SVB Financial Group
SILICON VALLEY BANCSHARES (Form: 10-K, Received: 03/05/2003 15:10:43)
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As filed with the Securities and Exchange Commission on March 5, 2003



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K

(Mark One)


ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the fiscal year ended December 31, 2002
OR

o 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
(State or other jurisdiction of
incorporation or organization)
  91-1962278
(I.R.S. Employer Identification No.)

3003 Tasman Drive
Santa Clara, California

(Address of principal executive offices)

 

95054-1191
(Zip Code)

Registrant's telephone number, including area code: (408) 654-7400


Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

Common Stock ($0.001 par value)
(Title of each class)
  Nasdaq National Market
(Name of each exchange on which registered)

        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  ý     No  o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  ý  No  o

        The aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 30, 2002, the last business day of the registrant's most recently completed second fiscal quarter, based upon the closing price of its common stock on such date, on the Nasdaq National Market was $1,203,441,259.

        At January 31, 2003, 38,912,748 shares of the registrant's common stock ($0.001 par value) were outstanding.

Documents Incorporated by Reference

Documents Incorporated

  Parts of Form 10-K
Into Which Incorporated

Definitive proxy statement for the Company's 2003 Annual Meeting of Stockholders to be filed within 120 days of the end of the fiscal year ended December 31, 2002   Part III




TABLE OF CONTENTS

 
   
  Page
PART I        

ITEM 1.

 

BUSINESS

 

3

ITEM 2.

 

PROPERTIES

 

14

ITEM 3.

 

LEGAL PROCEEDINGS

 

14

ITEM 4.

 

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

14

PART II

 

 

 

 

ITEM 5.

 

MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

15

ITEM 6.

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

16

ITEM 7.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

17

ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

17

ITEM 8.

 

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

62

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

106

PART III

 

 

 

 

ITEM 10.

 

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

106

ITEM 11.

 

EXECUTIVE COMPENSATION

 

106

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

106

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

106

ITEM 14.

 

CONTROLS AND PROCEDURES

 

107

PART IV

 

 

 

 

ITEM 15.

 

EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 

107

SIGNATURES

 

109

CERTIFICATIONS

 

110

INDEX TO EXHIBITS

 

113

2



PART I

ITEM 1. BUSINESS

General

        Silicon Valley Bancshares is a bank holding company and a financial holding company. Our principal subsidiary, Silicon Valley Bank, is a California state-chartered bank and a member of the Federal Reserve System. Silicon Valley Bank's deposits are insured by the Federal Deposit Insurance Corporation. Our corporate headquarters is 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 all of its subsidiaries collectively, including Silicon Valley Bank. When we refer to "Silicon," we are referring only to Silicon Valley Bancshares.

        Silicon Valley Bank's profitability, like most financial institutions, is primarily dependent on interest rate differentials. In general, the difference between the interest rates paid by Silicon Valley Bank on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received on its interest-earning assets, such as loans extended to its clients and securities held in its investment portfolio, comprise the major portion of its earnings. Silicon Valley Bank also provides a wide variety of fee-based financial services to its clients, including private label client investment and sweep products, foreign exchange products and deposit services. Over the long term, Silicon Valley Bank seeks to generate strong operating results by leveraging its lending practice to obtain warrant agreements to purchase equity in the technology and life sciences companies of the future.

        Our strategy is to increase our revenues by marketing our full range of financial products and services to clients and venture capital industry contacts we originally developed through our commercial banking business. In addition to our commercial banking services, we engage in venture capital fund and direct equity investment activities, fee-based merger and acquisition services and venture capital fund and fund of funds management. We believe that our ability to successfully cross-sell our five lines of banking and financial services to our clients is one of the strengths of our business model.

        We serve more than 9,500 clients across the country through 27 regional offices. We have 11 offices throughout California and operate regional offices across the country, including Arizona, Colorado, Florida, Georgia, Illinois, Massachusetts, Minnesota, New York, North Carolina, Oregon, Pennsylvania, Texas, Virginia, and Washington. We serve emerging-growth and mature companies in the technology and life sciences markets, as well as premium wineries. We believe our focus on specialized markets and extensive knowledge of the people and business issues driving them, that we provide a level of service and partnership that contributes to our clients' success.

Business Overview

        Silicon Valley Bancshares is organized along five lines of banking and financial services as follows:

Commercial Banking

        We provide cash management services including deposit services, collection services, disbursement services, electronic funds transfers, and online banking through SVBeConnect.

        International banking services include trade services, foreign exchange services, export trade finance, and international cash management.

        We also provide investment and advisory services through our broker-dealer, SVB Securities, which includes mutual funds, fixed income securities, and investment reporting and monitoring.

        Our lending services include traditional term loans, commercial finance lending, and structured finance lending.

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Investment Banking

        We provide merger and acquisition and corporate partnering services through our broker-dealer subsidiary, Alliant Partners.

Private Banking

        We provide a wide array of loan, personal asset management, mortgage services, trust and estate planning tailored for high-net-worth individuals. We also provide investment advisory services to these clients through our subsidiary, Woodside Asset Management, Inc.

Merchant Banking

        We make private equity and venture capital fund investments, international alliances and manage two limited partnerships: a venture capital fund and a fund of funds.

Other Business Services

        We provide Web-based business services, professional services, and executive placement services. Client Exchange™ is our online bulletin board, resume, and assets exchange service, and BenchmarkPro gives our clients the opportunity to see the financial performance of companies relative to their industry.

        In each of the industry sectors we serve, our products and services are tailored to the client's business life cycle, from early stage through maturity.

Industry Sectors

Technology and Life Sciences

        We serve a variety of clients in the technology and life sciences industries and markets. A key component of our technology and life sciences business strategy is to develop relationships with these clients at an early stage and offer them banking products and services throughout the business life cycle. We have cultivated strong relationships with venture capital firms, many of which are also clients, providing us access to many other potential clients.

        Our early-stage clients generally keep large cash balances in their deposit accounts and usually do not borrow large amounts under their credit facilities. The primary source of funding for most early-stage clients is equity from venture capitalists and public markets. Lending to this market typically involves working capital lines of credit, equipment financing, asset acquisition loans, and bridge financing.

        In the past few years, we expanded our target market within the technology and life sciences sector by adding an extended suite of financial products and services attractive to later-stage companies. From this initiative, we established our corporate technology practice, a network of senior lenders in every geographic region in which we operate, focused solely on the specific financial needs of our more mature clients. Today, we can comfortably address the financial needs of all companies in our target market, whether they are entrepreneurs with innovative ideas or multinational corporations with hundreds of millions of dollars in sales.

        Our technology and life sciences clients generally fall into the following industries:

    Communications and Electronics

            The world's growing demand for faster, more convenient communication is driving entrepreneurs to create new telecommunications services, the infrastructure for delivering them and advanced electronics for accessing them. Companies in these fields face intense competitive pressures from established global corporations. Additionally, these companies are challenged with the complexity of mastering rapidly evolving optical and semiconductor technology. We help these companies gain access to the capital they need to bring their innovations to market and gain the critical mass required for long-term success.

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    Software and Services

            Through our software and services practice, we are a full-service provider of banking solutions for companies in the Web-enabled applications, system integration and enterprise software industries. We help software companies capitalize on new opportunities with speed and financial flexibility by providing a wide range of credit facilities, international services and other support.

    Life Sciences

            Our life sciences practice serves companies in the biotechnology, drug discovery, medical software, and medical devices 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.

Premium Wineries

        Our premium wineries practice has become a leading provider of financial services to the rapidly expanding U.S. premium wine industry. We focus on vineyards and wineries that produce grapes and wines of the highest quality.

Industry Sectors Exited During 2002

        For many years, Silicon Valley Bancshares pursued a strategy of niche expansion that translated into reaching beyond the boundaries of technology and life sciences sectors, to penetrate what we thought to be under-served markets. In late 2002, we decided to focus our resources on the most profitable industry sectors served by us, which are technology, life sciences and premium wineries. As a result of narrowing our focus, we deliberately exited three niches: real estate, media, and religious lending. We will continue to service our existing real estate, media and religious niche loans until they are paid-off. However, we will not seek any new lending opportunities in these niches. We expect the termination of these niches to enable us to focus on more profitable aspects of our business and improve overall profitability.

Equity Securities

        We frequently obtain rights to acquire stock in the form of warrants in certain client companies as part of negotiated credit facilities. We also make investments in venture capital funds and direct equity investments in companies. As of December 31, 2002, we held 1,818 warrants in 1,355 companies, had investments in 244 venture capital funds, and had private equity investments in 25 companies. Additionally, we had private equity investments in 24 companies through our venture capital fund, Silicon Valley BancVentures, L.P. and made investments in 20 venture capital funds through our fund of funds, SVB Strategic Investors Fund, L.P.

Consolidated Managed Merchant Banking Activities

        In 2000, we formed SVB Strategic Investors, LLC, the general partner of SVB Strategic Investors Fund, L.P. SVB Strategic Investors Fund, L.P. raised approximately $135.3 million in committed capital to invest as a limited partner in top-tier venture funds, leading regional venture funds, and venture funds with a unique niche. We have committed capital of $15.0 million to SVB Strategic Investors Fund, L.P., representing an ownership interest of 11.1%, of which $3.9 million has been funded as of December 31, 2002. Effective January 1, 2003, the agreement of limited partnership of SVB Strategic Investors Fund, L.P. was amended to reduce the amount of capital that can be called by 10% to $121.8 million as a result of reductions in the size of the underlying venture capital funds. Thus, our committed capital that can be called was reduced to $13.5 million.

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        In 2000, we formed Silicon Valley BancVentures, Inc., the general partner of Silicon Valley BancVentures, L.P. Silicon Valley BancVentures, L.P. raised $56.1 million in committed capital to make private equity investments in emerging growth technology and life sciences companies throughout the United States. We have committed capital of $6.0 million to Silicon Valley BancVentures, L.P., representing an ownership interest of 10.7%, of which $2.0 million has been funded as of December 31, 2002.

Business Combinations

        On October 1, 2002, we acquired substantially all of the assets of Woodside Asset Management, Inc., an investment advisor firm, which has approximately $200 million under management for 70 clients. We are offering Woodside Asset Management's services as part of our private banking services. Additionally, as part of this acquisition, Silicon Valley Bancshares obtained the general partner interests in two limited partnerships, Taurus, L.P. and Libra, L.P., with total assets aggregating $12.4 million. We have less than a 1% ownership interest in each of these funds. The remaining ownership interest represents limited partners' funds invested on their behalf by the general partner in certain fixed income and marketable equity securities. However, due to our ability to control the investing activities of these limited partnerships, we have consolidated the related results of operations and financial condition into our consolidated financial statements as of and for the three-month period ended December 31, 2002. This acquisition did not have a material impact on goodwill and is not expected to materially impact our earnings in the short-term.

        On September 28, 2001, a subsidiary of Silicon Valley Bank, SVB Securities, Inc., completed the acquisition of Alliant Partners, an investment banking firm providing merger and acquisition and corporate partnering services. Our investment banking business continues to do business under the name "Alliant Partners." See "Item 8. Consolidated Financial Statements and Supplementary Data—Notes 2 to the Consolidated Financial Statements—Business Combinations." On October 1, 2002, Alliant Partners was sold from Silicon Valley Bank to Silicon. This transfer allows Alliant Partners to operate under less restrictive bank holding company regulations and increasing our capital ratios at Silicon Valley Bank.

Competition

        The banking and financial services industry is highly competitive. Our current competitors include other banks and specialty and diversified financial services companies that offer lending, leasing, and other financial products to our customer base. The principal competitive factors in our markets include product offerings, service and pricing. We believe we compete favorably in all our markets in all of these areas.

Employees

        As of December 31, 2002, we employed approximately 1,019 full-time equivalent employees. None of our employees are represented by a labor union, and our employee relations are considered good. Competition for qualified personnel in our industry is significant, particularly for client relationship manager positions and officers and employees with strong relationships with the venture capital community. Our future success will depend in part on our continued ability to attract, hire, and retain qualified personnel.

Supervision and Regulation

        Our operations are subject to extensive regulation by federal and state banking regulatory agencies. This regulatory framework is intended primarily to protect Silicon Valley Bank's depositors and the federal deposit insurance fund from losses and is not for the benefit of our stockholders. As a bank holding company and a financial holding company, Silicon is subject to the Federal Reserve Board's supervision and examination under the Bank Holding Company Act, or BHC Act, as revised by the Gramm-Leach-Bliley Act, discussed below. Silicon Valley Bank, as a California-chartered bank

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and a member of the Federal Reserve System, is subject to primary supervision and examination by the Federal Reserve Board through the Federal Reserve Bank of San Francisco and the Commissioner of the California Department of Financial Institutions. The following summary describes some of the more significant laws, regulations and policies that affect our operations. This summary is not intended to be a complete listing of all laws that apply to us. Any change in the statutes, regulations, or policies that apply to our operations may have a material effect on our business.

Gramm-Leach-Bliley Act

        On November 12, 1999, the Gramm-Leach-Bliley Act, or GLB Act, was signed into law, which significantly changed the regulatory structure and oversight of the financial services industry. The GLB Act repealed the provisions of the Glass-Steagall Act that restricted banks and securities firms from affiliating. It also revised the BHC Act to permit a qualifying bank holding company, called a financial holding company, to engage in a full range of financial activities, including banking, insurance, securities, and merchant banking activities. It permits financial holding companies to acquire many types of financial firms without the prior approval of the Federal Reserve Board. On November 14, 2000, Silicon became a financial holding company.

        The GLB Act provides expanded financial affiliation opportunities for existing bank holding companies and permits other financial services providers to acquire banks and become bank holding companies without ceasing any existing financial activities. Previously, a bank holding company could only engage in activities that were "closely related to banking." This limitation no longer applies to bank holding companies that qualify to be treated as financial holding companies. To qualify as a financial holding company, a holding company's subsidiary depository institutions must be well capitalized and have at least satisfactory general, managerial and Community Reinvestment Act examination ratings. A nonqualifying bank holding company is limited to activities that were permissible under the BHC Act as of November 11, 1999.

        The GLB Act changed the powers of national banks and their subsidiaries, and made similar changes in the powers of state bank subsidiaries. The GLB Act permits a national bank to underwrite, deal in and purchase state and local revenue bonds. It also allows a subsidiary of a national bank to engage in financial activities that the bank cannot, except for general insurance underwriting and real estate development and investment. In order for a subsidiary to engage in new financial activities, the national bank and its depository institution affiliates must be well capitalized; have at least satisfactory general, managerial, and Community Reinvestment Act examination ratings; and meet other qualification requirements relating to total assets, subordinated debt, capital, risk management, and affiliate transactions. Subsidiaries of state banks can exercise the same powers as national bank subsidiaries if they satisfy the same qualifying rules that apply to national banks. For state banks that are members of the Federal Reserve System like Silicon Valley Bank, prior approval of the Federal Reserve is required before a bank can create a subsidiary to capitalize on the additional financial activities empowered by the GLB Act.

        The GLB Act also reformed the overall regulatory framework of the financial services industry. In order to implement its underlying purposes, the GLB Act pre-empted state laws that would restrict the types of financial affiliations that are authorized or permitted under the GLB Act, subject to specified exceptions for state insurance laws and regulations.

        Separately, the GLB Act imposes customer privacy requirements on any company engaged in financial activities. Under these requirements, a financial company is required to protect the security and confidentiality of customer nonpublic personal information. Also, for customers who obtain a financial product such as a loan for personal, family, or household purposes, a financial company is required to disclose its privacy policy to the customer at the time the relationship is established and annually thereafter. The financial company must also disclose its policies concerning the sharing of the customer's nonpublic personal information with affiliates and third parties. If an exemption is not available, a financial company must provide consumers with a notice of its information-sharing practices that allows the consumer to reject the disclosure of its nonpublic personal information to

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third parties. Third parties that receive such information are subject to the same restrictions as the financial company on the reuse of the information. Finally, a financial company is prohibited from disclosing an account number or similar item to a third party for use in telemarketing, direct mail marketing, or other marketing through electronic mail. Financial companies were required to be in compliance with these consumer privacy requirements no later than July 1, 2001.

        As part of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act"), Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (IMLAFATA). IMLAFATA amended the Bank Secrecy Act and adopted certain additional measures that increase the obligation of financial institutions, including Silicon Valley Bank, to identify their customers, watch for and report upon suspicious transactions, respond to requests for information by federal banking regulatory authorities and law enforcement agencies, and share information with other financial institutions. The Secretary of the Treasury has adopted several regulations to implement these provisions. Silicon Valley Bank is also barred from dealing with foreign "shell" banks. In addition, IMLAFATA expands the circumstances under which funds in a bank account may be forfeited. IMLAFATA also amended the BHC Act and the Bank Merger Act to require the federal banking regulatory authorities to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing an application to expand operations. Silicon Valley Bank has in place a Bank Secrecy Act compliance program.

Capital Standards Applicable to Silicon and Silicon Valley Bank

    Silicon

            The Federal Reserve Board has adopted minimum risk-based capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and those recorded as off-balance sheet items. These include transactions, such as commitments, letters of credit, and recourse arrangements. Under these guidelines, dollar amounts of assets and credit-equivalent amounts of off-balance sheet items are adjusted by one of several conversion factors and/or risk adjustment percentages. The Federal Reserve Board requires bank holding companies generally to maintain a minimum ratio of qualifying total capital to risk-adjusted assets of 8% (10% to be well capitalized) and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4% (6% to be well capitalized). The Federal Reserve Board also requires Silicon Valley Bancshares to maintain a minimum amount of Tier 1 capital to total quarterly average assets, referred to as the Tier 1 leverage ratio. For a bank holding company in the highest of the five categories used by regulators to rate banking organizations, the minimum Tier 1 leverage ratio must be 3%. For all other institutions the ratio is 4% (5% to be well capitalized). In addition to these requirements, the Federal Reserve Board may set individual minimum capital requirements for specific institutions at rates substantially above the minimum guidelines and ratios. Under certain circumstances, Silicon must file written notice with, and obtain approval from, the Federal Reserve Board prior to purchasing or redeeming its equity securities. See "Item 1. Business—Supervision and Regulation—Prompt Corrective Action and Other Enforcement Mechanisms" for additional discussion of capital ratios.

            Silicon is subject to rules that govern the regulatory capital treatment of equity investments in nonfinancial companies made on or after March 13, 2000, and that are held under certain specified legal authorities by a bank holding company. Under the rules, these equity investments will be subject to a separate capital charge that will reduce a bank holding company's Tier 1 capital and, correspondingly, will remove these assets from being taken into consideration in establishing a bank holding company's required capital ratios discussed above. Silicon's capital ratios exceeded the well-capitalized requirements, as defined above, at December 31, 2002. See "Item 8. Consolidated Financial Statements and Supplementary Data—Note 22 to the Consolidated Financial Statements—Regulatory Matters" for Silicon's capital ratios as of December 31, 2002.

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            The rules provide for the following incremental Tier 1 capital charges: 8% of the adjusted carrying value of the portion of such aggregate investments that are up to 15% of Tier 1 capital; 12% of the adjusted carrying value of the portion of such aggregate investments that are between 15% and 25% of Tier 1 capital; and 25% of the adjusted carrying value of the portion of such aggregate investments that exceed 25% of Tier 1 capital. The rules normally do not apply to unexercised warrants acquired by a bank as additional consideration for making a loan or to equity securities that are acquired in satisfaction of a debt previously contracted and that are held and divested in accordance with applicable law.

    Silicon Valley Bank

            The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% (10% to be well capitalized) and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4% (6% to be well capitalized). In addition to the risk-based guidelines, federal banking regulators also require banking organizations to maintain a minimum Tier 1 leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum Tier 1 leverage ratio must be 3%. For all other institutions the ratio is 4% (5% to be well capitalized). In addition to these uniform risk-based capital guidelines and leverage-ratio requirements that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates substantially above the minimum guidelines and ratios. Silicon Valley Bank's capital ratios exceeded the well-capitalized requirements, as defined above, at December 31, 2002. See "Item 8. Consolidated Financial Statements and Supplementary Data—Note 22 to the Consolidated Financial Statements—Regulatory Matters" for Silicon's and the Bank's capital ratios as of December 31, 2002.

            Like Silicon, Silicon Valley Bank is subject to rules that govern the regulatory capital treatment of equity investments in non-financial companies made on or after March 13, 2000, but Silicon Valley Bank does not currently hold any such equity investments. See "Item 8. Consolidated Financial Statements and Supplementary Data—Note 22 to the Consolidated Financial Statements—Regulatory Matters" for Silicon Valley Bank's capital ratios as of December 31, 2002.

            The federal banking agencies have also adopted a joint agency policy statement which provides that the adequacy and effectiveness of a bank's interest rate risk management process and the level of its interest rate exposures are critical factors in the evaluation of the bank's capital adequacy. A bank with material weaknesses in its interest rate risk management process or high levels of interest rate exposure relative to its capital will be directed by the federal banking agencies to take corrective actions. Financial institutions that have substantial amounts of their assets concentrated in high-risk loans or nontraditional banking activities and who fail to adequately manage these risks may be required to set aside capital in excess of the regulatory minimums.

Bank Holding Company Regulation of Silicon

        As a registered bank holding company and a financial holding company, Silicon and its subsidiaries are subject to the Federal Reserve Board's supervision, regulation, examination, and reporting requirements under the BHC Act, as revised by the GLB Act. Prior to becoming a financial holding company under the BHC Act, Silicon was required to seek the prior approval of the Federal Reserve Board before acquiring ownership or control of more than 5% of the outstanding shares of any class of voting securities, or substantially all of the assets, of any company, including a bank or bank holding company. As a financial holding company, the prior approval of the Federal Reserve Board is not required to acquire ownership or control of entities engaged in specified financial activities, although the existing restrictions on directly or indirectly acquiring shares of a bank or savings association are still applicable. In addition, prior to becoming a financial holding company, Silicon was generally allowed to engage, directly or indirectly, only in banking and other activities that

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were deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. As a financial holding company under the GLB Act, Silicon is permitted to engage in a full range of financial activities, including banking, insurance and securities activities, and additional activities that the Federal Reserve Board determines to be financial in nature, incidental to such financial activities, or complementary to a financial activity.

        The Federal Reserve Board requires Silicon to maintain minimum capital ratios discussed above. Under Federal Reserve Board regulations, a bank holding company is also required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks or to observe established guidelines with respect to the payment of dividends by bank holding companies will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice, or a violation of the Federal Reserve Board's regulations, or both.

        Silicon's ability to pay cash dividends is limited by generally applicable Delaware corporation law limits. In addition, there are statutory and regulatory limitations on the amount of dividends that may be paid to Silicon by Silicon Valley Bank. See "Item 1. Business—Supervision and Regulation—Restrictions on Dividends" for further discussion of current limitations on the ability of Silicon Valley Bank to pay dividends to Silicon.

        Silicon is also treated as a bank holding company under the California Financial Code. As such, Silicon and its subsidiaries are subject to periodic examination by, and may be required to file reports with, the California Department of Financial Institutions.

Sarbanes-Oxley Act of 2002

        On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 (the S-O Act) implementing legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board which will enforce auditing, quality control and independence standards, and will be funded by fees from all publicly traded companies, the law restricts provision of both auditing and consulting services by accounting firms. To ensure auditor independence, any non-audit services being provided to an audit client will require preapproval by a company's audit committee members. In addition, the audit partners must be rotated. Chief executive officers and chief financial officers, or their equivalent, are required to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the S-O Act, counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself. Longer prison terms and increased penalties will be applied to corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company's financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan "blackout" periods, and loans to company executives are restricted.

        The S-O Act also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with a company's "registered public accounting firm" (RPAF). Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer. In addition, companies must disclose whether at least one member of the committee is a "financial expert" and if not, why

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not. Under the S-O Act, a RPAF is prohibited from performing statutorily mandated audit services for a company if such company's chief executive officer, chief financial officer, comptroller, chief accounting officer, or any person serving in equivalent positions has been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. The S-O Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the audit of a company's financial statements for the purpose of rendering the financial statement's materially misleading.

        The board is determined to continue a corporate governance structure that meets or exceeds the requirements of the Sarbanes-Oxley Act.

Regulation of Silicon Valley Bank

        Silicon Valley Bank is a California-chartered bank and a member of the Federal Reserve System. It is subject to primary supervision, periodic examination, and regulation by the Commissioner of the California Department of Financial Institutions, or the Commissioner, the Federal Reserve Board, and the Federal Deposit Insurance Corporation. The Federal Reserve Board and the Commissioner require Silicon Valley Bank to maintain minimum capital levels discussed above. Both the Federal Reserve Board and the Commissioner also have broad powers and remedies available if they determine that the financial condition, capital resources, asset quality, management, earnings prospects, liquidity, sensitivity to market risk, or other aspects of Silicon Valley Bank's operations are unsatisfactory, or that Silicon Valley Bank is violating or has violated any law or regulation.

Restrictions on Dividends

        Silicon is a legal entity separate and distinct from Silicon Valley Bank. Silicon Valley Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to Silicon. During 2002, Silicon Valley Bank paid dividends of $80.0 million to Silicon. Consequently, under these regulatory restrictions, the remaining amount available for payment of dividends to Silicon by Silicon Valley Bank totaled $13.7 million at December 31, 2002. During 2001, Silicon Valley Bank paid dividends of $140.0 million to Silicon. The Federal Reserve Board and the Commissioner have the authority to prohibit Silicon Valley Bank from engaging in activities that, in their opinion, constitute unsafe or unsound practices in conducting its business. Depending upon the financial condition of Silicon Valley Bank and other factors, the regulators could assert that the payment of dividends or other payments might, under some circumstances, be an unsafe or unsound practice. If Silicon Valley Bank fails to comply with its minimum capital requirements, its regulators could restrict its ability to pay dividends using prompt corrective action or other enforcement powers. The Commissioner may impose similar limitations on the conduct of California-chartered banks. See "Item 8. Consolidated Financial Statements and Supplementary Data—Note 23 to the Consolidated Financial Statements—Regulatory Matters" for further discussion on dividend restrictions.

Transactions with Affiliates

        Silicon Valley Bank is subject to restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, Silicon or other affiliates; the purchase of, or investments in, stock or other securities of Silicon or other affiliates; and the taking of such securities as collateral for loans, and the purchase of assets of Silicon or other affiliates. These restrictions prevent Silicon and such other affiliates from borrowing from Silicon Valley Bank unless the loans are secured by specified amounts of collateral. Any such secured loans and investments by Silicon Valley Bank to, or in, Silicon or to, or in, any other affiliate are limited individually to 10% of Silicon Valley Bank's capital and surplus (as defined by federal regulations); and such secured loans and investments are limited to, in the aggregate, 20% of Silicon Valley Bank's capital and surplus (as defined by federal regulations). California law also imposes restrictions on transactions involving Silicon and other controlling persons of Silicon Valley Bank. Additional restrictions on transactions with affiliates may be imposed on Silicon Valley Bank under the prompt corrective action provisions of

11



federal law. See "Item 1. Business—Supervision and Regulation—Prompt Corrective Action and Other Enforcement Mechanisms" for related discussion regarding restrictions on transactions with affiliates.

Prompt Corrective Action and Other Enforcement Mechanisms

        Federal banking agencies possess broad powers to take corrective and other supervisory action on an insured bank and its holding company. Federal laws require each federal banking agency to take prompt corrective action to resolve the problems of insured banks. Each federal banking agency has issued regulations defining five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.

        Based upon its capital levels, a bank that is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. At each successive lower-capital category, an insured bank is subject to more restrictions, including restrictions on the bank's activities, operational practices or the ability to pay dividends. However, the federal banking agencies may not treat an institution as critically undercapitalized unless its capital ratios actually warrant such treatment.

        In addition to measures taken under the prompt corrective action provisions, bank holding companies and insured banks may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses, or for violation of any law, rule, regulation, condition imposed in writing by the agency, or term of a written agreement with the agency. Enforcement actions may include the appointment of a conservator or receiver for the bank; the issuance of a cease and desist order that can be judicially enforced; the termination of the bank's deposit insurance; the imposition of civil monetary penalties; the issuance of directives to increase capital; the issuance of formal and informal agreements; the issuance of removal and prohibition orders against officers, directors, and other institution-affiliated parties; and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted.

Safety and Soundness Guidelines

        The federal banking agencies have adopted guidelines to assist in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines establish operational and managerial standards relating to: (1) internal controls, information systems, and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) asset growth; and (5) compensation, fees, and benefits. In addition, the federal banking agencies have adopted safety and soundness guidelines for asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate capital and reserves.

Premiums for Deposit Insurance

        Silicon Valley Bank's deposit accounts are insured by the Bank Insurance Fund (BIF), as administered by the Federal Deposit Insurance Corporation, up to the maximum permitted by law. The Federal Deposit Insurance Corporation's annual assessment for the insurance of BIF deposits as of December 31, 2002, ranged from 0 to 27 basis points per $100 of insured deposits. The amount charged is based on the regulatory capital of an institution and on a supervisory assessment of its operational risk profile. At December 31, 2002, Silicon Valley Bank's assessment rate was the statutory minimum assessment.

        Silicon Valley Bank is also required to pay an annual assessment of approximately 1.7 basis points per $100 of insured deposits toward the retirement of U.S. government-issued financing orporation bonds.

12



        The Federal Deposit Insurance Corporation may increase or decrease the assessment rate schedule on a semi-annual basis. Due to continued growth in deposits and some recent bank failures, the BIF is nearing its minimum ratio of 1.25% of insured deposits as mandated by law. If the ratio drops below 1.25%, it is likely the Federal Deposit Insurance Corporation will be required to assess premiums on all banks for the first time since 1996. Any increase in assessments or the assessment rate could have a material adverse effect on our earnings, depending on the amount of the increase.

Interstate Banking and Branching

        Bank holding companies from any state may generally acquire banks and bank holding companies located in any other state, subject to nationwide and state-imposed deposit concentration limits and limits on the acquisition of recently established banks. Banks also have the ability, subject to specific restrictions, to acquire by acquisition or merger branches located outside their home state. The establishment of new interstate branches is also possible in those states with laws that expressly permit it. Interstate branches are subject to many of the laws of the states in which they are located.

Community Reinvestment Act and Fair Lending

        Silicon Valley Bank is subject to a variety of fair lending laws and reporting obligations involving home mortgage lending operations and the Community Reinvestment Act, or CRA activities. The CRA generally requires the federal banking agencies to evaluate the record of a bank in meeting the credit needs of its local communities, including low- to moderate-income neighborhoods. In July 2002, the Federal Reserve Board approved Silicon Valley Bank's CRA Strategic Plan. This plan details our strategy in meeting our CRA obligations and is in effect from July 2002 through July 2005. The first CRA examination under this plan is scheduled for August 2003. In April 2001, the Federal Reserve Board rated Silicon Valley Bank "satisfactory" in complying with its CRA obligations. A bank can become subject to substantial penalties and corrective measures for a violation of certain fair lending laws. The federal banking agencies may take compliance with such laws and CRA obligations into account when regulating and supervising other activities or assessing whether to approve certain applications.

Regulation of Certain Subsidiaries

        Two of our subsidiaries, Alliant Partners and SVB Securities, are registered as broker-dealers with the Securities and Exchange Commission ("SEC") and as such are subject to regulation by the SEC and by self-regulatory organizations, such as the National Association of Securities Dealers, Inc. (NASD).

        Our broker-dealer subsidiaries are subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (the "Exchange Act"), which is designed to measure the general financial condition and liquidity of a broker-dealer. Under this rule, our broker-dealer subsidiaries are required to maintain the minimum net capital deemed necessary to meet broker-dealers' continuing commitments to customers and others. Under certain circumstances, this rule could limit the ability of Silicon Valley Bancshares to withdraw capital from Alliant Partners and limit the ability of Silicon Valley Bank to withdraw capital from SVB Securities.

        As broker-dealers, Alliant Partners and SVB Securities are also subject to other regulations covering the operations of their respective businesses, including sales and trading practices; use of client funds and securities; and conduct of directors, officers, and employees. Broker-dealers are also subject to regulation by state securities administrators in the states where they do business. Violations of the stringent regulations governing the actions of a broker-dealer can result in the revocation of broker-dealer licenses; the imposition of censures or fines; the issuance of cease and desist orders; and the suspension or expulsion from the securities business of a firm, its officers, or its employees. The SEC and the national securities exchange emphasize in particular the need for supervision and control by broker-dealers of their employees.

13



        Our investment advisory subsidiary, Woodside Asset Management, Inc., is registered with the SEC under the Investment Advisers Act of 1940, as amended, and is subject to that act and the rules and regulations promulgated there under.

Available Information

        Our Internet address is http://www.svb.com. We make available free of charge through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Silicon Valley Bancshares was incorporated in Delaware in 1999.


ITEM 2. PROPERTIES

        In 1995, we relocated our corporate headquarters and main branch and entered into a 10-year lease on a two-story office building located at 3003 Tasman Drive, Santa Clara, California. In July 1997 and June 2000, we finalized amendments to the original lease associated with our corporate headquarters. The amendments provide for the lease of two additional premises, approximating 56,000 square feet each, adjacent to the existing headquarters facility. We began occupying the first of these additional premises in August 1998 and the second in December 2000.

        In 2002, we exited leased premises, located in Santa Clara, California, approximating 18,000 square feet. The lease on the building will expire in August 2005. Our management determined that the premises would have no future economic value to our operations, except for any potential future sub-lease arrangement. Therefore, during 2002, we incurred charge-offs of approximately $2.5 million related to the exit of these premises.

        We currently operate 27 regional offices. We operate throughout the Silicon Valley in Fremont, Santa Clara, Palo Alto, and on Sand Hill Road, which is the center of the venture capital community in California. Other regional offices in California include: Irvine, Los Angeles, Napa Valley, San Diego, San Francisco, Santa Barbara, and Sonoma. Office locations outside of California include: Phoenix, Arizona; Boulder, Colorado; West Palm Beach, Florida; Atlanta, Georgia; Chicago, Illinois; Boston, Massachusetts; Minneapolis, Minnesota; New York, New York; Durham, North Carolina; Portland, Oregon; Philadelphia, Pennsylvania; Austin, Texas; Dallas, Texas; Northern Virginia; and Seattle, Washington. All of our properties are occupied under leases, which expire at various dates through October 2008, and in most instances include options to renew or extend at market rates and terms. We also own leasehold improvements, equipment, furniture, and fixtures at our offices, all of which are used in our business activities.


ITEM 3. LEGAL PROCEEDINGS

        There were no legal proceedings requiring disclosure pursuant to this item pending at December 31, 2002, or at the date of this report.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to a vote by the stockholders of Silicon Valley Bancshares' common stock during the fourth quarter of 2002.

14




PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

        Our common stock is traded over the counter on the National Association of Securities Dealers Automated Quotation (Nasdaq) national market under the symbol "SIVB."

        The following table shows the high and low sales prices for our common stock for each quarterly period during the last two years, based on the daily closing price as reported by the Nasdaq national market.

 
  2002
  2001
Quarter

  Low
  High
  Low
  High
First   $ 21.17   $ 31.25   $ 21.06   $ 38.00
Second   $ 25.30   $ 33.87   $ 18.06   $ 31.65
Third   $ 16.75   $ 27.01   $ 16.67   $ 22.54
Fourth   $ 14.58   $ 19.94   $ 18.68   $ 27.81

Stockholders

        There were 775 registered holders of stock as of December 31, 2002. Additionally, we believe there were approximately 8,573 beneficial holders of common stock whose shares are held in the name of brokerage firms or other financial institutions. We are not provided with the number or identities of all of these stockholders, but we have estimated the number of such stockholders from the number of stockholder documents requested by these brokerage firms for distribution to their customers.

Dividends

        We have not paid cash dividends on our common stock since 1992. Currently, we have no plan to pay cash dividends on our common stock. Periodically, we evaluate the decision of paying cash dividend in the context of our performance, general economic performance, and relevant tax and financial parameters. Our ability to pay cash dividends is limited by generally applicable corporate and banking laws and regulations. See "Item 1. Business—Supervision and Regulation—Restrictions on Dividends," and "Item 8. Consolidated Financial Statements and Supplementary Data—Note 23 to the Consolidated Financial Statements—Regulatory Matters" for additional discussion on restrictions and limitations on the payment of dividends imposed on us by government regulations.

15



ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

        The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and supplementary data as presented in Item 8 of this report. Certain reclassifications have been made to our prior years results to conform to 2002 presentations. Such reclassifications had no effect on the results of operations or stockholders' equity. In addition, the common stock summary information has been restated to reflect two-for-one stock splits affected on May 1, 1998 and May 15, 2000.

 
  Years Ended December 31,
 
 
  2002
  2001
  2000
  1999
  1998
 
 
  (Dollars and shares in thousands, except per share amounts)

 
Income Statement Summary:                                
Net interest income   $ 194,708   $ 262,985   $ 329,848   $ 205,439   $ 146,615  
Provision for loan losses     3,882     16,724     54,602     52,407     37,159  
Noninterest income     67,858     70,833     189,630     58,855     23,162  
Noninterest expense     186,374     183,488     198,361     125,659     83,645  
Minority interest     7,767     7,546     460          
   
 
 
 
 
 
Income before income tax expense     80,077     141,152     266,975     86,228     48,973  
Income tax expense     26,719     52,998     107,907     34,030     20,117  
   
 
 
 
 
 
Net income   $ 53,358   $ 88,154   $ 159,068   $ 52,198   $ 28,856  
   
 
 
 
 
 
Common Share Summary:                                
Basic earnings per share   $ 1.21   $ 1.85   $ 3.41   $ 1.27   $ 0.71  
Diluted earnings per share     1.18     1.79     3.23     1.23     0.69  
Book value per share     14.55     13.82     12.54     8.23     5.21  
Weighted average basic shares outstanding     44,000     47,728     46,656     41,258     40,536  
Weighted average diluted shares outstanding     45,080     49,155     49,220     42,518     41,846  

Year-End Balance Sheet Summary:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Investment securities   $ 1,535,694   $ 1,833,162   $ 2,107,590   $ 1,747,408   $ 1,397,502  
Loans, net of unearned income     2,086,080     1,767,038     1,716,549     1,623,005     1,611,921  
Goodwill     100,549     96,380              
Assets     4,183,181     4,172,077     5,626,775     4,596,398     3,545,452  
Deposits     3,436,127     3,380,977     4,862,259     4,109,405     3,269,753  
Long-term debt     17,397     25,685              
Trust preferred securities     39,472     38,641     38,589     38,537     38,485  
Stockholders' equity     590,350     627,515     614,121     368,850     215,865  

Average Balance Sheet Summary:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Investment securities   $ 1,554,035   $ 1,817,379   $ 1,932,461   $ 1,576,630   $ 1,123,152  
Loans, net of unearned income     1,762,296     1,656,958     1,580,176     1,591,634     1,318,826  
Goodwill     98,252     24,955              
Assets     3,866,242     4,372,000     5,180,750     3,992,410     2,990,548  
Deposits     3,063,516     3,581,725     4,572,457     3,681,598     2,746,041  
Long-term debt     23,769     6,652              
Trust preferred securities     38,667     38,611     38,559     38,507     23,621  
Stockholders' equity     631,005     651,861     478,018     238,085     198,675  

Capital Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Total risk-based capital ratio     16.0 %   17.2 %   17.7 %   15.5 %   11.5 %
Tier 1 risk-based capital ratio     14.8 %   15.9 %   16.5 %   14.3 %   10.3 %
Tier 1 leverage ratio     13.9 %   14.8 %   12.0 %   8.8 %   7.6 %
Average stockholders' equity to average assets     16.3 %   14.9 %   9.2 %   6.0 %   6.6 %

Selected Financial Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Return on average assets     1.4 %   2.0 %   3.1 %   1.3 %   1.0 %
Return on average stockholders' equity     8.5 %   13.5 %   33.3 %   21.9 %   14.5 %
Efficiency ratio     67.3 %   52.5 %   45.6 %   53.5 %   53.6 %
Net interest margin     5.7 %   6.8 %   6.9 %   5.5 %   5.2 %

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Private label client investment and sweep product balances   $ 8,495,321   $ 9,283,368   $ 10,805,694   $ 5,666,278   $ 1,096,300  

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Please 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 8 of this report.

        This discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our senior management has in the past and might in the future make forward-looking statements orally to analysts, investors, the media, and others. Forward-looking statements are statements that are not historical facts. Broadly speaking, forward-looking statements include:

    (1)
    Projections of our revenues, income, earnings per share, capital expenditures, capital structure or other financial items

    (2)
    Descriptions of strategic initiatives, plans or objectives of our management for future operations, including pending acquisitions

    (3)
    Descriptions of products, services, and industry sectors

    (4)
    Forecasts of future economic performance

    (5)
    Descriptions of assumptions underlying or relating to any of the foregoing

        In this report, we make forward-looking statements discussing our management's expectations about:

    (1)
    Future changes in our average loan balances and their impact on our net interest margin

    (2)
    Future changes in short-term interest rates and their impact on our earnings

    (3)
    Future changes in private label investment product balances due to transferring of private label investment operations from Silicon Valley Bank to its wholly owned broker-dealer subsidiary

    (4)
    Future revenue of Alliant Partners

    (5)
    Future investment gains or losses from private equity and venture capital fund investments

    (6)
    Future changes in trust preferred securities distributions expense due to changes in hedging interest rates

    (7)
    Future changes in market prices of the underlying common stock and its impact on future warrant income of those companies

    (8)
    Future changes in allowance for loan losses balance

    (9)
    Future cost of funds savings from raising capital through real estate investment trust

    (10)
    Future tax benefits from real estate investment trust

    (11)
    Future common stock repurchases

        You can identify these and other forward-looking statements by using such words as: "becoming," "may," "will," "should," "predicts," "potential," "continue," "anticipates," "believes," "estimates," "seeks," "expects," "plans," "intends," or using the negative of such words, or comparable terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, and we have based these expectations on our beliefs, as well as our assumptions, such expectations may prove to be incorrect. Our actual results of operations and financial performance could differ significantly from those expressed in or implied by our management's forward-looking statements.

17



        For information about factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see the subsection titled "Risk Factors" at the end of this section. 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 to 2002 presentations. Such reclassifications had no effect on our results of operations or stockholders' equity.

Critical Accounting Policies

Marketable Equity Securities

        Investments in marketable equity securities include warrants for shares of publicly-traded companies and investments in shares of publicly-traded companies. Equity securities in our warrant, direct equity, and venture capital fund portfolios generally become marketable when a portfolio company completes an initial public offering on a publicly-reported market, or is acquired by a publicly-traded company. Our merchant banking marketable warrant and equity securities totaled $0.8 million at December 31, 2002 and $2.5 million at December 31, 2001. Marketable equity securities related to Taurus, L.P. and Libra, L.P. totaled approximately $7.1 million, see "Item 1. Business—Acquisitions." These instruments are classified as available-for-sale and are accounted for at fair value. We recognized gains from the disposition of client warrants in our consolidated statements of income of $1.7 million in 2002, $8.5 million in 2001, and $86.3 million in 2000.

        Unrealized gains or losses on warrant and equity investment securities are recorded upon the establishment of a readily determinable fair value of the underlying security, as defined by Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Instruments."

            1.    Unrealized gains or losses after applicable taxes, on available-for-sale marketable equity securities that result from initial public offerings are excluded from earnings and are reported in accumulated other comprehensive income, which is a separate component of stockholders' equity. Unrealized losses on available-for-sale securities become realized and are charged against earnings when it is determined that an other than temporary decline in value has occurred. Further, the cost basis of the individual security is written down to fair value as a new cost basis. We are often contractually restricted from selling equity securities subsequent to the portfolio company's initial public offering. Gains or losses on these marketable equity instruments are recorded in our consolidated statements of income in the period the underlying securities are sold to a third party.

            2.    Gains or losses on marketable warrant and equity investment securities that result from a portfolio company being acquired by a publicly-traded company are marked to market when the acquisition occurs. The resulting gains or losses are recognized into income on that date, in accordance with Emerging Issues Task Force, Issue No. 91-5, "Nonmonetary Exchange of Cost-Method Investments." Further fluctuations in the market value of these marketable equity instruments, prior to eventual sale, are excluded from earnings and are reported in accumulated other comprehensive income, which is a separate component of stockholders' equity. Upon the sale of these equity securities to a third party, gains and losses, which are measured from the acquisition price, are recognized in our consolidated statements of income.

        Notwithstanding the foregoing, a decline in the fair value of any of these securities that is considered other than temporary, is recorded in our consolidated statements of income in the period the impairment occurs.

18


        We consider our marketable equity securities accounting policies to be critical, as the timing and amount of income, if any, from these instruments typically depend upon factors beyond our control. These factors include the general condition of the public equity markets, levels of mergers and acquisitions activity, fluctuations in the market prices of the underlying common stock of these companies, and legal and contractual restrictions on our ability to sell the underlying securities. Hence, the amount of income we realize from these equity instruments in future periods may vary materially from the current unrealized amount of $0.7 million and are likely to vary materially from period to period.

Non-Marketable Equity Securities

        We invest in non-marketable equity securities in several ways:

    Through the exercise of warrants obtained in the normal course of lending

    By direct purchases of preferred or common stock in privately-held companies

    By capital contributions to venture capital funds, which in turn, make investments in preferred or common stock of privately held companies

    Through our venture capital fund, Silicon Valley BancVentures, L.P., which makes investments in preferred or common stock of privately held companies

    Through our fund of funds, SVB Strategic Investors Fund, L.P., which makes investments in venture capital funds, which in turn invest in privately held companies

        Unexercised warrant securities are recorded at a nominal value on our consolidated balance sheets. They are carried at this value until they become marketable or expire.

        A summary of our accounting policies for other non-marketable equity securities is presented in the following table. A complete description of the accounting policies follows the table.

 
  Private Equity and Venture
Capital Fund Investments

Wholly-Owned by Silicon   Cost Basis Less Identified Impairment, If Any

Owned by Silicon Valley BancVentures, L.P. and SVB Strategic Investors Fund, L.P.

 

Investment Accounting, Adjust To Fair Value On A Quarterly Basis Through The Statement Of Income

        Non-marketable venture capital fund investments and other direct private equity investments wholly-owned by Silicon totaled $31.6 million at December 31, 2002 and $30.7 million at December 31, 2001 (excluding our ownership interest in our managed funds, SVB Strategic Investors Fund, L.P. and Silicon Valley BancVentures, L.P., which are described below.) We record these investments on a cost basis as our interests are considered minor because we own less than 5% of the company and have no influence over the company's operating and financial policies. Our cost basis in each investment is reduced by returns until the cost basis of the individual investment is fully recovered. Returns in excess of the cost basis are recorded as investment gains in noninterest income.

        The values of the investments are reviewed at least quarterly, giving consideration to the facts and circumstances of each individual investment. Management's review of private equity investments typically includes the relevant market conditions, offering prices, operating results, financial conditions, and exit strategies. A decline in the fair value that is considered other than temporary is recorded in our consolidated statements of income in the period the impairment occurs. Any estimated loss is recorded in noninterest income as investment losses.

        Investments held by Silicon Valley BancVentures, L.P. totaled $10.0 million at December 31, 2002 and $5.1 million at December 31, 2001 and are recorded at fair value using investment accounting rules. The investments consist of stock in private companies that are not traded on a public market

19



and are subject to restrictions on resale. These investments are carried at estimated fair value as determined by the general partner. The valuation generally remains at cost until such time that there is significant evidence of a change in values based upon consideration of the relevant market conditions, offering prices, operating results, financial conditions, exit strategies, and other pertinent information. The general partner, Silicon Valley BancVentures, Inc. is owned and controlled by Silicon and has an ownership interest of 10.7% in Silicon Valley BancVentures, L.P. Therefore, Silicon Valley BancVentures, L.P. is fully consolidated and any gains or losses resulting from changes in the estimated fair value of the investments are recorded as investment gains or losses in our consolidated statements of income. The portion of any gains or losses belonging to the limited partners is reflected in minority interest and adjusts Silicon's income to its percentage ownership.

        The SVB Strategic Investors Fund, L.P. portfolio consists primarily of investments in venture capital funds. These funds totaled $22.1 million at December 31, 2002 and $16.5 million at December 31, 2001, which are recorded at fair value using investment accounting rules. The carrying value of the investments is determined by the general partner based on the percentage of SVB Strategic Investors Fund, L.P.'s interest in the total fair market value as provided by each venture capital fund investment. SVB Strategic Investors, LLC generally utilizes the fair values assigned to the underlying portfolio investments by the management of the venture capital funds. The estimated fair value of the investments is determined after giving consideration to the relevant market conditions, offering prices, operating results, financial conditions, exit strategy, and other pertinent information. The general partner, SVB Strategic Investors, LLC, is owned and controlled by Silicon and has an ownership interest of 11.1% in SVB Strategic Investors Fund, L.P. Therefore, SVB Strategic Investors Fund, L.P. is fully consolidated and any gains or losses resulting from changes in the estimated fair value of the venture capital fund investments are recorded as investment gains or losses in our consolidated statements of income. The limited partner's share of any gains or losses is reflected in minority interest and adjusts Silicon's income to its percentage ownership.

        The following tables present the carrying value of our non-marketable venture capital and other private equity investments at and for the year ended December 31, 2002.

 
  (As Consolidated)
 
 
  Wholly-Owned Equity
Investments

  Managed Funds
Activities

   
 
 
  Venture
Capital
Funds

  Other
Private
Equity

  Silicon Valley
BancVentures,
L.P.

  SVB Strategic
Investors
Fund, L.P.

  Total
 
 
  (Dollars in thousands)

 
Fund size           $ 56,100   $ 135,334 * $ 191,434  
Commitments   $ 54,558   $ 14,954     14,176     108,189     191,877  
Capital investment     36,074     14,954     14,176     31,315     96,519  
Carrying value     24,740     6,834     9,986     22,082     63,642  
Net investment losses     (1,251 )   (2,083 )   (734 )   (5,717 )   (9,785 )
 
  (Net of minority interest ownership of managed funds)
 
 
  Wholly-Owned Equity
Investments

  Managed Funds
Activities

   
 
 
  Venture
Capital
Funds

  Other
Private
Equity

  Silicon Valley
BancVentures,
L.P.

  SVB Strategic
Investors
Fund, L.P.

  Total
 
 
  (Dollars in thousands)

 
Commitments   $ 54,558   $ 14,954   $ 6,000   $ 15,000 * $ 90,512  
Capital investment     36,074     14,954     1,980     3,900     56,908  
Carrying value     24,740     6,834     1,068     2,448     35,090  
Net investment losses     (1,251 )   (2,083 )   (78 )   (634 )   (4,046 )
Management fee revenue             1,082     1,323     2,405  

*
Effective January 1, 2003, SVB Strategic Investors Fund, L.P. reduced the total capital that can be called to $121.8 million as a result of the reductions in the size of the underlying venture capital fund investments. Our committed capital that can be called was reduced to $13.5 million.

20


        The following tables present the carrying value of our non-marketable venture capital and other private equity investments at and for the year ended December 31, 2001.

 
  (As Consolidated)
 
 
  Wholly-Owned Equity
Investments

  Managed Funds
Activities

   
 
 
  Venture
Capital
Funds

  Other
Private
Equity

  Silicon Valley
BancVentures,
L.P.

  SVB Strategic
Investors
Fund, L.P.

  Total
 
 
  (Dollars in thousands)

 
Fund size           $ 56,100   $ 135,334   $ 191,434  
Commitments   $ 54,516   $ 14,354     8,600     111,000     188,470  
Capital investment     31,332     14,354     8,600     19,884     74,170  
Carrying value     22,170     8,562     5,144     16,477     52,353  
Net investment losses     (1,005 )   (4,933 )   (3,456 )   (3,002 )   (12,396 )
 
  (Net of minority interest ownership of managed funds)
 
 
  Wholly-Owned Equity
Investments

  Managed Funds
Activities

   
 
 
  Venture
Capital
Funds

  Other
Private
Equity

  Silicon Valley
BancVentures,
L.P.

  SVB Strategic
Investors
Fund, L.P.

  Total
 
 
  (Dollars in thousands)

 
Commitments   $ 54,516   $ 14,354   $ 6,000   $ 15,000   $ 89,870  
Capital investment     31,332     14,354     1,501     3,000     50,187  
Carrying value     22,170     8,562     550     1,826     33,108  
Net investment losses     (1,005 )   (4,933 )   (370 )   (333 )   (6,641 )
Management fee revenue             1,082     1,323     2,405  

        We consider our non-marketable equity securities accounting policies to be critical, as the timing and amount of gain or losses, if any, from these instruments depend upon factors beyond our control. These factors include 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 or losses with any degree of accuracy and any gains or losses are likely to vary materially from period to period. In addition, the valuation of non-marketable equity securities included in our financial statements at December 31, 2002 represents our best interpretation of the underlying equity securities performance at this time. Because of the inherent uncertainty of valuations, the estimated values of these securities may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment's carrying value, thereby possibly requiring an impairment charge in the future.

Allowance for Loan Losses

        We consider our accounting policy relating to the estimation of the allowance for loan losses to be critical as it involves material estimates by our management and is particularly susceptible to significant changes in the near term.

        We define credit risk as the probability of sustaining a loss because other parties to the financial instrument fail to perform in accordance with the terms of the contract. Through the administration of loan policies and monitoring of the loan portfolio, our management seeks to reduce such credit risks. 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.

21



        The allowance for loan losses is established through a provision for loan losses charged to expense to provide for credit risk. Our allowance for loan losses is established for loan losses not yet realized. The process of anticipating loan losses is imprecise. Our management applies the following evaluation process to our loan portfolio to estimate the required allowance for loan losses.

        We maintain a systematic process for the evaluation of individual loans and pools of loans for inherent risk of loan losses. On a quarterly basis, each loan in our portfolio is assigned a credit risk-rating. Credit risk-ratings are assigned on a scale of 1 to 10, with 1 representing loans with a low risk of nonpayment, 9 representing loans with the highest risk of nonpayment, and 10 representing loans, which have been charged-off. This credit risk-rating evaluation process includes, but is not limited to, consideration of 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. Our policies require a committee of senior management to review credit relationships that exceed specific dollar values, at least quarterly. Our review process evaluates the appropriateness of the credit risk rating and allocation of allowance for loan losses, as well as other account management functions. In addition, our management receives and approves an analysis for all impaired loans, as defined by the Statement of Financial Accounting Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan." The allowance for loan losses is allocated based on a formula allocation for similarly risk-rated loans, or for specific risk issues, which suggest a probable loss factor exceeding the formula allocation for a specific loan, or for individual impaired loans as determined by SFAS No. 114.

        Our evaluation process was designed to determine the adequacy of the allowance for loan losses. We assess the risk of losses inherent in the loan portfolio by utilizing modeling techniques. For this purpose, we have developed a statistical model based on historical loan loss migration to estimate an appropriate allowance for outstanding loan balances. In addition, we apply macro and contingent allocations to the results of the aforementioned model to ascertain the total allowance for loan losses. 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.

    Historical Loan Loss Migration Model

            We use the historical loan loss migration model as a basis for determining expected loan loss factors by credit risk-rating category. The effectiveness of the historical loan loss migration model is predicated on the theory that historical trends are predictive of future experience. Specifically, the model calculates the likelihood and rate of a loan in one risk-rating category moving one category lower using loan data from our portfolio.

            We analyze the historical loan loss migration trend by compiling gross loan loss data and by credit risk rating for the four-quarter period preceding the current period end. Each of the loans charged-off over the four-quarter period is assigned a credit risk rating at the period end of each of the preceding quarters. On a quarter-by-quarter basis, the model calculates charged-off loans as a percentage of current period end loans by credit risk-rating category. These percentages are weighted, based on the age of the data, and are aggregated to estimate our loan loss factors. These expected loan loss factors are ultimately applied to the current period end aggregate outstanding loan balances to provide an estimation of the allowance for loan losses.

    Macro and Contingent Allocations

            Additionally, we apply a contingent allocation to the results of this model. Our contingent allocation acknowledges that unfunded credit obligations can result in future losses. Unfunded credit obligations at each quarter end are allocated to credit risk-rating categories in accordance with the client's credit risk-rating. We provide for the risk of loss on unfunded credit obligations by allocating fixed credit risk-rating factors to our unfunded credit obligations.

22


            A macro allocation is calculated each quarter based upon an assessment of the risks that may lead to a loan loss experience different from our historical results. These risks are aggregated to become our macro allocation. Based on management's prediction or estimates of changing risks in the lending environment, the macro allocation may vary significantly from period to period and includes but is not limited to consideration of the following factors:

    (1)
    Changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices

    (2)
    Changes and development in national and local economic business conditions, including the market and economic condition of our clients' industry sectors

    (3)
    Changes in the nature of our loan portfolio

    (4)
    Changes in experience, ability and depth of lending management and staff

    (5)
    Changes in the trend of the volume and severity of past due and classified loans

    (6)
    Changes in the trend of the volume of nonaccrual loans, troubled debt restructurings and other loan modifications

            Finally, we compute several modified versions of the model, which provide additional assurance that the statistical results of the historical loan loss migration model are reasonable. Our Chief Credit Officer and Chief Financial Officer evaluate the adequacy of the allowance for loan losses based on the results of the historical loan loss migration model.

            In addition to risk-rating every loan in our portfolio, our management concluded that our allowance for loan and lease losses at December 31, 2002 was appropriate in consideration of the following factors:

    (7)
    A decreased risk of severe future losses from the early-stage product loan portfolio

    (8)
    A decreased risk of loan losses resulting from client instigated corporate fraud, due to the enforcement of recent government corporate governance regulations

    (9)
    An increase of $31.0 million in our average loan balance between September 30, 2002 and December 31, 2002

    (10)
    A continued weakness in the U.S. economy

    (11)
    A declining venture capital fund investment into our clients in our core industry sectors

    (12)
    A continued volatility in global stock markets indices

            We consider our allowance for loan losses at December 31, 2002 to be adequate but not excessive and to be our best estimate using the historical loan loss experience and our perception of variables potentially leading to deviation from the historical loss experience.

Goodwill

        As discussed in "Item 8. Consolidated Financial Statements and Supplementary Data—Note 1 to the Consolidated Financial Statements Significant Accounting Policies", we adopted the provisions of Statement of Financial Accounting Standard No. 142 ("SFAS No.142"), "Goodwill and Other Intangible Assets" on January 1, 2002. Under this standard, we are required to test intangible assets identified as having an indefinite useful life for impairment in accordance with the provisions of SFAS No. 142 in 2002.

        Substantially all of our goodwill pertains to the acquisition of Alliant Partners, discussed in "Item 8. Consolidated Financial Statements and Supplementary Data—Note 2 to the Consolidated Financial Statements—Business Combinations." In accordance with the provision of SFAS No. 142, the goodwill balance was determined to be unamortizable. We completed our initial test for goodwill

23



impairment in July 2002, the result of which concluded that the goodwill balance was not impaired. At December 31, 2002, our goodwill totaled $100.5 million.

        In testing for a potential impairment of goodwill, SFAS 142 requires us to: 1. allocate goodwill to the reporting units to which the acquired goodwill relates, 2. estimate the fair value of those reporting units to which goodwill relates, and 3. determine the carrying value (book value) of those reporting units. Furthermore, if the estimated fair value is less than the carrying value for a particular reporting unit, then we are required to estimate the fair value of all identifiable assets and liabilities of the reporting unit in a manner similar to a purchase price allocation for an acquired business. Only after this process is completed is the amount of goodwill impairment determined.

        Accordingly, the process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. In estimating the fair value of the businesses with recognized goodwill for the purposes of our financial statements at December 31, 2002, we applied the fair value test using discounted estimated net cash flows. Our cash flow forecasts were based on assumptions that are consistent with the plans and estimates we are using to manage the underlying business.

        Based on our best estimates, we have concluded that there is no impairment of our goodwill. However, changes in these estimates could cause the businesses to be valued differently. If Alliant does not meet projected operating results, then this analysis could potentially result in a non-cash goodwill impairment charge, depending on the estimated value of the Alliant business unit and the value of the other assets and liabilities attributed to the business.

        Senior management discussed the development, selection, and disclosure of the aforementioned critical accounting policies with our audit committee on January 15, 2003.

Results of Operations

Earnings Summary

        We reported net income in 2002 of $53.4 million, as compared to the net income of $88.2 million in 2001 and $159.1 million in 2000. Diluted earnings per common share totaled $1.18 in 2002, as compared to $1.79 in 2001, and $3.23 in 2000. Return on average equity in 2002 was 8.5%, as compared to 13.5% in 2001, and 33.3% in 2000. Return on average assets was 1.4% in 2002, as to 2.0% in 2001, and 3.1% in 2000.

        The decrease in net income for 2002, as compared to 2001, resulted primarily from a decline in net interest income, partially offset by decreases in both provision for loan losses and income tax expense. The decrease in net interest income was caused by a 224 basis points decline in the average prime rate from 6.9% in 2001 to 4.7% in 2002. The decrease in net income for 2001 as compared to 2000, was primarily attributable to decline in both net interest income and noninterest income, partially offset by decreases in both provision for loan losses and income tax expense. The major components of net income and changes in these components are summarized in the following

24



table for the years ended December 31, 2002, 2001, and 2000, and are discussed in more detail on the following pages.

 
  Years Ended December 31,
 
 
  2002
  2001
  2001 to 2002
Increase/
(Decrease)

  2000
  2000 to 2001
Increase/
(Decrease)

 
 
  (Dollars in thousands)

 
Net interest income   $ 194,708   $ 262,985   $ (68,277 ) $ 329,848   $ (66,863 )
Provision for loan losses     3,882     16,724     (12,842 )   54,602     (37,878 )
Noninterest income     67,858     70,833     (2,975 )   189,630     (118,797 )
Noninterest expense     186,374     183,488     2,886     198,361     (14,873 )
Minority interest     7,767     7,546     221     460     7,086  
   
 
 
 
 
 
Income before income tax expense     80,077     141,152     (61,075 )   266,975     (125,823 )
Income tax expense     26,719     52,998     (26,279 )   107,907     (54,909 )
   
 
 
 
 
 
Net income   $ 53,358   $ 88,154   $ (34,796 ) $ 159,068   $ (70,914 )
   
 
 
 
 
 

Net Interest Income and Margin

        Net interest income is defined as the difference between interest earned, primarily on loans, investment securities, federal funds sold, securities purchased under agreement to resell, 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.

25



        The following table sets forth average assets, liabilities, minority interest 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, 2002, 2001, and 2000.

 
  Years Ended December 31,
 
 
  2002
  2001
  2000
 
 
  Average
Balance

  Interest
Income/
Expense

  Yield/
Rate

  Average
Balance

  Interest
Income/
Expense

  Yield/
Rate

  Average
Balance

  Interest
Income/
Expense

  Yield/
Rate

 
 
  (Dollars in thousands)

 
Interest-earning assets:                                                  
Federal funds sold and securities purchased under agreement to resell(1)   $ 153,185   $ 2,865   1.9 % $ 509,965   $ 25,421   5.0 % $ 1,310,971   $ 83,472   6.4 %
Investment securities:                                                  
  Taxable     1,376,977     46,585   3.4     1,522,785     79,245   5.2     1,769,309     107,268   6.1  
  Non-taxable(2)     177,058     10,606   6.0     294,594     16,616   5.6     163,152     10,704   6.6  
  Loans:(3) (4) (5)                                                  
  Commercial     1,508,204     141,697   9.4     1,459,748     167,850   11.5     1,384,744     169,098   12.2  
  Real estate construction and term     102,479     7,245   7.1     83,389     8,819   10.6     121,076     12,723   10.5  
  Consumer and other     151,613     7,298   4.8     113,821     8,190   7.2     74,356     7,241   9.7  
   
 
 
 
 
 
 
 
 
 
Total loans     1,762,296     156,240   8.9     1,656,958     184,859   11.2     1,580,176     189,062   12.0  
   
 
 
 
 
 
 
 
 
 
Total interest-earning assets     3,469,516     216,296   6.2     3,984,302     306,141   7.7     4,823,608     390,506   8.1  
   
 
 
 
 
 
 
 
 
 
Cash and due from banks     182,400               239,571               268,032            
Allowance for loan losses     (74,845 )             (76,287 )             (74,018 )          
Goodwill     98,252               24,955                          
Other assets     190,919               199,459               163,128            
   
           
           
           
Total assets   $ 3,866,242             $ 4,372,000             $ 5,180,750            
   
           
           
           
Funding sources:                                                  
Interest-bearing liabilities:                                                  
  NOW deposits   $ 33,567     220   0.7   $ 42,037     381   0.9   $ 55,825     770   1.4  
  Regular money market deposits     288,238     2,751   1.0     269,886     3,034   1.1     386,701     7,089   1.8  
  Bonus money market deposits     614,378     5,855   1.0     733,412     8,580   1.2     1,275,545     25,117   2.0  
  Time deposits     610,996     7,403   1.2     792,031     24,871   3.1     582,354     23,936   4.1  
  Short-term borrowing     33,824     1,083   3.2     10,682     265   2.5            
  Long-term debt     23,769     564   2.4     6,652     210   3.2            
   
 
 
 
 
 
 
 
 
 
Total interest-bearing liabilities     1,604,772     17,876   1.1     1,854,700     37,341   2.0     2,300,425     56,912   2.5  
Portion of noninterest-bearing funding sources     1,864,744               2,129,602               2,523,183            
   
 
 
 
 
 
 
 
 
 
Total funding sources     3,469,516     17,876   0.5     3,984,302     37,341   0.9     4,823,608     56,912   1.2  
   
 
 
 
 
 
 
 
 
 
Noninterest-bearing funding sources:                                                  
  Demand deposits     1,516,337               1,744,359               2,272,032            
  Other liabilities     44,316               52,023               85,855            
  Trust preferred securities(6)     38,667               38,611               38,559            
  Minority interest     31,145               30,446               5,861            
  Stockholders' equity     631,005               651,861               478,018            
  Portion used to fund interest-earning assets     (1,864,744 )             (2,129,602 )             (2,523,183 )          
   
           
           
           
Total liabilities, minority interest and stockholders' equity   $ 3,866,242             $ 4,372,000             $ 5,180,750            
   
           
           
           
Net interest income and margin         $ 198,420   5.7 %       $ 268,800   6.8 %       $ 333,594   6.9 %
         
 
       
 
       
 
 
Total deposits   $ 3,063,516             $ 3,581,725             $ 4,572,457            
   
           
           
           

(1)
Includes average interest-bearing deposits in other financial institutions of $609, $568, and $501 in 2002, 2001, and 2000, respectively.

(2)
Interest income on nontaxable investments is presented on a fully taxable-equivalent basis using the federal statutory tax rate of 35% for all years presented. These adjustments were $3,712, $5,815, and $3,746 for the years ended December 31, 2002, 2001, and 2000, respectively.

(3)
Average loans include average nonaccrual loans of $19,602, $21,565, and $24,337 in 2002, 2001, and 2000, respectively.

(4)
Average loans are net of average unearned income of $11,651, $7,669, and $9,929 in 2002, 2001, and 2000, respectively.

(5)
Loan interest income includes loan fees of $36,701, $37,407, and $26,183 in 2002, 2001 and 2000, respectively.

(6)
The 8.25% annual distribution to SVB Capital I, which is the special-purpose trust formed for the purpose of issuing the trust-preferred securities, is recorded as a component of noninterest expense.

26


        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 simultaneous changes attributable to both volume and rate for the years indicated. 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 tax rate of 35% for all years presented.

 
  2002 Compared to 2001
(Decrease) Increase
Due to Changes in

  2001 Compared to 2000
(Decrease) Increase
Due to Changes in

 
 
  Volume
  Rate
  Total
  Volume
  Rate
  Total
 
 
  (Dollars in thousands)

 
Interest income:                                      
  Federal funds sold and securities purchased under agreement to resell   $ (11,905 ) $ (10,651 ) $ (22,556 ) $ (42,832 ) $ (15,219 ) $ (58,051 )
  Investment securities     (14,099 )   (24,571 )   (38,670 )   (6,304 )   (15,807 )   (22,111 )
  Loans     11,391     (40,010 )   (28,619 )   8,927     (13,130 )   (4,203 )
   
 
 
 
 
 
 
Decrease in interest income     (14,613 )   (75,232 )   (89,845 )   (40,209 )   (44,156 )   (84,365 )
   
 
 
 
 
 
 
Interest expense:                                      
  NOW deposits     (69 )   (92 )   (161 )   (163 )   (226 )   (389 )
  Regular money market deposits     171     (454 )   (283 )   (1,778 )   (2,277 )   (4,055 )
  Bonus money market deposits     (1,201 )   (1,524 )   (2,725 )   (8,459 )   (8,078 )   (16,537 )
  Time deposits     (4,766 )   (12,702 )   (17,468 )   7,390     (6,455 )   935  
  Short-term borrowings     724     94     818     265         265  
  Long-term debt     422     (68 )   354     210         210  
   
 
 
 
 
 
 
Decrease in interest expense     (4,719 )   (14,746 )   (19,465 )   (2,535 )   (17,036 )   (19,571 )
   
 
 
 
 
 
 
Decrease in net interest income   $ (9,894 ) $ (60,486 ) $ (70,380 ) $ (37,674 ) $ (27,120 ) $ (64,794 )
   
 
 
 
 
 
 

2002 Compared to 2001

        Net interest income on a fully taxable-equivalent basis totaled $198.4 million in 2002, a decrease of $70.4 million, or 26.2%, from $268.8 million in 2001. The decrease in net interest income was due to an $89.8 million, or 29.3%, decline in interest income, offset by a $19.5 million, or 52.1%, decrease in interest expense over the comparable prior-year period.

        In 2002, we implemented numerous measures to minimize the impact of the decline in market interest rates. These measures included diversifying the product mix in the investment portfolio to higher-yielding, high-quality assets, reducing rates paid on interest-bearing deposits, and embedding minimum interest rate "floors" into client loan agreements. We also increased the average expected life of investments in our portfolio by replacing some assets from lower-yielding short-term securities to higher-yielding longer-term securities, thereby taking advantage of the steeper interest rate curve. Overall, the expected average life of portfolio investments increased to approximately 1.5 years, as compared to less than 1 year in 2001.

        The $89.8 million decrease in interest income for 2002, as compared to 2001, was the result of a $14.6 million unfavorable volume variance, combined with a $75.2 million unfavorable rate variance. The $14.6 million unfavorable volume variance resulted from a $514.8 million, or 12.9%, decrease in average interest-earning assets over the comparable prior-year period. The decrease in average interest-earning assets was primarily concentrated in highly-liquid federal funds sold, and securities purchased under agreement to resell, which decreased $356.8 million, and investment securities,

27



which decreased $263.3 million. These decreases were partially offset by $105.3 million increase in loans.

        Average loans increased $105.3 million, or 6.4%, in 2002, as compared to 2001, resulting in an $11.4 million favorable volume variance. At December 31, 2002, we grew our loan portfolio to a record level by refocusing on attracting middle-market and mature corporate technology and life sciences clients, which we believe are currently under-served by competitors exiting these industry sectors. We experienced loan growth across most of the industry sectors we serve. Additionally, our new loans continue to be subject to our standard underwriting practices. We expect further growth in our loan balances to bolster our net interest margin since it will shift liquid interest-earning assets from our investment portfolio, which currently yields 3.7%, to loans with yields ranging from approximately 4.8% to 9.4%.

        Average investment securities for 2002 decreased $263.3 million, or 14.5%, as compared to 2001, resulting in a $14.1 million unfavorable volume variance. The decrease in average investment securities was primarily centered in U.S. agency securities, which decreased $291.0 million. This decrease resulted from declines in our average deposit balances and our common stock repurchase programs. Deposit balances declined in 2001 as our clients continued to experience reduced liquidity due to the slowdown in the capital markets and lower levels of venture capital fund investment. However, quarterly average deposit balances stabilized during 2002.

        Average federal funds sold and securities purchased under agreement to resell in 2002 decreased $356.8 million, or 70.0%, as compared to the prior year, resulting in an $11.9 million unfavorable volume variance. This decline was primarily due to a change in the investment portfolio mix, as funds were invested in longer-term, high quality securities while still maintaining high levels of liquidity. We expect to continue the trend of managing federal funds and overnight repurchase agreements at appropriate levels.

        Unfavorable rate variances associated with each component of interest-earning assets caused a $75.2 million decline in our interest income for 2002 as compared to 2001. Short-term market interest rates decreased rapidly throughout 2001, and we experienced additional, although less severe, market interest rate decreases in 2002. Thus, we earned lower yields in 2002 on federal funds sold and securities purchased under agreements to resell, as well as our investment securities, a significant portion of which were short-term in nature. The decrease in short-term market interest rates resulted in a combined $35.2 million unfavorable rate variance in 2002, as compared to 2001. In 2002, we incurred a $40.0 million unfavorable rate variance associated with our loan portfolio. The average yield on loans in 2002 decreased 230 basis points to 8.9% from 11.2% in the prior year. This was due to two factors. First, the lower average prime rate reduced yields on floating rate loans, which represent approximately 79.0% of our total loan portfolio. The weighted-average prime rate declined 224 basis points from 6.9% in 2001 to 4.7% in 2002. Second, our fixed-rate loans are priced by reference to U.S. Treasury securities. During 2002, the treasury yield curve moved lower and flattened. Thus, we earned lower yields on new, renewed, and refinanced fixed-rate loans. Our investment and loan portfolios are extremely interest rate sensitive, and therefore we expect that any increase in short-term interest rates will be incremental to our earnings.

        The yield on average interest-earning assets decreased 150 basis points in 2002 from the prior year. This decrease primarily resulted from a decline in short-term market interest rates; thus, we earned lower yields on each component of our interest-earning assets.

        Total interest expense in 2002 decreased $19.5 million from 2000. This decrease was due to a favorable rate variance of $14.7 million, combined with a favorable volume variance of $4.7 million. The favorable rate variance largely resulted from a reduction between 2001 and 2002 in the average rate paid on our time-deposit product from 3.1% to 1.2%.

        The average cost of funds paid on average interest-bearing liabilities in 2002 was 1.1% down from 2.0% in 2001. This decrease in the average cost of funds was largely due to a decrease of 190 basis points in the average rate paid on our time-deposit product.

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2001 Compared to 2000

        Net interest income, on a fully taxable-equivalent basis, totaled $268.8 million in 2001, a decrease of $64.8 million, or 19.4%, from the $333.6 million in 2000. The decrease in net interest income was due to an $84.4 million, or 21.6%, decline in interest income, which was offset by a $19.6 million, or 34.4%, decrease in interest expense over the comparable prior year period.

        The $84.4 million decrease in interest income for 2001, as compared to 2000, was the result of a $40.2 million unfavorable volume variance, combined with a $44.2 million unfavorable rate variance. The $40.2 million unfavorable volume variance resulted from an $839.3 million, or 17.4%, decrease in average interest-earning assets over the comparable prior-year period. The decrease in average interest-earning assets resulted primarily from lower investable funds as the result of a decline in our client deposits, which decreased $990.7 million, or 21.7%, from 2000 to 2001. The decrease in average interest-earning assets was primarily concentrated in highly liquid, federal funds sold, and securities purchased under agreement to resell, which decreased $801.0 million.

        Average loans increased $76.8 million, or 4.9%, in 2001, as compared to 2000, resulting in an $8.9 million favorable volume variance. Although we continued to add high-quality loans to our portfolio throughout 2001, the slowdown in our clients' capital markets and venture capital funding reduced those opportunities and impeded our ability to increase loan balances.

        Average investment securities for 2001 decreased $115.1 million, or 6.0%, as compared to 2000, resulting in a $6.3 million unfavorable volume variance. The decrease in investment securities was primarily centered in U.S. agency securities and resulted from a corresponding decrease in client deposits.

        Average federal funds sold and securities purchased under agreement to resell in 2001 decreased a combined $801.0 million, or 61.1%, as compared to the prior year, resulting in a $42.8 million unfavorable volume variance. This decrease was a result of a decline in investable funds related to the decline in our clients' average deposit balances.

        Unfavorable rate variances associated with each component of interest-earning assets combined to decrease interest income by $44.2 million in 2001, as compared to the prior year. Short-term market interest rates decreased during the past year. As a result, we earned lower yields during 2001 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 combined $31.0 million unfavorable rate variance, as compared to the prior year. In 2001, we incurred a $13.1 million unfavorable rate variance associated with our loan portfolio. The average yield on loans in 2001 decreased 80 basis points to 11.2% from 12.0% in the prior year. Approximately 72.2% of our loan balance was prime-rated based at December 31, 2001; the majority of the remaining loan balance was fixed rate.

        The yield on average interest-earning assets decreased 60 basis points in 2001 from the prior year. This decrease primarily resulted from a decline in short-term market rates; thus, we earned lower yields on each component of our interest-earning assets.

        Total interest expense in 2001 decreased $19.6 million, as compared to 2000. This decrease was due to a favorable rate variance of $17.0 million, combined with a favorable volume variance of $2.5 million. The favorable rate variance largely resulted from a reduction, between 2000 and 2001 in the average rate paid on our bonus money market deposit product from 2.0% to 1.2%, and from 4.1% to 3.1% on our time-deposit product.

        The average cost of funds paid on average interest-bearing liabilities in 2001 was 2.0% down from 2.5% in 2000. This decrease in the average cost of funds was largely due to a decrease of 80 basis points in the average rate paid on our bonus money market deposit product and a 100 basis point decrease on the average rate paid on our time-deposit product.

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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 $3.9 million in 2002, as compared to $16.7 million in 2001, and $54.6 million in 2000. We incurred net charge-offs of $5.8 million in 2002, as compared to $18.1 million in 2001, and $52.6 million in 2000. The decrease in provision for loan losses for 2002, as compared to 2001, resulted from $22.2 million in recoveries in 2002, relating in large part to loan loss recoveries from entertainment loan litigation settlements. For a more detailed discussion of credit quality and the allowance for loan losses, see "Item 7. Critical Accounting Policies" and "Item 7. Financial Condition—Credit Quality and the Allowance for Loan Losses."

Noninterest Income

        The following table summarizes the components of noninterest income for the past three years.

 
  Years Ended December 31,
 
  2002
  2001
  2000
 
  (Dollars in thousands)

Client investment fees   $ 30,671   $ 41,598   $ 35,831
Letter of credit and foreign exchange income     15,225     12,655     18,586
Corporate finance fees     12,110     2,911     1,820
Deposit service charges     9,072     6,196     3,336
Disposition of client warrants     1,661     8,500     86,322
Investment (losses) gains     (9,825 )   (12,373 )   37,065
Other     8,944     11,346     6,670
   
 
 
Total noninterest income   $ 67,858   $ 70,833   $ 189,630
   
 
 

        Noninterest income decreased $3.0 million, or 4.2%, in 2002, as compared to 2001. This decrease was primarily due to a $10.9 million decrease in client investment fees, a decrease of $6.8 million in income from the disposition of client warrants, and a decrease of $2.4 million in other noninterest income. These decreases were offset by an increase of $9.2 million in corporate finance fees, a $2.9 million increase in deposit service charges, a $2.6 million increase in letter of credit and foreign exchange income, and a $2.5 million decrease in investment losses. Noninterest income decreased $118.8 million, or 62.6% in 2001, as compared to 2000. This decrease was largely due to a $77.8 million decrease in income from the disposition of client warrants, combined with a $49.4 million decline in investment (loss) gain contribution.

        Client investment fees totaled $30.7 million in 2002, as compared to $41.6 million in 2001, and $35.8 million in 2000. We offer private label investment and sweep products to clients on which we earn fees ranging from 12.5 to 107 basis points on the average balance of these products. At December 31, 2002, $8.5 billion in client funds were invested in these private label investment and sweep products, including $6.4 billion in the mutual fund products, as compared to $9.3 billion and $7.4 billion, respectively, at December 31, 2001. The decrease in client investment fees of $10.9 million was due to a combination of a shift in investment mix and a decline in our clients' investment balances. Also, in the third quarter of 2002, we completed an initiative of transferring the private label investment operations from Silicon Valley Bank into a wholly-owned, registered, broker-dealer subsidiary of Silicon Valley Bank. This action will allow us to provide a more expansive and competitive array of investment products and service to our clients. We believe this initiative will provide us additional future opportunities to compete for additional client funds and grow client private label investment balances.

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        Letter of credit fees, foreign exchange fees, and other trade finance income totaled $15.2 million in 2002, an increase of $2.6 million, or 20.3%, from the $12.7 million total in 2001, and a decrease of $3.4 million, or 18.1%, from the $18.6 million total in 2000. The increase between 2001 and 2002 reflects an increase in the number of products offered by us and an increase in the volume of client foreign exchange transactions during 2002 as compared to 2001.

        Corporate finance fees totaled $12.1 million in 2002, an increase of $9.2 million, or 316.0%, from the $2.9 million in 2001, and an increase of $10.3 million or 565.4%, from the $1.8 million total in 2000. In 2002, Alliant Partners, our investment-banking subsidiary, generated the entire balance of $12.1 million. SVB Securities, Inc., generated $1.1 million in 2001 and $1.8 million in 2000. The increase in corporate finance fees was primarily due to the acquisition of Alliant on September 28, 2001, which increased our mergers and acquisitions advisory activity. Alliant's revenues are typically a function of the valuation of their clients' mergers and acquisitions transactions. Global political and economic events have depressed valuations of high technology and life sciences corporations. Consequently, Alliant has not achieved the initial revenue goals we defined at the acquisition date. See "Item 8. Consolidated Financial Statements and Supplementary Data—Note 2 to the Consolidated Financial Statements—Business Combinations". However, Alliant has met its targets for mergers and acquisitions transaction volumes for 2002. In the fourth quarter of 2002, Alliant's revenue showed improvement, as public equity markets improved slightly and Alliant deal flow volume returned to a more normal pace. We expect Alliant revenues to continue to be volatile, but exhibit a general upward trend over the long term.

        Deposit service charges totaled $9.1 million in 2002, an increase of $2.9 million, or 46.4%, as compared to the $6.2 million reported in 2001, and an increase of $5.7 million, or 171.9% from the $3.3 million in 2000. As we have expanded and enhanced our suite of fee-based financial (depository) services and client usage has increased, overall service fees have increased year over year. Additionally, clients compensate us for depository services, either through earnings credits computed on their demand deposit balances, or through explicit payments recognized by us as deposit service charges income. Earnings credits are calculated using client average daily deposit balances, less a reserve requirement and a discounted U.S. Treasury bill interest rate. Clients received lower earnings credits in 2002, as compared to 2001 due to lower average client deposit balances and lower market interest rates. As such, our clients had fewer credits to offset explicit deposit service charges. Thus, we earned higher explicit deposit service charges in 2002.

        Due to reduced client initial public offering and merger and acquisition activities, the income from disposition of client warrants totaled $1.7 million in 2002, as compared to $8.5 million in 2001 and $86.3 million in 2000. 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. Therefore, we cannot predict the timing and amount of income with any degree of accuracy, and this income is likely to vary materially from period to period.

        We incurred $9.8 million in losses on investment securities in 2002, as compared to losses of $12.4 million in 2001, and gains of $37.1 million in 2000. The 2002 and 2001 losses primarily related to the write-down of certain venture capital fund and direct equity investments. Excluding the impact of minority interest, the net write-downs of our equity securities for 2002 totaled approximately $4.1 million and $6.6 million for 2001. The 2000 gains primarily related to a gain of $26.2 million realized on the sale of a venture capital fund investment, which completed its initial public offering in 1999.

        Other noninterest income largely consisted of service-based fee income, and totaled $8.9 million in 2002, as compared to $11.3 million in 2001 and $6.7 million in 2000. This decrease in 2002, as

31



compared to 2001 and 2000, was primarily due to the elimination of supply chain service operations in late 2001.

Noninterest Expense

        Noninterest expense in 2002 totaled $186.4 million, a $2.9 million, or 1.6%, increase from 2001. Total noninterest expense was $183.5 million in 2001, a decrease of $14.9 million, or 7.5%, from 2000. 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 adjusted noninterest expense by adjusted revenues. Noninterest expense is adjusted to exclude costs associated with amortization of investments in tax credit funds, minority interest, and retention and warrant incentive plans. Revenues are adjusted to exclude income associated with minority interest, the disposition of client warrants, and gains or losses related to investment securities. This ratio reflects the level of operating expense required to generate $1 of operating revenue. Our efficiency ratio was 67.3% for 2002, as compared to 52.5% and 45.6% in 2001 and 2000, respectively.

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        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,
 
 
  2002
  2001
  2000
 
 
  Amount
  Percent of
Adjusted
Revenues

  Amount
  Percent of
Adjusted
Revenues

  Amount
  Percent of
Adjusted
Revenues

 
 
  (Dollars in thousands)

 
Compensation and benefits   $ 105,168   38.9 % $ 89,060   26.4 % $ 106,385   26.9 %
Net occupancy     20,391   7.5     16,181   4.8     9,363   2.4  
Professional services     18,385   6.8     24,543   7.3     20,832   5.3  
Furniture and equipment     9,562   3.5     13,916   4.1     11,999   3.0  
Business development and travel     8,426   3.1     10,159   3.0     11,188   2.8  
Postage and supplies     3,190   1.2     3,995   1.2     3,500   0.9  
Telephone     3,123   1.2     4,317   1.3     2,815   0.7  
Correspondent bank fees     2,835   1.0     479   0.1     112   0.0  
Trust preferred securities distributions     2,230   0.8     3,300   1.0     3,300   0.8  
Advertising and promotion     1,025   0.4     3,126   0.9     3,445   0.9  
Other     9,959   3.7     10,183   3.1     8,111   2.0  
Expenses incurred by minority interest     (2,114 ) (0.8 )   (2,435 ) (0.7 )   (671 ) (0.1 )
   
 
 
 
 
 
 
Total, excluding cost of other real estate retention, warrant incentive plan, tax credit fund amortization, and minority interest     182,180   67.3 %   176,824   52.5 %   180,379   45.6 %
         
       
       
 
Tax credit funds amortization     2,963         2,756              
Expenses incurred by minority interest     2,114         2,435         671      
Retention and warrant incentive plans     (883 )       1,473         17,311      
   
     
     
     
Total noninterest expense   $ 186,374       $ 183,488       $ 198,361      
   
     
     
     

        Compensation and benefits expenses totaled $105.2 million in 2002, a $16.1 million, or 18.1% increase from the $89.1 million incurred in 2001. We experienced an increase in compensation and benefits during 2002 for the following reasons. First, we completed a strategic realignment of some of our business activities, which resulted in severance expense of $1.1 million in the second quarter of 2002. Second, we incurred $6.1 million in incentive compensation expense related to our target earnings levels being achieved in 2002, as compared to $0 in 2001. Finally, average full-time equivalent (FTE) personnel increased from 970 in 2001 to 1,000 in 2002. Compensation and benefits expenses totaled $89.1 million in 2001, a $17.3 million, or 16.3%, decrease from the $106.4 million incurred in 2000. This decrease was largely the result of a decrease in performance-based compensation associated with our incentive bonuses and employee stock ownership plan. Average FTE personnel increased from 830 in 2000 to 970 in 2001. The increase in FTE personnel from 2000 through 2002 was primarily due to conversion of certain consultants to permanent employees status, the acquisition of Alliant Partners and Woodside Asset Management, Inc., and our efforts to build an infrastructure sufficient to support our business activities and regulatory requirements. We are continuing our specific measures to control the number of FTE personnel during 2003 due to the economic slowdown in our marketplace.

        Occupancy expense totaled $20.4 million in 2002, $16.2 million in 2001, and $9.4 million in 2000. Occupancy expense has generally increased over the past two years due to incremental costs associated with the addition of regional offices in the San Francisco Bay Area, which were opened in

33



the latter half of 2001. Additionally, in 2002, we exited leased premises, in Santa Clara, California, approximating 18,000 square feet. The lease on the building expires in August 2005. Our management determined that the premises would have no future economic value to our operations, except for any potential future sub-lease arrangement. Therefore, during 2002, we incurred charge-offs of approximately $2.5 million related to the exit of these premises.

        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 $18.4 million in 2002, a $6.2 million, or 25.1% decrease from the $24.5 million total in 2001. We incurred $20.8 million in professional services expenses in 2000. The decrease in professional services is primarily related to a reduction in the number of business initiatives supported by consultants. The increase in professional services expenses in 2001, as compared to 2000, reflects the extensive efforts we had undertaken to continue to build and support our infrastructure, as well as evaluate and pursue new business opportunities.

        Furniture, and equipment expenses totaled $9.6 million in 2002, a decrease of $4.4 million, or 31.3%, compared to the $13.9 million in 2001, and a decrease of $2.4 million, or 20.3% compared to the $12.0 million in 2000. The decrease in furniture and equipment expenses in 2002 as compared to 2001, was primarily due to a $1.2 million charge-off of software related to an abandoned project in the third quarter of 2001. The higher level of furniture and equipment expense in 2000 was primarily attributable to certain nonrecurring costs in connection with the expansion of our existing corporate headquarters facility during the fourth quarter of 2000, the addition of new regional offices, and an increase in recurring expenses associated with our additional office space.

        Business development and travel expenses totaled $8.4 million in 2002, a decrease of $1.7 million, or 17.1%, as compared to the $10.2 million total in 2001. We incurred $11.2 million in business development and travel expenses in 2000. The decrease in costs associated with business development, and travel expense in 2002 as compared to 2001, and in 2001 as compared to 2000 was primarily due to our efforts to control noninterest expense.

        Postage and supplies expenses totaled $3.2 million, $4.0 million, and $3.5 million in 2002, 2001, and 2000, respectively. Total telephone expenses were $3.1 million in 2002, $4.3 million in 2001, and $2.8 million in 2000. The decrease in both postage and supplies expenses and telephone expenses between 2002 and 2001 reflects our efforts to control noninterest expense.

        Correspondent bank fees totaled $2.8 million in 2002, $0.5 million in 2001, and $0.1 million in 2000. Many of our correspondent banks provide earnings credits to offset bank fees we incur when using their services. Earnings credits are generally calculated using average daily deposit balances, less a reserve requirement and a short-term market interest rate. We received lower earnings credits in 2002 as compared to 2001 and 2000, due to our maintaining lower average balances with our correspondent banks and lower market interest rates. As such, we had fewer earnings credits to offset bank fees charges incurred by us. Thus, we incurred higher recognizable bank fees in 2002 as compared to 2001 and 2000. Management made the decision to lower the average balances with correspondent banks because we were able to earn more on our funds by investing them than we would have saved by leaving these funds with the correspondent banks.

        We issued $40.0 million in cumulative trust preferred securities during the second quarter of 1998. Trust preferred securities distributions totaled $2.2 million, $3.3 million, and $3.3 million in 2002, 2001, and 2000, respectively. The trust preferred securities pay a fixed-rate quarterly distribution of 8.25% and have a maximum maturity of 30 years. On June 3, 2002, we entered into a derivative agreement with a notional amount of $40.0 million. The agreement hedges against the risk of changes in fair value associated with our $40.0 million of trust preferred securities. The terms of the agreement provide for quarterly receipt of 8.25% fixed-rate and payment of London Inter-Bank Offer Rate (LIBOR) plus a spread, based on the $40.0 million notional amount. The derivative agreement provided a $1.1 million decrease in trust preferred security distribution expense for 2002. We expect this hedge to provide a greater reduction of the cost of our trust preferred securities during the first half of 2003. However, the counterparty to the derivative agreement has the option to cancel the

34



agreement in June 2003. Should the derivative agreement be cancelled, we will evaluate whether additional hedging is warranted. There is no assurance that a similar hedging opportunity will become available at that time.

        Advertising and promotion expenses totaled $1.0 million, $3.1 million, and $3.4 million in 2002, 2001, and 2000, respectively. The decrease in advertising and promotion expenses during 2002 and 2001 was primarily the result of our effort to control noninterest expense.

        Retention and warrant incentive plans expense totaled $(0.9) million in 2002, $1.5 million in 2001, and $17.3 million in 2000. 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. In 2002, certain employees terminated employment with us. Consequently, we reversed the portion of the retention plan accrual applicable to those employees. Since we did not record any significant amount of retention plan expense related to existing or new plans in 2002, the reversal of the accrual caused a reduction in expense in 2002. The decrease in retention and warrant plans expense in 2001 as compared to 2000, was directly related to the decline in warrant, venture capital fund, and direct equity investment gains recognized by us in those years.

        Other noninterest expenses, excluding the affect of tax credit fund investment amortization, totaled $10.0 million in 2002, $10.2 million in 2001, and $8.1 million in 2000. The increase in other noninterest expenses in 2001 as compared to 2000, was primarily attributable to higher insurance and data processing costs.

Minority Interests

        The minority interest limited partner's share of losses were $7.8 million, $7.5 million, and $0.5 million in 2002, 2001 and 2000, respectively. The minority interest limited partner losses were primarily due to a write-down of minority interest-owned investments associated with SVB Strategic Investors Fund, L.P. and Silicon Valley BancVentures, L.P. of $5.7 million and $5.8 million in 2002 and 2001, respectively. Minority interest limited partner losses in 2000 primarily related to fund management fees associated with SVB Strategic Investors Fund, L.P. and Silicon Valley BancVentures, L.P.

Income Taxes

        Our effective income tax rate was 33.4% in 2002, compared to 37.5% in 2001 and 40.4% in 2000. The change in our effective income tax rate from 2001 to 2002 was primarily due to an increase in items giving rise to permanent tax benefits.

        In particular, on September 11, 2002, California enacted a law requiring large banks (those with average assets in excess of $500 million) to conform to federal law with respect to accounting for bad debts. Prior to the law change, all banks, regardless of size, were eligible to use the reserve method of accounting for bad debts which enabled them to take deductions for anticipated bad debt losses prior to the losses being incurred for California tax purposes. With the change, large banks may now only deduct actual charge-offs net of recoveries in determining their California taxable income. Banks that are required to conform to the new law must include in taxable income 50 percent of their existing bad debt reserves as of the end of the prior tax year. As a concession for requiring large banks to comply with the new law, recapture of the remaining 50 percent of the reserve is waived thereby creating a permanent tax benefit. Our one-time tax benefit resulting from the law change was $0.8 million and has been reflected in our income tax expense for 2002. This change, while reducing income tax expense, also results in accelerated tax payments.

        In August 2002, we implemented a real estate investment trust (REIT) to serve as a future-funding vehicle. In 2002 we obtained $0.8 million in tax benefits from the REIT structure.

        The increase in tax rate from 2000 to 2001 was principally attributable to changes in our multi-state income tax rate.

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Financial Condition

        Total assets remained fairly consistent between December 31, 2001 and December 31, 2002 at $4.2 billion. However, we experienced a shift in the composition of our assets, reflected by a $320.9 million increase in net loans, offset by decreases in investment securities and federal funds sold and securities purchased under agreement to resell by $297.5 million and $9.6 million, respectively.

Federal Funds Sold and Securities Purchased under Agreement to Resell

        Federal funds sold and securities purchased under agreement to resell totaled a combined $202.7 million at December 31, 2002, a decrease of $9.6 million, or 4.5% as compared to $212.2 million outstanding at the prior year end. Year over year federal funds sold and securities purchased under agreement to resell were virtually unchanged. However, as stated previously, average balances were down significantly demonstrating the shift into longer-term securities while maintaining high levels of liquidity.

Investment Securities

        For a description of the accounting policies related to investment Securities, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies" and "Item 8. Consolidated Financial Statements and Supplementary Data—Note 1 to the Consolidated Financial Statements—Significant Accounting Policies—Investment Securities."

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        The following table details the composition of investment securities, which were classified as available-for-sale and reported at fair value, with the exception of non-marketable securities that include Federal Reserve Bank and Federal Home Loan Bank stock, tax credit funds, venture capital fund investments, and other private equity investments, which were reported on a cost basis less any identified impairment or reported at fair value using investment accounting rules at December 31, 2002, 2001, and 2000.

 
  December 31,
 
  2002
  2001
  2000
 
  (Dollars in thousands)

Available-for-sale securities:                  
  U.S. Treasury securities   $ 20,578   $ 85,148   $ 25,011
  U.S. agencies and corporations:                  
    Discount notes and bonds     197,545     425,843     1,027,531
    Mortgage-backed securities     158,936     142,493     166,409
    Asset-backed securities     38,508        
    Collateralized mortgage obligations     420,161     154,314     209,585
  Obligations of states and political subdivisions     210,517     421,634     401,047
  Commercial paper and other debt securities     11,148     34,800     53,900
  Money market mutual funds     378,933     494,230     155,254
  Warrant securities     839     2,406     7,033
  Venture capital fund investments     11     69    
  Other equity investments(1)     7,055     5     23
   
 
 
Total available-for-sale securities     1,444,231     1,760,942     2,045,793
   
 
 

Non-marketable securities:

 

 

 

 

 

 

 

 

 
  Federal Reserve Bank stock and tax credit funds     25,649     19,867     15,538
  Federal Home Loan Bank stock     2,172        
  Venture capital fund investments(2)     46,822     38,647     30,519
  Other private equity investments(3)     16,820     13,706     15,740
   
 
 
Total non-marketable securities     91,463     72,220     61,797
   
 
 
Total investment securities   $ 1,535,694   $ 1,833,162   $ 2,107,590
   
 
 

(1)
Available-for-sale other equity investments included $7.1 million related to investments owned by two consolidated limited partnerships, Taurus, L.P. and Libra, L.P. as of December 31, 2002.

(2)
Non-marketable venture capital fund investments included $22.1 million, $16.5 million, and $10.3 million related to SVB Strategic Investors Fund, L.P., as of December 31, 2002, 2001, and 2000, respectively.

(3)
Non-marketable other private equity investments included $10.0 million, $5.1 million, and $3.5 million related to Silicon Valley BancVentures, L.P., as of December 31, 2002, 2001, and 2000, respectively.

        Investment securities totaled $1.5 billion at December 31, 2002, a decrease of $297.5 million, or 16.2%, from the December 31, 2001 balance of $1.8 billion. This decrease resulted from a reallocation of funds to loans and our common stock repurchase programs during 2002. The decrease in investment securities was primarily in U.S. Treasury and agency securities, short-term obligations of states and political subdivisions, and money market mutual funds. This was partially offset by an increase in collateralized mortgage obligations. This shift represents a change in investment portfolio management as we become more active in measuring and managing our interest rate risk. We have increased the expected average life of investments in our portfolio to approximately 1.5 years in 2002 from under 1 year in 2001 by adding higher yielding, highly liquid agency mortgage-backed securities and other triple A rated securities. The increase in venture capital fund investments of $8.1 million between 2001 and 2002 was primarily due to additional investments made by our managed fund, SVB Strategic Investors, L.P. during the year. The change in the composition of investments was the result of current interest rate conditions.

37



        Investment securities totaled $1.8 billion at December 31, 2001, a decrease of $274.4 million, or 13.0%, from the December 31, 2000 balance of $2.1 billion. This decrease resulted from a decline in investable funds as a result of a decline in our deposits during 2001 and primarily consisted of U.S agency securities. The decrease in collateralized mortgage obligations was primarily due to maturities and prepayments. The increase in venture capital fund investments of $8.2 million between 2000 and 2001 was primarily due to additional investments made by our managed fund, SVB Strategic Investors, L.P. during the year. The change in the composition of investments was the result of interest rate conditions at that time.

        Based on December 31, 2002 market valuations, we had potential pre-tax warrant gains totaling $0.8 million related to 16 companies. We are restricted from exercising many of these warrants. As of December 31, 2002, we held 1,818 warrants in 1,355 companies, had made investments in 244 venture capital funds, and had direct equity investments in 25 companies, many of which are private. We also had investments in 20 venture capital funds through our fund of funds, SVB Strategic Investors, L.P. and had direct equity investments in 24 companies through our venture capital fund, Silicon Valley BancVentures, L.P. We are typically contractually precluded from taking steps 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.

        At December 31, 2002, money market mutual funds were the only investment securities held by us that 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.

38


        The following table provides the remaining contractual principal maturities and fully taxable-equivalent yields on investment securities as of December 31, 2002, except for auction rate securities that use the next reset date as the maturity date. The weighted-average yield is computed using the amortized cost of available-for-sale securities, which are reported at fair value. Expected remaining maturities of callable U.S. agency securities, mortgage-backed securities, and collateralized mortgage obligations may differ significantly from their contractual maturities because borrowers may have the right to prepay obligations with or without penalties. This is most apparent in mortgage backed securities and collateralized mortgage obligations as contractual maturities are typically 15 to 30 years whereby expected average lives of these securities are between two and five years. Warrant securities, venture capital fund investments, other private equity investments, Federal Reserve Bank stock, Federal Home Loan Bank stock, and tax credit funds were included in the table below as maturing after 10 years.

 
  December 31, 2002
 
 
  Total

  One Year
or Less

  After One
Year to
Five Years

  After Five
Years to
Ten Years

  After
Ten Years

 
 
  Carrying
Value

  Weighted-
Average
Yield

  Carrying
Value

  Weighted-
Average
Yield

  Carrying
Value

  Weighted-
Average
Yield

  Carrying
Value

  Weighted-
Average
Yield

  Carrying
Value

  Weighted-
Average
Yield

 
 
  (Dollars in thousands)

 
U.S. Treasury securities   $ 20,578   2.05 % $ 19,354   1.85 % $ 879   5.32 % $ 345   4.89 %      
U.S. agencies and corporations:                                                    
  Discount notes and bonds     197,545   4.23     10,103   3.09     177,145   4.31     10,297   3.83        
  Mortgage-backed securities     158,936   5.75           4,196   4.39     31,108   6.62   $ 123,632   5.59 %
  Asset-backed securities     38,508   2.27     11,392   1.46     17,036   2.38     10,080   3.01        
  Collateralized mortgage obligations     420,161   4.34     1,567   3.53     8,370   3.19     23,518   3.52     386,706   4.41  
Obligations of states and political subdivisions     210,517   4.90     66,029   2.34     78,091   5.91     66,397   6.62        
Commercial paper and other debt securities     11,148   2.41     11,148   2.41                    
Money market mutual funds     378,933   1.34     378,933   1.34                    
Warrant securities     839                         839    
Venture capital fund investments     46,833                         46,833    
Other private equity investments     23,875                         23,875    
Federal Reserve Bank stock, Federal Home Loan Bank stock, and tax credit funds     27,821                         27,821    
   
 
 
 
 
 
 
 
 
 
 
Total   $ 1,535,694   3.67 % $ 498,526   1.56 % $ 285,717   4.60 % $ 141,745   5.64 % $ 609,706   4.69 %
   
 
 
 
 
 
 
 
 
 
 

        Callable U.S. agency securities, mortgage-backed securities, and collateralized mortgage obligations pose risks not associated with fixed maturity bonds, primarily related to the ability of the borrower to call or prepay the debt with or without penalty. This risk, known as prepayment risk, may result in these securities having longer or shorter average lives than that anticipated at the time of purchase. As interest rates decline, prepayments generally tend to increase, causing the average expected remaining maturity to shorten. Conversely, as interest rates rise, prepayments tend to decrease causing the average expected remaining maturity to extend.

39


Loans

        The following table details the composition of the loan portfolio, net of unearned income, for each of the past five years:

 
  December 31,
 
  2002
  2001
  2000
  1999
  1998
 
  (Dollars in thousands)

Commercial   $ 1,756,182   $ 1,536,845   $ 1,531,468   $ 1,414,728   $ 1,429,980
Real estate construction     43,178     52,088     62,253     76,209     74,023
Real estate term     56,190     50,935     38,380     67,738     60,841
Consumer and other     230,530     127,170     84,448     64,330     47,077
   
 
 
 
 
Total loans   $ 2,086,080   $ 1,767,038   $ 1,716,549   $ 1,623,005   $ 1,611,921
   
 
 
 
 

        Average loans increased $105.3 million, or 6.4%, in 2002 as compared to 2001, resulting in an $11.4 million favorable volume variance. We expect to continue to increase the number of client lending relationships in most of our technology, life sciences, and premium winery industry sectors.

        The following table sets forth the remaining contractual maturity distribution of our gross loans at December 31, 2002 for fixed and variable rate loans:

 
  December 31, 2002
 
  One Year
or Less

  After One Year
and Through
Five Years

  After
Five Years

  Total
 
  (Dollars in thousands)

Fixed rate loans:                        
Commercial   $ 45,664   $ 322,069   $ 38,866   $ 406,599
Real estate construction             2,218     2,218
Real estate term         28,894     82     28,976
Consumer and other     507     3,050         3,557
   
 
 
 
Total fixed-rate loans   $ 46,171   $ 354,013   $ 41,166   $ 441,350
   
 
 
 
Variable-rate loans:                        
Commercial   $ 831,074   $ 409,935   $ 119,721   $ 1,360,730
Real estate construction     8,099     15,287     17,982     41,368
Real estate term     5,405     16,304     5,653     27,362
Consumer and other     63,424     97,643     65,980     227,047
   
 
 
 
Total variable-rate loans   $ 908,002   $ 539,169   $ 209,336   $ 1,656,507
   
 
 
 

        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.

        A substantial percentage of our loans are commercial in nature, and such loans are generally made to emerging growth or middle-market companies in a variety of industries. As of December 31, 2002, our software tools and applications industry subsector represented 16.2% of total gross loans, premium wineries industry sector represented 13.2% of total gross loans, venture capital industry subsector represented 11.8% of total gross loans, and private banking industry subsector represented 10.3% of total gross loans. No other industry sector represented more than 10.0% of total gross loans at December 31, 2002.

Loan Administration

        Authority over our loan policies resides with our board of directors. This authority is managed through the approval and periodic review of our loan policies. The board of directors delegates authority to the directors' loan committee to supervise our loan underwriting, approval, and monitoring

40



activities. The directors' loan committee consists of outside board of director members and our chief executive officer, who serves as an alternate.

        Subject to the oversight of the directors' loan committee, lending authority is delegated to the chief credit officer and our internal loan committee, which consists of the chief executive officer, chief credit officer, chief banking officer, chief strategy officer, and other senior members of our lending management. Requests for new and existing credits that meet certain size and underwriting criteria may be approved outside of our internal loan committee by designated senior lenders or jointly with a senior credit officer.

Credit Quality and the Allowance for Loan Losses

        For a description of the accounting policies related to the allowance for loan losses, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies" and "Item 8. Consolidated Financial Statements and Supplementary Data—Note 1 to the Consolidated Financial Statements—Significant Accounting Policies—Loans—Allowance for Loan Losses."

        The following table presents an analysis of the allowance for loan losses for the past five years:

 
  December 31,
 
 
  2002
  2001
  2000
  1999
  1998
 
 
  (Dollars in thousands)

 
Balance at January 1,   $ 72,375   $ 73,800   $ 71,800   $ 46,000   $ 37,700  
Charge-offs:                                
  Commercial     (27,408 )   (37,671 )   (63,177 )   (34,312 )   (31,123 )
  Real estate         (690 )            
  Consumer and other     (524 )   (424 )   (203 )   (196 )    
   
 
 
 
 
 
Total charge-offs     (27,932 )   (38,785 )   (63,380 )   (34,508 )   (31,123 )
   
 
 
 
 
 
Recoveries:                                
  Commercial     22,175     20,408     10,507     7,849     1,897  
  Real estate         209     47     34     366  
  Consumer and other         19     224     18     1  
   
 
 
 
 
 
Total recoveries     22,175     20,636     10,778     7,901     2,264  
   
 
 
 
 
 

Net charge-offs

 

 

(5,757

)

 

(18,149

)

 

(52,602

)

 

(26,607

)

 

(28,859

)
  Provision for loan losses     3,882     16,724     54,602     52,407     37,159  
   
 
 
 
 
 
Balance at December 31,   $ 70,500   $ 72,375   $ 73,800   $ 71,800   $ 46,000  
   
 
 
 
 
 
Net charge-offs to average total loans     0.3 %   1.1 %   3.3 %   1.7 %   2.2 %
   
 
 
 
 
 

        The following table displays the allocation of the allowance for loan losses among specific classes of loans.

 
  December 31,
 
 
  2002
  2001
  2000
  1999
  1998
 
 
  Amount
  Percent
of Total
Loans

  Amount
  Percent
of Total
Loans

  Amount
  Percent
of Total
Loans

  Amount
  Percent
of Total
Loans

  Amount
  Percent
of Total
Loans

 
 
  (Dollars in thousands)

 
Commercial   $ 58,702   83.8 % $ 65,972   92.3 % $ 54,300   92.7 % $ 49,985   95.5 % $ 28,417   95.8 %
Real estate term     6,879   9.8     2,528   3.5     806   1.4     795   1.5     438   1.4  
Real estate construction     1,016   1.4     1,062   1.5     1,141   1.9     792   1.5     374   1.3  
Consumer and other     3,474   5.0     1,959   2.7     2,350   4.0     757   1.5     434   1.5  
Unallocated     429   N/A     854   N/A     15,203   N/A     19,471   N/A     16,337   N/A  
   
 
 
 
 
 
 
 
 
 
 
Total   $ 70,500   100.0 % $ 72,375   100.0 % $ 73,800   100.0 % $ 71,800   100.0 % $ 46,000   100.0 %
   
 
 
 
 
 
 
 
 
 
 

41


        The allowance for loan losses totaled $70.5 million at December 31, 2002, a decrease of $1.9 million, or 2.6%, as compared to $72.4 million at December 31, 2001. This decrease was due to net charge-offs of $5.8 million, a decline of $12.4 million from the prior year offset by additional provisions to the allowance for loan losses of $3.9 million. Our loan recoveries in 2002 primarily related to entertainment niche loans, which were charged-off in 2000. The 2002 net charge-off amount was composed of $27.9 million in gross charge-offs and $22.2 million in gross recoveries.

        The 2001 gross charge-offs included one entertainment credit totaling $3.8 million. Of the total 2001 gross charge-offs, $4.9 million were classified as nonperforming loans at the end of 2000. The 2001 gross recoveries included three credits, one from our technology industry sector and two from our discontinued entertainment and healthcare niches, totaling $12.0 million.

        The unallocated component of the allowance for loan losses at December 31, 2001 decreased $14.3 million from 2000. The decrease in the unallocated allowance between 2000 and 2001, principally reflects our management's decision to provide an additional allocation of the allowance for loan losses for our early-stage product loan portfolio. No such specific allocation existed at December 31, 2000. Early-stage product loans represent approximately 20% of our total loan portfolio and are defined by us as loans made to nonpublic, emerging growth, technology and life science companies that have not yet attained profitability. We determined that an additional allocation of the allowance for loan losses was necessary as our early-stage product loan portfolio experienced higher than normal annualized gross loan losses that ranged from approximately 7% to 10% during each of the last three fiscal quarters of 2001. Therefore, our management established an additional allocation to specifically address potential loan losses from this portfolio.

        The 2000 gross charge-offs included three entertainment credits totaling $23.1 million and two commercial credits totaling $12 million in our healthcare services industry sector. Of the total 2000 gross charge-offs, $13.4 million were classified as nonperforming loans at the end of 1999.

42


Nonperforming Assets

        Nonperforming assets consist of loans that are past due 90 days or more that are still accruing interest, loans on nonaccrual status, other real estate owned (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. During 2002, 2001 and 2000, our nonaccrual loans represented all impaired loans. We measure all loans placed on nonaccrual status for impairment based on the fair value of the underlying collateral or the net present value of the expected cash flows in accordance with Statement of Financial Accounting Standard (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan."

 
  December 31,
 
 
  2002
  2001
  2000
  1999
  1998
 
 
  (Dollars in thousands)

 
Nonperforming assets:                                
Loans past due 90 days or more   $   $ 1,000   $ 98   $ 911   $ 441  
Nonaccrual loans     20,411     17,307     18,287     27,552     19,444  
   
 
 
 
 
 
Total nonperforming loans     20,411     18,307     18,385     28,463     19,885  
OREO and other foreclosed assets                     1,800  
   
 
 
 
 
 
Total nonperforming assets   $ 20,411   $ 18,307   $ 18,385   $ 28,463   $ 21,685  
   
 
 
 
 
 
Nonperforming loans as a percent of total gross loans     1.0 %   1.0 %   1.1 %   1.7 %   1.2 %
Nonperforming assets as a percent of total assets     0.5 %   0.4 %   0.3 %   0.6 %   0.6 %
Allowance for loan losses   $ 70,500   $ 72,375   $ 73,800   $ 71,800   $ 46,000  
  As a percent of total gross loans     3.4 %   4.1 %   4.3 %   4.4 %   2.8 %
  As a percent of nonaccrual loans     345.4 %   418.2 %   403.6 %   260.6 %   236.6 %
  As a percent of nonperforming loans     345.4 %   395.3 %   401.4 %   252.3 %   231.3 %

Nonaccrual Loans

        The detailed composition of nonaccrual loans is presented in the following table.

 
  December 31,
 
  2002
  2001
 
  (Dollars in thousands)

Commercial   $ 14,688   $ 16,967
Real estate     5,723     340
   
 
Total nonaccrual loans   $ 20,411   $ 17,307
   
 

Nonperforming Loans

        Nonperforming loans totaled $20.4 million at December 31, 2002, an increase of $2.1 million, or 11.5%, from the $18.3 million total at December 31, 2001. Of the total nonperforming loans at year-end 2001, $8.4 million were charged off, $1.6 million remained on nonperforming status, $8.0 million were repaid during 2002, and $0.3 were upgraded to performing status. Additionally, $15.8 million in loans were placed on nonperforming status during 2002 and were still classified as nonperforming loans at the end of 2002.

        Nonperforming loans totaled $18.3 million at December 31, 2001, a decrease of $0.1 million, or 0.4%, from the $18.4 million total at December 31, 2000. Of the total nonperforming loans at year-end 2000, $4.9 million were charged off, $2.8 million remained on nonperforming status, and $10.7 million were repaid during 2001. Additionally, $15.5 million in loans were placed on nonperforming status during 2001 and were still classified as nonperforming loans at the end of 2001.

43



        Nonperforming loans totaled $18.4 million at December 31, 2000, a decrease of $10.1 million, or 35.4%, from the $28.5 million total at December 31, 1999. Of the total nonperforming loans at year-end 1999, $13.4 million were charged off, $1.1 million remained on nonperforming status and $14.0 million were repaid during 2000. Additionally, $17.3 million in loans were placed on nonperforming status during 2000 and still classified as nonperforming loans at the end of 2000.

        In addition to the loans disclosed in the foregoing analysis as of January 31, 2003, we have identified three loans with principal amounts aggregating approximately $11.8 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 cast serious doubts about the ability of the borrower to comply with the loan repayment terms.

        We held no OREO or other foreclosed assets at December 31, 2002, 2001, 2000, and 1999. OREO or other foreclosed assets totaled a combined $1.8 million at December 31, 1998. The OREO and other foreclosed assets balance at December 31, 1998 consisted of one OREO property and one other asset that was acquired through foreclosure. Both of these were sold during 1999. The OREO property consisted of multiple undeveloped lots and was acquired by us prior to June 1993. 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 that we acquired upon foreclosure of a loan during 1997.

Deposits

        Our deposits are largely obtained from clients within our technology, life sciences, and premium winery industry sectors, and, to a lesser extent, from individuals served by our private banking division. We do not obtain deposits from conventional retail sources and have no brokered deposits. The following table presents the composition of our deposits for the last five years:

 
  December 31,
 
  2002
  2001
  2000
  1999
  1998
 
  (Dollars in thousands)

Noninterest-bearing demand   $ 1,892,125   $ 1,737,663   $ 2,448,758   $ 1,928,100   $ 921,790
NOW     21,531     25,401     57,857     43,643     19,978
Regular money market     285,640     264,858     354,939     363,920     350,110
Bonus money market     647,615     630,091     1,164,624     1,481,457     1,835,249
Time     589,216     722,964     836,081     292,285     142,626
   
 
 
 
 
Total deposits   $ 3,436,127   $ 3,380,977   $ 4,862,259   $ 4,109,405   $ 3,269,753
   
 
 
 
 

        Total deposits were $3.4 billion at December 31, 2002, an increase of $55.2 million, or 1.6%, from the prior year-end total of $3.4 billion. Although our total period end client deposit balances remained fairly consistent between 2002 and 2001, we experienced a shift in the composition of deposit balances. Our noninterest-bearing demand deposits increased $154.5 million, or 8.9%, and money market deposits increased $38.3 million or 4.3%. These increases were largely offset by a decrease in time deposits of $133.7 million, or 18.5% from the prior year-end.

        Total deposits were $3.4 billion at December 31, 2001, a decrease of $1.5 billion, or 30.5%, from the prior year-end total of $4.9 billion. A substantial portion of the decrease in deposits during 2001 was concentrated in our noninterest-bearing demand deposits, which decreased $711.1 million, or 29.0%, and bonus money market deposits, which decreased $534.5 million or 45.9%, from the prior year-end. This decrease was explained by a slowdown in our clients' capital markets and venture capital funding that reduced our clients' liquidity levels at December 31, 2001.

44



        The aggregate amount of time deposit accounts individually exceeding $100,000 totaled $530.5 million at December 31, 2002 and $653.5 million at December 31, 2001. At December 31, 2002, substantially all time deposit accounts exceeding $100,000 were scheduled to mature within one year. No material portion of our deposits has been obtained from a single depositor and the loss of any one depositor would not materially affect our business.

Contractual Obligations and Commercial Commitments

        As of December 31, 2002, we had the following contractual obligations and commercial commitments:

 
  Payments Due By Period
Contractual obligations

  Total
  Less than
1 year

  1-3
years

  4-5
years

  After 5
years

 
  (Dollars in thousands)

Borrowings(1)   $ 26,524   $ 9,127   $ 17,397        
Operating leases(2)     35,325     11,566     17,711   $ 5,070   $ 978
Trust preferred securities     39,472                 39,472
Remaining unfunded commitments to wholly-owned venture capital funds(3)     18,484     18,484            
Remaining unfunded commitments to venture capital funds by SVB Strategic Investors Fund, L.P.(3)     76,874     76,874            
Remaining unfunded commitments to SVB Strategic Investors Fund, L.P.(3)(4)     11,100     11,100            
Remaining unfunded commitments to Silicon Valley BancVentures, L.P.(3)(5)     4,020     4,020            

Other commercial commitments


 

Amount of Commitment Expiring Per Period

Commitments to extend credit(6)   $ 2,500,283   $ 2,091,721   $ 364,826   $ 31,993   $ 11,743
Standby letters of credit(6)     566,607     508,742     50,856     3,395     3,614
Foreign exchange letters of credit(6)     16,301     16,301            
Commercial letters of credit(6)     1,917     1,917            

(1)
See "Item 8. Consolidated Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Footnote 11. Borrowings" for further disclosure related to borrowings.

(2)
See "Item 8. Consolidated Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Footnote 8. Premises and Equipment" for further disclosure related to premises and equipment.

(3)
See "Item 8. Consolidated Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Footnote 6. Investment Securities" for further disclosure related to investment securities. In the merchant banking business, we make commitments to venture capital fund investments. Commitments to invest in these funds are generally made up to a ten-year period from the inception of the venture capital fund. The timing of future cash requirements to fund such commitments is generally dependent upon the venture capital investment cycle, the overall market conditions, and the nature and type of industry in which the privately held companies operate.

(4)
See "Item 8. Consolidated Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Footnote 6. Investment Securities" for further disclosure related to investment securities. Silicon has committed capital of $15.0 million to SVB Strategic Investors Fund, L.P., representing an ownership interest of 11.1%. Effective January 1, 2003, our committed capital that can be called by SVB Strategic Investors Fund, L.P. was reduced to $13.5 million, thereby reducing the remaining unfunded commitment to $9.6 million.

(5)
See "Item 8. Consolidated Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Footnote 6. Investment Securities" for further disclosure related to investment securities. Silicon made a capital commitment of $6.0 million to our venture capital fund, Silicon Valley BancVentures, L.P. in which we have an ownership interest of 10.7%.

(6)
See "Item 8. Consolidated Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Footnote 20. Financial Instruments with Off-Balance Sheet Risk" for further disclosure related to financial instruments with off-balance sheet risk.

45


Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk Management

        A key objective of asset/liability management is to manage interest rate risk associated with changing asset and liability cash flows and market interest rate movements. Interest rate risk occurs when interest rate sensitive assets and liabilities do not re-price simultaneously both in timing and volume. Our asset/liability committee (ALCO) provides oversight to our interest rate risk management process and recommends policy guidelines regarding exposure to interest rates for approval by our Board of Directors. Adherence to these policies is monitored on an ongoing basis, and decisions related to the management of interest rate exposure are made when appropriate.

        We manage interest rate risk principally through strategies involving our investment securities portfolio. Our policies permit the use of off-balance-sheet derivative instruments in managing interest rate risk.

        Our monitoring activities related to managing interest rate risk include both interest rate sensitivity gap analysis and the use of a simulation model. While traditional gap analysis provides a simple picture of the interest rate risk embedded in the balance sheet, it provides only a static view of interest rate sensitivity at a specific point in time and does not measure the potential volatility in forecasted results relating to changes in market interest rates over time. Accordingly, we combine the use of gap analysis with use of a simulation model that provides a dynamic assessment of interest rate sensitivity.

Interest Rate Sensitivity Analysis

        The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets and interest sensitive liabilities that are anticipated to re-price within a specific time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest sensitive liabilities re-pricing within that same time period. Positive cumulative gaps in early time periods suggest that earnings will increase when interest rates rise. Negative cumulative gaps suggest that earnings will increase when interest rates fall. The gap analysis as of December 31, 2002 indicates that the cumulative one-year gap as a percentage of interest-earning assets was a positive 27%.

46



        The following table illustrates our interest rate sensitivity gap positions at December 31, 2002:

Interest Rate Sensitivity Analysis as of December 31, 2002

 
  Assets and liabilities which mature or reprice
 
  Immediately
  1 Day
to
1 Month

  After
1 Month
to
3 Months

  After
3 Months
to
6 Months

  After
6 Months
to
1 Year

  After
1 Year
to
5 Years

  After
5 Years

  Not
Stated

  Total
 
  (Dollars in thousands)

Interest-Earning Assets:                                                      
Cash and due from banks         $ 239,927                                       $ 239,927
Federal funds sold and securities purchased under agreement to resell(1)         202,662                             202,662
   
 
 
 
 
 
 
 
 
Investment securities:                                                      
  U.S. Treasury and agencies obligations(2)         2,999           $ 26,458   $ 178,024   $ 10,642         218,123
  Collateralized mortgage obligations and mortgage-backed securities(2)         10,239   $ 18,816   $ 24,497     39,822     416,029     69,694         579,097
  Obligations of states and political subdivisions         55,000     2,573     2,251     6,205     78,091     66,397         210,517
  Commercial paper and other debt securities         49,656                             49,656
  Money market mutual funds         378,933                             378,933
  Other equity securities(3)                               $ 9,565     9,565
   
 
 
 
 
 
 
 
 
Total investment securities         496,827     21,389     26,748     72,485     672,144     146,733     9,565     1,445,891
   
 
 
 
 
 
 
 
 
Loans(4)(5)   $ 1,594,683     32,943     47,876     58,978     103,283     221,004     20,678     6,635     2,086,080
   
 
 
 
 
 
 
 
 
Total interest-earning assets   $ 1,594,683   $ 972,359   $ 69,265   $ 85,726   $ 175,768   $ 893,148   $ 167,411   $ 16,200   $ 3,974,560
   
 
 
 
 
 
 
 
 
Funding Sources:                                                      
  Demand deposits       $ 83,971   $ 156,927   $ 210,228   $ 343,567   $ 973,241   $ 124,191       $ 1,892,125
  Money market and NOW deposits         48,206     89,015     116,924     184,722     463,075     52,844         954,786
  Time deposits         445,311     47,405     50,180     45,871     449             589,216
   
 
 
 
 
 
 
 
 
  Total interest-bearing deposits         577,488     293,347     377,332     574,160     1,436,765     177,035         3,436,127
Short-term borrowings                       9,127                 9,127
Long-term debt                           17,397             17,397
Trust preferred securities                               39,472         39,472
Portion of noninterest-bearing funding sources                                 $ 472,437     472,437
   
 
 
 
 
 
 
 
 
Total funding sources   $   $ 577,488   $ 293,347   $ 377,332   $ 583,287   $ 1,454,162   $ 216,507   $ 472,437   $ 3,974,560
   
 
 
 
 
 
 
 
 
Off-Balance Sheet Items:                                                      
  Interest Rate Swap             (40,000 )   40,000                    

Gap

 

$

1,594,683

 

$

394,871

 

$

(264,082

)

$

(251,606

)

$

(407,519

)

$

(561,014

)

$

(49,096

)

$

(456,237

)

 

Cumulative Gap   $ 1,594,683   $ 1,989,554   $ 1,725,472   $ 1,473,866   $ 1,066,347   $ 505,333   $ 456,237        

(1)
Includes interest-bearing deposits in other financial institutions of $0 as of December 31, 2002.

(2)
Principal cash flows are based on estimated principal payments as of December 31, 2002.

(3)
Not stated column consists of investments in Federal Reserve and Federal Home Loan Bank stock as of December 31, 2002.

(4)
Not stated column consists of nonaccrual loans of $20.4 million offset by unearned income of $11.8 million as of December 31, 2002.

(5)
Maturity/repricing columns for fixed rate loans are based upon the amount and timing of related principal payments as of December 31, 2002.

47


Market Value of Portfolio Equity (MVPE)

        One application of the aforementioned simulation model involves measurement of the impact of market interest rate changes on the net present value of estimated cash flows from our assets, liabilities, and off-balance-sheet items, defined as our market value of portfolio equity (MVPE). This analysis assesses the changes in market values of interest-rate-sensitive financial instruments that would occur in response to an instantaneous and sustained increase or decrease in market interest rates of 100 and 200 basis points and the resulting effect on our MVPE. Policy guidelines establish maximum variances in our MVPE of 20.0% and 30.0% in the event of an instantaneous and sustained increase or decrease in market interest rates of 100 and 200 basis points, respectively.

        The following table presents our MVPE exposure at December 31, 2002 and December 31, 2001, related to an instantaneous and sustained increase or decrease in market interest rates of 100 and 200 basis points, respectively.

 
   
  Estimated Increase/
(Decrease) in MVPE

 
Change in Interest
Rates (Basis Points)

  Estimated
MVPE

 
  Amount
  Percent
 
 
 
(Dollars in thousands)

 
December 31, 2002:                  
  +200   $ 746,459   $ 12,864   1.8 %
  +100     739,634     6,039   0.8  
  -     733,595        
  -100     722,113     (11,482 ) (1.6 )
  -200     707,976     (25,619 ) (3.5 )

December 31, 2001:

 

 

 

 

 

 

 

 

 
  +200   $ 805,971   $ 9,845   1.2 %
  +100     800,734     4,608   0.6  
  -     796,126        
  -100     789,689     (6,437 ) (0.8 )
  -200     779,263     (16,863 ) (2.1 )

        The preceding table indicates that at December 31, 2002, in the event of an instantaneous and sustained increase or decrease in market interest rates, our MVPE would be expected to respectively increase or decrease accordingly.

        The market value calculations supporting the results in the preceding table are based on the present value of estimated cash flows using both market interest rates provided by independent broker/dealers and other publicly available sources that we deem reliable. These calculations do not contemplate any changes that we could make to reduce our MVPE exposure in response to a change in market interest rates.

        As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the preceding table. For example, although certain of our assets and liabilities may have similar maturity or re-pricing profiles, they may react to changes in market interest rates with different magnitudes. Also, actual prepayment rates on loans and investments could vary substantially from the assumptions utilized in the model in deriving the results as presented in the preceding table. Further, a change in the shape of the forward yield curve could result in different MVPE estimations from those presented herein. Accordingly, the results in the preceding table should not be relied upon as indicative of actual results in the event of changing market interest rates. Additionally, the resulting MVPE estimates are not intended to represent, and should not be construed to represent the underlying value.

        The simulation model also gives us the ability to simulate our net interest income using an interest rate forecast (simple simulation). In order to measure the sensitivity of our forecasted net interest income to changing interest rates utilizing the simple simulation methodology, both a rising and falling interest rate scenario were projected and compared to a base market interest rate forecast

48


derived from the forward yield curve. For the rising and falling interest rate scenarios, the base market interest rate forecast was increased or decreased, as applicable, by 200 basis points in 12 equal increments over a one-year period.

        In addition to the 200 basis point ramp scenario mentioned above we run net interest income and net income simulations in an interest rate environment whereby we shock the base rate immediately both up and down 100 basis points. The combination of the ramp and shock scenarios provides us with additional information with respect to our sensitivity to interest rates and the impact on our net income under varied interest rate scenarios.

        Our policy guidelines provide that the difference between a base market interest rate forecast scenario over the succeeding one-year period compared with the aforementioned rising and falling interest rate scenarios over the same time period should not result in net interest income sensitivity exceeding 20.0%. Simulations as of December 31, 2002 indicated that we were well within these policy guidelines.

        Interest rate risk is the most significant market risk impacting us. Other types of market risk affecting us in the normal course of our business activities include foreign currency exchange risk, equity price risk, and basis risk. The impact resulting from these market risks is not considered significant and no separate quantitative information concerning market rate and price exposure is presented herein.

        Our MVPE exposure at December 31, 2002 increased slightly from December 31, 2001 primarily due to changes in the investment portfolio while staying well within our policy guidelines. In addition, our net interest income at risk remains well within policy limits. These estimates are highly assumption-dependent and will change regularly as the company's asset-liability structure changes and as different interest rate environments evolve. We expect to continue to actively manage our interest rate risk utilizing on and off-balance sheet strategies as appropriate.

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, to meet depositors' needs, and to service other liabilities as they become 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 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. We continue to expand on opportunities to increase our liquidity. In the third quarter of 2002, we became a member of the Federal Home Loan Bank of San Francisco adding to our liquidity channels. Other sources of liquidity available to us include federal funds purchased, reverse 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 financing or 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 December 31, 2002, our ratio of liquid assets to total deposits was 43.7%. Although this ratio is lower than the comparable ratio of 48.3% as of December 31, 2001, it is well in excess of our minimum policy guidelines. In addition to monitoring the level of liquid assets relative to total

49



deposits, we also utilize other policy measures in our liquidity management activities. As of December 31, 2002 and 2001, we were in compliance with all of these policy measures.

        In analyzing our liquidity during 2002, reference is made to our consolidated statement of cash flows for the year ended December 31, 2002, see "Item 8. Consolidated Financial Statements and Supplementary Data." The statement of cash flows includes separate categories for operating, investing, and financing activities. Operating activities included net income of $53.4 million for 2002, which was adjusted for certain non-cash items including the provision for loan losses, depreciation, deferred tax assets, and an assortment of other miscellaneous items resulting in cash generated from operations. Investing activities consisted of transactions in investment securities resulting in a net cash inflow of $296.2 million and the net change in total loans which resulted in a net cash outflow of $346.8 million in 2002. The net cash outflow from securities transactions were the net result of investment securities maturities and sales, offset by purchases of securities. The net cash outflow related to loans relates to loan originations offset by principal collections. Financing activities reflected cash outflows of $109.4 million resulting from the repurchase of common stock, and net cash outflows of $40.4 million from decreases in short-term borrowings and long-term debt. Additionally, our total deposits increased by $55.2 million during 2002, and we received net cash proceeds received from issuance of common stock totaling $9.8 million under the provisions of our employee benefit plans. In total, the transactions noted above resulted in a net cash inflow of $2.1 million for 2002 and total cash and cash equivalents, as defined in our consolidated statement of cash flows, of $442.6 million at December 31, 2002.

        On a stand-alone basis, Silicon is dependent on dividends from Silicon Valley Bank as its primary source of liquidity. The ability of Silicon Valley Bank to pay dividends is subject to certain regulations, see "Item 1. Business—Supervision and Regulation—Restriction on Dividends."

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.

        We repurchased 3.3 million shares of common stock, at an average price of $18.21 per share, for a total purchase price of $59.7 million during 2002, in conjunction with the $100.0 million share repurchase program authorized by the Board of Directors on September 16, 2002.

        In November 2002, we entered into an accelerated stock repurchase (ASR) agreement to facilitate the repurchase of our shares of common stock. Pursuant to the agreement, we purchased approximately 2.3 million shares from the counterparty for approximately $40.0 million. The agreement has a five-year term. During the term of the agreement, we have an obligation to sell shares to the counterparty equal to the number of shares we purchased from them at the outset of the agreement. We may fulfill this obligation either by buying shares in the open market and selling those shares to the counterparty at forward prices specified in the agreement or by issuing new shares and remitting them to the counterparty in exchange for the forward price. The forward price is based on a formula that begins with the price of the initial purchase and is adjusted for fees and commissions and the length of time from the initial purchase to when shares are sold or delivered to the counterparty. We have complete discretion as to the timing and amounts of shares that we sell to the counterparty subject to a cumulative minimum of 20% by the end of each year of the agreement. Thus, we are required to sell to the counterparty 20% of the shares in the ASR by the first anniversary date, 40% by the second anniversary date, and so on.

        We accounted for the initial payment under the ASR as a purchase of treasury stock, and we subsequently retired those shares. The obligation under the forward contract is not recorded in our financial statements, but rather treated as a contingent obligation. Under the agreement, the number of shares to be issued by us, if we were required to pay the counterparty and elected to net settle in shares, is capped at approximately 6.7 million. As of the end of 2002, we had purchased in the open

50



market and sold to the counterparty approximately 1.6 million shares leaving less than 700,000 shares remaining under the forward contract obligation.

        Based on our stock price at the end of the fourth quarter of 2002, we would pay approximately $356,000 in cash to the counterparty to settle the ASR contract in existence at December 31, 2002. However, for every one dollar of change in the average price of our common stock during the valuation period, the settlement amount would change by about $700,000. Subsequent to the end of the year, but prior to filing this report, we completed all obligations under the ASR.

        Additionally, during 2002, prior to the ASR agreement, we also repurchased 2.3 million shares of common stock, at an average price of $21.83 per share, for a total purchase price of $50.2 million in conjunction with the $50.0 million shares repurchase program authorized by the Board of Directors on March 21, 2002.

        Subsequent to the end of 2002, we entered into another ASR agreement for 1.7 million shares for $29.9 million. The terms of this second ASR arrangement are substantially the same as those in the first agreement described above.

        During 2002, we implemented a real estate investment trust (REIT) to serve as a future-funding vehicle. We expect to be able to raise capital through the REIT at a lower cost of funds than funds raised directly through Silicon Valley Bank. Additionally, we expect to obtain a tax benefit from the REIT structure for several quarters.

        During 2001, we repurchased 4.5 million shares of common stock, at an average price of $22.20 per share, for a total purchase price of $99.9 million in conjunction with the share repurchase program authorized by the Board of Directors on April 5, 2001.

        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. Proceeds from the sale of these securities in December 1999 and January 2000 totaled $63.3 million, net of underwriting commissions and other offering expenses. In August 2000, we issued an additional 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 commissions and other offering expenses.

        Stockholders' equity totaled $590.4 million at December 31, 2002, a decrease of $37.2 million, or 5.9%, from the $627.5 million balance at December 31, 2001. This decrease in 2002, as compared to 2001, was primarily due to the repurchase of 5.5 million shares of common stock for an aggregate purchase price of $109.4 million, substantially offset by net income of $53.4 million and stock issuances under employee stock purchase and option programs. 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 December 31, 2002.

        Funds generated through retained earnings are a significant source of capital and liquidity and are expected to continue to be so in the future. Our management engages in a periodic capital planning process in an effort to make effective use of the capital available to us. The capital plan considers capital needs for the foreseeable future and allocates capital to both existing business activities and expected future business activities. Expected future activities for which capital is set aside include potential product expansions and acquisitions of new business lines. Once capital is allocated to both existing and future business needs, management determines if any excess capital is available. If there is, management recommends to the Board of Directors action steps to use the excess capital. In 2002, excess capital was used to repurchase shares. In the future, excess capital may be used to continue repurchases or pay dividends. As of December 31, 2002, there are no plans for payment of dividends or repurchases in excess of those already disclosed above.

        We received an initial credit rating during 2002. Silicon's credit rating by Moody's Investor Service ("Moody's") at December 31, 2002 was "Baa1" for issuer rating. According to Moody's, issuers rated "Baa1" offer adequate financial security. However, certain protective elements may be lacking or may

51



be unreliable over any great period of time. Silicon Valley Bank's credit rating by Moody's at December 31, 2002 was "A3" for issuer rating, "A3" for long-term deposits, "P-2" for short-term deposits, and "C" for financial strength. Moody's bank deposit ratings are opinions of a bank's ability to repay punctually its foreign and/or domestic currency deposit obligations. According to Moody's an "A" rating for deposits represents good credit quality, however, elements may be present that suggest a susceptibility to impairment over the long-term. Banks rated "P-2" by Moody's, for short-term deposits offer strong credit quality and a strong capacity for timely payment of short-term deposit obligations. Financial strength ratings represent Moody's opinion of a bank's intrinsic safety and soundness and, as such, exclude certain external credit risks and credit support elements that are addressed by Moody's bank deposit ratings. Banks rated "C" possess adequate intrinsic financial strength and are typically institutions with more limited but still valuable business franchises, good financial fundamentals, and a predictable and stable operating environment.

        The table below presents the relationship between the following significant financial ratios:

 
  Years Ended December 31,
 
 
  2002
  2001
  2000
 
Return on average assets   1.4 % 2.0 % 3.1 %
  Divided by              
Average equity as a percentage of average assets   16.3 % 14.9 % 9.2 %
  Equals              
Return on average equity   8.5 % 13.5 % 33.3 %
  Times              
Earnings retained   100.0 % 100.0 % 100.0 %
  Equals              
Internal capital growth   8.5 % 13.5 % 33.3 %

        Both Silicon's 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 December 31, 2002, 2001, and 2000. See "Item 8. Consolidated Financial Statements and Supplementary Data—Note 23 to the Consolidated Financial Statements—Regulatory Matters." Capital ratios for Silicon Valley Bancshares are set forth below:

 
  December 31,
 
 
  2002
  2001
  2000
 
Total risk-based capital ratio   16.0 % 17.2 % 17.7 %
Tier 1 risk-based capital ratio   14.8 % 15.9 % 16.5 %
Tier 1 leverage ratio   13.9 % 14.8 % 12.0 %

        The decrease in our total risk-based capital ratio and the Tier 1 risk-based capital ratio at the end of 2002 from the prior year-end was primarily attributable to a decrease in Tier 1 capital. The decrease in all of our regulatory capital ratios between 2001 and 2002 was primarily due to the reduction of additional paid in capital, which resulted from our stock repurchase programs.

        The decrease in our total risk-based capital ratio and the Tier 1 risk-based capital ratio at the end of 2001 from the prior year-end was primarily attributable to a decrease in Tier 1 capital. This decrease was due to an adjustment for goodwill related to the Alliant purchase completed on September 28, 2001. The Tier 1 leverage ratio improved as of December 31, 2001, as compared to December 31, 2000, due to a decrease in quarterly average total assets, resulting from a decline in deposits during 2001.

52


Stock Option Program

        Our stock option program is a broad-based, long-term retention program that is intended to attract and retain talented employees and align stockholder and employee interests. We consider our option program critical to our operations and productivity. Our 1997 equity incentive plan and our 1989 and 1983 stock option plans provide for the granting of incentive and nonstatutory stock options. These options entitle directors, employees, and certain other parties to purchase shares of our common stock at a price not less than 100% and 85% of the fair market value of the common stock on the date the option is granted for incentive and non-statutory stock options, respectively. Options may vest over various periods not in excess of five years from the date of grant and expire five to ten years from the date of grant. Subsequent to December 31, 2002, the board of directors of Silicon Valley Bancshares approved an amendment to the 1997 equity incentive plan, which provides that the exercise price of each nonstatutory stock option shall be not less than eighty-five percent (85%) of the Fair Market Value of the stock subject to the option on the date the option is granted and will be in lieu of cash compensation.

        Decisions regarding compensation of our executive officers, including those related to stock and stock options, are considered by our full board of directors based upon the recommendations and analysis performed by the compensation committee, which is currently composed of members from our board of directors. All members of the compensation committee are independent directors, as defined in the applicable rules for issuers traded on the Nasdaq Stock Market. See the "Report Of The Compensation and Benefits Subcommittee of the Executive Committee of the Board On Executive Compensation" included in our definitive proxy statement for the annual meeting of stockholders to be held on April 17, 2003, for further information concerning our policies and procedures regarding the use of stock options.

        The following table describes the employee and executive option grants.

 
  Year ended
December 31,

 
 
  2002
  2001
  2000
 
Net grants during the period as % of outstanding shares   2.6 % 1.5 % 2.5 %
Grants to listed officers* during the period as % of total options granted   9.3 % 9.5 % 3.0 %
Grants to listed officers* during the period as % of outstanding shares   0.5 % 0.3 % 0.1 %
Cumulative options held by listed officers* as % of total options outstanding   9.8 % 8.5 % 7.2 %

*
See the "Executive Options" section to find the four highest compensated members of our executive management team subject to the requirements of Section 16 of the Securities and Exchange Act of 1934, as of December 31, 2002.

        During 2002, 90.7% of the options we granted went to employees other than the top four officers. During 2002, we granted options to purchase 2,147,709 shares of our common stock to our employees, which was a net increase of 1,059,897 shares of options outstanding after deducting 562,982 shares for options exercised and 524,830 shares for options forfeited. The net options granted after forfeitures represented 2.6% of our total outstanding shares of 40,578,093 as of December 31, 2002.

        During 2002, options granted to the four most highly compensated executive officers amounted to 9.3% of the grants made to all employees. Options granted to the top four executive officers as a percentage of total options granted to all employees vary from year to year.

53



        The following table describes in-the-money and out-of-the-money option information as of December 31, 2002.

 
  Exercisable
  Unexercisable
  Total
 
  Shares
  Wtd. Avg.
Exercise Price

  Shares
  Wtd. Avg.
Exercise Price

  Shares
  Wtd. Avg.
Exercise Price

In-the-Money   1,146,128   $ 10.95   923,184   $ 15.15   2,069,312   $ 12.83
Out-of-the-Money(1)   1,038,058     27.98   3,127,268     27.35   4,165,326     27.51
   
       
       
     
Total Options Outstanding   2,184,186     19.05   4,050,452     24.56   6,234,638     22.63
   
       
       
     

(1)
Out of money options are those options with an exercise price equal to or above the closing price of $18.25 at December 31, 2002.

        For additional information about our stock option plan for years 1999 through 2001 and the pro-forma earnings presentation as if we had expensed our stock options grants using the fair value method of accounting, see "Item 8. Consolidated Financial Statements and Supplementary Data—Note 18 to the Consolidated Financial Statements—Employee Benefit Plans."

Executive Options:

        The following table describes the options granted to listed officers during 2002.

 
  Individual Grants
Officers

  Number of
Securities
Underlying
Options Per Grant

  Percent of
Total Options
Granted to
Employees

  Exercise of
Base Price
($/Share)

  Expiration
Date

Kenneth P. Wilcox, President and CEO   50,000
30,000
  2.3
1.4
%
%
30.84
17.07
  5/30/12
11/8/12
Harry W. Kellogg, Jr., President of Merchant Bank   15,000
15,000
  0.7
0.7
%
%
31.29
17.07
  4/17/12
11/18/12
Marc J. Verissimo, Chief Strategy Officer   12,500
15,000
  0.6
0.7
%
%
31.29
17.07
  4/17/12
11/8/12
Lauren Friedman, Chief Financial Officer   40,000
12,500
10,000
  1.9
0.6
0.5
%
%
%
24.57
31.29
17.07
  1/16/12
4/17/12
11/8/12

        The above table reflects the four highest compensated members of our executive management team, who are deemed to be subject to the requirements of Section 16 of the Securities and Exchange Act of 1934. These options were granted pursuant to our 1997 Equity Incentive Plan (the Plan). The Plan provides for administration of the Plan by our Board of Directors, or by a committee thereof to which the Board of Directors has delegated authority to administer the Plan (the "Administrator"). The Administrator designates the persons to be granted options, the type of option, the number of underlying shares, the exercise price, the date of grant, and the date options become exercisable. These options were granted at 100% of the fair market value of our common stock on the date of grant. The option grants vest ratably over four years and expire ten years from the date of grant. Should the stock price decrease below the exercise price, these options become worthless. Upon a "Change in Control" of Silicon Valley Bancshares or Silicon Valley Bank, the options become fully exercisable. See "Termination Agreements" included in our definitive proxy statement for the annual meeting of stockholders to be held on April 17, 2003 for further information concerning our policies and procedures regarding the use of stock options.

54



        The following table describes the options exercised during 2002, and the remaining holdings of listed officers as of December 31, 2002.

 
   
   
  Number of Securities
Underlying Unexercised
Options at End
of Quarter Date

   
   
 
   
   
  Values of Unexercised
In-the-Money Option
at End of Quarter Date(1)

Name

  Shares
Acquired on
Exercise

  Value
Realized

  Exercisable
  Unexercisable
  Exercisable
  Unexercisable
Kenneth P. Wilcox         125,000   140,000   $ 1,009,520   $ 105,240
Harry W. Kellogg, Jr.         98,750   73,750     809,520     87,540
Marc J. Verissimo   36,800   $ 734,420   42,575   70,625     227,814     64,260
Lauren Friedman           62,500         11,800

(1)
The dollar value of options does not represent actual realizable value to the optionee, but was computed by multiplying the number of shares by the closing market price of our common stock at December 31, 2002, less the number of shares times the closing market price of our common stock on the date grants were approved by our Board of Directors. Market prices used were those quoted in the National Association of Securities Dealers Automated Quotation/National Market.

55


Risk Factors

        Our business is subject to a number of risks, including those described below.

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 are dependent to a great extent on our experience and judgment. We cannot assure that our allowance for loan losses will be sufficient to absorb future loan losses or prevent a material adverse effect on our business, profitability or financial condition. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Allowance for Loan Losses" for further discussion on the evaluation process of the adequacy of the allowance for loan losses.

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 default. Because of the intense competition and rapid technological change that characterizes the companies in our technology and life science industry sectors, a borrower's financial position can deteriorate rapidly. We also make loans that 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. 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.

Decreases in amount of capital available to start-up and emerging growth companies, could adversely affect our business, profitability, and growth prospects.

        Our strategy has focused on providing banking products and services to emerging growth and middle-market companies receiving financial support from sophisticated investors, including venture capitalists, "angels," 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. The amount of capital available to startup and emerging growth companies has decreased in the past three years, which has caused our client deposit balances to decline. If the amount of capital available to such companies continues to decrease, it is likely that the number of new clients and investor financial support to our existing borrowers would decrease, having an adverse effect on our business, profitability and growth prospects.

        Among the factors that have and could in the future affect the amount of capital available to startup and emerging growth companies are the receptivity of the capital markets to initial public offerings or mergers and acquisitions of companies within our technology and life science industry sectors, the availability and return on alternative investments, and general economic conditions in the technology and life sciences industries. Over the past three years, the stock prices of many technology and life science companies have declined substantially, and the capital markets have been

56



less receptive to initial public offerings. Reduced capital markets valuations could further reduce the amount of capital available to startup and emerging growth companies, including companies within our technology and life science industry sectors.

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.

        Silicon Valley Bancshares, Silicon Valley Bank, and their subsidiaries are extensively regulated under federal and state law. These regulations are intended primarily for the protection of depositors, other clients, and the deposit insurance fund—not for the benefit of stockholders or security holders. Federal and state laws and regulations limit the activities in which Silicon Valley Bancshares, Silicon Valley Bank, and their subsidiaries may engage. In addition, Silicon Valley Bancshares, Silicon Valley Bank and their subsidiaries 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 Bancshares and Silicon Valley Bank. Alliant Partners and SVB Securities, both broker-dealer subsidiaries, are regulated by the SEC and the NASD. Violations of the stringent regulations governing the actions of a broker-dealer can result in the revocation of broker-dealer licenses, the imposition of censures or fines, the issuance of cease and desist orders, and the suspension or expulsion from the securities business of a firm, its officers or employees. Supervisory actions can result in higher capital requirements, higher insurance premiums, and limitations on the activities of Silicon Valley Bancshares, Silicon Valley Bank or their subsidiaries. These supervisory actions could have a material adverse effect on our business and profitability.

Warrant, venture capital fund, and direct equity investment portfolio gains or losses depend upon the performance of the portfolio investments and the general condition of the public equity markets, which is uncertain.

        We have historically obtained rights to acquire stock, in the form of warrants, in certain clients as part of negotiated credit facilities. We may not be able to realize gains from warrants in future periods, or our realized gains may be materially less than the current level of unrealized gains disclosed in this filing. We also have made investments in venture capital funds as well as direct equity investments in companies. The timing and amount of income, if any, from the disposition of client warrants, venture capital funds and direct equity investments, typically depend upon factors beyond our control, including the performance of the underlying portfolio companies, investor demand for initial public offerings, fluctuations in the market prices of the underlying common stock of these companies, levels of mergers and acquisitions activity, and legal and contractual restrictions on our ability to sell the underlying securities. In addition, our investments in venture capital funds and direct equity investments have and could continue to lose value or become worthless, which would reduce our net income or could cause a net loss in any period. All of these factors are difficult to predict, particularly in the current economic environment. If equity market conditions do not improve, it is likely that additional investments within our existing portfolio will become impaired. However, we are not in a position to know at the present time which specific investments, if any, are likely to be impaired or the extent or timing of individual impairments. Therefore, we cannot predict future investment gains or losses with any degree of accuracy, and any gains or losses are likely to vary materially from period to period.

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.

        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.

57



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 beyond our control, such as inflation, recession, global economic disruptions, and unemployment. In addition, legislative changes could affect the manner in which we pay interest on deposits or other liabilities. For example, Congress has for many years debated repealing a law that prohibits banks from paying interest rates on checking accounts. If this law were to be repealed, we would be subject to competitive pressure to pay interest on our clients' checking accounts, which would negatively affect our interest rate spread. Any material decline in our interest rate spread would have a material adverse effect on our business and profitability. For example, over the past two years the federal funds interest rate declined by 525 basis points. Consequently, our net interest margin decreased by 140 basis points, from the fourth quarter of 2000 to the fourth quarter of 2002.

Adverse changes in domestic or global economic conditions, especially in the technology sector and especially in California, 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. Current uncertainty surrounding a possible war with Iraq is one of many factors that may prevent or delay an economic recovery in the near future. Many of our technology clients have been harmed by the current economic slowdown, and would be further harmed by the continuation or worsening of the global or U.S. economic slowdown. Our clients may be particularly sensitive to disruptions in the growth of the technology sector of the U.S. economy. In addition, a substantial number of our clients are geographically concentrated in California, and adverse economic conditions in California could harm the businesses of a disproportionate number of our clients. To the extent that our clients' underlying business is harmed, they are more likely to default on their loans. In 2002, the economic slowdown resulted in both lower average interest-earning assets and average client deposit balances, as compared to 2001, thus reducing our net interest income. Net interest income in 2002 was $194.7 million, down from $263.0 million in 2001.

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 frequently have opportunities for alternative employment with competing financial institutions and with our clients. We did not pay any incentive compensation in 2001 and paid minimal amounts in 2002. The lack of meaningful incentive compensation payouts increases the risk associated with employee retention.

We cannot assure 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 have more capital than we do, offer lending, leasing and other financial products to our customer base. In some cases, our competitors focus their marketing on our industry sectors and seek to increase their lending and other financial relationships with technology companies, early stage growth companies or special industries such as wineries. In other cases, our competitors may offer a financial product that provides an alternative to one of the products we offer to our clients. When new competitors seek to enter one of our markets, or when existing market participants seek to increase their market share, new competitors sometimes undercut the pricing and/or credit terms prevalent in

58



that market. Our pricing and credit terms could deteriorate if we act to meet these competitive challenges.

We face risks in connection with completed or potential acquisitions.

        We completed one acquisition in each of 2002 and 2001 and, if appropriate opportunities present themselves, we intend to acquire businesses, technologies, services or products that we believe are strategic. There can be no assurance that we will be able to identify, negotiate or finance future acquisitions successfully, or to integrate such acquisitions with our current business.

        Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and/or amortization expenses related to goodwill and other intangible assets, which could have a material adverse affect on our business, results of operations, and/or financial condition. Any such future acquisitions of other businesses, technologies, services or products might require us to obtain additional equity or debt financing, which might not be available on terms favorable to us, or at all; and such financing, if available, might be dilutive. See "Item 8. Consolidated Financial Statements and Supplementary Data—Note 2 to the Consolidated Financial Statements—Business Combinations."

        Upon completion of an acquisition, we are faced with the challenges of integrating the operations, services, products, personnel, and systems of acquired companies into our business, which may divert management's attention from ongoing business operations. In addition, acquisitions of new businesses may subject us to regulatory scrutiny. We cannot assure that we will be successful in integrating any acquired business effectively into the operations of our business. Moreover, there can be no assurance that the anticipated benefits of any acquisition will be realized.

The price of our common stock may decrease rapidly and significantly.

        The market price of our common stock could decrease in price rapidly and significantly at any time. The market price of our common stock has fluctuated in recent years. Between January 1, 2001 and December 31, 2002, the closing market price of our common stock has ranged from a low of $14.58 per share to a high of $38.00 per share. Fluctuations may occur, among other reasons, in response to:

    Operating results

    Market interest rates

    Perceived value of our warrants, venture capital investments, and direct equity investments

    Trends in our nonperforming assets or the nonperforming assets of other banks

    Announcements by competitors

    Economic changes

    General market conditions

    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. We believe that investors should consider the likelihood of these market fluctuations before investing in our common stock.

59



We could be liable for breaches of security in our online banking services. Fear of security breaches could limit the growth of our online services.

        We offer various Internet-based services to our clients, including online banking services, a client exchange program, and a Web site where our clients can exchange information with one another. The secure transmission of confidential information over the Internet is essential to maintain our clients' confidence in our online services. Advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology we use to protect client transaction data. Although we have developed systems and processes that are designed to prevent security breaches and periodically test our security, failure to mitigate breaches of security could adversely affect our ability to offer and grow our online services and could harm our business.

        People generally are concerned with security and privacy on the Internet and any publicized security problems could inhibit the growth of the Internet as a means of conducting commercial transactions. Our ability to provide financial services over the Internet would be severely impeded if clients became unwilling to transmit confidential information online. As a result, our operations and financial condition could be adversely affected.

We face risks associated with international operations.

        A component of our strategy is to expand internationally on a limited basis. Expansion into the international markets, albeit on a limited basis, will require management attention and resources. We have limited experience in internationalizing our service, and we believe that many of our competitors are also undertaking expansion into foreign markets. There can be no assurance that we will be successful in expanding into international markets. In addition to the uncertainty regarding our ability to generate revenues from foreign operations and to expand our international presence, there are certain risks inherent in doing business on an international basis, including, among others, regulatory requirements, legal uncertainty regarding liability, tariffs, and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, different accounting practices, problems in collecting accounts receivable, political instability, seasonal reductions in business activity, and potentially adverse tax consequences, any of which could adversely affect the success of our international operations. To the extent we expand into international operations and have additional portions of our international revenues denominated in foreign currencies, we could become subject to increased risks relating to foreign currency exchange rate fluctuations. There can be no assurance that one or more of the factors discussed above will not have a material adverse effect on our business, results of operations, and/or financial condition.

Maintaining or increasing our market share depends on market acceptance and regulatory approval of new products and services.

        Our success depends, in part, upon our ability to adapt our products and services to evolving industry standards and consumer demand. There is increasing pressure on financial services companies to provide products and services at lower prices. In addition, the widespread adoption of new technologies, including Internet-based services, could require us to make substantial expenditures to modify or adapt our existing products or services. A failure to achieve market acceptance of any new products we introduce, or a failure to introduce products that the market may demand, could have an adverse affect on our business, profitability, or growth prospects.

We have businesses other than banking.

        In addition to commercial banking services, we provide M&A advisory services, merchant banking services, investment advisory services, and other business services. We may in the future develop or acquire other non-banking businesses. As a result of such other businesses, our earnings could be subject to risks and uncertainties that are different than our commercial banking services.

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If Alliant Partners does not meet earnings targets, we could have an impairment of goodwill.

        In 2001, we acquired the assets of Alliant Partners. Alliant offers merger and acquisition advisory services. The success of Alliant's business is dependent on a number of factors, including the general level of merger and acquisition activity and client company valuations, which have been negatively affected by the current economic slowdown. Success is also dependent on the continued employment of several key employees of Alliant. We test for impairment of goodwill relating to Alliant on an annual basis. As of December 31, 2002, we concluded that goodwill relating to Alliant is not impaired. However, if Alliant does not meet projected revenues in the future, or if certain key employees were to leave Alliant, we could conclude that the value of the business has dropped and that goodwill relating to Alliant has been impaired. If we were to conclude that goodwill has been impaired, that conclusion could result in a non-cash goodwill impairment charge to us, which could adversely affect our results of operations.

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT

KPMG LOGO

The Board of Directors and Stockholders
Silicon Valley Bancshares:

        We have audited the accompanying consolidated balance sheets of Silicon Valley Bancshares and subsidiaries (the Company) as of December 31, 2002 and 2001, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Silicon Valley Bancshares and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

KPMG LLP SIG

San Francisco, California
January 16, 2003

62




SILICON VALLEY BANCSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
  December 31,
 
 
  2002
  2001
 
 
  (Dollars in thousands,
except par value)

 
Assets  
Cash and due from banks   $ 239,927   $ 228,318  
Federal funds sold and securities purchased under agreement to resell     202,662     212,214  
Investment securities     1,535,694     1,833,162  
Loans, net of unearned income     2,086,080     1,767,038  
Allowance for loan losses     (70,500 )   (72,375 )
   
 
 
Net loans     2,015,580     1,694,663  
Premises and equipment     17,886     21,719  
Goodwill     100,549     96,380  
Accrued interest receivable and other assets     70,883     85,621  
   
 
 
Total assets   $ 4,183,181   $ 4,172,077  
   
 
 

Liabilities, Minority Interest, and Stockholders' Equity

 
Liabilities:              
Deposits:              
  Noninterest-bearing demand   $ 1,892,125   $ 1,737,663  
  NOW     21,531     25,401  
  Money market     933,255     894,949  
  Time     589,216     722,964  
   
 
 
Total deposits     3,436,127     3,380,977  
Short-term borrowings     9,127     41,203  
Other liabilities     47,550     29,781  
Long-term debt     17,397     25,685  
   
 
 
Total liabilities     3,510,201     3,477,646  
   
 
 

Company obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely junior subordinated debentures (trust preferred securities)

 

 

39,472

 

 

38,641

 
Minority interest     43,158     28,275  
Stockholders' equity:              
Preferred stock, $0.001 par value, 20,000,000 shares authorized; none outstanding              
Common stock, $0.001 par value, 150,000,000 shares authorized; 40,578,093 and 45,390,007 shares outstanding at December 31, 2002 and 2001, respectively     41     45  
Additional paid-in capital     99,979     196,143  
Retained earnings     476,610     423,252  
Unearned compensation     (652 )   (1,600 )
Accumulated other comprehensive income:              
  Net unrealized gains on available-for-sale investments     14,372     9,675  
   
 
 
Total stockholders' equity     590,350     627,515  
   
 
 
Total liabilities, minority interest, and stockholders' equity   $ 4,183,181   $ 4,172,077  
   
 
 

See notes to consolidated financial statements.

63



SILICON VALLEY BANCSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 
  Years Ended December 31,
 
  2002
  2001
  2000
 
  (Dollars in thousands, except per share amounts)

Interest income:                  
  Loans   $ 156,240   $ 184,859   $ 189,062
  Investment securities:                  
    Taxable     46,585     79,245     107,268
    Non-taxable     6,894     10,801     6,958
  Federal funds sold and securities purchased under agreement to resell     2,865     25,421     83,472
   
 
 
Total interest income     212,584     300,326     386,760
   
 
 
Interest expense:                  
  Deposits     16,229     36,866     56,912
  Other borrowings     1,647     475    
   
 
 
Total interest expense     17,876     37,341     56,912
   
 
 
Net interest income     194,708     262,985     329,848
Provision for loan losses     3,882     16,724     54,602
   
 
 
Net interest income after provision for loan losses     190,826     246,261     275,246
   
 
 
Noninterest income:                  
  Client investment fees     30,671     41,598     35,831
  Letter of credit and foreign exchange income     15,225     12,655     18,586
  Corporate finance fees     12,110     2,911     1,820
  Deposit service charges     9,072     6,196     3,336
  Disposition of client warrants     1,661     8,500     86,322
  Investment (losses) gains     (9,825 )   (12,373 )   37,065
  Other     8,944     11,346     6,670
   
 
 
Total noninterest income     67,858     70,833     189,630
   
 
 
Noninterest expense:                  
  Compensation and benefits     105,168     89,060     106,385
  Net occupancy     20,391     16,181     9,363
  Professional services     18,385     24,543     20,832
  Furniture and equipment     9,562     13,916     11,999
  Business development and travel     8,426     10,159     11,188
  Postage and supplies     3,190     3,995     3,500
  Telephone     3,123     4,317     2,815
  Tax credit fund amortization     2,963     2,756    
  Correspondent bank fees     2,835     479     112
  Trust preferred securities distributions     2,230     3,300     3,300
  Advertising and promotion     1,025     3,126     3,445
  Retention and warrant incentive plans     (883 )   1,473     17,311
  Other     9,959     10,183     8,111
   
 
 
Total noninterest expense     186,374     183,488     198,361
Minority interest     7,767     7,546     460
   
 
 
Income before income tax expense     80,077     141,152     266,975
Income tax expense     26,719     52,998     107,907
   
 
 
Net income   $ 53,358   $ 88,154   $ 159,068
   
 
 
Basic earnings per share   $ 1.21   $ 1.85   $ 3.41
Diluted earnings per share   $ 1.18   $ 1.79   $ 3.23

See notes to consolidated financial statements.

64



SILICON VALLEY BANCSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
  Years Ended December 31,
 
 
  2002
  2001
  2000
 
 
  (Dollars in thousands)

 
Net income   $ 53,358   $ 88,154   $ 159,068  
Other comprehensive income (loss), net of tax:                    
  Change in unrealized gains (losses) on available-for-sale investments:                    
    Unrealized holding gains     5,804     12,398     34,452  
    Reclassification adjustment for gains included in net income     (1,107 )   (5,323 )   (73,514 )
   
 
 
 
Other comprehensive income (loss)     4,697     7,075     (39,062 )
   
 
 
 
Comprehensive income   $ 58,055   $ 95,229   $ 120,006  
   
 
 
 

See notes to consolidated financial statements.

65



SILICON VALLEY BANCSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

 
  Years Ended December 31,
2002, 2001, and 2000

 
 
  (Dollars in thousands)

 
 
  Common Stock
   
   
   
  Accumulated
Other
Comprehensive
Income

   
 
 
  Additional
Paid-in
Capital

  Retained
Earnings

  Unearned
Compensation

   
 
 
  Shares
  Amount
  Total
 
Balance at December 31, 1999   44,800,736   $ 45   $ 153,440   $ 176,030   $ (2,327 ) $ 41,662   $ 368,850  
Issuance of common stock, net of offering costs of $6.2 million   2,510,000     3     99,079                 99,082  
Common stock issued under employee benefit plans, net of cancellation   1,013,985     1     9,202         (3,274 )       5,929  
Income tax benefit from stock options exercised and vesting of restricted stock           18,287                 18,287  
Net income               159,068             159,068  
Amortization of unearned compensation                   1,967         1,967  
Other comprehensive loss:                                          
  Net change in unrealized gains (losses) on available-for-sale investments                       (39,062 )   (39,062 )
2-for-1 stock split in the form of a stock dividend   653,185                          
   
 
 
 
 
 
 
 
Balance at December 31, 2000   48,977,906     49     280,008     335,098     (3,634 )   2,600     614,121  
   
 
 
 
 
 
 
 
Common stock issued under employee benefit plans, net of cancellation   874,101     1     11,362         326         11,689  
Income tax benefit from stock options exercised and vesting of restricted stock           4,619                 4,619  
Net income               88,154             88,154  
Amortization of unearned compensation                   1,708         1,708  
Other comprehensive income:                                          
  Net change in unrealized gains (losses) on available-for-sale investments                       7,075     7,075  
Common stock repurchase   (4,462,000 )   (5 )   (99,846 )               (99,851 )
   
 
 
 
 
 
 
 
Balance at December 31, 2001   45,390,007     45     196,143     423,252     (1,600 )   9,675     627,515  
   
 
 
 
 
 
 
 
Common stock issued under employee benefit plans, net of cancellation   722,464     1     9,112                 9,113  
Income tax benefit from stock options exercised and vesting of restricted stock           4,113                 4,113  
Net income               53,358             53,358  
Amortization of unearned compensation                   948         948  
Other comprehensive income:                                          
  Net change in unrealized gains (losses) on available-for-sale investments                       4,697     4,697  
Common stock repurchase   (5,534,378 )   (5 )   (109,389 )               (109,394 )
   
 
 
 
 
 
 
 
Balance at December 31, 2002   40,578,093   $ 41   $ 99,979   $ 476,610   $ (652 ) $ 14,372   $ 590,350  
   
 
 
 
 
 
 
 

See notes to consolidated financial statements.

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SILICON VALLEY BANCSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
  Years Ended December 31,
 
 
  2002
  2001
  2000
 
 
  (Dollars in thousands)

 
Cash flows from operating activities:                    
  Net income   $ 53,358   $ 88,154   $ 159,068  
  Adjustments to reconcile net income to net cash provided by operating activities:                    
    Provision for loan losses     3,882     16,724     54,602  
    Minority interest     (7,767 )   (7,546 )   (460 )
    Depreciation and amortization     7,850     5,717     4,016  
    Net loss (gain) on sales of investment securities     9,825     12,373     (37,065 )
    Net gains on disposition of client warrants     (1,661 )   (8,500 )   (86,322 )
    Decrease (increase) in accrued interest receivable     6,095     16,189     (4,331 )
    Deferred income tax expense (benefits)     1,687     (1,958 )   (5,127 )
    Decrease (increase) in inventory         18,511     (5,991 )
    Increase in prepaid expenses     (156 )   (744 )   (1,128 )
    Decrease (increase) in income tax receivable     17,141     (6,203 )   (1,576 )
    Increase (decrease) in unearned income     (150 )   3,527     (167 )
    Increase (decrease) in retention, warrant and other incentive plan payable     2,774     (29,717 )   19,285  
    Other, net     5,790     6,029     6,167  
   
 
 
 
Net cash provided by operating activities     98,668     112,556     100,971  
   
 
 
 
Cash flows from investing activities:                    
  Proceeds from maturities and paydowns of investment securities     3,025,729     1,615,360     914,238  
  Proceeds from sales of investment securities     2,547,913     11,381     224,015  
  Purchases of investment securities     (5,277,398 )   (1,347,596 )   (1,434,770 )
  Net increase in loans     (346,824 )   (92,801 )   (156,757 )
  Proceeds from recoveries of charged off loans     22,175     20,636     10,778  
  Payments for acquisitions     (42,364 )   (30,000 )    
  Purchases of premises and equipment     (4,017 )   (8,753 )   (11,767 )
   
 
 
 
Net cash (used) provided by investing activities     (74,786 )   168,227     (454,263 )
   
 
 
 
Cash flows from financing activities:                    
  Net increase (decrease) in deposits     55,150     (1,481,282 )   752,854  
  Proceeds from issuance of common stock, net of issuance costs     9,769     13,363     115,574  
  Repurchase of common stock     (109,394 )   (99,851 )    
  Capital contributions from minority interest participants     22,650     5,153     31,128  
   
 
 
 
Net cash (used) provided by financing activities     (21,825 )   (1,562,617 )   899,556  
   
 
 
 
Net increase (decrease) in cash and cash equivalents     2,057     (1,281,834 )   546,264  
Cash and cash equivalents at January 1,     440,532     1,722,366     1,176,102  
   
 
 
 
Cash and cash equivalents at December 31,   $ 442,589   $ 440,532   $ 1,722,366  
   
 
 
 
Supplemental disclosures:                    
  Interest paid   $ 18,487   $ 38,431   $ 55,789  
  Income taxes paid   $ 6,812   $ 53,798   $ 105,709  
Noncash investing and financing activities:                    
  Fair value of net assets acquired   $   $ 508   $  
  Short-term borrowings   $   $ 41,203   $  
  Long-term debt   $   $ 25,685   $  

See notes to consolidated financial statements.

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SILICON VALLEY BANCSHARES AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Significant Accounting Policies

        The accounting and reporting policies of Silicon Valley Bancshares and its subsidiaries (the "Company") conform with accounting principles generally accepted in the United States of America. Certain reclassifications have been made to the Company's 2001 and 2000 consolidated financial statements to conform to the 2002 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 consolidated financial statements.

Nature of Operations

        Silicon Valley Bancshares is a bank holding company and a financial holding company whose principal subsidiary is Silicon Valley Bank (the "Bank"), a California-chartered bank, founded in 1983, and headquartered in Santa Clara, California. The Bank serves more than 9,500 clients across the country, through its 27 regional offices. The Bank has 11 offices throughout California and operates regional offices across the country, including Arizona, Colorado, Florida, Georgia, Illinois, Massachusetts, Minnesota, New York, North Carolina, Oregon, Pennsylvania, Texas, Virginia, and Washington. The Bank serves emerging growth and mature companies in the technology, life sciences and premium winery markets. Substantially all of the assets, liabilities, and earnings of the Company relate to its investment in the Bank. Additionally, the Company provides merger and acquisition services through its wholly-owned subsidiary, Alliant Partners ("Alliant").

Consolidation

        The Consolidated Financial Statements include the accounts of Silicon Valley Bancshares and those of its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. SVB Strategic Investors, LLC and Silicon Valley BancVentures, Inc., as general partners, are considered to have significant influence over the operating and financing policies of SVB Strategic Investors Fund, L.P. and Silicon Valley BancVentures, L.P., respectively. Therefore, SVB Strategic Investors Fund, L.P. and Silicon Valley BancVentures, L.P. are included in the Company's Consolidated Financial Statements. Minority interest represents the minority participants' share of the equity of SVB Strategic Investors Fund, L.P., and Silicon Valley BancVentures, L.P.

        Similar accounting is applied to Woodside Financial, the general partner of Taurus, L.P. and Libra L.P., see "Item 8. Consolidated Financial Statements and Supplementary Data—Note 2 to the Consolidated Financial Statements—Business Combinations."

Basis of Financial Statement Presentation

        The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 reported periods. 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 a range of possible changes cannot be made.

Revenue recognition

        Revenues earned on mergers and acquisitions advisory services are recognized when Alliant Partners has fully completed its contractual and regulatory obligations related to its client service engagements.

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        Revenues related to client invest fees are recognized as earned.

Cash and Cash Equivalents

        Cash and cash equivalents as reported in the consolidated statements of cash flows include cash on hand, cash balances due from banks, federal funds sold, and securities purchased under agreement to resell. The cash equivalents are readily convertible to known amounts of cash and present insignificant risk of changes in value due to maturity dates of 90 days or less.

Federal Funds Sold and Securities Purchased under Agreement to Resell

        Federal funds sold and securities purchased under agreement to resell as reported in the consolidated balance sheets include interest-bearing deposits in other financial institutions of $0 and $2,880,000 at December 31, 2002 and 2001, respectively.

Investment Securities

Fixed Income Securities

        Fixed income investment securities are classified as held-to-maturity, available-for-sale, trading, or non-marketable upon purchase or acquisition.

        Securities purchased with the ability and positive intent to hold to maturity are classified as held-to-maturity and are accounted for at historical cost, adjusted for the amortization of premiums or the accretion of discounts to maturity, where appropriate. The Company does not currently have any investments in the held-to-maturity portfolio as of December 31, 2002 or December 31, 2001. Unrealized losses on held-to-maturity securities become realized and are charged against earnings when it is determined that an other-than-temporary decline in value has occurred.

        Securities that are held to meet investment objectives such as interest rate risk and liquidity management, and which may be sold by the Company as needed to implement management strategies, are classified as available-for-sale and are accounted for at fair value. Unrealized gains and losses on available-for-sale securities, after applicable taxes, are reported in accumulated other comprehensive income, which is a separate component of stockholders' equity, until realized. Unrealized losses on available-for-sale securities becomes realized and are charged against earnings when it is determined that an other than temporary decline in value has occurred. Further, the cost basis of the individual security is written down to fair value as a new cost basis.

        Amortization of premiums and accretion of discounts on debt securities are included in interest income over the contractual terms of the underlying investment securities using the straight-line method, which approximates the effective interest method.

        Securities acquired and held principally for the purpose of sale in the near term are classified as trading and are accounted for at fair value. Unrealized gains and losses resulting from fair value adjustments on trading securities, as well as gains and losses realized upon the sale of investment securities, are included in noninterest income. The Company does not have a trading portfolio as of December 31, 2002 and December 31, 2001.

        Non-marketable securities include Federal Reserve Bank and Federal Home Loan Bank stock and tax credit funds.

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Marketable Equity Securities

        Investments in marketable equity securities include warrants for shares of publicly-traded companies and investments in shares of publicly-traded companies. Equity securities in the Company's warrant, direct equity and venture capital fund portfolios generally become marketable when a portfolio company completes an initial public offering on a publicly-reported market, or is acquired by a publicly-traded company.

        Unrealized gains or losses on warrant and equity investment securities are recorded upon the establishment of a readily determinable fair value of the underlying security, as defined by Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Instruments."

        Unrealized gains or losses after applicable taxes, on available-for-sale marketable equity securities which result from initial public offerings, are excluded from earnings and are reported in accumulated other comprehensive income, which is a separate component of stockholders' equity. The Company is often contractually restricted from selling equity securities subsequent to the portfolio company's initial public offering. Gains or losses on these marketable equity instruments are recorded in the consolidated statements of income in the period the underlying securities are sold to a third party.

        Gains or losses on marketable warrant and equity investment securities, which result from a portfolio company being acquired by a publicly-traded company, are marked to market when the acquisition occurs. The resulting gains or losses are recognized into income on that date, in accordance with Emerging Issues Task Force, Issue No. 91-5, "Nonmonetary Exchange of Cost-Method Investments." Further fluctuations in the market value of these marketable equity instruments, prior to eventual sale, are excluded from earnings and are reported in accumulated other comprehensive income, which is a separate component of stockholders' equity. Upon the sale of these equity securities, gains and losses, which are measured from the acquisition price, are realized in the Company's consolidated statements of income.

        Notwithstanding the foregoing, a decline in the fair value of any of these securities, which is considered other than temporary, is recorded in the Company's consolidated statements of income in the period the impairment occurs.

        Summary financial data related to the Company's marketable equity securities at December 31, 2002 are presented in "Item 8. Consolidated Financial Statements and Supplementary Data—Note 6 to the Consolidated Financial Statements—Investment Securities."

Non-Marketable Equity Securities

        The Company invests in non-marketable equity securities in several ways

    Through the exercise of warrants obtained in the normal course of lending

    By direct purchases of preferred or common stock in privately-held companies

    By capital contributions to venture capital funds, which in turn, make investments in preferred or common stock of privately held companies

    Through its venture capital fund, Silicon Valley BancVentures, L.P., which makes investments in preferred or common stock of privately held companies

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    Through its fund of funds SVB Strategic Investors Fund, L.P., which makes investments in venture capital funds, which in turn invest in privately held companies

        Unexercised warrant securities are recorded at a nominal value on the Company's consolidated balance sheets. They are carried at this value until they become marketable or expire.

        The Company records wholly owned non-marketable venture capital fund investments and other direct private equity investments on a cost basis. The Company's interests are considered minor, as it owns less than 5% and has no influence over the company's operating and financial policies. The Company's cost basis in each investment is reduced by returns until the cost basis of the individual investment is fully recovered. Returns in excess of the cost basis are recorded as investment gains in noninterest income.

        The values of the investments are reviewed at least quarterly, giving consideration to the facts and circumstances of each individual investment. The Company's review of private equity investments typically includes the relevant market conditions, offering prices, operating results, financial conditions, and exit strategies. A decline in the fair value that is considered other than temporary is recorded in the Company's consolidated statements of income in the period the impairment occurs. Any estimated loss is recorded in noninterest income as investment losses.

        Investments held by Silicon Valley BancVentures, L.P. are recorded at fair value using investment accounting rules. The investments consist of stock in private companies that are not traded on a public market and are subject to restrictions on resale. These investments are carried at estimated fair value as determined by the general partner. The valuation generally remains at cost until such time that there is significant evidence of a change in values based upon consideration of the relevant market conditions, offering prices, operating results, financial conditions, exit strategy, and other pertinent information. The general partner, Silicon Valley BancVentures, Inc., is owned and controlled by the Company and has an ownership interest of 10.7% in Silicon Valley BancVentures, L.P. As such, Silicon Valley BancVentures, L.P. is fully consolidated and any gains or losses resulting from changes in the estimated fair value of the investments are recorded as investment gains or losses in our consolidated statements of income. The portion of any gains or losses belonging to the limited partners is reflected in minority interest and adjusts the Company's income to its percentage ownership.

        The SVB Strategic Investors Fund, L.P. portfolio consists primarily of investments in venture capital funds. These funds are recorded at fair value using investment accounting rules. The carrying value of the investments are determined by the general partner based on the percentage of SVB Strategic Investors Fund, L.P.'s interest in the total fair market value as provided by each venture capital fund investment. SVB Strategic Investors, LLC generally utilizes the fair values assigned to the underlying portfolio investments by the management of the venture capital funds. The estimated fair value of the investments are determined after giving consideration to the relevant market conditions, offering prices, operating results, financial conditions, exit strategy, and other pertinent information. The general partner, SVB Strategic Investors, LLC, is owned and controlled by the Company and has an ownership interest of 11.1% in SVB Strategic Investors Fund, L.P. As such, SVB Strategic Investors, LLC is fully consolidated, and any gains or losses resulting from changes in the estimated fair value of the venture capital fund investments are recorded as investment gains or losses in the Company's consolidated statements of income. The limited partner's share of any gains or losses is reflected in minority interest and adjusts the Company's income to its percentage ownership.

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        Summary financial data related to the Company's non-marketable equity securities at December 31, 2002 are presented in "Item 8. Consolidated Financial Statements and Supplementary Data—Note 6 to the Consolidated Financial Statements—Investment Securities."

Loans

        Loans are reported at the principal amount outstanding, net of unearned income. Unearned income includes both deferred loan origination and commitment fees and costs. The net amount of unearned income is amortized into loan interest income over the contractual terms of the underlying loans and commitments using the interest method or the straight-line method, if not materially different, adjusted for actual loan prepayment experience.

    Allowance for Loan Losses

            The allowance for loan losses is established through a provision for loan losses charged to expense to provide for credit risk. The Company applies the following evaluation process to its loan portfolio to estimate the required allowance for loan losses.

            The Company maintains a systematic process for the evaluation of individual loans and pools of loans for inherent risk of loan losses. On a quarterly basis, each loan in its portfolio is assigned a credit risk-rating. Credit risk-ratings are assigned on a scale of 1 to 10, 1 representing loans with a low risk of nonpayment, 9 representing loans with the highest risk of nonpayment, and 10 representing loans which have been charged-off. This credit risk-rating evaluation process 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. The Company's policies require certain credit relationships that exceed specific dollar values, be reviewed by a committee of senior management, at least quarterly. The Company's review process evaluates the appropriateness of the credit risk rating and allocation of allowance for loan losses, as well as other account management functions. In addition, Management receives and approves an analysis for all impaired loans, as defined by the Statement of Financial Accounting Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan." The allowance for loan losses is allocated based on a formula allocation for similarly risk-rated loans, or for specific risk issues, which suggest a probable loss factor exceeding the formula allocation for a specific loan, or for individual impaired loans as determined by SFAS No. 114.

            The Company's evaluation process is designed to determine the adequacy of the allowance for loan losses. The Company assesses the risk of losses inherent in the loan portfolio by utilizing modeling techniques. For this purpose the Company has developed a statistical model based on historical loan loss migration to estimate an appropriate allowance for outstanding loan balances. In addition, the Company applies macro and contingent allocations to the results of the aforementioned model to ascertain the total allowance for loan losses. 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 Company's allowance for loan losses is established for loan losses not yet realized. The process of anticipating loan losses is imprecise. The Company's allowance for loan losses is its best estimate using the historical loan loss experience and its perception of variables potentially leading to deviation from the historical loss experience.

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    Nonaccrual Loans

            Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" requires the Company to measure impairment of a loan based upon the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, the Company may measure impairment based on the loan's observable market price or the fair value of the collateral if the loan is collateral-dependent. A loan is considered impaired when, based upon currently known information, it is deemed probable that the Company will be unable to collect all amounts due according to the contractual terms of the agreement.

            Loans are placed on nonaccrual status when they become 90 days past due as to principal or interest payments (unless the principal and interest are well secured and in the process of collection), when the Company has determined, based upon currently known information, that the timely collection of principal or interest is doubtful, or when the loans otherwise become impaired under the provisions of SFAS No. 114, "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 and interest appears probable.

Premises and Equipment

        Premises and equipment are reported at cost, less accumulated depreciation and amortization computed using the straight-line method over the estimated useful lives of the assets or the terms of the related leases, whichever is shorter. This time period may range from one to 10 years. The Company had no capitalized lease obligations at December 31, 2002 and 2001.

Foreign Exchange Contracts

        The Company enters into foreign exchange contracts with clients involved in international trade finance activities. The Company also enters into an opposite-way foreign exchange contract with a correspondent bank, which completely mitigates the risk of fluctuations in foreign currency exchange rates, for each of the contracts entered into with its clients. However, settlement, credit, and operational risks remain. The Company does not enter into foreign exchange contracts for any other purposes. These contracts are not designated as hedging instruments and are recorded at fair value in the Company's consolidated balance sheets. Changes in the fair value of these contracts are recognized immediately in non-interest income.

Income Taxes

        The Company files a consolidated federal income tax return, and consolidated or combined state income tax returns as appropriate. The Company's federal and state income tax provisions are based upon taxes payable for the current year as well as current year changes in deferred taxes related to temporary differences between the tax basis and financial statement balances of assets and liabilities. Deferred tax assets and liabilities are included in the consolidated financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are

73



expected to be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Stock-Based Compensation

        The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and related interpretations, in accounting for its employee stock options rather than the alternative fair value accounting allowed by SFAS No. 123, "Accounting for Stock-Based Compensation." APB No. 25 provides that the compensation expense relative to the Company's employee stock options is measured based on the intrinsic value of the stock option. SFAS No. 123 requires companies that continue to follow APB No. 25 to provide a pro forma disclosure of the impact of applying the fair value method of SFAS No. 123. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation." See "Item 8. Consolidated Financial Statements and Supplementary Data—Note 18 to the Consolidated Financial Statements—Employee Benefit Plans."

        The following is a reconciliation of reported and pro forma net income and earning per share for the years ended December 31, 2002, 2001 and 2000:

 
  Years Ended December 31,
 
 
  2002
  2001
  2000
 
 
  (Dollars in thousands, except per share amounts)

 
Net income, as reported   $ 53,358   $ 88,154   $ 159,068  
Add: Stock-based compensation expense indicated in reported net income, net of tax     651     1,036     1,327  
Less: Total stock-based employee compensation expense determined under fair value based method, net of tax     (17,529 )   (16,188 )   (11,498 )
   
 
 
 
Pro forma net income   $ 36,480   $ 73,002   $ 148,897  
   
 
 
 
Basic earnings per share:                    
  As reported   $ 1.21   $ 1.85   $ 3.41  
  Pro forma     0.83     1.53     3.19  
Diluted earnings per share:                    
  As reported     1.18     1.79     3.23  
  Pro forma     0.84     1.54     3.07  

Earnings Per Share

        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 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.

Segment Reporting

        Prior to January 1, 2002, the Company operated as one segment. On January 1, 2002, the Bank reorganized into five lines of banking and financial services: Commercial Banking, Merchant Banking, Private Banking, Mergers and Acquisitions Services, and Other Business Services. See "Item 8.

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Consolidated Financial Statements and Supplementary Data—Note 14 to the Consolidated Financial Statements—Segment Reporting."

Derivative Financial Instruments

        The Company accounts for derivative instruments in accordance with the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, and requires that all derivative instruments be recorded on the balance sheet at fair value. Additionally, the accounting for changes in fair value depends on whether the derivative instrument is designated and qualifies as part of a hedging relationship and, if so, the nature of the hedging activity. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of a particular hedge, must be recognized currently in earnings. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period, unless the derivative instrument meets the definition of the short-cut treatment, as defined by SFAS No. 133. See "Item 8. Consolidated Financial Statements and Supplementary Data—Note 12 and Note 13 to the Consolidated Financial Statements—Trust Preferred Securities and Derivative Financial Instruments." For derivative instruments that are designated and qualify as a cash flow hedge, changes in the fair value of the effective portion of the derivative instrument are recognized in Other Comprehensive Income (OCI). These amounts are reclassified from OCI and recognized in earnings when either the forecasted transaction occurs or it becomes probable that the forecasted transaction will not occur.

Business Combinations

        The Company accounts for business combinations in accordance with the provisions of SFAS No. 141, "Business Combinations," which requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies the criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. See "Item 8. Consolidated Financial Statements and Supplementary Data—Note 2 to the Consolidated Financial Statements—Business Combinations."

Goodwill and Other Intangibles

        The Company accounts for intangible assets in accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." Under these provisions, the Company is required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the year of adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company is required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the year of adoption. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. The Company adopted the provisions of SFAS No. 142 on January 1, 2002.

        Substantially all of the Company's goodwill pertains to the acquisition of Alliant Partners, discussed in "Item 8. Consolidated Financial Statements and Supplementary Data—Note 2 to

75



Consolidated Financial Statements—Business Combinations." In accordance with the provisions of SFAS No. 142, the goodwill balance was determined to be unamortizable. The Company completed its initial test for goodwill impairment in July 2002, the result of which concluded that the goodwill balance was not impaired. At December 31, 2002, the Company's goodwill totaled $100.5 million.

        In testing for a potential impairment of goodwill, SFAS 142 requires the Company to: (1) allocate goodwill to the reporting units to which the acquired goodwill relates; (2) estimate the fair value of those reporting units to which goodwill relates; and (3) determine the carrying value (book value) of those reporting units. Furthermore, if the estimated fair value is less than the carrying value for a particular reporting unit, then the Company is required to estimate the fair value of all identifiable assets and liabilities of the reporting unit, in a manner similar to a purchase price allocation for an acquired business. Only after this process is completed is the amount of goodwill impairment determined.

        Accordingly, the process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. In estimating the fair value of the reporting units with recognized goodwill for the purposes of our financial statements at December 31, 2002, the Company applied the fair value test using discounted estimated net cash flows. The Company's cash flow forecasts were based on assumptions that are consistent with the plans and estimates it is using to manage the underlying business.

        Based on the Company's best estimates, it has concluded that there is no impairment of its goodwill. However, changes in these estimates could cause the businesses to be valued differently. If Alliant does not meet projected operating results, subsequent analyses could result in a non-cash goodwill impairment charge, depending on the estimated value of the Alliant business unit and the value of the other assets and liabilities attributed to the business.

Recent Accounting Pronouncements

        In December 2001, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 01-6, "Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others." SOP 01-6 reconciles the specialized accounting and financial reporting guidance in the existing Banks and Savings Institutions Guide, Audits of Credit Unions Guide, and Audits of Finance Companies Guide. The SOP eliminates differences in accounting and disclosure established by the respective guides and carries forward accounting guidance for transactions determined to be unique to certain financial institutions. Adopting of this pronouncement has not had a material impact on the Company's results of operations or financial position.

        In October 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 147, "Acquisitions of Certain Financial Institutions," which addresses accounting for the acquisition of certain financial institutions. The provisions of SFAS No. 147 rescind the specialized accounting guidance in paragraph 5 of SFAS No. 72 and would require unidentifiable intangible assets to be reclassified to goodwill if certain criteria are met. Financial institutions meeting the conditions outlined in SFAS No. 147 will be required to restate previously issued financial statements back to the date SFAS No. 142 was initially applied. The provisions of SFAS No. 147 are effective for financial statements after September 30, 2002. The adoption of SFAS 147 has had no material impact on the Company's results of operations or financial position.

        In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," which amended SFAS No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value

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based method of accounting for stock-based compensation. In addition, this statement amended the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the chosen method on reporting results. The provisions of SFAS No. 148 are effective for annual periods ending December 15, 2002, and for interim periods beginning after December 15, 2002. See "Item 8. Consolidated Financial Statements and Supplementary Data—Note 1 and Note 18 to the Consolidated Financial Statements—Significant Accounting policies—Stock Based Compensation, and Employee Benefit Plans."

        In November 2002, FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." It addresses the accounting for the stand-ready obligation under guarantees. A guarantor is required to recognize a liability with respect to its stand-ready obligation under the guarantee even if the probability of future payments under the guarantee is remote. The initial liability will be measured as the fair value of the stand-ready obligation. Additionally, the Interpretation addresses disclosure requirements for guarantees including the nature and terms of the guarantees, maximum potential for future amounts and the carrying amount of the liabilities. The disclosure requirements are effective for interim and annual financial statements ending after December 15, 2002. The initial recognition and measurement provisions are effective for all guarantees within the scope of Interpretation 45 issued or modified after December 31, 2002. Commercial letters of credit and other loan commitments, which are commonly thought of as guarantees of funding were not included in the scope of the interpretation. The Bank has made relevant disclosures in the current year financial statements. The Bank does not expect the adoption of Interpretation No. 45 to have a material impact on its financials.

        In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities (VIE)." It defined a VIE as a corporation, partnership, trust, or any other legal structure used for the business purpose that either a) does not have equity investors with voting rights or b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. This interpretation will require a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE's activities or entitled to receive a majority of the entity's residual return. The provisions of interpretation No. 46 are required to be applied immediately to VIEs created after January 31, 2003. As of December 31, 2002, the Company invested as a limited partner in six real estate limited partnerships. These partnership invest in affordable housing projects which provide its investors Low Income Housing Tax Credits. As of December 31, 2002, the Company committed approximately $24.6 million to these partnerships, of which approximately $20.4 million had been funded. One or more of these limited partnerships, may be deemed to be a VIE. These partnerships were not consolidated in the Company's financial statements at December 31, 2002. The Company does not expect the impact of consolidation of these partnerships to have a material impact on its financial statements.

Common 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 consolidated financial statements have been adjusted to give retroactive recognition to a two-for-one stock split distributed on May 15, 2000.

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2. Business Combinations

        On October 1, 2002, the Company acquired substantially all of the assets of Woodside Asset Management, Inc., an investment advisor firm, which has approximately $200 million under management for 70 clients. Woodside Asset Management, Inc. is expected to enable the Company to expand its product offerings in the private banking. Additionally, as part of this acquisition, Silicon Valley Bancshares obtained the general partner interests in two limited partnerships, Taurus, L.P., and Libra, L.P., with total assets aggregating $12.4 million. The Company has less than a 1% ownership interest in each of these funds. The remaining ownership interest represents limited partners' funds invested on their behalf by the general partner in certain fixed income and marketable equity securities. However, due to the Company's ability to control the investing activities of these limited partnerships, we have consolidated the related results of operations and financial condition into our consolidated financial statements, as of and for the three-month period ended December 31, 2002. This acquisition did not have a material impact on goodwill and is not expected to materially impact the Company's earnings in the short-term.

        On September 28, 2001, the Company completed its acquisition of Alliant Partners and has included its results of operations in the Company's consolidated results of operations since that date. The acquisition has allowed the Company to strengthen its investment banking platform for its clients. The Company agreed to purchase the assets of Alliant for a total of $100.0 million, due in several installments of cash and common stock. These installments are payable over four years between September 30, 2001 and September 30, 2005. The first two installments aggregating $72.0 million have been paid in cash. The remaining $28.0 million was discounted at prevailing forward market interest rates ranging between 2.9% and 3.3% and was recorded as short-term and long-term debt. In addition to the fixed purchase price, the sellers received certain contingent purchase price payments including 75% of the pre-tax income of Alliant for the twelve-month period ended September 28, 2002. Furthermore, the Company shall pay to the sellers an amount equal to fifteen times the amount by which Alliant's cumulative after-tax net income from October 1, 2002 to September 30, 2005 exceeds $26.5 million, provided, however, that the aggregate amount of any deferred earnout payment payable shall not exceed $75.0 million. The Company shall also make retention payments aggregating $5.0 million in equal annual installments on September 28, 2003, 2004, and 2005. The purchase price was allocated to the assets acquired and liabilities assumed, based on the estimated net fair values at the date of acquisition of approximately $0.5 million. The excess of purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. The business combinations were recorded in accordance with SFAS No. 141. See "Item 8. Consolidated Financial Statements and Supplementary Data—Note 1 and Note 11 to the Consolidated Financial Statements—Significant Accounting Policies and Borrowings."

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3. Earnings Per Share

        The following is a reconciliation of basic EPS to diluted EPS for the years ended December 31, 2002, 2001, and 2000.

 
  Years Ended December 31,
2002, 2001, and 2000

 
  Net Income
  Weighted-
Average
Shares

  Per Share
Amount

 
  (Dollars and shares in thousands,
except per share amounts)

2002                
Basic EPS:                
Income available to common stockholders   $ 53,358   44,000   $ 1.21
Effect of Dilutive Securities:                
Stock options and restricted stock       1,080    
   
 
 
Diluted EPS:                
Income available to common stockholders plus assumed conversions   $ 53,358   45,080   $ 1.18
   
 
 

2001

 

 

 

 

 

 

 

 
Basic EPS:                
Income available to common stockholders   $ 88,154   47,728   $ 1.85
Effect of Dilutive Securities:                
Stock options and restricted stock       1,427    
   
 
 
Diluted EPS:                
Income available to common stockholders plus assumed conversions   $ 88,154   49,155   $ 1.79
   
 
 

2000

 

 

 

 

 

 

 

 
Basic EPS:                
Income available to common stockholders   $ 159,068   46,656   $ 3.41
Effect of Dilutive Securities:                
Stock options and restricted stock       2,564    
   
 
 
Diluted EPS:                
Income available to common stockholders plus assumed conversions   $ 159,068   49,220   $ 3.23
   
 
 

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4. Restrictions on Cash Balances

        The Bank is required to maintain reserves against customer deposits by keeping balances with the Federal Reserve Bank of San Francisco in a noninterest-bearing cash account. The minimum required reserve amounts were $2.8 million and $12.3 million at December 31, 2002 and 2001, respectively. The average required reserve balance totaled $10.2 million in 2002 and $17.3 million in 2001. The Company has restricted cash related to the Trust Preferred Securities totaling $2.0 million and $0 at December 31, 2002 and 2001, respectively. See "Item 8. Consolidated Financial Statements and Supplementary Data—Note 12 to the Consolidated Financial Statements—Trust Preferred Securities."

5. Securities Purchased under Agreement to Resell

        Securities purchased under agreement to resell at December 31, 2002 consisted of U.S. Treasury securities, U.S. agency securities, and private label mortgage-backed securities, which are rated A or better. The securities underlying the agreement are held in book-entry form in the Company's name in the custodian's account. Securities purchased under agreement to resell totaled $202.7 million at December 31, 2002, averaged $145.0 million in 2002, and the maximum amount outstanding at any month-end during 2002 was $304.9 million.

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6. Investment Securities

        The following tables detail the major components of the Company's investment securities portfolio at December 31, 2002 and 2001.

 
  December 31, 2002
 
  Amortized
Cost

  Unrealized
Gains

  Unrealized
Losses

  Carrying
Value

 
  (Dollars in thousands)

Available-for-sale securities:                        
  U.S. Treasury securities   $ 20,354   $ 224   $   $ 20,578
  U.S. agencies and corporations:                        
    Discount notes and bonds     193,608     3,937         197,545
    Mortgage-backed securities     152,633     6,303         158,936
    Asset-backed securities     38,304     214     (10 )   38,508
    Collateralized mortgage obligations     415,303     4,922     (64 )   420,161
  Obligations of states and political subdivisions     201,533     8,984         210,517
  Commercial paper and other debt securities     12,848         (1,700 )   11,148
  Money market mutual funds     378,933             378,933
  Warrant securities     25     814         839
  Venture capital fund investments     136         (125 )   11
  Other equity investments(1)     7,055             7,055
   
 
 
 
Total available-for-sale securities   $ 1,420,732   $ 25,398   $ (1,899 )   1,444,231
   
 
 
 

Non-marketable securities at cost:

 

 

 

 

 

 

 

 

 

 

 

 
  Federal Reserve Bank stock and tax credit funds                       25,649
  Federal home loan bank stock                       2,172
  Venture capital fund investments(2)                       46,822
  Other private equity investments(3)                       16,820
                     
Total non-marketable securities                       91,463
                     
Total investment securities                     $ 1,535,694
                     

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  December 31, 2001
 
  Amortized
Cost

  Unrealized
Gains

  Unrealized
Losses

  Carrying
Value

 
  (Dollars in thousands)

Available-for-sale securities:                        
  U.S. Treasury securities   $ 85,130   $ 18   $   $ 85,148
  U.S. agencies and corporations:                        
    Discount notes and bonds     419,612     6,561     (330 )   425,843
    Mortgage-backed securities     139,811     2,815     (133 )   142,493
  Collateralized mortgage obligations     153,279     1,793     (758 )   154,314
  Obligations of states and political subdivisions     418,605     3,198     (169 )   421,634
  Commercial paper and other debt securities     34,800             34,800
  Money market mutual funds     494,230             494,230
  Warrant securities     193     2,213         2,406
  Venture capital fund investments     142         (73 )   69
  Other equity investments     50         (45 )   5
   
 
 
 
Total available-for-sale securities   $ 1,745,852   $ 16,598   $ (1,508 )   1,760,942
   
 
 
 

Non-marketable securities at cost:

 

 

 

 

 

 

 

 

 

 

 

 
  Federal Reserve Bank stock and tax credit funds                       19,867
  Venture capital fund investments(2)                       38,647
  Other private equity investments(3)                       13,706
                     
Total non-marketable securities                       72,220
                     
Total investment securities                     $ 1,833,162
                     

(1)
Available-for-sale other private equity investments included $7.1 million related to investments owned by two consolidated limited partnerships, Taurus, L.P. and Libra, L.P. as of December 31, 2002. The Company has a controlling ownership interest of less than 1% in the funds.

(2)
Non-marketable venture capital fund investments included $22.1 million and $16.5 million related to the Company's fund of funds, SVB Strategic Investors Fund, L.P., as of December 31, 2002 and 2001,