-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KMutC9/Ya6wTEIepF7XAOITyY96V+Yuio2tO2BliRbZ2ZKiaeKAKpkUTtV80wwzx HCsXDPTVynHvCC2v3hJbpQ== 0000912057-99-007929.txt : 19991202 0000912057-99-007929.hdr.sgml : 19991202 ACCESSION NUMBER: 0000912057-99-007929 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19991201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SILICON VALLEY BANCSHARES CENTRAL INDEX KEY: 0000719739 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 942856336 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-91159 FILM NUMBER: 99767511 BUSINESS ADDRESS: STREET 1: 3003 TASMAN DRIVE, M/S NC820 CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4086547400 MAIL ADDRESS: STREET 1: 3003 TASMAN DRIVE, M/S NC820 CITY: SANTA CLARA STATE: CA ZIP: 95054 S-3/A 1 FORM S-3 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) DELAWARE 91-1962278 (State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization)
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)
------------------------------ COPIES TO: 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
------------------------------ 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. 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 ------------------------
PER SHARE TOTAL --------- -------- Public offering price............................. $ $ Underwriting discount............................. $ $ Proceeds, before expenses, to Silicon Valley Bancshares...................................... $ $
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 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
PAGE 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
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 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 - 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 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 THE OFFERING 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
6 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.
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) 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% AS OF AND FOR THE YEAR ENDED DECEMBER 31, ---------- 1994 ---------- (DOLLARS AND NUMBERS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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%
7 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.
1999 YEAR ENDED DECEMBER 31, ------------------------------ ---------------------------------------------------- SEPT 30 JUNE 30 MAR 31 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) 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%
- ------------------------------ (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 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 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 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 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 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 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.
SEPTEMBER 30, 1999 ---------------------- ACTUAL AS ADJUSTED -------- ----------- (DOLLARS IN THOUSANDS) 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 ======== ========
- ------------------------ (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 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.
SEPTEMBER 30, 1999 ---------------------- ACTUAL AS ADJUSTED -------- ----------- 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% SEPTEMBER 30, 1999 ---------------------- ACTUAL AS ADJUSTED -------- ----------- 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)
- ------------------------------ (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.
FISCAL 1997 LOW HIGH - ----------- -------- -------- First Quarter............................................... $15.88 $20.00 Second Quarter.............................................. 16.63 23.88 Third Quarter............................................... 20.88 29.88 Fourth Quarter.............................................. 24.44 29.38
FISCAL 1998 LOW HIGH - ----------- -------- -------- First Quarter............................................... $24.75 $32.25 Second Quarter.............................................. 30.25 36.50 Third Quarter............................................... 12.25 39.00 Fourth Quarter.............................................. 10.31 27.31
FISCAL 1999 LOW HIGH - ----------- -------- -------- 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
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 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.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (UNAUDITED) (UNAUDITED) ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- (DOLLARS IN THOUSANDS) 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 ======= ======= ======== ========
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 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.
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) 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 ========== ==========
- ------------------------------ (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
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) 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 ========== ==========
- ------------------------------ (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 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.
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) 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 ======= ======= ======= ======= ======== =======
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 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 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 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:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (UNAUDITED) (UNAUDITED) ---------------------- ---------------------- 1999 1998 1999 1998 -------- -------- -------- -------- (DOLLARS IN THOUSANDS) 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 ======= ====== ======= =======
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 $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 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 period. The following tables present the detail of noninterest expense and the incremental contribution of each line item to our efficiency ratio:
THREE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------- 1999 1998 --------------------- --------------------- PERCENT OF PERCENT OF ADJUSTED ADJUSTED AMOUNT REVENUES AMOUNT REVENUES -------- ---------- -------- ---------- (UNAUDITED) (DOLLARS IN THOUSANDS) 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 ======= =======
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------- 1999 1998 --------------------- --------------------- PERCENT OF PERCENT OF ADJUSTED ADJUSTED AMOUNT REVENUES AMOUNT REVENUES -------- ---------- -------- ---------- (UNAUDITED) (DOLLARS IN THOUSANDS) 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 ======= =======
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 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 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.
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- (DOLLARS IN THOUSANDS) 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 ======== ======== =======
27 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.
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 1998 1997 ---------------------------------- ---------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE ---------- -------- ---------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) 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 ========== ========== YEARS ENDED DECEMBER 31, ---------------------------------- 1996 ---------------------------------- AVERAGE AVERAGE BALANCE INTEREST YIELD/RATE ---------- -------- ---------- (DOLLARS IN THOUSANDS) 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 ==========
- ------------------------------ (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
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) 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 ======= ======= ======= ======= ======= =======
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 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 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 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:
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- (DOLLARS IN THOUSANDS) Letter of credit and foreign exchange income................ $ 7,397 $ 4,512 $ 3,423 Disposition of client warrants.............................. 6,657 5,480 5,389 Investment gains............................................ 5,240 90 1 Deposit service charges..................................... 1,730 1,772 1,663 Other....................................................... 2,138 1,411 1,133 ------- ------- ------- Total noninterest income.................................... $23,162 $13,265 $11,609 ======= ======= =======
Noninterest 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 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:
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) 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 ======= ======= =======
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 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 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 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.
DECEMBER 31, 1998 SEPTEMBER 30, ------------------------------------ 1999 1998 1997 1996 -------------- ---------- ---------- ---------- (UNAUDITED) (DOLLARS IN THOUSANDS) 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 ========== ========== ========== ========
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 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:
AS OF AS OF DECEMBER 31, SEPTEMBER 30, -------------------------------------------------------- 1999 1998 1997 1996 1995 1994 -------------- ---------- ---------- -------- -------- -------- (UNAUDITED) (DOLLARS IN THOUSANDS) 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 ========== ========== ========== ======== ======== ========
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 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:
SEPTEMBER 30, 1999 ------------------------------------------------------ AFTER ONE YEAR ONE YEAR OR AND THROUGH AFTER FIVE LESS FIVE YEARS YEARS TOTAL ----------- -------------- ---------- ---------- (UNAUDITED) (DOLLARS IN THOUSANDS) 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 ======== ======== ======== ==========
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 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:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1999 SEPTEMBER 30, 1999 ------------------ ------------------ (UNAUDITED) (DOLLARS IN THOUSANDS) 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% ======== ========
An analysis of the allowance for loan losses for the past five years is as follows:
DECEMBER 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) 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% ======== ======= ======= ======= ========
39 The following table displays the allocation of the allowance for loan losses among specific classes of loans:
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) 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 ======= ===== ======= ===== ======= ===== ======= DECEMBER 31, ------------------------------ 1995 1994 -------- ------------------- PERCENT PERCENT OF TOTAL OF TOTAL LOANS AMOUNT LOANS -------- -------- -------- (DOLLARS IN THOUSANDS) 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% ===== ======= =====
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 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.
SEPTEMBER 30, JUNE 30, MARCH 31, 1999 1999 1999 -------------- --------- ---------- (UNAUDITED) (DOLLARS IN THOUSANDS) 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%
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 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.
DECEMBER 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) 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%
- ------------------------ (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 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:
AS OF AS OF DECEMBER 31, SEPTEMBER 30, -------------------------------------------------------------- 1999 1998 1997 1996 1995 1994 ------------- ---------- ---------- ---------- ---------- ---------- (UNAUDITED) (DOLLARS IN THOUSANDS) 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 ========== ========== ========== ========== ========== ==========
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 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 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 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 $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:
DECEMBER 31, SEPTEMBER 30, ------------------------------ 1999 1998 1997 1996 ------------- -------- -------- -------- (UNAUDITED) 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%
Capital ratios for Silicon Valley Bank are set forth below:
DECEMBER 31, SEPTEMBER 30, ------------------------------ 1999 1998 1997 1996 ------------- -------- -------- -------- (UNAUDITED) 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%
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 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 "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 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.
NAME AGE POSITION - ------------------------------------------ -------- ------------------------------------------ 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
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 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 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 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.
UNDERWRITER NUMBER OF SHARES - ----------- ---------------- Dain Rauscher Incorporated.................................. Keefe, Bruyette & Woods, Inc................................ Hoefer & Arnett Incorporated................................ ---------- Total....................................................... 1,250,000 ==========
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.
NO EXERCISE FULL EXERCISE ----------- ------------- Per Share............................................ $ $ Total................................................ $ $
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 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 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1,250,000 SHARES [LOGO] COMMON STOCK ---------------- PRICE $ PER SHARE ------------------------ DAIN RAUSCHER WESSELS KEEFE, BRUYETTE & WOODS, INC. HOEFER & ARNETT INCORPORATED --------------- , 1999 ------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION 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 ========
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 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
EXHIBIT NO. DESCRIPTION - ----------- ----------- 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.
* 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 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. Silicon Valley Bancshares By */s/ JOHN C. DEAN -------------------------------------------- John C. Dean CHIEF EXECUTIVE OFFICER
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.
NAME TITLE DATE ---- ----- ---- */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
II-3
NAME TITLE DATE ---- ----- ---- */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
* 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 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ----------- 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.
* Previously filed. EX-1.1 2 EXHIBIT 1.1 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: 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 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. 3 (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 4 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 5 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 6 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 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 (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 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 10 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. 11 (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 12 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 13 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. 14 (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. 15 (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. 16 (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 17 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 18 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. 19 (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. 20 (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 21 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 22 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 23 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 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 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 SCHEDULE A SCHEDULE OF UNDERWRITERS
Number of Firm Maximum Number Underwriter Shares to be Purchased of Option Shares ----------- ---------------------- ---------------- Dain Rauscher Incorporated.................................... Keefe, Bruyette & Woods ...................................... Hoefer & Arnett, Incorporated ................................ Total....................................... 1,250,000 187,500
27 EX-5.1 3 EXHIBIT 5.1 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 EX-23.1 4 EXHIBIT 23.1 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 -----END PRIVACY-ENHANCED MESSAGE-----