provide products and services in international markets.
Deposit service charges totaled $0.7 million for the first quarter of 2000,
relatively unchanged from the same period in 1999. Clients compensate us for
depository services either through earnings credits computed on their demand
deposit balances, or via explicit payments recognized by us as deposit service
charges income.
Other noninterest income largely consists of service-based fee income, and
increased $1.2 million, or 163.4%, to $1.9 million in the first quarter of 2000
from $0.7 million in the first quarter of 1999. This increase in other
noninterest income was primarily due to corporate finance fees of $0.6 million
and a higher volume of cash management and loan documentation services related
to our growing client base.
NONINTEREST EXPENSE
Noninterest expense in the first quarter of 2000 totaled $47.5 million, a $22.0
million, or 86.1%, increase from the $25.5 million incurred in the comparable
prior year 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 retention and warrant incentive plans and 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 45.2% for the first quarter of 2000, compared
to 54.6% for the same quarter of 1999. The following table presents the detail
of noninterest expense and the
18
<PAGE>
incremental contribution of each expense line item to our efficiency ratio:
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------
2000 1999
---------------------- ---------------------
Percent of Percent of
Adjusted Adjusted
(Dollars in thousands) Amount Revenues Amount Revenues
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Compensation and benefits $24,371 29.2% $14,881 32.6%
Professional services 2,446 2.9 2,343 5.1
Business development and travel 2,443 2.9 1,331 2.9
Furniture and equipment 2,014 2.4 1,388 3.0
Net occupancy 1,904 2.3 1,469 3.2
Trust preferred securities distributions 825 1.0 825 1.8
Postage and supplies 788 1.0 665 1.5
Advertising and promotion 499 0.6 600 1.3
Telephone 496 0.6 399 0.9
Other 1,883 2.3 1,043 2.3
- -------------------------------------------------------------------------------------------------
Total, excluding cost of other real estate owned
and retention and warrant incentive plans 37,669 45.2% 24,944 54.6%
Retention and warrant incentive plans 9,850 320
Cost of other real estate owned - 273
- -------------------------------------------------------------------------------------------------
Total noninterest expense $47,519 $25,537
=================================================================================================
</TABLE>
Compensation and benefits expenses totaled $24.4 million in the first quarter of
2000, a $9.5 million, or 63.8%, increase over the $14.9 million incurred in the
first quarter of 1999. This increase in compensation and benefits expenses was
largely the result of an increase in the number of average full-time equivalent
(FTE) personnel we employ, combined with an increase in performance-based
compensation associated with our incentive bonuses and employee stock ownership
plan. Average FTE personnel increased from 602 in the first quarter 1999 to 713
in the first quarter of 2000. The increase in FTE 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 FTE personnel is likely to occur
during future years as a result of the continued expansion of our business
activities.
Retention and warrant incentive plans expense totaled $9.9 million in the first
quarter of 2000, a $9.5 million increase over the $0.3 million incurred in the
first quarter of 1999. Under the provisions of the retention and warrant
incentive plans, employees are compensated with a fixed percentage of gains
realized on warrant and certain venture capital fund and direct equity
investments. The increase in retention and warrant plans expense in the first
quarter of 2000 was directly related to the increase in warrant, venture capital
fund and direct equity investment gains over the comparable 1999 period.
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 $2.4 million in the first
quarter of 2000, relatively unchanged from the same period in 1999.
Business development and travel expenses totaled $2.4 million in the first
quarter of 2000, a $1.1 million, or 83.5%, increase from the $1.3 million
incurred in the first quarter of 1999. The
19
<PAGE>
increase in business development and travel expenses was largely attributable to
overall growth in our business, including both an increase in the number of FTE
personnel and expansion into new geographic markets.
Occupancy, furniture and equipment expenses totaled $3.9 million in the first
quarter of 2000, a $1.1 million, or 37.1%, increase compared to $2.9 million in
the same quarter in 1999. The increase in occupancy, furniture and equipment
expenses in 2000, as compared to 1999, 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 March 31, 2000 and 1999, 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 expense totaled $1.9 million in the first quarter of 2000, an
increase of $0.8 million, or 80.5%, compared to $1.0 million incurred in the
first quarter of 1999. The increase in noninterest expense was primarily related
to an increase in data processing costs.
INCOME TAXES
Our effective tax rate was 40.9% in the 2000 first quarter, relatively unchanged
from 40.4% in the prior year first quarter.
FINANCIAL CONDITION
Our total assets were $5.1 billion at March 31, 2000, an increase of $468.1
million, or 10.2%, compared to $4.6 billion at December 31, 1999.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell totaled a
combined $1.1 billion at March 31, 2000, an increase of $172.5 million, or
19.2%, compared to the $898.0 million outstanding at the prior year end. This
increase was attributable to our investing excess funds, resulting from
continued strong deposit growth during the first quarter of 2000, in these types
of short-term liquid investments.
INVESTMENT SECURITIES
Investment securities totaled $1.9 billion at March 31, 2000, an increase of
$163.1 million, or 9.3%, from the December 31, 1999, balance of $1.7 billion.
This increase resulted from excess funds that were generated by strong growth in
our deposits outpacing the growth in loans during the first three months of
2000, and primarily consisted of U.S. agency securities, collateralized mortgage
obligations and municipal securities. The overall growth in the investment
portfolio reflected our actions to increase, as well as to further diversify our
portfolio in response to a continued significant increase in liquidity.
The increase in market interest rates during first quarter 2000 resulted in a
pre-tax unrealized loss on our available-for-sale fixed income securities
investment portfolio of $48.8 million as of March 31, 2000, which was partially
offset by a pre-tax unrealized gain of $54.1 million associated with our warrant
securities. Because of the level of liquidity we maintain, we do not
20
<PAGE>
anticipate having to sell fixed income investment securities and incurring
material losses on sales in future periods for liquidity purposes.
Based on April 30, 2000 market valuations, we had potential pre-tax warrant
gains totaling $30.2 million (down from $54.1 million as of March 31, 2000 due
to a decrease in market valuations) related to 43 companies. We are restricted
from exercising many of these warrants until the second, third and fourth
quarters of 2000. As of April 30, 2000, we held 1,020 warrants in 786 companies,
and had made investments in 159 venture capital funds and direct equity
investments in 37 companies. Many of these companies are non-public. Thus, for
those companies for which a readily determinable market value cannot be
obtained, we value those equity instruments at cost less any identified
impairment. Additionally, we are typically precluded from using any type of
derivative instrument to secure the current unrealized gains associated with
many of these equity instruments. Hence, the amount of income we 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.
LOANS
Total loans, net of unearned income, at March 31, 2000, were $1.6 billion, a
slight increase of $8.4 million compared to the total at December 31, 1999.
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
paydowns and loan payoffs, which has caused total loans to remain relatively
unchanged from December 31, 1999 to March 31, 2000.
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.
21
<PAGE>
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, composed of allocated and
unallocated portions that supplements the first two components, 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 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.
The allowance for loan losses totaled $72.9 million at March 31, 2000, an
increase of $1.1 million, or 1.5%, compared to the $71.8 million balance at
December 31, 1999. This increase was due to $12.6 million in additional
provisions to the allowance for loan losses, offset by net charge-offs of $11.5
million for the first three months of 2000.
The first quarter of 2000 net charge-off amount was composed of $16.3 million in
gross charge-offs and $4.8 million in gross recoveries. The gross charge-offs
included two commercial credits totaling $12.0 million in our healthcare
services niche. Of the total first quarter gross charge-offs, $7.5 million were
classified as nonperforming loans at the end of 1999.
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 March 31, 2000.
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. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review our allowance for loan losses.
Such agencies may require us to make adjustments to the allowance for loan
losses based on their judgment of information available to them at the time of
their examination.
Nonperforming assets consist of loans that are past due 90 days or more but
still accruing interest, loans on nonaccrual status and OREO and other
foreclosed assets. The table below sets forth certain relationships between
nonperforming loans, nonperforming assets and the allowance for loan losses:
22
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Dollars in thousands) (Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming assets:
Loans past due 90 days or more $ - $ 911
Nonaccrual loans 28,789 27,552
- ---------------------------------------------------------------------------------------------
Total nonperforming loans 28,789 28,463
OREO and other foreclosed assets - -
- ---------------------------------------------------------------------------------------------
Total nonperforming assets $28,789 $28,463
=============================================================================================
Nonperforming loans as a percentage of total loans 1.8% 1.7%
Nonperforming assets as a percentage of total assets 0.6% 0.6%
Allowance for loan losses: $72,900 $71,800
As a percentage of total loans 4.4% 4.4%
As a percentage of nonaccrual loans 253.2% 260.6%
As a percentage of nonperforming loans 253.2% 252.3%
</TABLE>
Nonperforming loans totaled $28.8 million, or 1.8% of total loans, at March
31, 2000, an increase of $0.3 million, or 1.1%, from the prior year-end total
of $28.5 million, or 1.7% of total loans. Nonperforming loans at March 31,
2000 include two commercial credits totaling $13.8 million. The first credit,
totaling $7.1 million, is in our healthcare services niche and was disclosed
as having a higher than normal risk of becoming a nonperforming in our 1999
10-K. The second credit, a $6.7 million financial services (non technology)
niche loan, has been classified as nonperforming since March 31, 1999 and was
partially charged off in the fourth quarter of 1999. Our management believes
these credits are adequately secured with collateral and reserves, and that
any future charge-offs associated with these loans will not have a material
impact on our future net income.
In addition to the loans disclosed in the foregoing analysis, we have identified
two loans totaling $12.0 million, that, on the basis of information known to us,
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.
DEPOSITS
Total deposits were $4.5 billion at March 31, 2000, an increase of $406.4
million, or 9.9%, from the prior year-end total of $4.1 billion. A significant
portion of the increase in deposits during the first three months of 2000 was
concentrated in our noninterest-bearing demand deposits, which increased $477.4
million, or 24.8%, to a total of $2.4 billion at the end of the first quarter of
2000. This increase was explained by high levels of client liquidity
attributable to a strong inflow of investment capital into the venture capital
community and the equity markets, and by growth in the number of clients served
by us during the first quarter of 2000.
23
<PAGE>
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 (MVPE). See our 1999 Annual
Report on Form 10-K for disclosure of the quantitative and qualitative
information regarding the interest rate risk inherent in interest rate risk
sensitive instruments as of December 31, 1999. There have been no changes in the
assumptions used by us in monitoring interest rate risk as of March 31, 2000.
Other types of market risk affecting us in the normal course of our business
activities include foreign currency exchange risk and equity price risk. The
impact on us, resulting from these other two types of market risks, is deemed
immaterial. We do not maintain a portfolio of trading securities and do not
intend to engage in such activities in the immediate future.
LIQUIDITY
Another important objective of asset/liability management is to manage
liquidity. The objective of liquidity management is to ensure that funds are
available in a timely manner to meet loan demand and depositors' needs, and to
service other liabilities as they come due, without causing an undue amount of
cost or risk, and without causing a disruption to normal operating conditions.
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 (ALCO) provides oversight
to the liquidity management process and recommends policy guidelines, subject
to board of directors approval, 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. Our liquidity
requirements can also be met through the use of our portfolio of liquid assets.
Our definition of liquid assets includes 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.
Our policy guidelines provide that liquid assets as a percentage of total
deposits should not fall below 20.0%. At March 31, 2000, the Bank's ratio of
liquid assets to total deposits was 57.5%. This ratio is well in excess of our
minimum policy guidelines and is higher than the comparable ratio of 55.7% as of
December 31, 1999. In addition to monitoring the level of liquid assets relative
to total deposits, we also utilize other policy measures in liquidity management
activities. As of March 31, 2000, we were 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
24
<PAGE>
regulatory capital guidelines. Our primary sources of new capital include the
issuance of trust preferred securities and common stock, as well as retained
earnings.
We issued 1.6 million shares of common stock at $42.00 per share in relation to
an offering in the fourth quarter of 1999. We received proceeds of $63.3 million
related to the sale of these securities, net of underwriting commissions and
other offering expenses. In addition, in 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 $400.7 million at March 31, 2000, an increase of
$31.8 million, or 8.6%, from the $368.9 million balance at December 31, 1999.
This increase was primarily due to net income of $54.7 million for the three
months ended March 31, 2000 and net proceeds from the issuance of common stock
of $17.6 million, partially offset by a decrease in the after-tax net unrealized
gains on available-for-sale securities of $38.6 million. We have not paid a cash
dividend on our common stock since 1992, and we do not have any material
commitments for capital expenditures as of March 31, 2000.
Both Silicon and Silicon Valley Bank are subject to capital adequacy guidelines
issued by the Federal Reserve Board. Under these capital guidelines, the minimum
total risk-based capital ratio and Tier 1 risk-based capital ratio requirements
are 10.0% and 6.0%, respectively, of risk-weighted assets and certain
off-balance sheet items for a well capitalized depository institution.
The Federal Reserve Board has also established minimum capital leverage ratio
guidelines for state member banks. The ratio is determined using Tier 1 capital
divided by quarterly average total assets. The guidelines require a minimum of
5.0% for a well capitalized depository institution.
Both Silicon's and Silicon Valley Bank's capital ratios were in excess of
regulatory guidelines for a well capitalized depository institution as of March
31, 2000, and December 31, 1999. Capital ratios for Silicon and Silicon Valley
Bank are set forth below:
25
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Unaudited)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Silicon Valley Bancshares:
Total risk-based capital ratio............................ 16.2% 15.5%
Tier 1 risk-based capital ratio........................... 14.9% 14.3%
Tier 1 leverage ratio ................................. 9.0% 8.8%
Silicon Valley Bank:
Total risk-based capital ratio............................ 14.4% 14.0%
Tier 1 risk-based capital ratio........................... 13.1% 12.7%
Tier 1 leverage ratio ................................. 7.9% 7.9%
</TABLE>
The increase in the total risk-based capital ratio and the Tier 1 risk-based
capital ratio from December 31, 1999 to March 31, 2000 was primarily
attributable to an increase in Tier 1 capital. This increase was due to both the
issuance of common stock, which generated net proceeds of $17.6 million, and
internally generated capital, primarily net income of $54.7 million. The Tier 1
leverage ratio remained fairly consistent between December 31, 1999 and March
31, 2000 due to an increase in quarterly average total assets which offset the
increase in Tier 1 capital. Quarterly average total assets increased due to
strong growth in deposits during the 2000 first quarter.
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%. As of March 31, 2000, we were in compliance with this
term of the memorandum of understanding.
26
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item
pending at March 31, 2000, or at the date of this report.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
None.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 2000.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SILICON VALLEY BANCSHARES
Date: May 12, 2000 /s/ Donal D. Delaney
----------------------------------------
Donal D. Delaney
Senior Vice President and Controller
(Principal Accounting Officer)
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS RELATED NOTES AND MANAGEMENT
DISCUSSION AND ANALYSTS CONAINED IN THE REPORT ON FORM 10-Q FILED BY SILICON
VALLEY BANC SHARES FOR TEH THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 393,295
<INT-BEARING-DEPOSITS> 542
<FED-FUNDS-SOLD> 1,070,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,910,499
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,631,442
<ALLOWANCE> 72,900
<TOTAL-ASSETS> 5,064,525
<DEPOSITS> 4,515,851
<SHORT-TERM> 0
<LIABILITIES-OTHER> 109,440
<LONG-TERM> 0
0
0
<COMMON> 23
<OTHER-SE> 400,661
<TOTAL-LIABILITIES-AND-EQUITY> 5,064,525
<INTEREST-LOAN> 44,293
<INTEREST-INVEST> 24,556
<INTEREST-OTHER> 16,027
<INTEREST-TOTAL> 84,876
<INTEREST-DEPOSIT> 13,376
<INTEREST-EXPENSE> 13,376
<INTEREST-INCOME-NET> 71,500
<LOAN-LOSSES> 12,572
<SECURITIES-GAINS> 29,888
<EXPENSE-OTHER> 47,519
<INCOME-PRETAX> 92,543
<INCOME-PRE-EXTRAORDINARY> 54,655
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,655
<EPS-BASIC> 2.42<F1>
<EPS-DILUTED> 2.30<F2>
<YIELD-ACTUAL> 6.6
<LOANS-NON> 28,789
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 71,800
<CHARGE-OFFS> 16,253
<RECOVERIES> 4,781
<ALLOWANCE-CLOSE> 72,900
<ALLOWANCE-DOMESTIC> 53,657
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 19,243
<FN>
<F1>Represents - basic earnings per share
<F2>Represents - diluted earnings per share
</FN>
</TABLE>
