As filed with the Securities and Exchange Commission on August 14, 2000
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ________.
Commission File Number: 33-41102
SILICON VALLEY BANCSHARES
(Exact name of registrant as specified in its charter)
Delaware 91-1962278
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3003 Tasman Drive
Santa Clara, California 95054-1191
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 654-7400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
At July 31, 2000, 46,370,712 shares of the registrant's common stock
($0.001 par value) were outstanding.
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This report contains a total of 31 pages.
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 30
ITEM 2. CHANGES IN SECURITIES 30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 30
ITEM 5. OTHER INFORMATION 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 30
SIGNATURES 31
2
PART I - FINANCIAL INFORMATION
ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(Dollars in thousands, except par value) 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 346,108 $ 278,061
Federal funds sold and securities purchased under
agreement to resell 1,203,779 898,041
Investment securities, at fair value 2,184,348 1,747,408
Loans, net of unearned income 1,598,534 1,623,005
Allowance for loan losses (73,800) (71,800)
- -------------------------------------------------------------------------------------------------------------------
Net loans 1,524,734 1,551,205
Premises and equipment 10,008 10,742
Accrued interest receivable and other assets 124,248 110,941
- -------------------------------------------------------------------------------------------------------------------
Total assets $5,393,225 $4,596,398
===================================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Deposits:
Noninterest-bearing demand $2,536,821 $1,928,100
NOW 62,022 43,643
Money market 1,615,289 1,845,377
Time 631,090 292,285
- -------------------------------------------------------------------------------------------------------------------
Total deposits 4,845,222 4,109,405
Other liabilities 73,257 79,606
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 4,918,479 4,189,011
- -------------------------------------------------------------------------------------------------------------------
Company obligated mandatorily redeemable trust preferred securities of
subsidiary trust holding solely junior subordinated debentures
(trust preferred securities) 38,563 38,537
Stockholders' Equity:
Preferred stock, $0.001 par value, 20,000,000 shares authorized;
none outstanding
Common stock, $0.001 par value, 60,000,000 shares authorized; 46,283,012 and
44,800,736 shares outstanding at June 30, 2000
and December 31, 1999, respectively 46 45
Additional paid-in capital 178,457 153,440
Retained earnings 264,420 176,030
Unearned compensation (3,699) (2,327)
Accumulated other comprehensive income:
Net unrealized gains (losses) on available-for-sale investments (3,041) 41,662
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 436,183 368,850
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $5,393,225 $4,596,398
===================================================================================================================
See notes to interim consolidated financial statements.
3
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended For the six months ended
-------------------------- -------------------------
June 30, June 30, June 30, June 30,
(Dollars in thousands, except per share amounts) 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Interest income:
Loans $47,089 $39,527 $ 91,382 $ 77,059
Investment securities 29,104 22,250 53,660 41,094
Federal funds sold and securities
purchased under agreement to resell 18,873 6,947 34,900 12,925
- -------------------------------------------------------------------------------------------------------------------
Total interest income 95,066 68,724 179,942 131,078
Interest expense 13,168 21,952 26,544 42,904
- -------------------------------------------------------------------------------------------------------------------
Net interest income 81,898 46,772 153,398 88,174
Provision for loan losses 11,058 10,802 23,630 18,770
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 70,840 35,970 129,768 69,404
- ---------------------------------------------------------------------------------------------------------------
Noninterest income:
Disposition of client warrants 16,755 1,688 56,109 2,510
Investment gains (losses) 2,245 (374) 32,133 (243)
Client investment fees 8,237 246 13,856 478
Letter of credit and foreign
exchange income 4,695 3,474 8,326 6,143
Deposit service charges 868 677 1,582 1,344
Other 1,795 747 3,723 1,479
- -------------------------------------------------------------------------------------------------------------------
Total noninterest income 34,595 6,458 115,729 11,711
- -------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and benefits 27,372 15,385 51,743 30,266
Retention and warrant incentive plans 2,936 335 12,786 655
Professional services 6,277 3,552 8,723 5,895
Furniture and equipment 2,877 1,402 4,891 2,790
Business development and travel 2,292 1,524 4,735 2,855
Net occupancy 2,142 1,569 4,046 3,038
Postage and supplies 901 567 1,689 1,232
Trust preferred securities distributions 825 825 1,650 1,650
Advertising and promotion 803 734 1,302 1,334
Telephone 711 439 1,207 838
Cost of other real estate owned - (5) - 268
Other 1,864 1,470 3,747 2,513
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense 49,000 27,797 96,519 53,334
- -------------------------------------------------------------------------------------------------------------------
Income before income tax expense 56,435 14,631 148,978 27,781
Income tax expense 22,700 5,678 60,588 10,991
- -------------------------------------------------------------------------------------------------------------------
Net income $33,735 $ 8,953 $ 88,390 $ 16,790
===================================================================================================================
Basic earnings per share $ 0.74 $ 0.22 $ 1.95 $ 0.41
Diluted earnings per share $ 0.70 $ 0.21 $ 1.85 $ 0.40
===================================================================================================================
See notes to interim consolidated financial statements.
4
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended For the six months ended
-------------------------- -------------------------
June 30, June 30, June 30, June 30,
(Dollars in thousands) 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Net income $ 33,735 $ 8,953 $ 88,390 $16,790
Other comprehensive income loss, net of tax:
Changes in unrealized gains (losses) on
available-for-sale investments:
Unrealized holding gains (losses) 5,262 (6,227) 7,651 (6,929)
Less: Reclassification adjustment for
gains included in net income (11,358) (789) (52,354) (1,360)
- -------------------------------------------------------------------------------------------------------------------
Other comprehensive loss (6,096) (7,016) (44,703) (8,289)
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 27,639 $ 1,937 $ 43,687 $ 8,501
===================================================================================================================
See notes to interim consolidated financial statements.
5
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended
--------------------------
June 30, June 30,
(Dollars in thousands) 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 88,390 $ 16,790
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 23,630 18,770
Provision for other real estate owned - 264
Depreciation and amortization 1,838 1,618
Net (gain) loss on sales of investment securities (32,133) 243
Net gains on disposition of client warrants (56,109) (2,510)
Increase in prepaid expenses (874) (384)
Increase in accrued interest receivable (4,266) (9,149)
Increase (decrease) in unearned income 3,250 (1,441)
Increase (decrease) in taxes payable 399 (7,281)
Increase in retention, warrant and other
incentive plans payable 13,318 972
Other, net 4,889 4,691
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 42,332 22,583
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and paydowns of
investment securities 332,412 682,149
Proceeds from sales of investment securities 186,507 539,225
Purchases of investment securities (941,157) (1,432,108)
Net (increase) decrease in loans (6,291) 24,908
Proceeds from recoveries of charged off loans 5,882 3,769
Net proceeds from sales of other real estate owned - 400
Purchases of premises and equipment (1,104) (1,963)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (423,751) (183,620)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 735,817 521,221
Proceeds from issuance of common stock,
net of issuance costs 19,387 1,527
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 755,204 522,748
- -------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 373,785 361,711
Cash and cash equivalents at January 1, 1,176,102 522,203
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at June 30, $1,549,887 $883,914
===================================================================================================================
Supplemental disclosures:
Interest paid $ 25,808 $ 42,906
Income taxes paid $ 21,380 $ 18,590
===================================================================================================================
See notes to interim consolidated financial statements.
6
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Silicon Valley Bancshares and its
subsidiaries (the "Company") conform with generally accepted accounting
principles and prevailing practices within the banking industry. Certain
reclassifications have been made to the Company's 1999 consolidated financial
statements to conform to the 2000 presentations. Such reclassifications had no
effect on the results of operations or stockholders' equity. The following is a
summary of the significant accounting and reporting policies used in preparing
the interim consolidated financial statements.
NATURE OF OPERATIONS
Silicon Valley Bancshares is a bank holding company whose principal subsidiary
is Silicon Valley Bank (the "Bank"), a California-chartered bank with
headquarters in Santa Clara, California. The Bank maintains regional banking
offices in California, and additionally has loan offices in Arizona, Colorado,
Georgia, Illinois, Massachusetts, Minnesota, North Carolina, Oregon,
Pennsylvania, Texas, Virginia, and Washington. The Bank serves emerging growth
and middle-market companies in targeted niches, focusing on the technology and
life sciences industries, while also identifying and capitalizing on
opportunities to serve companies in other industries whose financial services
needs are underserved. Substantially all of the assets, liabilities and earnings
of the Company relate to its investment in the Bank.
CONSOLIDATION
The interim consolidated financial statements include the accounts of Silicon
Valley Bancshares and those of its wholly owned subsidiaries, the Bank, SVB
Strategic Investors, LLC, SVB Capital I and SVB Leasing Company (inactive).
Intercompany accounts and transactions have been eliminated.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of Management, the interim consolidated financial statements
contain all adjustments (consisting of only normal, recurring adjustments)
necessary to present fairly the Company's consolidated financial position at
June 30, 2000, the results of its operations and cash flows for the three and
six months ended June 30, 2000, and June 30, 1999. The December 31, 1999
consolidated financial statements were derived from audited financial
statements, and certain information and footnote disclosures normally presented
in annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted.
The interim consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's 1999 Annual Report on Form 10-K. The results of operations for the
three and six months ended June 30, 2000 may not necessarily be indicative of
the Company's operating results for the full year.
7
BASIS OF FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and judgments that
affect the reported amounts of assets and liabilities as of the balance sheet
date and the results of operations for the period. Actual results could differ
from those estimates. A material estimate that is particularly susceptible to
possible change in the near term relates to the determination of the allowance
for loan losses. An estimate of possible changes or range of possible changes
cannot be made.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents as reported in the interim consolidated statements of
cash flows includes cash on hand, cash balances due from banks, federal funds
sold, and securities purchased under agreement to resell. The cash equivalents
are readily convertible to known amounts of cash and present an insignificant
risk of changes in value due to maturity dates of 90 days or less.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell as
reported in the consolidated balance sheets includes interest-bearing deposits
in other financial institutions of $546,000 and $291,000 at June 30, 2000, and
December 31, 1999, respectively.
NONACCRUAL LOANS
Loans are placed on nonaccrual status when they become 90 days past due as to
principal or interest payments (unless the principal and interest are well
secured and in the process of collection), when the Company has determined,
based upon currently known information, that the timely collection of principal
or interest is doubtful, or when the loans otherwise become impaired under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan."
When a loan is placed on nonaccrual status, the accrued interest is reversed
against interest income and the loan is accounted for on the cash or cost
recovery method thereafter until qualifying for return to accrual status.
Generally, a loan will be returned to accrual status when all delinquent
principal and interest become current in accordance with the terms of the loan
agreement and full collection of the principal appears probable.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB Opinion No. 25, compensation expense is based on the
difference, if any, on the date of the grant, between the fair value of the
Company's stock and the exercise price. The Company accounts for stock issued
to non-employees in accordance with the provisions of SFAS No. 123 and
Emerging Issues Task Force Issue No. 96-18.
8
SEGMENT REPORTING
Management views the Company as one operating segment, therefore, separate
reporting of financial segment information under SFAS No. 131 is not considered
necessary. Management approaches the Company's principal subsidiary, the Bank,
as one business enterprise which operates in a single economic environment,
since the products and services, types of customers and regulatory environment
all have similar economic characteristics.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued and was effective for all fiscal years beginning after
June 15, 1999. SFAS No. 133 was subsequently amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133" and will now be effective for fiscal
years beginning after June 15, 2000, with early adoption permitted. SFAS No.
133, as amended, requires the Company to recognize all derivatives as either
assets or liabilities and measure those instruments at fair value. It further
provides criteria for derivative instruments to be designated as fair value,
cash flow and foreign currency hedges and establishes respective accounting
standards for reporting changes in the fair value of the derivative instruments.
Upon adoption, the Company will be required to adjust hedging instruments to
fair value in the balance sheet and recognize the offsetting gains or losses as
adjustments to be reported in net income or other comprehensive income, as
appropriate. SFAS No. 133, was further amended by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities", which primarily
relates to certain foreign-exchange, consolidation, normal purchases and normal
sales derivative issues. The Company has not completed its assessment of the
impact of SFAS No. 133, as amended and SFAS No. 138, on its consolidated
financial position or results of operations. The Company expects to adopt these
statements on January 1, 2001.
2. EARNINGS PER SHARE
The Company computes net income per share in accordance with SFAS No. 128,
"Earnings per Share." Under the provisions of SFAS No. 128, basic earnings per
share (EPS) excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
financial instruments or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
9
The following is a reconciliation of basic EPS to diluted EPS for the three and
six months ended June 30, 2000 and 1999.
Three Months Ended June 30, Six Months Ended June 30,
- ----------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, Net Per Share Net Per Share
except per share amounts) Income Shares Amount Income Shares Amount
- ----------------------------------------------------------------------------------------------------------------
2000:
Basic EPS:
Income available to common
stockholders $33,735 45,586 $0.74 $88,390 45,417 $1.95
Effect of Dilutive Securities:
Stock Ooptions And Restricted Stock - 2,393 - - 2,346 -
- -------------------------------------------------------------------------------------------------------------------
Diluted EPS:
Income available to common
stockholders plus assumed
conversions $33,735 47,979 $0.70 $88,390 47,763 $1.85
===================================================================================================================
1999:
Basic EPS:
Income available to common
stockholders $8,953 41,025 $0.22 $16,790 41,001 $0.41
Effect of Dilutive Securities:
Stock options and restricted stock - 789 - - 715 -
- -------------------------------------------------------------------------------------------------------------------
Diluted EPS:
Income available to common
stockholders plus assumed
conversions $8,953 41,814 $0.21 $16,790 41,716 $0.40
===================================================================================================================
3. LOANS
The detailed composition of loans, net of unearned income of $11.8 million and
$8.6 million at June 30, 2000, and December 31, 1999, respectively, is presented
in the following table:
June 30, December 31,
(Dollars in thousands) 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Commercial $1,403,072 $1,414,728
Real estate construction 59,178 76,209
Real estate term 57,268 67,738
Consumer and other 79,016 64,330
- -------------------------------------------------------------------------------------------------------------------
Total loans $1,598,534 $1,623,005
===================================================================================================================
10
4. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the three and six months
ended June 30, 2000 and 1999 was as follows:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------
(Dollars in thousands) 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Beginning balance $72,900 $47,600 $71,800 $46,000
Provision for loan losses 11,058 10,802 23,630 18,770
Loans charged off (11,259) (4,162) (27,512) (12,239)
Recoveries 1,101 2,060 5,882 3,769
- -------------------------------------------------------------------------------------------------------------------
Balance at June 30, $73,800 $56,300 $73,800 $56,300
===================================================================================================================
The aggregate recorded investment in loans for which impairment has been
determined in accordance with SFAS No. 114 totaled $26.8 million and $46.7
million at June 30, 2000, and June 30, 1999, respectively. Allocations of the
allowance for loan losses related to impaired loans totaled $10.4 million at
June 30, 2000, and $11.2 million at June 30, 1999. Average impaired loans for
the second quarter of 2000 and 1999 totaled $26.0 million and $48.2 million,
respectively.
5. STOCK SPLIT
In March 2000, the Board of Directors approved a two-for-one stock split, in the
form of a stock dividend of the Company's common stock. Holders of the Company's
$0.001 par value common stock as of the record date, April 21, 2000 received one
additional share of $0.001 par value for every one share of common stock they
owned as of the record date. Shares and per share amounts for all periods
presented in the accompanying financial statements have been adjusted to give
retroactive recognition to a two-for-one stock split distributed on May 15,
2000.
6. COMMON STOCK OFFERING
On August 7, 2000, the Company issued 2.3 million shares of common stock at
$42.19 per share. The Company received proceeds of $91.0 million related to the
sale of these securities, net of underwriting commission and other offering
expenses.
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Throughout the following management discussion and analysis when we refer to
"Silicon Valley Bancshares," or "we" or similar words, we intend to include
Silicon Valley Bancshares and its subsidiaries collectively, including Silicon
Valley Bank. When we refer to "Silicon," we are referring only to Silicon Valley
Bancshares.
You should read the following discussion and analysis of financial condition and
results of operations in conjunction with our consolidated financial statements
and supplementary data as presented in Item 1 of this report. This discussion
and analysis includes "forward-looking statements" as that term is used in the
securities laws. All statements regarding our expected financial position,
business and strategies are forward-looking statements. In addition, in this
discussion and analysis the words "anticipates," "believes," "estimates,"
"seeks," "expects," "plans," "intends" and similar expressions, as they relate
to Silicon Valley Bancshares or our management, are intended to identify
forward-looking statements. Although we believe that the expectations reflected
in these forward-looking statements are reasonable, and have based these
expectations on our beliefs as well as our assumptions, such expectations may
prove to be incorrect.
For information with respect to factors that could cause actual results to
differ from the expectations stated in the forward-looking statements, see the
text under the caption "Risk Factors" included in our Report on Form S-3 filed
with the Securities and Exchange Commission on August 1, 2000. We urge investors
to consider these factors carefully in evaluating the forward-looking statements
contained in this discussion and analysis. All subsequent written or oral
forward-looking statements attributable to our company or persons acting on our
behalf are expressly qualified in their entirety by these cautionary statements.
The forward-looking statements included in this filing are made only as of the
date of this filing. We do not intend, and undertake no obligation, to update
these forward-looking statements.
Certain reclassifications have been made to our prior years results to conform
with 2000 presentations. Such reclassifications had no effect on our results of
operations or stockholders' equity.
EARNINGS SUMMARY
We reported net income of $33.7 million, or $0.70 per diluted share, for the
second quarter of 2000, compared with net income of $9.0 million, or $0.21 per
diluted share, for the second quarter of 1999. Net income totaled $88.4 million,
or $1.85 per diluted share, for the six months ended June 30, 2000, versus $16.8
million, or $0.40 per diluted share, for the respective 1999 period. The
annualized return on average assets (ROA) was 2.7% in the second quarter of 2000
versus 0.9% in the second quarter of 1999. The annualized return on average
equity (ROE) for the second quarter of 2000 was 33.1%, compared to 16.0% in the
1999 second quarter. For the first six months of 2000, ROA was 3.6% and ROE was
44.2% versus 0.9% and 15.3%, respectively, for the comparable prior year period.
The increase in net income during the three and six months ended June 30, 2000,
as compared with the prior year respective periods, resulted primarily from
significant growth in both net
12
interest income and noninterest income, partially offset by increases
in the provision for loan losses and in noninterest expense. The major
components of net income and changes in these components are summarized in
the following table for the three and six months ended June 30, 2000 and
1999, and are discussed in more detail below.
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------
(Dollars in thousands) 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Net interest income $81,898 $46,772 $153,398 $88,174
Provision for loan losses 11,058 10,802 23,630 18,770
Noninterest income 34,595 6,458 115,729 11,711
Noninterest expense 49,000 27,797 96,519 53,334
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 56,435 14,631 148,978 27,781
Income tax expense 22,700 5,678 60,588 10,991
- ---------------------------------------------------------------------------------------------------------------
Net income $33,735 $ 8,953 $ 88,390 $16,790
===============================================================================================================
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
taxable-equivalent interest income expressed as a percentage of average
interest-earning assets. The average rate paid on funding sources is defined as
interest expense as a percentage of average interest-earning assets.
The following tables set forth average assets, liabilities and stockholders'
equity, interest income and interest expense, average yields and rates, and the
composition of our net interest margin for the three and six months ended June
30, 2000 and 1999, respectively.
13
----------------------------------------------------------------------------
AVERAGE BALANCES, RATES AND YIELDS
----------------------------------------------------------------------------
For the three months ended June 30,
----------------------------------------------------------------------------
2000 1999
--------------------------------- ---------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------
Interest-Earning Assets:
Federal funds sold and
securities purchased under
agreement to resell (1) $ 1,211,928 $18,873 6.3% $ 581,544 $ 6,947 4.8%
Investment securities:
Taxable 1,799,231 27,291 6.1 1,433,357 20,779 5.8
Non-taxable (2) 168,234 2,789 6.7 143,961 2,263 6.3
Loans:
Commercial 1,377,250 41,831 12.2 1,380,428 34,620 10.1
Real estate construction and term 124,773 3,372 10.9 137,807 3,472 10.1
Consumer and other 76,785 1,886 9.9 68,662 1,435 8.4
- ---------------------------------------- ------------------------------------ ------------------------------------
Total loans 1,578,808 47,089 12.0 1,586,897 39,527 10.0
- ---------------------------------------- ------------------------------------ ------------------------------------
Total interest-earning assets 4,758,201 96,042 8.1 3,745,759 69,516 7.4
- ---------------------------------------- ------------------------------------ ------------------------------------
Cash and due from banks 255,753 181,657
Allowance for loan losses (74,090) (51,658)
Other real estate owned - 127
Other assets 127,170 66,078
- ---------------------------------------- ----------- -----------
Total assets $ 5,067,034 $ 3,941,963
======================================== =========== ===========
Funding Sources:
Interest-Bearing Liabilities:
NOW deposits $ 58,260 184 1.3 $ 21,896 85 1.5
Regular money market deposits 391,291 1,788 1.8 346,161 2,328 2.7
Bonus money market deposits 1,182,789 5,728 1.9 2,100,758 17,587 3.4
Time deposits 538,768 5,468 4.1 188,866 1,952 4.1
- ------------------------------------------------------------------------------ ------------------------------------
Total interest-bearing liabilities 2,171,108 13,168 2.4 2,657,681 21,952 3.3
Portion of noninterest-bearing
Funding sources 2,587,093 1,088,078
- ---------------------------------------- ------------------------------------ ------------------------------------
Total funding sources 4,758,201 13,168 1.1 3,745,759 21,952 2.4
- ---------------------------------------- ------------------------------------ ------------------------------------
Noninterest-Bearing Funding Sources:
Demand deposits 2,359,962 996,696
Other liabilities 87,770 25,039
Trust preferred securities (3) 38,552 38,501
Stockholders' equity 409,642 224,046
Portion used to fund
Interest-earning assets (2,587,093) (1,088,078)
- ---------------------------------------- ------------ ------------
Total liabilities and stockholders'
equity $ 5,067,034 $ 3,941,963
======================================== =========== ===========
Net interest income and margin $82,874 7.0% $47,564 5.0%
======================================== ======= ==== ======= ====
Memorandum: Total deposits $ 4,531,070 $ 3,654,377
======================================== =========== ===========
(1) Includes average interest-bearing deposits in other financial institutions
of $544 and $174 for the three months ended June 30, 2000 and 1999,
respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in 2000
and 1999. The tax equivalent adjustments were $976 and $792 for the three
months ended June 30, 2000 and 1999, respectively.
(3) The 8.25% annual distribution to SVB Capital I is recorded as a component
of noninterest expense.
14
----------------------------------------------------------------------------
AVERAGE BALANCES, RATES AND YIELDS
----------------------------------------------------------------------------
For the six months ended June 30,
----------------------------------------------------------------------------
2000 1999
---------------------------------- ------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------
Interest-Earning Assets:
Federal funds sold and
securities purchased under
agreement to resell (1) $ 1,156,563 $ 34,900 6.1% $ 545,688 $ 12,925 4.8%
Investment securities:
Taxable 1,693,688 50,403 6.0 1,343,699 38,360 5.8
Non-taxable (2) 155,637 5,011 6.5 133,725 4,206 6.3
Loans:
Commercial 1,387,585 81,163 11.8 1,387,052 67,544 9.8
Real estate construction and term 130,374 6,852 10.6 137,953 7,040 10.3
Consumer and other 70,927 3,368 9.5 57,228 2,474 8.7
- ---------------------------------------- ------------------------------------ ------------------------------------
Total loans 1,588,886 91,383 11.6 1,582,233 77,058 9.8
- ---------------------------------------- ------------------------------------ ------------------------------------
Total interest-earning assets 4,594,774 181,697 8.0 3,605,345 132,549 7.4
- ---------------------------------------- ------------------------------------ ------------------------------------
Cash and due from banks 269,448 167,595
Allowance for loan losses (72,701) (50,538)
Other real estate owned - 365
Other assets 156,691 64,354
- ---------------------------------------- ----------- -----------
Total assets $ 4,948,212 $ 3,787,121
======================================== =========== ===========
Funding Sources:
Interest-Bearing Liabilities:
NOW deposits $ 55,428 445 1.6 $ 22,119 160 1.5
Regular money market deposits 405,339 3,692 1.8 342,250 4,578 2.7
Bonus money market deposits 1,340,399 13,307 2.0 2,014,054 34,664 3.5
Time deposits 448,207 9,101 4.1 167,674 3,502 4.2
- ---------------------------------------- ------------------------------------ ----------------------------------
Total interest-bearing liabilities 2,249,373 26,545 2.4 2,546,097 42,904 3.4
Portion of noninterest-bearing
Funding sources 2,345,401 1,059,248
- ---------------------------------------- ------------------------------------ ------------------------------------
Total funding sources 4,594,774 26,545 1.2 3,605,345 42,904 2.4
- ---------------------------------------- ------------------------------------ ------------------------------------
Noninterest-Bearing Funding Sources:
Demand deposits 2,170,640 956,294
Other liabilities 87,353 24,724
Trust preferred securities (3) 38,546 38,494
Stockholders' equity 402,300 221,512
Portion used to fund
Interest-earning assets (2,345,401) (1,059,248)
- ---------------------------------------- ----------- -----------
Total liabilities and stockholders'
equity $ 4,948,212 $ 3,787,121
======================================== ============ ===========
Net interest income and margin $155,152 6.8% $ 89,645 5.0%
======================================== ======== ==== ======== ====
Memorandum: Total deposits $ 4,420,013 $ 3,502,391
======================================== =========== ===========
(1) Includes average interest-bearing deposits in other financial institutions
of $454 and $184 for the six months ended June 30, 2000 and 1999,
respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in 2000
and 1999. The tax equivalent adjustments were $1,754 and $1,472 for the six
months ended June 30, 2000 and 1999, respectively.
(3) The 8.25% annual distribution to SVB Capital I is recorded as a component
of noninterest expense.
15
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. Because
of the numerous simultaneous volume and rate changes during any period, it is
not possible to allocate such changes between volume and rate. For this table,
changes that are not solely due to either volume or rate are allocated in
proportion to the percentage changes in average volume and average rate. Changes
relating to investments in non-taxable municipal securities are presented on a
fully taxable-equivalent basis using the federal statutory rate of 35% in 2000
and 1999.
2000 Compared to 1999
--------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
----------------------------- -------------------------------
(Dollars in thousands) Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------
Interest income:
Federal funds sold and securities
purchased under agreement to resell $ 9,293 $ 2,633 $ 11,926 $17,699 $ 4,276 $ 21,975
Investment securities 5,852 1,186 7,038 11,170 1,678 12,848
Loans (205) 7,767 7,562 331 13,994 14,325
- ------------------------------------------------------------------------------------------------------------------
Increase in interest income 14,940 11,586 26,526 29,200 19,948 49,148
- ------------------------------------------------------------------------------------------------------------------
Interest expense:
NOW deposits 117 (18) 99 266 19 285
Regular money market deposits 273 (813) (540) 752 (1,638) (886)
Bonus money market deposits (6,047) (5,812) (11,859) (9,408) (11,949) (21,357)
Time deposits 3,546 (30) 3,516 5,709 (110) 5,599
- ------------------------------------------------------------------------------------------------------------------
Decrease in interest expense (2,111) (6,673) (8,784) (2,681) (13,678) (16,359)
- ------------------------------------------------------------------------------------------------------------------
Increase in net interest income $17,051 $18,259 $35,310 $31,881 $ 33,626 $ 65,507
==================================================================================================================
Net interest income, on a fully taxable-equivalent basis, totaled $82.9 million
for the second quarter of 2000, an increase of $35.3 million, or 74.2%, from the
$47.6 million total for the second quarter of 1999. The increase in net interest
income was the result of a $26.5 million, or 38.2%, increase in interest income,
combined with a $8.8 million, or 40.0%, decrease in interest expense over the
comparable prior year period.
The $26.5 million increase in interest income for the second quarter of 2000, as
compared to the second quarter of 1999, was the result of a $14.9 million
favorable volume variance and a $11.6 million favorable rate variance. The
favorable volume variance resulted from a $1.0 billion, or 27.0%, increase in
average interest-earning assets over the comparable prior year period. The
increase in average interest-earning assets resulted primarily from strong
growth in our deposits, which increased $876.7 million, or 24.0%, compared to
the second quarter of 1999. The increase in average interest-earning assets was
primarily centered in highly liquid, federal funds sold, securities purchased
under agreement to resell and investment securities, which collectively
increased $1.0 billion.
Average investment securities for the second quarter of 2000 increased $390.1
million, or 24.7%, as compared to the 1999 second quarter, resulting in a $5.9
million favorable volume variance. The aforementioned strong growth in average
deposits exceeded the growth in average loans over
16
the past year, and generated excess funds that were partially invested in U.S.
agency securities, mortgage-backed securities and municipal securities. The
growth in the investment portfolio reflected our actions to continue to increase
as well as further diversify our portfolio of short-term investments in response
to the continuing increase in liquidity.
Average federal funds sold and securities purchased under agreement to resell
increased a combined $630.4 million, or 108.4%, in the second quarter of 2000
over the prior year second quarter, resulting in a $9.3 million favorable volume
variance. This increase was also a result of the aforementioned strong growth in
average deposits during the past year and reflected our actions to continue to
further diversify our portfolio of short-term investments.
Favorable rate variances associated with each component of interest-earning
assets combined to increase interest income by $11.6 million in the second
quarter of 2000, as compared to the respective prior year period. Short-term
market interest rates have increased on an overall basis during the first half
of 2000. As a result of this increase, we earned higher yields during the second
quarter of 2000 on federal funds sold, securities purchased under agreements to
resell and our investment securities, a significant portion of which were
short-term in nature, resulting in a $3.8 million favorable rate variance as
compared to the prior year. The average yield on loans in second quarter 2000
also increased 200 basis points from the respective prior year second quarter,
accounting for the remaining $7.8 million of the total favorable rate variance.
This increase was primarily attributable to a 149 basis point increase in our
weighted average prime rate in the second quarter of 2000 as compared to the
similar prior year period. A significant portion of our loans continues to be
prime rate-based as of June 30, 2000.
The yield on average interest-earning assets increased 70 basis points in the
second quarter of 2000 from the comparable prior year period. This increase
primarily resulted from a rise in the average yield on loans, largely due to an
increase in our prime rate, as well as an increase in short-term market rates,
which resulted in increased yields on federal funds sold and securities
purchased under agreement to resell.
Total interest expense in the 2000 second quarter decreased $8.8 million from
the second quarter of 1999. This decrease was due to a favorable volume variance
of $2.1 million, combined with favorable rate variance of $6.7 million. The
favorable volume variance resulted from a $486.6 million, or 18.3%, decrease in
average interest-bearing liabilities in the second quarter of 2000 as compared
to the second quarter of 1999. This decrease was largely concentrated in our
bonus money market deposit product, which decreased $918.0 million, or 43.7%.
The favorable rate variance largely resulted from a reduction in the average
rate paid on our bonus money market deposit product, from 3.4% in second quarter
1999 to 1.9% in second quarter 2000. The reduction in average rates paid on
interest-bearing liabilities during the second quarter of 2000 as compared to
the similar prior year period was primarily attributable to our lowering the
average rate paid on our bonus money market deposit product by 150 basis points.
We took this action in order to lower total assets and thereby increase our Tier
1 leverage capital ratio. See " Item 2. Capital Resources."
The average cost of funds paid in the second quarter of 2000 was 1.1%, down from
the 2.4% paid in the second quarter of 1999. The decrease in the average cost of
funds was largely due to a decrease of 150 basis points in the average rate paid
on our bonus money market deposit product.
Net interest income, on a fully taxable-equivalent basis, totaled $155.2 million
for the first half of 2000, an increase of $65.5 million, or 73.1%, from the
$89.6 million total for the first half of
17
1999. The increase in net interest income was the result of a $49.1 million,
or 37.1%, increase in interest income, combined with a $16.4 million, or
38.1%, decrease in interest expense over the comparable prior year period.
The $49.1 million increase in interest income for the first half of 2000, as
compared to the first half of 1999, was the result of a $29.2 million favorable
volume variance and a $19.9 million favorable rate variance. The favorable
volume variance resulted from a $989.4 million, or 27.4%, 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 $917.6 million, or 26.2%, compared to the first half of 1999.
The increase in average interest-earning assets was primarily centered in highly
liquid, federal funds sold, securities purchased under agreement to resell and
investment securities, which collectively increased $982.8 million.
The yield on average interest-earning assets increased 60 basis points in the
first half of 2000 from the comparable prior year period. This increase
primarily resulted from a rise in the average yield on loans, largely due to an
increase in our prime rate, as well as an increase in short-term market rates,
which resulted in increased yields on federal funds sold and securities
purchased under agreement to resell.
Total interest expense in the 2000 first half decreased $16.4 million from the
first half of 1999. This decrease was due to a favorable volume variance of $2.7
million, combined with a favorable rate variance of $13.7 million. The favorable
volume variance resulted from a $296.7 million, or 11.7%, decrease in average
interest-bearing liabilities in the first half of 2000 as compared to the first
half of 1999. This decrease was largely concentrated in our bonus money market
deposit product, which decreased $673.7 million, or 33.4%, partially offset by
an increase in our time deposit product, which increase $280.5 million, or
167.3%. The favorable rate variance largely resulted from a reduction in the
average rate paid on our bonus money market deposit product, from 3.5% in the
first half 1999 to 2.0% in the first half 2000. The reduction in average rates
paid on interest-bearing liabilities during the first half of 2000 as compared
to the similar prior year period was primarily attributable to our lowering the
average rate paid on our bonus money market deposit product by 150 basis points.
We took this action in order to lower total assets and thereby increase our Tier
1 leverage capital ratio. See "Item 2. Capital Resources."
The average cost of funds paid in the first half of 2000 was 1.2%, down from the
2.4% paid in the first half of 1999. The decrease in the average cost of funds
was largely due to a decrease of 150 basis points in the average rate paid on
our 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 $11.1 million for the second quarter of
2000, a $0.3 million, or 2.4%, increase compared to the $10.8 million provision
for the second quarter of 1999. The provision for loan losses increased $4.9
million, or 25.9%, to a total of $23.6 million for the first six months of 2000
versus $18.8 million for the comparable 1999 period. See "Financial Condition--
Credit Quality and the Allowance for Loan Losses" for additional related
discussion.
18
NONINTEREST INCOME
The following table summarizes the components of noninterest income for the
three and six months ended June 30, 2000 and 1999:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(Dollars in thousands) 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Disposition of client warrants $16,755 $1,688 $ 56,109 $ 2,510
Investment gains (losses) 2,245 (374) 32,133 (243)
Client investment fees 8,237 246 13,856 478
Letter of credit and foreign exchange income 4,695 3,474 8,326 6,143
Deposit service charges 868 677 1,582 1,344
Other 1,795 747 3,723 1,479
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest income $34,595 $6,458 $115,729 $11,711
=====================================================================================================================
Noninterest income increased $28.1 million, or 435.7%, to a total of $34.6
million in the second quarter of 2000 versus $6.5 million in the prior year
second quarter. This increase was largely due to a $15.1 million increase in
income from the disposition of client warrants, combined with a $8.0 million
increase in client investment fees and a $2.6 million increase in investment
gains. Noninterest income totaled $115.7 million for the first six months of
2000, an increase of $104.0 million, or 888.2%, from the $11.7 million in the
comparable 1999 period. This increase was largely due to a $53.6 million
increase in income from the disposition of client warrants, combined with a
$32.4 million increase in investment gains and a $13.4 million increase in
client investment fees.
Income from the disposition of client warrants totaled $16.8 million and $56.1
million for the three and six months ended June 30, 2000, compared to $1.7
million and $2.5 million for the respective 1999 periods. We have historically
obtained rights to acquire stock, in the form of warrants, in certain clients
primarily as part of negotiated credit facilities. The receipt of warrants does
not change the loan covenants or other collateral control techniques we employ
to mitigate the risk of a loan becoming nonperforming. The collateral
requirements on loans with warrants are similar to lending arrangements where
warrants are not obtained. The timing and amount of income from the disposition
of client warrants typically depends upon factors beyond our control, including
the general condition of the public equity markets as well as the merger and
acquisition environment. We therefore cannot predict the timing and amount of
income with any degree of accuracy and it is likely to vary materially from
period to period. During the first half of 2000 and throughout 1999, a portion
of the income from the disposition of client warrants was offset by expenses
related to our efforts to build an infrastructure sufficient to support present
and prospective business activities, and was also offset by increases to the
provision for loan losses in those periods.
We realized $2.2 million and $32.1 million in gains on sale of investment
securities during the three and six months ended June 30, 2000, related to
venture capital fund and direct equity investments.
Client investment fees totaled $8.2 million and $13.9 million in the three and
six months ended June 30, 2000, compared to $0.2 million and $0.5 million in the
similar prior year periods. Prior to June 1999, we only earned client investment
fees on off-balance sheet funds that were invested by clients in investment
securities such as U.S. Treasuries, U.S. agencies and commercial paper.
Beginning in June 1999, we began offering off-balance sheet private label mutual
fund products to clients. We earn fees ranging from 35 to 50 basis points on the
average balance in these products.
19
At June 30, 2000, $10.2 billion in client funds were invested by clients
off-balance sheet, including $7.1 billion in the mutual fund products. The
significant growth in the amount of off-balance sheet client funds was
explained by high levels of client liquidity attributable to a strong inflow
of investment capital into the venture capital community during the past
year. Additionally, growth in off-balance sheet client funds was also
attributable to the expansion of our client base and increased marketing of
off-balance sheet private label mutual fund products.
Letter of credit fees, foreign exchange fees and other trade finance income
totaled $4.7 million in the second quarter of 2000, an increase of $1.2 million,
or 35.1%, from the $3.5 million earned in the second quarter of 1999. For the
first six months of 2000, letter of credit fees, foreign exchange fees and other
trade finance income totaled $8.3 million, an increase of $2.2 million, or
35.5%, compared to the $6.1 million in the first six months of 1999. The growth
reflects a concerted effort by our management to expand the penetration of trade
finance-related products and services among our growing client base, a large
percentage of which provide products and services in international markets.
Deposit service charges totaled $0.9 million for the three months ended June 30,
2000, an increase of $0.2 million, or 28.2%, from the $0.7 million reported in
the second quarter of 1999. For the first six months of 2000 and 1999 deposit
service charges totaled $1.6 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 by us as
deposit service charges income.
Other noninterest income largely consists of service-based fee income, and
increased $1.0 million, or 140.3%, to $1.8 million in the second quarter of 2000
from $0.7 million in the second quarter of 1999. For the six months ended June
30, 2000, other noninterest income increased $2.2 million, or 151.7%, to $3.7
million from $1.5 million in the comparable 1999 period. The increase in other
noninterest income was primarily due to corporate finance fees of $0.6 million
and $1.2 million for the three and six months ended June 30, 2000 and a higher
volume of cash management and loan documentation services related to our growing
client base.
NONINTEREST EXPENSE
Noninterest expense in the second quarter of 2000 totaled $49.0 million, a $21.2
million, or 76.3%, increase from the $27.8 million incurred in the comparable
1999 period. Noninterest expense totaled $96.5 million for the first six months
of 2000, an increase of $43.2 million, or 81.0%, over the $53.3 million total
for the comparable 1999 period. We closely monitor our level of noninterest
expense using a variety of financial ratios, including the efficiency ratio. The
efficiency ratio is calculated by dividing the amount of noninterest expense,
excluding costs associated with retention and warrant incentive plans and other
real estate owned, by adjusted revenues, defined as the total of net interest
income and noninterest income, excluding income from the disposition of client
warrants and gains or losses related to sales of investment securities. Our
efficiency ratio for the 2000 second quarter was 47.2% versus 52.9% for the
second quarter of 1999. Our efficiency ratio for the first six months of 2000
was 46.3%, versus 53.7% for the comparable 1999 period. The following table
presents the detail of noninterest expense and the incremental contribution of
each line item to our efficiency ratio:
20
Three Months Ended June 30,
---------------------------------------------------------------
2000 1999
------------------------ ----------------------------
Percent of Percent of
Adjusted Adjusted
(Dollars in thousands) Amount Revenues Amount Revenues
- -------------------------------------------------------------------------------------------------------------------
Compensation and benefits $27,372 28.1% $15,385 29.6%
Professional services 6,277 6.4 3,552 6.9
Furniture and equipment 2,877 3.0 1,402 2.7
Business development and travel 2,292 2.4 1,524 2.9
Net occupancy 2,142 2.2 1,569 3.0
Postage and supplies 901 0.9 567 1.1
Trust preferred securities distributions 825 0.8 825 1.6
Advertising and promotion 803 0.8 734 1.4
Telephone 711 0.7 439 0.9
Other 1,864 1.9 1,470 2.8
- -------------------------------------------------------------------------------------------------------------------
Total, excluding cost of other real estate owned
and retention and warrant incentive plans 46,064 47.2% 27,467 52.9%
Retention and warrant incentive plans 2,936 335
Cost of other real estate owned - (5)
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense $49,000 $27,797
===================================================================================================================
Six Months Ended June 30,
---------------------------------------------------------------
2000 1999
------------------------ ----------------------------
Percent of Percent of
Adjusted Adjusted
(Dollars in thousands) Amount Revenues Amount Revenues
- -------------------------------------------------------------------------------------------------------------------
Compensation and benefits $51,743 28.6% $30,266 31.0%
Professional services 8,723 4.8 5,895 6.0
Furniture and equipment 4,891 2.7 2,790 2.9
Business development and travel 4,735 2.6 2,855 2.9
Net occupancy 4,046 2.2 3,038 3.1
Postage and supplies 1,689 1.0 1,232 1.3
Trust preferred securities distributions 1,650 0.9 1,650 1.7
Advertising and promotion 1,302 0.7 1,334 1.4
Telephone 1,207 0.7 838 0.9
Other 3,747 2.1 2,513 2.5
- -------------------------------------------------------------------------------------------------------------------
Total, excluding cost of other real estate owned
and retention and warrant incentive plans 83,733 46.3% 52,411 53.7%
Retention and warrant incentive plans 12,786 655
Cost of other real estate owned - 268
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense $96,519 $53,334
===================================================================================================================
Compensation and benefits expenses totaled $27.4 million in the second quarter
of 2000, a $12.0 million, or 77.9%, increase over the $15.4 million incurred in
the second quarter of 1999. For the first six months of 2000, compensation and
benefits expenses totaled $51.7 million, an increase of $21.5 million, or 71.0%,
compared to $30.3 million for the comparable 1999 period. The increase in
compensation and benefits expenses was largely the result of an increase in the
number of average full-time equivalent (FTE) personnel we employ, combined with
an increase in performance-based compensation associated with our incentive
bonuses and employee stock
21
ownership plan. Average FTE were 783 and 771 for the three and six months
ended June 30, 2000 versus 618 and 607 for the respective prior year periods.
The increase in FTE personnel was primarily due to a combination of our
efforts to develop and support new markets through geographic expansion, to
develop and expand products, services and niches, and to build an
infrastructure sufficient to support present and prospective business
activities. Further growth in our FTE personnel is likely to occur during
future years as a result of the continued expansion of our business
activities.
Retention and warrant incentive plans expense totaled $2.9 million in the second
quarter of 2000, a $2.6 million increase over the $0.3 million incurred in the
second quarter of 1999. Retention and warrant incentive plans expense totaled
$12.8 million for the first six months of 2000, a $12.1 million increase over
the $0.7 million incurred in the first six months of 1999. Under the provisions
of the retention and warrant incentive plans, employees are compensated with a
fixed percentage of gains realized on warrant and certain venture capital fund
and direct equity investments. The increase in retention and warrant plans
expense was directly related to the increase in warrant, venture capital fund
and direct equity investment gains over the comparable 1999 period.
Professional services expenses, which consist of costs associated with corporate
legal services, litigation settlements, accounting and auditing services,
consulting, and our Board of Directors, totaled $6.3 million and $8.7 million
for the three and six months ended June 30, 2000, an increase of $2.7 million,
or 76.7%, and $2.8 million, or 48.0%, compared to $3.6 million and $5.9 million
in the comparable 1999 periods. The increase in professional services expenses
reflects the extensive efforts undertaken by us 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 believes we
can achieve a combination of cost savings and increased quality of service.
Occupancy, furniture and equipment expenses totaled $5.0 million for the three
months ended June 30, 2000, an increase of $2.0 million, or 68.9%, from the $3.0
million for the three months ended June 30, 1999. Occupancy, furniture and
equipment expenses totaled $8.9 million and $5.8 million for the six months
ended June 30, 2000 and 1999. The increase in occupancy, furniture and equipment
expenses in 2000, as compared to 1999, was primarily the result of our effort to
achieve greater capacity from our existing facilities as well as continued
geographic expansion to develop and support new markets.
Business development and travel expenses totaled $2.3 million and $4.7 million
for the three and six months ended June 30, 2000, an increase of $0.8 million,
or 50.4%, and $1.9 million, or 65.8%, compared to $1.5 million and $2.9 million
in the comparable 1999 periods. The increase in business development and travel
expenses was largely attributable to overall growth in our business, including
both an increase in the number of FTE personnel and expansion into new
geographic markets.
Trust preferred securities distributions totaled $0.8 million and $1.7 million
for the three and six months ended June 30, 2000 and 1999. These amounts
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.
22
Other noninterest expense totaled $1.9 million and $3.7 million for the three
and six months ended June 30, 2000, an increase of $0.4 million, or 26.8%, and
$1.2 million, or 49.1%, compared to $1.5 million and $2.5 million for the
respective 1999 periods. This increase was primarily attributable to increase in
data processing costs related to both the overall growth in the our business and
several new business initiatives.
INCOME TAXES
Our effective tax rate was 40.2% and 40.7% for the second quarter and first half
of 2000, respectively, compared to 38.8% and 39.6% for the equivalent three and
six month prior year periods, respectively. The increase in our effective income
tax rate was primarily attributable to the increase in pre-tax income as
compared to the relatively constant level of non-taxable income from security
investments.
FINANCIAL CONDITION
Our total assets were $5.4 billion at June 30, 2000, an increase of $796.8
million, or 17.3%, compared to $4.6 billion at December 31, 1999.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell totaled a
combined $1.2 billion at June 30, 2000, an increase of $305.7 million, or 34.0%,
compared to the $898.0 million outstanding at December 31, 1999. This increase
was attributable to our investing excess funds, resulting from continued strong
deposit growth during the first half of 2000, in these types of short-term
liquid investments.
INVESTMENT SECURITIES
Investment securities totaled $2.2 billion at June 30, 2000, an increase of
$436.9 million, or 25.0%, from the December 31, 1999 balance of $1.7 billion.
This increase resulted from excess funds that were generated by strong growth in
our deposits outpacing the growth in loans during the first six months of 2000,
and primarily consisted of U.S. agency securities, commercial paper, money
market mutual funds, and municipal securities. The overall growth in the
investment portfolio reflected our actions to increase, as well as to further
diversify our portfolio in response to a continued significant increase in
liquidity.
The increase in market interest rates during first half of 2000 resulted in a
pre-tax unrealized loss on our available-for-sale fixed income securities
investment portfolio of $43.9 million as of June 30, 2000, which was partially
offset by a pre-tax unrealized gain of $37.8 million associated with our warrant
securities. 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.
Based on July 31, 2000 market valuations, we had potential pre-tax warrant gains
totaling $33.4 million related to 50 companies. We are restricted from
exercising many of these warrants until the third and fourth quarters of 2000,
and first and second quarters of 2001. As of July 31, 2000, we held 1,105
warrants in 871 companies, and had made investments in 175 venture capital funds
and direct equity investments in 40 companies. Many of these companies are
non-public. Thus, for those companies for which a readily determinable market
value cannot be obtained, we value
23
these equity instruments at cost less any identified impairment.
Additionally, we are typically precluded from using any type of derivative
instrument to secure the current unrealized gains associated with many of
these equity instruments. Hence, the amount of income we realize from these
equity instruments in future periods may vary materially from the current
unrealized amount due to fluctuations in the market prices of the underlying
common stock of these companies. Furthermore, we may reinvest some or all of
the income realized from the disposition of these equity instruments in
pursuing our business strategies.
LOANS
Total loans, net of unearned income, at June 30, 2000, were $1.6 billion, a
slight decrease of $24.5 million compared to the balance at December 31, 1999.
While we continue to generate new loans in most of our technology and life
sciences and special industry niche practices, as well as in specialized lending
products, many of our clients, primarily in the technology and life sciences
niche, have received significant cash inflows from the capital markets and
venture capital community. Consequently, we have experienced higher than normal
paydowns and loan payoffs, which has caused total loans to remain relatively
unchanged from December 31, 1999 to June 30, 2000.
CREDIT QUALITY AND THE ALLOWANCE FOR LOAN LOSSES
Credit risk is defined as the possibility of sustaining a loss because other
parties to the financial instrument fail to perform in accordance with the terms
of the contract. While we follow underwriting and credit monitoring procedures
which we believe are appropriate in growing and managing the loan portfolio, in
the event of nonperformance by these other parties, our potential exposure to
credit losses could significantly affect our consolidated financial position and
earnings.
Lending money involves an inherent risk of nonpayment. Through the
administration of loan policies and monitoring of the loan portfolio, our
management seeks to reduce such risks. The allowance for loan losses is an
estimate to provide a financial buffer for losses, both identified and
unidentified, in the loan portfolio.
We regularly review and monitor the loan portfolio to determine the risk profile
of each credit, and to identify credits whose risk profiles have changed. This
review includes, but is not limited to, such factors as payment status, the
financial condition of the borrower, borrower compliance with loan covenants,
underlying collateral values, potential loan concentrations, and general
economic conditions. We identify potential problem credits and, based upon known
information, we develop action plans.
We have established an evaluation process designed to determine the adequacy of
the allowance for loan losses. This process attempts to assess the risk of
losses inherent in the loan portfolio by segregating the allowance for loan
losses into three components: "specific," "loss migration," and "general." The
specific component is established by allocating a portion of the allowance for
loan losses to individual classified credits on the basis of specific
circumstances and assessments. The loss migration component is calculated as a
function of the historical loss migration experience of the internal loan credit
risk rating categories. The general component, composed of allocated and
unallocated portions that supplements the first two components, includes: our
management's judgment of the effect of current and forecasted economic
conditions on the borrowers' abilities to repay, an evaluation of the allowance
for loan losses in relation to the size of the overall loan
24
portfolio, an evaluation of the composition of, and growth trends within, the
loan portfolio, consideration of the relationship of the allowance for loan
losses to nonperforming loans, net charge-off trends, and other factors.
While this evaluation process uses historical and other objective
information, the classification of loans and the establishment of the
allowance for loan losses, relies, to a great extent, on the judgment and
experience of our management.
The allowance for loan losses totaled $73.8 million at June 30, 2000, an
increase of $2.0 million, or 2.8%, compared to the $71.8 million balance at
December 31, 1999. This increase was due to $23.6 million in additional
provisions to the allowance for loan losses, offset by net charge-offs of $21.6
million for the first half of 2000.
We incurred $11.3 million and $27.5 million in gross charge-off during the three
and six months ended June 30, 2000. The gross charge-offs in the first six
months of 2000 included four commercial credits totaling $16.5 million, of which
$12.0 million was centered in our healthcare services niche. Of the total gross
charge-offs incurred during the first half of 2000, $12.5 million were
classified as nonperforming loans at the end of 1999.
We believe our allowance for loan losses is adequate as of June 30, 2000.
However, future changes in circumstances, economic conditions or other factors
could cause us to increase or decrease the allowance for loan losses as deemed
necessary. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review our allowance for loan losses.
Such agencies may require us to make adjustments to the allowance for loan
losses based on their judgment of information available to them at the time of
their examination.
Nonperforming assets consist of loans that are past due 90 days or more but
still accruing interest, loans on nonaccrual status and OREO and other
foreclosed assets.
The table below sets forth certain relationships between nonperforming loans,
nonperforming assets and the allowance for loan losses:
June 30, December 31,
(Dollars in thousands) 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Nonperforming assets:
Loans past due 90 days or more $ 62 $ 911
Nonaccrual loans 26,817 27,552
- -------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 26,879 28,463
OREO and other foreclosed assets - -
===================================================================================================================
Total nonperforming assets $26,879 $28,463
===================================================================================================================
Nonperforming loans as a percentage of total loans 1.7% 1.7%
Nonperforming assets as a percentage of total assets 0.5% 0.6%
Allowance for loan losses: $73,800 $71,800
As a percentage of total loans 4.6% 4.4%
As a percentage of nonaccrual loans 275.2% 260.6%
As a percentage of nonperforming loans 274.6% 252.3%
25
Nonperforming loans totaled $26.9 million, or 1.7% of total loans, at June 30,
2000, a decrease of $1.6 million or 5.6%, from the prior year-end total of $28.5
million, or 1.7% of total loans. Nonperforming loans at June 30, 2000 include
two commercial credits totaling $14.8 million. The first credit, totaling $7.9
million, is in our entertainment niche and was disclosed as having a higher than
normal risk of becoming nonperforming in our 2000 first quarter Form 10-Q. The
second credit, totaling $6.9 million, is in our healthcare services niche and
has been nonperforming since the 2000 first quarter. Our management believes
these credits are adequately secured with collateral and reserves, and that any
future charge-offs associated with these loans will not have a material impact
on our future net income.
In addition to the loans disclosed in the foregoing analysis, we have identified
four loans totaling $15.6 million, that, on the basis of information known to
us, were judged to have a higher than normal risk of becoming nonperforming. We
are not aware of any other loans where known information about possible problems
of the borrower casts serious doubts about the ability of the borrower to comply
with the loan repayment terms.
DEPOSITS
Total deposits were $4.8 billion at June 30, 2000, an increase of $735.8
million, or 17.9%, from the prior year-end total of $4.1 billion. A significant
portion of the increase in deposits during the first half of 2000 was due to
increases in both the noninterest-bearing demand and time deposit products,
which increased $608.7 million, or 31.6%, and $338.8 million, or 115.9%,
respectively. These increases were explained by high levels of client liquidity
attributable to a strong inflow of investment capital into the venture capital
community and equity markets, and by growth in the number of clients served by
us during the first half of 2000.
MARKET RISK MANAGEMENT
Interest rate risk is the most significant market risk impacting us. Our
monitoring activities related to managing interest rate risk include both
interest rate sensitivity "gap" analysis and the use of a simulation model to
measure the impact of market interest rate changes on the net present value of
estimated cash flows from our assets, liabilities and off-balance sheet items,
defined as our market value of portfolio equity (MVPE). See our 1999 Annual
Report on Form 10-K for disclosure of the quantitative and qualitative
information regarding the interest rate risk inherent in interest rate risk
sensitive instruments as of December 31, 1999. There have been no changes in the
assumptions used by us in monitoring interest rate risk as of June 30, 2000.
Other types of market risk affecting us in the normal course of our business
activities include foreign currency exchange risk and equity price risk. The
impact on us, resulting from these other two types of market risks, is deemed
immaterial. We do not maintain a portfolio of trading securities and do not
intend to engage in such activities in the immediate future.
LIQUIDITY
Another important objective of asset/liability management is to manage
liquidity. The objective of liquidity management is to ensure that funds are
available in a timely manner to meet loan demand and depositors' needs, and to
service other liabilities as they come due, without causing an undue amount of
cost or risk, and without causing a disruption to normal operating conditions.
26
We regularly assess the amount and likelihood of projected funding requirements
through a review of factors such as historical deposit volatility and funding
patterns, present and forecasted market and economic conditions, individual
client funding needs, and existing and planned business activities. Our
asset/liability committee (ALCO) provides oversight to the liquidity management
process and recommends policy guidelines, subject to board of directors
approval, and courses of action to address our actual and projected liquidity
needs.
The ability to attract a stable, low-cost base of deposits is our primary source
of liquidity. Other sources of liquidity available to us include short-term
borrowings, which consist of federal funds purchased, security repurchase
agreements and other short-term borrowing arrangements. Our liquidity
requirements can also be met through the use of our portfolio of liquid assets.
Our definition of liquid assets includes cash and cash equivalents in excess of
the minimum levels necessary to carry out normal business operations, federal
funds sold, securities purchased under resale agreements, investment securities
maturing within six months, investment securities eligible and available for
pledging purposes with a maturity in excess of six months, and anticipated near
term cash flows from investments.
Our policy guidelines provide that liquid assets as a percentage of total
deposits should not fall below 20.0%. At June 30, 2000, the Bank's ratio of
liquid assets to total deposits was 64.1%. This ratio is well in excess of our
minimum policy guidelines and is higher than the comparable ratio of 55.7% as of
December 31, 1999. In addition to monitoring the level of liquid assets relative
to total deposits, we also utilize other policy measures in liquidity management
activities. As of June 30, 2000, we were in compliance with all of these policy
measures.
CAPITAL RESOURCES
Our management seeks to maintain adequate capital to support anticipated asset
growth and credit risks, and to ensure that Silicon and Silicon Valley Bank are
in compliance with all regulatory capital guidelines. Our primary sources of new
capital include the issuance of trust preferred securities and common stock, as
well as retained earnings.
On August 7, 2000, we issued 2.3 million shares of common stock at $42.19 per
share. We received proceeds of $91.0 million related to the sale of these
securities, net of underwriting commission and other offering expenses.
In December 1999 we issued 2.8 million shares of common stock at $21.00 per
share. In January 2000, we issued an additional 0.4 million shares at $21.00 per
share in relation to the exercise of an over-allotment option by the
underwriters for that offering. Proceed from the sale of these securities
totaled $63.3 million, net of underwriting commissions and other offering
expenses. In addition, in 1998 we issued $40.0 million face amount 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."
27
Stockholders' equity totaled $436.2 million at June 30, 2000, an increase of
$67.3 million, or 18.3%, from the $368.9 million balance at December 31, 1999.
This increase was primarily due to net income of $88.4 million for the six
months ended June 30, 2000 and net proceeds from the issuance of common stock of
$19.4 million, partially offset by a decrease in the after-tax net unrealized
gains on available-for-sale securities of $44.7 million. We have not paid a cash
dividend on our common stock since 1992, and we do not have any material
commitments for capital expenditures as of June 30, 2000.
Both Silicon and Silicon Valley Bank are subject to capital adequacy guidelines
issued by the Federal Reserve Board. Under these capital guidelines, the minimum
total risk-based capital ratio and Tier 1 risk-based capital ratio requirements
are 10.0% and 6.0%, respectively, of risk-weighted assets and certain
off-balance sheet items for a well capitalized depository institution.
The Federal Reserve Board has also established minimum capital leverage ratio
guidelines for state member banks. The ratio is determined using Tier 1 capital
divided by quarterly average total assets. The guidelines require a minimum of
5.0% for a well capitalized depository institution.
Both Silicon's and Silicon Valley Bank's capital ratios were in excess of
regulatory guidelines for a well capitalized depository institution as of June
30, 2000, and December 31, 1999. Capital ratios for Silicon and Silicon Valley
Bank are set forth below:
June 30, December 31,
2000 1999
- ----------------------------------------------------------------------------------------------------------------
Silicon Valley Bancshares:
Total risk-based capital ratio.................................................. 15.7% 15.5%
Tier 1 risk-based capital ratio................................................. 14.4% 14.3%
Tier 1 leverage ratio........................................................... 9.4% 8.8%
Silicon Valley Bank:
Total risk-based capital ratio.................................................. 13.9% 14.0%
Tier 1 risk-based capital ratio................................................. 12.6% 12.7%
Tier 1 leverage ratio........................................................... 8.2% 7.9%
The increase in the total risk-based capital ratio, the Tier 1 risk-based
capital ratio and the Tier 1 leverage ratio from December 31, 1999 to June 30,
2000 was primarily attributable to an increase in Tier 1 capital. This increase
was due to both the issuance of common stock, which generated net proceeds of
$19.4 million, and internally generated capital, primarily net income of $88.4
million.
28
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item
pending at June 30, 2000, or at the date of this report.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on April 20, 2000. Each of the
persons named in the Proxy Statement as a nominee for director was elected; the
amendment to the Company's 1997 Equity Incentive Plan; and the appointment of
KPMG LLP as the Company's independent auditors for 2000 was ratified. The
following are the voting results on each of these matters:
Election of Directors In Favor Withheld
- --------------------- -------- --------
Gary K. Barr 19,561,785 395,275
James F. Burns, Jr. 19,559,185 397,875
John C. Dean 17,305,591 2,651,469
David M. deWilde 19,561,785 395,275
Stephen E. Jackson 19,561,685 395,375
Daniel J. Kelleher 19,558,943 398,117
James R. Porter 19,561,785 395,275
Ann R. Wells (1) 19,530,850 426,210
Kenneth P. Wilcox 19,561,337 395,723
(1) Ann R. Wells resigned from the board of directors during the second quarter
of 2000.
Other Matters In Favor Opposed Abstained
- ------------- -------- ------- ---------
The amendment to the Company's 1997
Equity Incentive Plan to reserve an
additional 2.2 million shares of common
stock for issuance thereunder was
approved. 10,530,925 9,365,298 60,387
Other Matters In Favor Opposed Abstained
- ------------- -------- ------- ---------
Ratification of the appointment of KPMG
LLP as the Company's independent
auditors for 2000. 19,885,436 34,768 36,856
29
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
---------
27.1 Financial Data Schedule
(b) The Company filed the following reports on Form 8-K during the second
quarter of 2000:
1. A report on Form 8-K was filed on June 16, 2000, whereby the Company
announced that the Federal Reserve Bank of San Francisco and the
California Department of Financial Institution have removed the
memorandum of understanding the Bank had been under since September
1999.
2. A report on Form 8-K was filed on June 16, 2000, whereby the Company
announced financial highlights for the two months ended May 31, 2000.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SILICON VALLEY BANCSHARES
Date: August 14, 2000 /s/ Donal D. Delaney
-------------------------------
Donal D. Delaney
Controller
(Principal Accounting Officer)
31