SVB Financial Group
SILICON VALLEY BANCSHARES (Form: 10-Q, Received: 08/09/2004 15:56:20)

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TABLE OF CONTENTS

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


FORM 10-Q

(Mark One)  

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

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: 000-15637


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)

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


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

        At July 31, 2004, 35,643,672 shares of the registrant's common stock ($0.001 par value) were outstanding.





TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

ITEM 1.

 

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

 

CONSOLIDATED BALANCE SHEETS

 

 

CONSOLIDATED STATEMENTS OF INCOME

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

ITEM 2.

 

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

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4.

 

CONTROLS AND PROCEDURES

PART II—OTHER INFORMATION

ITEM 1.

 

LEGAL PROCEEDINGS

ITEM 2.

 

CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

ITEM 4.

 

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 5.

 

OTHER INFORMATION

ITEM 6.

 

EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

INDEX TO EXHIBITS

2



PART I—FINANCIAL INFORMATION

ITEM 1—INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SILICON VALLEY BANCSHARES AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value)

  June 30,
2004

  December 31,
2003

 
Assets              
Cash and due from banks   $ 213,530   $ 252,521  
Federal funds sold and securities purchased under agreement to resell     331,104     542,475  
Investment securities     2,087,995     1,575,434  
Loans, net of unearned income     2,114,435     1,989,229  
Allowance for loan losses     (61,900 )   (64,500 )
   
 
 
Net loans     2,052,535     1,924,729  
Premises and equipment     14,083     14,999  
Goodwill     37,549     37,549  
Accrued interest receivable and other assets     120,725     117,663  
   
 
 
Total assets   $ 4,857,521   $ 4,465,370  
   
 
 

Liabilities, minority interest, and stockholders' equity

 

 

 

 

 

 

 
Liabilities:              
Deposits:              
  Noninterest-bearing demand   $ 2,394,651   $ 2,186,352  
  NOW     19,469     20,897  
  Money market     1,274,997     1,080,559  
  Time     316,269     379,068  
   
 
 
Total deposits     4,005,386     3,666,876  
Short-term borrowings     34,263     9,124  
Other liabilities     69,898     87,335  
Long-term debt     205,805     204,286  
   
 
 
Total liabilities     4,315,352     3,967,621  
   
 
 

Minority interest in capital of consolidated affiliates

 

 

68,692

 

 

50,744

 
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; 35,576,861 and 35,028,470 shares outstanding at June 30, 2004 and December 31, 2003, respectively     36     35  
Additional paid-in capital     34,491     14,240  
Retained earnings     451,851     422,131  
Unearned compensation     (2,563 )   (1,232 )
Accumulated other comprehensive income:              
  Net unrealized gains and (losses) on available-for-sale investments     (10,338 )   11,831  
   
 
 
Total stockholders' equity     473,477     447,005  
   
 
 
Total liabilities, minority interest, and stockholders' equity   $ 4,857,521   $ 4,465,370  
   
 
 

See accompanying notes to interim consolidated financial statements.

3


SILICON VALLEY BANCSHARES AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME

 
  For the three months ended
June 30,

  For the six months ended
June 30,

 
(Dollars in thousands, except per share amounts)

 
  2004
  2003
  2004
  2003
 
Interest income:                          
  Loans   $ 37,280   $ 38,134   $ 73,912   $ 75,970  
  Investment securities                          
    Taxable     17,989     8,557     32,012     18,934  
    Non-taxable     1,290     1,586     2,751     3,182  
  Federal funds sold and securities purchased under agreement to resell     1,306     1,129     2,750     1,959  
   
 
 
 
 
Total interest income     57,865     49,406     111,425     100,045  
Interest expense:                          
  Deposits     2,124     2,389     4,138     4,840  
  Other borrowings     712     317     1,438     527  
   
 
 
 
 
Total interest expense     2,836     2,706     5,576     5,367  
Net interest income     55,029     46,700     105,849     94,678  
Provision for loan losses     (2,759 )   1,162     (2,742 )   4,546  
   
 
 
 
 
Net interest income after provision for loan losses     57,788     45,538     108,591     90,132  
   
 
 
 
 
Noninterest income:                          
  Corporate finance fees     10,897     4,641     14,984     8,785  
  Client investment fees     6,399     6,034     12,667     12,366  
  Letter of credit and foreign exchange income     3,805     3,128     7,534     6,631  
  Deposit service charges     3,695     3,245     7,408     6,121  
  Income from client warrants     3,310     1,051     6,218     3,013  
  Investment gains (losses)     478     (3,839 )   1,800     (8,544 )
  Credit card fees     604     988     1,381     2,034  
  Other     2,320     2,257     4,402     4,545  
   
 
 
 
 
Total noninterest income     31,508     17,505     56,394     34,951  
Noninterest expense:                          
  Compensation and benefits     41,153     29,486     75,256     61,176  
  Net occupancy     4,587     4,103     9,110     8,505  
  Professional services     4,876     3,985     8,215     7,424  
  Furniture and equipment     3,450     2,710     6,359     4,904  
  Business development and travel     2,180     2,296     4,171     3,912  
  Correspondent bank fees     1,243     1,094     2,524     2,134  
  Data processing services     789     1,392     1,874     2,483  
  Telephone     902     857     1,684     1,635  
  Postage and supplies     872     632     1,644     1,216  
  Tax credit fund amortization     620     716     1,240     1,431  
  Advertising and promotion     924     357     1,180     531  
  Impairment of goodwill         17,000         17,000  
  Trust preferred securities distributions         313         594  
  Other     2,054     2,262     3,562     4,366  
   
 
 
 
 
Total noninterest expense     63,650     67,203     116,819     117,311  
Minority interest in net (gains) losses of consolidated affiliates     (67 )   2,765     (548 )   6,244  
   
 
 
 
 
Income (loss) before income taxes     25,579     (1,395 )   47,618     14,016  
Income tax expense (benefit)     9,871     (819 )   17,900     4,174  
   
 
 
 
 
Net income (loss)   $ 15,708   $ (576 ) $ 29,718   $ 9,842  
   
 
 
 
 
Earnings (loss) per common share—basic   $ 0.45   $ (0.02 ) $ 0.85   $ 0.26  
Earnings (loss) per common share—diluted   $ 0.43   $ (0.02 ) $ 0.81   $ 0.25  

See accompanying notes to interim consolidated financial statements.

4


SILICON VALLEY BANCSHARES AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
  For the three months ended
  For the six months ended
 
(Dollars in thousands)

  June 30,
2004

  June 30,
2003

  June 30,
2004

  June 30,
2003

 
Net income (loss)   $ 15,708   $ (576 ) $ 29,718   $ 9,842  

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Change in unrealized (losses) gains on available-for-sale investments:                          
    Unrealized holding (losses) gains     (25,952 )   949     (17,511 )   (73 )
    Reclassification adjustment for gains included in net income     (1,979 )   (434 )   (4,658 )   (2,116 )
   
 
 
 
 
Other comprehensive (loss) income, net of tax     (27,931 )   515     (22,169 )   (2,189 )
   
 
 
 
 
Comprehensive income (loss)   $ (12,223 ) $ (61 ) $ 7,549   $ 7,653  
   
 
 
 
 

See accompanying notes to interim consolidated financial statements.

5


SILICON VALLEY BANCSHARES AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

 
  For the six months ended
 
(Dollars in thousands)

  June 30,
2004

  June 30,
2003

 
Cash flows from operating activities:              
  Net income   $ 29,718   $ 9,842  
  Adjustments to reconcile net income to net cash provided by operating activities:              
    Impairment of goodwill         17,000  
    Provision for loan losses     (2,742 )   4,546  
    Minority interest     548     (6,244 )
    Depreciation and amortization     4,168     3,927  
    Net (gain) loss on available for sale securities     (1,800 )   8,544  
    Net gains on disposition of client warrants     (6,218 )   (3,013 )
  Changes in other assets and liabilities:              
    Decrease (Increase) deferred income tax benefits     10,711     (7,615 )
    (Increase) in accounts receivable     (7,566 )   (1,687 )
    (Increase) in taxes receivable     (10,231 )   (6,393 )
    Increase (decrease) in accrued retention, warrant, and other incentive plans     (1,620 )   4,403  
    Increase in investment payable         48,137  
    Other, net     4,474     10,830  
   
 
 
Net cash provided by operating activities     19,442     82,277  
   
 
 
Cash flows from investing activities:              
  Proceeds from maturities and paydowns of investment securities     1,661,349     524,597  
  Proceeds from sales of investment securities     3,558,610     5,020,896  
  Purchases of investment securities     (5,759,114 )   (5,685,395 )
  Net (increase) decrease in loans     (133,669 )   107,552  
  Proceeds from recoveries of charged-off loans     7,263     7,854  
  Purchases of premises and equipment     (3,252 )   (1,626 )
   
 
 
Net cash used by investing activities     (668,813 )   (26,122 )
   
 
 
Cash flows from financing activities:              
  Net increase in deposits     338,510     52,257  
  Increase in short-term borrowings     25,000      
  Proceeds from issuance of convertible notes and warrants, net of issuance costs and convertible note hedge         123,493  
  Proceeds net of issuance costs, from issuance of common stock including tax benefits of certain stock option exercises     18,099     4,445  
  Repurchase of common stock         (148,969 )
  Capital contributions from minority interest participants     17,400     13,841  
   
 
 
Net cash provided by financing activities     399,009     45,067  
   
 
 
Net increase (decrease) in cash and cash equivalents     (250,362 )   101,222  
Cash and cash equivalents at January 1,     794,996     442,589  
   
 
 
Cash and cash equivalents at June 30,   $ 544,634   $ 543,811  
   
 
 
Supplemental disclosures:              
  Interest paid   $ 5,512   $ 5,509  
  Income taxes paid   $ 13,920   $ 14,327  

See accompanying notes to interim consolidated financial statements.

6



SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1.     Summary of Significant Accounting Policies

        Silicon Valley Bancshares and its subsidiaries (the "Company") offer its clients financial products and services through its five lines of banking and financial services: Our segments are described in Note 8 to the Interim Consolidated Financial Statements. 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 9,800 clients across the country, through its 26 regional offices. The Bank has 12 offices throughout California and operates regional offices across the country, including Arizona, Colorado, Georgia, Illinois, Massachusetts, Minnesota, New York, North Carolina, Oregon, Pennsylvania, Texas, Virginia, and Washington. The Bank serves clients in all stages of growth from emerging-growth companies to corporate technology clients in the technology and life sciences markets, as well as the premium wine industry. We define "emerging-growth" clients as companies in the start-up or early stages of their lifecycle; these companies tend to be privately held, thinly capitalized and backed by venture capital; they tend to have few employees, primarily engaged in research and development, have brought relatively few products or services to market, and have no or little revenue. By contrast, the company defines "corporate technology" clients as companies that tend to be more mature; they may be relatively well capitalized, publicly traded and more established in the markets in which they participate, although not necessarily the leading players in the largest industries. Merger, acquisition, private placement and corporate partnering services are provided through the Company's wholly-owned investment banking subsidiary, SVB Alliant, whose offices are in California and Massachusetts.

        The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America. Certain reclassifications have been made to the Company's 2003 interim consolidated financial statements to conform to the 2004 presentations. Such reclassifications had no effect on the results of operations or stockholders' equity.

        Descriptions of the Company's significant accounting policies are included in the Company's 2003 Annual Report on Form 10-K under "Item 8. Consolidated Financial Statements and Supplementary Data—Note 1 to the Consolidated Financial Statements—Summary of Significant Accounting Policies." As of June 30, 2004, there have been no significant changes to these policies, except as included herein.

Basis of Presentation and Preparation

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, SVB Strategic Investors II, LLC and Silicon Valley BancVentures, Inc., as general partners, are considered to have significant influence over the operating and financing policies of non wholly-owned affiliates, SVB Strategic Investors Fund, L.P., SVB Strategic Investors Fund, L.P. II and Silicon Valley BancVentures, L.P., respectively. The limited partners of SVB Strategic Investors Fund, L.P., SVB Strategic Investors Fund, L.P. II and Silicon Valley BancVentures, L.P. hold no substantive participating rights, therefore, the assets, liabilities, partners' capital and results of operations are included in the Company's Interim Consolidated Financial Statements. Minority interest in the capital of consolidated affiliates primarily represents the minority participants' share of the equity of SVB Strategic Investors Fund, L.P., SVB Strategic Investors Fund, L.P. II and Silicon Valley BancVentures, L.P.

7


        Similar accounting is applied to SVB Woodside Financial, the general partner of Taurus Growth Partners, L.P. and Libra Partners, L.P., see the Company's 2003 Annual Report on Form 10-K under "Item 8. Consolidated Financial Statements and Supplementary Data—Note 2 to the Consolidated Financial Statements—Business Combinations."

        The preparation of interim 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 materially from those estimates. An estimate of possible changes or a range of possible changes cannot be made. For more information on the Company's critical accounting policies and estimates, refer to "Part 1, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates."

        In the opinion of Management, the interim consolidated financial statements contain all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the Company's consolidated financial position at June 30, 2004, and the interim results of its operations and interim cash flows for the three and six months ended June 30, 2004 and 2003. The December 31, 2003 Consolidated Balance Sheet was derived from audited financial statements. Certain information and footnote disclosures normally presented have been omitted from this report. The results of operations for the three and six months ended June 30, 2004, may not necessarily be indicative of the Company's operating results for the full year. The interim consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 2003 Annual Report on Form 10-K.

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. If the Company had earned a profit during the three month period ended June 30, 2003, we would have added 1.1 million common equivalent shares to our basic weighted-average shares outstanding.

Income from Client Warrants

        Unexercised warrant equity instruments in private companies are initially recorded at a nominal value on the Company's interim consolidated balance sheets. They are carried at this value until they become marketable or expire.

        Gains on warrant equity instruments that result from a portfolio company being acquired by a publicly-traded company are marked to market when the acquisition occurs. The resulting gains are recognized into net income on that date, in accordance with Emerging Issues Task Force, Issue No. 91-5, "Nonmonetary Exchange of Cost-Method Investments."

        Unrealized gains on warrant equity instruments 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," and are excluded from net income and are reported in accumulated other comprehensive income, which is a separate component of stockholders' equity.

        Further fluctuations in the market value of these marketable equity instruments, prior to eventual sale, are excluded from net income and are reported in accumulated other comprehensive income, which is a separate component of stockholders' equity. Gains or losses on warrant equity instruments

8



are recorded in our consolidated net income in the period the underlying securities are sold to a third party.

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," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." 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 as amended by SFAS No. 148 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 (FASB) Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation."

        Had compensation cost related to both the Company's stock option awards to employees and directors and to the Employee Stock Purchase Plan been determined under the fair value method prescribed under SFAS No. 123, the Company's net income, basic earnings per share, and diluted earnings per share would have been the pro-forma amounts below:

 
  For the three months ended
June 30,

  For the six months ended
June 30,

 
 
  2004
  2003
  2004
  2003
 
 
  (Dollars in thousands, except per share amounts)

 
Net income (loss), as reported   $ 15,708   $ (576 ) $ 29,718   $ 9,842  
Add: Stock-based compensation expense included in reported net income, net of tax     286     253     418     391  
Less: Total stock-based employee compensation
expense determined under fair value based method, net of tax
    (4,179 )   (4,836 )   (8,459 )   (8,548 )
   
 
 
 
 
Net income (loss), pro-forma   $ 11,815   $ (5,159 ) $ 21,677   $ 1,685  
   
 
 
 
 
Basic income (loss) per share:                          
  As reported   $ 0.45   $ (0.02 ) $ 0.85   $ 0.26  
  Pro-forma     0.34     (0.14 )   0.62     0.04  
Diluted income (loss) per share:                          
  As reported     0.43     (0.02 )   0.81     0.25  
  Pro-forma     0.33     (0.13 )   0.61     0.05  

        Refer to the Company's 2003 Annual Report on Form 10-K under "Item 8. Consolidated Financial Statements and Supplementary Data—Note 18 to the Consolidated Financial Statements—Employee Benefit Plans" for assumptions used in calculating the pro-forma amounts above.

2.     Business Combinations

        On September 28, 2001, the Company completed its acquisition of SVB Alliant (formerly known as 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 SVB Alliant for a total of $100.0 million, due in several installments of cash and/or common stock. These installments are payable over four years

9



between September 30, 2001 and September 30, 2005. As of June 30, 2004, the first three installments aggregating $81.3 million have been paid in cash, and the remaining $18.7 million, which was discounted at prevailing forward market interest rates of approximately 3.3% at the time of purchase, are 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 SVB Alliant for the twelve-month period ended September 28, 2002, which totaled approximately $2.4 million.

        Furthermore, the agreement provides for the Company to pay to the sellers an amount equal to fifteen times the amount by which SVB 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 earn-out payment payable shall not exceed $75.0 million. SVB Alliant's cumulative after-tax net loss, from October 1, 2002 through June 30, 2004 was $36.3 million.

        The Company also agreed to make retention payments aggregating $5.0 million in equal annual installments on September 28, 2003, 2004, and 2005, of which, the first installment was paid in late 2003.

        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 "Note 6 and Note 7 to the Interim Consolidated Financial Statements—Goodwill, and Short-term Borrowings and Long-term Debt."

3.     Earnings Per Share (EPS)

        The following is a reconciliation of basic EPS to diluted EPS for the three and six months ended June 30, 2004 and 2003.

 
  For the three months ended June 30,
  For the six months ended June 30,
(Dollars and shares in thousands,
except per share amounts)

  Net
Income

  Shares
  Per Share
Amount

  Net
Income

  Shares
  Per Share
Amount

2004:                                
Basic EPS:                                
Income available to common stockholders   $ 15,708   35,049   $ 0.45   $ 29,718   34,965   $ 0.85
Effect of Dilutive Securities:                                
Stock options and restricted stock       1,868           1,849    
   
 
 
 
 
 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Income available to common stockholders plus assumed conversions   $ 15,708   36,917   $ 0.43   $ 29,718   36,814   $ 0.81
   
 
 
 
 
 

2003:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Basic EPS:                                
Income (loss) available to common stockholders   $ (576 ) 36,735   $ (0.02 ) $ 9,842   37,909   $ 0.26
Effect of Dilutive Securities:                                
Stock options and restricted stock                 908    
   
 
 
 
 
 
Diluted EPS:                                
Income (loss) available to common stockholders plus assumed conversions   $ (576 ) 36,735   $ (0.02 ) $ 9,842   38,817   $ 0.25
   
 
 
 
 
 

10


4.     Investment Securities

        The detailed composition of the Company's investment securities is presented as follows:

(Dollars in thousands)

  June 30,
2004

  December 31,
2003

Available-for-sale securities, at fair value   $ 1,967,491   $ 1,479,383
Marketable equity securities (investment company accounting)(1)     1,131    
Non-marketable securities (investment company accounting)            
  Venture capital fund investments(2)     42,427     30,149
  Other private equity investments(3)     12,402     10,097
  Other Investments(4)     1,500    
Non-marketable securities (cost basis accounting)            
  Venture capital fund investments     25,476     25,196
  Tax credit funds     15,310     16,551
  Federal Home Loan Bank stock     12,532     3,009
  Federal Reserve Bank stock     7,771     7,467
  Other private equity investments     1,955     3,582
   
 
Total investment securities   $ 2,087,995   $ 1,575,434
   
 

(1)
Included $1.0 million related to Silicon Valley BancVentures, L.P., at June 30, 2004. The Company manages this fund and has a controlling ownership interest of 10.7% in the fund. Excluding the minority interest-owned portion of Silicon Valley BancVentures, L.P., the Company has marketable equity securities (investment company accounting) of $0.1 million as of June 30, 2004.

(2)
Included $39.8 million and $30.1 million related to SVB Strategic Investors Fund, L.P., at June 30, 2004, and December 31, 2003, respectively. The Company manages this fund and has a controlling ownership interest of 11.1% in the fund. It also included $2.6 million related to SVB Strategic Investors Fund II, L.P., at June 30, 2004. The Company manages this fund and has a controlling interest of 30.0% in the fund as of June 30, 2004. Excluding the minority interest-owned portion of these funds, the Company has non-marketable venture capital fund investments (investment company accounting) of $5.2 million and $3.3 million, as of June 30, 2004 and December 31, 2003, respectively.

(3)
Included $12.4 million and $10.0 million related to Silicon Valley BancVentures, L.P., at June 30, 2004, and December 31, 2003, respectively. The Company has a controlling ownership interest of 10.7% in the fund. Excluding the minority interest-owned portion of Silicon Valley BancVentures, L.P., the Company has non-marketable other private equity investments of $1.3 million and $1.1 million as of June, 30, 2004, and December 31, 2003, respectively.

(4)
Non-marketable other investments included $1.5 million related to Partners For Growth, L.P., at June 30, 2004. The Company has a majority ownership interest of 53.2% in the fund. Excluding the minority interest-owned portion of Partners For Growth, L.P., the Company has non-marketable other investments of $0.8 million as of June 30, 2004.

        The following tables present the total commitments, funded commitments, and carrying value of the Company's venture capital and other private equity investments at June 30, 2004. The table also presents net investment gains (losses) for the six months ended June 30, 2004. The carrying value of the Company's venture capital and other private equity investments at and for the year ended December 31, 2003, are included in "Item 8. Consolidated Financial Statements and Supplementary

11



Data—Note 6 to the Consolidated Financial Statements—Investment Securities" in the Company's 2003 Annual Report on Form 10-K.

 
  (As consolidated)
 
  Venture Capital Funds
  Other Private Equity
   
 
  Wholly-owned
Fund Investments

  Funds of Funds
  Wholly-owned
Equity
Investments

  Co-Investment
Fund

  Debt Fund
  Total
 
  (Dollars in thousands)

Commitments by investors to managed funds   $   $ 171,800   $   $ 56,100   $ 47,000   $ 274,900
Commitments to investments     57,844     142,975     16,027     22,911     1,501     241,258
Commitments funded     42,996     59,420     16,027     22,911     1,501     142,855
Inception to date distributions     48,831     3,724     8,902     4,175         65,632
Current cost of investments                                    
  Marketable     8         24     1,189     1     1,222
  Non-marketable     25,476     56,733     1,955     17,130     1,500     102,794
   
 
 
 
 
 
      25,484     56,733     1,979     18,319     1,501     104,016
Carrying value                                    
  Marketable     16         186     1,046     84     1,332
  Non-marketable     25,476     42,427     1,955     12,402     1,500     83,760
   
 
 
 
 
 
      25,492     42,427     2,141     13,448     1,584     85,092

Net investment (losses) gains

 

 

(1,394

)

 

878

 

 

371

 

 

747

 

 

84

 

 

686
 
  (The Company's ownership interest)
   
 
 
  Venture Capital Funds
  Other Private Equity
   
 
 
  Wholly-owned
  Managed Funds of Funds
  Wholly-owned
  Managed Venture Capital Fund
  Venture Debt Fund
  Total
 
 
  (Dollars in thousands)

 
Commitments to investments   $ 57,844   $ 28,500   $ 16,027   $ 6,000   $ 25,000   $ 133,371  
Current cost of investments     25,484     6,800     1,979     1,959     798     37,020  
Carrying value     25,492     5,200     2,141     1,438     843     35,114  
Net investment (losses) gains     (1,394 )   83     371     80     45     (815 )

12


5.     Loans and Allowance for Loan Losses

        The detailed composition of loans, net of unearned income of $13.7 million and $12.3 million, at June 30, 2004, and December 31, 2003, respectively, is presented in the following table:

(Dollars in thousands)

  June 30,
2004

  December 31,
2003

Commercial   $ 1,763,670   $ 1,703,986

Vineyard development

 

 

74,011

 

 

50,118
Commercial real estate     8,759     12,204
   
 
  Total real estate construction     82,770     62,322

Real estate term—consumer

 

 

24,992

 

 

19,213
Real estate term—commercial     14,190     12,902
   
 
  Total real estate term     39,182     32,115
Consumer and other     228,813     190,806
   
 
Total loans, net of unearned income   $ 2,114,435   $ 1,989,229
   
 

        The activity in the allowance for loan losses for the three and six months ended June 30, 2004 and 2003 was as follows:

 
  Three months ended June 30,
  Six months ended June 30,
 
(Dollars in thousands)

 
  2004
  2003
  2004
  2003
 
Beginning balance   $ 63,300   $ 70,000   $ 64,500   $ 70,500  
Provision for loan losses     (2,759 )   1,162     (2,742 )   4,546  
Loans charged off     (3,067 )   (4,696 )   (7,121 )   (13,400 )
Recoveries     4,426     3,034     7,263     7,854  
   
 
 
 
 
Ending balance   $ 61,900   $ 69,500   $ 61,900   $ 69,500  
   
 
 
 
 

        The aggregate recorded investment in loans for which impairment has been determined in accordance with SFAS No. 114 totaled $12.6 million and $16.7 million at June 30, 2004, and June 30, 2003, respectively. Allocations of the allowance for loan losses specific to impaired loans totaled $3.8 million at June 30, 2004, and $8.7 million at June 30, 2003. Average impaired loans for the second quarter of 2004 and 2003 totaled $13.7 million and $18.9 million, respectively.

6.     Goodwill

        The Company's total goodwill balance was $37.5 million at June 30, 2004 and December 31, 2003. Substantially all of the Company's goodwill pertains to the acquisition of SVB Alliant and a minor portion relates to the acquisition of Woodside Asset Management, Inc.

        As discussed in the 2003 Annual Report on Form 10-K under "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.

        During the 2004 second quarter, the Company conducted its annual valuation analysis of the SVB Alliant reporting unit in accordance with SFAS No. 142, based primarily on forecasted discounted cash

13



flow analyses. The valuation analysis of SVB Alliant indicated no further impairment beyond that already identified in the valuation analyses performed on that reporting unit as of June 30, 2003 and again as of December 31, 2003, which had previously indicated impairment of goodwill of $17.0 million and $46.0 million, respectively. The Company expensed these amounts to continuing operations as impairment charges during the second and fourth quarters of 2003, respectively.

        For a description of the Company's accounting policies relating to goodwill, refer to the 2003 Annual Report on Form 10-K, under "Item 8. Consolidated Financial Statements and Supplementary Data—Note 1 to the Consolidated Financial Statements—Summary of Significant Accounting Policies."

7.     Short-term Borrowings and Long-term Debt

        The following table represents the outstanding short-term borrowings and long-term debt at June 30, 2004 and December 31, 2003:

(Dollars in thousands)

  Maturity
  June 30,
2004

  December 31,
2003

Short-term borrowings:                
  Short-term note payable(1)   September 28, 2004   $ 9,263   $ 9,124
  Federal funds purchased   July 1, 2004     25,000    
       
 
Total short-term borrowings       $ 34,263   $ 9,124
       
 
Long-term debt:                
  Long-term note payable(1)   September 28, 2005   $ 8,979   $ 8,837
  Convertible subordinated notes   June 15, 2008     146,268     145,797
  Junior subordinated debentures   October 30, 2033     50,558     49,652
       
 
Total long-term debt       $ 205,805   $ 204,286
       
 

(1)
Relates to the acquisition of SVB Alliant, and are payable to the former owners, who were employed by the Company. These notes were discounted over their respective terms, based on market interest rates as of September 28, 2001. Refer to Interim Consolidated Financial Statements Note 2. Business Combinations.

        On June 30, 2004, the company entered into federal funds purchased arrangements with an average interest rate of 1.4% repayable on July 1, 2004.

        On May 20, 2003, the Company issued $150.0 million of zero-coupon, convertible subordinated notes at face value, due June 15, 2008, to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 and outside the United States to non-US persons pursuant to Regulation S under the Securities Act. The notes are convertible into the Company's common stock at a conversion price of $33.6277 per share and are subordinated to all present and future senior debt of the Company. Holders of the notes may convert their notes only if: (i) the price of the Company's common stock issuable upon conversion of a note reaches a specified threshold, (ii) specified corporate transactions occur, or (iii) the trading price for the notes falls below certain thresholds. At the initial conversion price, each $1,000 principal amount of notes will be convertible into approximately 29.7374 shares of the Company's common stock. The Company filed a shelf registration statement with respect to the resale of the notes and the common stock issuable upon the conversion of the notes with the SEC on August 14, 2003. The fair value of the convertible subordinated notes at June 30, 2004 was $189.3 million, based on quoted market prices. This debt will be convertible in the 2004 third quarter, since the Company's stock price was $39.65 at June 30, 2004, which exceeded the conversion threshold. The potential dilutive effect of this contingently convertible debt as of June 30, 2004 was excluded from the calculation of earnings per share in 2004 and 2003 in accordance with the provisions of SFAS No. 128 and EITF 90-19.

14



        Concurrent with the issuance of the convertible notes, the Company entered into convertible note hedge and warrant transactions with respect to its common stock, with the objective of limiting its exposure to potential dilution from conversion of the notes. The terms and conditions of the convertible note hedge are disclosed in "Part I. Financial Information—Item 1. Notes to the Interim Consolidated Financial Statements—Note 8 to the Interim Consolidated Financial Statements—Derivative Financial Instruments." The proceeds of the warrant transaction were included in stockholders' equity in accordance with the guidance in Emerging Task Force Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." Under the warrant agreement, Credit Suisse First Boston LLC may purchase up to approximately 4.4 million shares of the Company's common stock at $51.34 per share, upon the occurrence of conversion events defined above. The warrant transaction will expire on June 15, 2008.

7.0% Junior Subordinated Debentures

        On October 30, 2003, the Company issued $51.5 million in 7.0% Junior Subordinated Debentures to a special-purpose trust, SVB Capital II. Distributions to SVB Capital II are cumulative and are payable quarterly at a fixed rate of 7.0% per annum of the face value of the Junior Subordinated Debentures. The Junior Subordinated Debentures are mandatorily redeemable upon the maturity of the debentures on October 15, 2033, or to the extent that there are any earlier redemptions of any debentures by the Company. The Company may redeem the debentures prior to maturity in whole or in part, at its option, at any time on or after October 30, 2008. In addition, the Company may redeem the debentures, in whole but not in part, prior to October 30, 2008 upon the occurrence of certain events. Issuance costs of $2.2 million related to the Junior Subordinated Debentures were deferred and are being amortized over the period until mandatory redemption of the debentures in October 2033. Also see "Note 8. Derivative Financial Instruments" below. The fair value of the 7.0% Junior Subordinated Debentures was estimated to be $45.4 million as of June 30, 2004.

Available Lines of Credit

        The Company currently has available federal funds and lines of credit facilities totaling $169.0 million, of which $139.0 million were unused at June 30, 2004.

8.     Derivative Financial Instruments

        Derivative instruments that the Company uses as a part of its interest rate risk management may include interest rate swaps, caps and floors and forward contracts.

        On October 30, 2003, the Company entered into an interest rate swap agreement with a notional amount of $50.0 million. This agreement hedges against the risk of changes in fair value associated with the Company's Junior Subordinated Debentures. The terms of this interest rate hedge agreement provide for a swap of the Company's 7.0% fixed rate payment for a variable rate based on London Inter-Bank Offer Rate (LIBOR) plus a spread. Because the swap meets the criteria for the "short cut" treatment under SFAS No. 133, the benefit or expense is recorded in the period incurred. This derivative agreement provided a benefit of $0.6 million and $1.2 million for the three and six months ended June 30, 2004. The swap agreement mirrors the terms of the Junior Subordinated Debentures and therefore is callable by the counterparty anytime after October 30, 2008. The Company assumes no ineffectiveness as the swap agreement meets the short-cut method requirements under SFAS No. 133 for fair value hedges of debt instruments. As a result, changes in the fair value of the swap are offset by changes in the fair value of the Junior Subordinated Debentures, and no net gain or loss is recognized in earnings. Changes in the fair value of the derivative agreement and the Junior Subordinated Debentures are primarily dependent on changes in market interest rates. The derivative instrument had a fair value of $1.2 million, which was recorded in other assets at June 30, 2004.

15


        On May 15, 2003, the Company entered into a convertible note hedge agreement (purchased call option) with Credit Suisse First Boston LLC (the Counterparty) with respect to its common stock, to limit its exposure to potential dilution from conversion of the Company's $150.0 million principal amount of zero coupon convertible notes. Upon the occurrence of conversion events, the Company has the right to purchase up to approximately 4.4 million of its common stock from the Counterparty at a price of $33.6277 per common share. The convertible note hedge agreement will expire on June 15, 2008. The Company has the option to settle any amounts due under the convertible hedge either in cash or net shares of its common stock. The cost of the convertible note hedge is included in stockholders' equity in accordance with the guidance in Emerging Task Force Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock."

        For the Company's Foreign Exchange Contracts and Foreign Currency Option Contracts, see the Company's 2003 Annual Report on Form 10-K.

9. Operating Segments

        The Company is organized into five lines of banking and financial services for management reporting: Commercial Banking, Merchant Banking (SVB Capital), Investment Banking (SVB Alliant), Private Client Services (formerly Private Banking), and Other Business Services. These operating segments are strategic units that offer different services to different clients. They are managed separately because each segment appeals to different markets and, accordingly, requires different strategies. The results of operating segments are based on the Company's management reporting process, which assigns assets, liabilities, income, and expenses to the aforementioned operating segments. This process is dynamic and there is no comprehensive, authoritative guidance for management reporting. The management reporting process measures the performance of operating segments based on the Company's management structure and is not necessarily comparable with similar information for other financial services companies. Changes in the management structure and/or the allocation process have resulted, and may in the future result in, changes in the Company's allocation methodology as this process is under constant refinement. In the event of such changes, results for prior periods have been, and may be, restated for comparability, and to reflect changes in the Company's allocation methodology.

        As of June 30, 2004, based on the quantitative threshold for determining reportable segments as required by SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information," the Company's reportable segments are: Commercial Banking, which is the principal operating segment of the Company, Merchant Banking (SVB Capital), and Investment Banking (SVB Alliant). Private Client Services does not meet the separate reporting thresholds as defined by SFAS No. 131 and as such has been combined with other business services for segment reporting purposes.

        Commercial Banking provides services to commercial clients in the technology, life science and premium wine industry niches. Lending services, include traditional term loans, commercial finance lending, and structured finance lending. The segment's cash management services unit provides deposit services, collection services, disbursement services, electronic funds transfers, and online banking through SVBeConnect. Commercial Banking's International services unit provides trade services, foreign exchange services, export trade finance, and international cash management. Investment and advisory services are provided through Silicon Valley Bank's broker-dealer subsidiary, SVB Securities, which includes mutual funds, fixed income securities, and investment reporting and monitoring. Also under Commercial Banking, SVB Asset Management one of the Bank's registered investment advisor subsidiaries, actively manages commercial client investment portfolios.

        Merchant Banking (SVB Capital) makes private equity and venture capital fund investments, international alliances and manages three limited partnerships: a venture capital fund and two funds of

16



funds. Merchant Banking also provides the lending, deposit, cash management, international, and investment banking services to venture capital firms and other private equity firms.

        Investment Banking (SVB Alliant) provides merger and acquisition, private placement, and corporate partnering services.

        Private Client Services and Other segment includes Private Client Services and Other Business Services. Private Client Services provides a wide array of loan, personal asset management, mortgage services, and trust and estate planning tailored for high-net-worth individuals. It also provides investment advisory services to these high-net-worth clients through the Company's subsidiary Woodside Asset Management, Inc. The Other Business Services unit provides Web-based business services and professional services. The Private Client Services and Other segment also includes necessary adjustments to reconcile segment data to the interim consolidated financial statements.

        The Company's primary source of revenue is from net interest income. Thus, the Company's segments are reported below using net interest income. The Company also evaluates performance based on noninterest income and noninterest expense, which are presented as measures of segment profit and loss. The Company does not allocate income taxes to its segments. Additionally, the

17



Company's management reporting model is predicated on average asset balances, therefore, it is not possible to provide period-end asset balances for segment reporting purposes.

 
  Commercial
Banking

  Merchant
Banking
(SVB Capital)

  Investment
Banking
(SVB Alliant)

  Private Client
Services and
Other

  Total
 
 
  (Dollars in thousands)

 
Second quarter of 2004                                
Net interest income   $ 39,681   $ 2,803   $   $ 12,545   $ 55,029  
Provision for loan losses(1)     (1,355 )   (4 )       (1,400 )   (2,759 )
Noninterest income (loss)(2)     16,854     4,363     10,897     (606 )   31,508  
Noninterest expense(3)     42,287     5,334     10,501     5,528     63,650  
Minority interest         652         (719 )   (67 )
Income before income taxes     15,603     2,488     396     7,092     25,579  

Total average loans

 

 

1,567,596

 

 

83,966

 

 


 

 

229,418

 

 

1,880,980

 
Total assets(4)     3,625,749     577,527     68,667     442,997     4,714,940  
Total average deposits     3,236,317     545,149         117,029     3,898,495  
Period-end goodwill             35,638     1,911     37,549  

Second quarter of 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net interest income   $ 38,055   $ 2,895   $ 14   $ 5,736   $ 46,700  
Provision for loan losses(1)     1,469             (307 )   1,162  
Noninterest income (loss)(2)     13,453     690     4,641     (1,279 )   17,505  
Noninterest expense(3)     35,054     4,537     20,258     7,354     67,203  
Minority interest         487         2,278     2,765  
Income (loss) before income taxes     14,985     (465 )   (15,603 )   (312 )   (1,395 )

Total average loans

 

 

1,524,815

 

 

69,279

 

 


 

 

230,440

 

 

1,824,534

 
Total assets(4)     2,797,922     507,049     91,442     494,151     3,890,564  
Total average deposits     2,499,871     483,430         154,027     3,137,328  
Period-end Goodwill             81,637     1,911     83,548  

First six months of 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net interest income   $ 77,764   $ 5,370   $   $ 22,715   $ 105,849  
Provision for loan losses(1)     (137 )           (2,605 )   (2,742 )
Noninterest income(2)     32,581     8,197     14,985     631     56,394  
Noninterest expense(3)     79,041     10,089     14,623     13,066     116,819  
Minority interest         1,123         (1,671 )   (548 )
Income before income taxes     31,441     4,601     362     11,214     47,618  

Total average loans

 

 

1,544,969

 

 

74,113

 

 


 

 

224,954

 

 

1,844,036

 
Total assets(4)     3,418,001     548,215     67,111     534,965     4,568,292  
Total average deposits     3,119,950     524,596         114,796     3,759,342  

First six months of 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net interest income   $ 76,805   $ 6,115   $ 27   $ 11,731   $ 94,678  
Provision for loan losses(1)     5,355             (809 )   4,546  
Noninterest income (loss)(2)     27,697     2,178     8,785     (3,709 )   34,951  
Noninterest expense(3)     70,814     8,758     23,226     14,513     117,311  
Minority interest         1,057         5,187     6,244  
Income (loss) before income taxes     28,333     592     (14,414 )   (495 )   14,016  

Total average loans

 

 

1,528,018

 

 

79,150

 

 


 

 

233,258

 

 

1,840,426

 
Total assets(4)     2,843,995     514,652     91,442     442,463     3,892,552  
Total average deposits     2,514,429     485,413         148,608     3,148,450  

(1)
For segment reporting purposes, the Company reports net charge-offs as the provision for loan losses. Thus, the Private Client Service and Other segment includes $(1.4) million and $(0.3) million for the three-month periods ended June 30, 2004 and 2003, respectively, and includes $(2.6) million and $(0.8) million for the six-month periods ended June 30, 2004 and 2003, respectively, which represent the difference between net (recoveries) charge-offs and the provision for loan losses.

(2)
Noninterest income presented in the Merchant Banking (SVB Capital) segment included warrant income of $3.3 million and $1.1 million, for the three months ended June 30, 2004 and 2003, respectively and $6.2 million and $3.0 million, for the six months ended June 30, 2004 and 2003, respectively.

(3)
Commercial Banking segment includes direct depreciation and amortization of $0.5 million and $0.3 million for the three months ended June 30, 2004 and 2003, respectively, and $0.8 million and $0.7 million for the six months ended June 30, 2004 and 2003, respectively. Due to the complexity of the Company's cost allocation model, it is not feasible to determine the exact amount of the remaining depreciation and amortization expense allocated to the various business segments (totaling approximately $1.7 million for the three months ended June 30, 2004 and 2003, and approximately $3.3 million for the six months ended June 30, 2004 and 2003).

(4)
Total assets for the Commercial Banking and Merchant Banking (SVB Capital), segments equals the greater of total loans or the sum of total deposits and total stockholders' equity for each segment. Total assets presented in the Investment Banking (SVB Alliant) and the Private Client Services and Other segments included goodwill.

18


10. Common Stock Repurchase

$160.0 million share repurchase program authorized by the board of directors, effective May 7, 2003

        On May 7, 2003, the Company announced that its board of directors authorized a stock repurchase program of up to $160.0 million. This program became effective immediately and replaced previously announced stock repurchase programs. The Company did not repurchase any shares under this program in the first half of 2004. Under this program, the Company repurchased in aggregate 4.5 million shares of common stock totaling $113.2 million in 2003. On May 20, 2003, the Company purchased 1.3 million shares of common stock for approximately $33.4 million in conjunction with the Company's convertible note offering. Additionally, during the second quarter of 2003, the Company entered into an accelerated stock repurchase agreement (ASR) for 3.2 million shares at an initial price of $79.9 million. The Company completed its settlement obligations under this ASR agreement in the third quarter of 2003.

$100.0 million share repurchase program authorized by the board of directors on September 16, 2002

        From its inception through its termination on May 7, 2003, the Company repurchased 5.2 million shares of common stock totaling $94.3 million in conjunction with the $100.0 million share repurchase program. Under this program, the Company had repurchased 3.3 million shares of common stock totaling $59.7 million during 2002. A portion of the shares repurchased under this program was completed under an ASR agreement.

        For terms of these ASR agreements, see our 2003 Annual Report on Form 10-K, under "Item 8. Consolidated Financial Statements and Supplementary Data, Note 15. Common Stock Repurchases".

11. Obligations Under Guarantees

        The Company provides guarantees related to financial and performance standby letters of credit issued to its clients to enhance their credit standings and enable them to complete a wide variety of business transactions. Financial standby letters of credit are conditional commitments issued by the Company to guarantee the payment by a client to a third party (beneficiary). Financial standby letters of credit are primarily used to support many types of domestic and international payments. Performance standby letters of credit are issued to guarantee the performance of a client to a third party when certain specified future events have occurred. Performance standby letters of credit are primarily used to support performance instruments such as bid bonds, performance bonds, lease obligations, repayment of loans, and past due notices. These standby letters of credit have fixed expiration dates and generally require a fee paid by a client at the time the Company issues the commitment. Fees generated from these standby letters of credit are recognized in noninterest income over the commitment period.

        The credit risk involved in issuing letters of credit is essentially the same as that involved with extending loan commitments to clients, and accordingly, we use a credit evaluation process and collateral requirements similar to those for loan commitments. The Company's standby letters of credit often are cash-secured by its clients. The actual liquidity needs or the credit risk that the Company has experienced historically have been lower than the contractual amount of letters of credit issued because a significant portion of these conditional commitments expire without being drawn upon.

        The table below summarizes the Company's standby letter of credits at June 30, 2004. The maximum potential amount of future payments represents the amount that could be lost under the

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standby letters of credit if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from the collateral held or pledged.

 
  Expires in one
year or less

  Expires after
one year

  Total amount
outstanding

  Maximum amount of
future payments

 
  (dollars in thousands)

Financial standby   $ 493,210   $ 58,450   $ 551,660   $ 551,660
Performance standby     3,677     4,220     7,897     7,897
   
 
 
 
Total   $ 496,887   $ 62,670   $ 559,557   $ 559,557
   
 
 
 

        At June 30, 2004 and 2003, the carrying amount of the liabilities related to financial and performance standby letters of credit was approximately $3.3 million and $2.2 million, respectively. At June 30, 2004 and 2003, cash collateral available to the Company to reimburse losses under financial and performance standby letters of credits was $220.0 million and $293.4 million respectively.

12. Subsequent Events

Rights Plan

        On August 2, 2004, the Company and Wells Fargo Bank, N.A., as Rights Agent (the "Rights Agent"), executed Amendment No. 1 to the Amended and Restated Preferred Stock Rights Agreement, dated as of January 29, 2004, by and between the Company and the Rights Agent, to, among other things, change the Final Expiration Date (as such term is defined in the Restated Rights Agreement, as amended) from January 31, 2014 to January 31, 2008, and make certain conforming changes.

SVB Alliant

        On September 28, 2001, the Company completed its acquisition of SVB Alliant (formerly known as Alliant Partners). In addition to the fixed purchase price, the acquisition agreement provided for certain additional contingent earn out payments of cash and/or common stock to be made by the Company to the sellers, based upon SVB Alliant's cumulative after-tax net income. See "Part 1, Item 1 Interim Consolidated financial Statements, Note 2—Business Combinations"

        On August 6, 2004, the Company and the founders of SVB Alliant (formerly known as Alliant Partners) agreed to release the Company (and its relevant Affiliates) from any prospective earn-out payments associated with SVB Alliant's after-tax net income, other than those associated with any change of control of the Company. In exchange for the release of the Earn Out Payments, the Company agreed to shorten the term of the non-compete agreements with certain of the founders of Alliant Partners.

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ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

        Throughout the following management discussion and analysis when we refer to "Silicon Valley Bancshares," or "we" or similar words, we intend to include Silicon Valley Bancshares and all of its subsidiaries collectively, including Silicon Valley Bank. When we refer to "Bancshares," we are referring only to Silicon Valley Bancshares.

        The following discussion and analysis of financial condition and results of operations should be read in conjunction with our interim consolidated financial statements and notes as presented in Part I—Item 1 of this report and in conjunction with our 2003 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (SEC). Certain reclassifications have been made to prior years' results to conform with 2004 presentations. Such reclassifications had no effect on our results of operations or stockholders' equity.

Executive Overview

        For over 20 years, we have been dedicated to helping entrepreneurs succeed, specifically focusing on industries where we have deep knowledge and relationships. Our focus remains on the technology, life science, private equity, and premium wine niches. We continue to diversify our services to support our clients throughout their life cycles, regardless of their age or size. We offer a range of financial services that generate three distinct sources of income.

        In part, our income is generated from interest rate differentials. The difference between the interest rates paid by us on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received on interest-earning assets, such as loans extended to clients and securities held in our investment portfolio, accounts for the major portion of our earnings. Our deposits are largely obtained from commercial clients within our technology, life science, private equity, and premium winery industry sectors, and, to a lesser extent, from individuals served by our private client services group. We do not obtain deposits from conventional retail sources and have no brokered deposits. As part of negotiated credit facilities and certain other services, we frequently obtain rights to acquire stock in the form of warrants in certain client companies.

        Fee-based services also generate income for our business. We market our full range of financial services to all of our clients which includes private equity firms and venture capitalists. In addition to commercial banking and private client services, we offer fee-based merger and acquisition services, private placements, and investment and advisory services. Our ability to integrate and cross-sell our diverse financial services to our clients is a strength of our business model.

        In addition, we seek to obtain equity returns through investments in direct private equity and venture capital fund investments. We also manage three limited partnerships: a venture capital fund and two funds that invest in venture capital funds.

        We are able to offer our clients financial products and services through five lines of banking and financial services, as discussed in further detail below: Commercial Banking, Merchant Banking (SVB Capital), Investment Banking (SVB Alliant), Private Client Services and Other Business Services. These operating segments are strategic units that offer different services to different clients, and are managed separately because each segment appeals to different markets and, accordingly, require different strategies.

Commercial Banking

        We provide solutions to the needs of our commercial clients in technology, life science and premium wine industry niches through our lending, deposit, cash management and global trade products and services.

21



        Through our lending products and services, we extend loans and other credit facilities to our commercial clients, most often secured by our clients' assets. We offer a variety of loans, including term loans, equipment loans, revolving lines of credit, receivable based lines of credit, real estate loans, vineyard loans and financing of affordable housing projects. We often obtain warrants to purchase an equity position in a client company's stock in consideration for making loans to these clients.

        We also provide deposit account related products and services to commercial clients to provide short and long-term cash management solutions. The deposit account products include traditional deposit and checking accounts, certificates of deposit and money market accounts. In connection with deposit accounts, we also provide lockbox and merchant services that facilitate quicker depositing of checks and other payments to clients' accounts. We also provide wire transfer and Automatic Clearing House services to enable clients to transfer funds quickly from their deposit accounts.

        We also provide global banking and trade services to facilitate our clients' global finance and business needs. Those services include foreign exchange services that empower commercial clients to manage their foreign currency risks through purchases and sales of currencies on the global inter-bank market. We also offer a variety of loans and credit facilities guaranteed by the Export-Import Bank of the United States to facilitate our clients' international trade. Further, we provide a variety of letters of credit, including export, import and standby letters of credit, to enable clients to ship and receive goods globally.

        Through our broker-dealer, SVB Securities, we provide our commercial clients with mutual fund and fixed income investment securities to enable clients to manage their assets. Our registered investment advisor, SVB Asset Management, provides our commercial clients with customized cash and investment portfolio management.

Merchant Banking (SVB Capital)

        Our Merchant Banking group focuses on the business needs of our venture capital and private equity clients while establishing and maintaining relationships with those firms domestically and internationally. Through this group, Silicon Valley Bank provides banking services and financial solutions, including traditional deposit and checking accounts, loans, letters of credit, and cash management services.

        Our Merchant Banking group also makes investments in venture capital and other private equity firms, and in companies in the niches we serve. The group also manages three venture funds that are consolidated into our financial statements: SVB Strategic Investors Fund, L.P. and SVB Strategic Investors Fund, L.P.II, funds of funds that invest in other venture funds; and Silicon Valley BancVentures, L.P., a direct equity venture fund that invests in privately held technology and life-sciences companies. This group also holds a majority interest in Partners For Growth, L.P., a fund that provides secured debt to "emerging-growth" clients, a term as defined in Part 1, Item 1. Interim Consolidated Financial Statements—Note 1.

        The Merchant Banking group, through the Special Equities Group (a division of SVB Securities), also assists private equity firms with liquidating restricted securities following initial public offerings and mergers and acquisitions, including in-kind stock transactions, restricted stock sales, block trading, and special situations trading such as liquidation of foreign securities.

Investment Banking (SVB Alliant)

        Through a broker-dealer subsidiary, we provide merger and acquisition (M&A), strategic alliance services, and specialized financial studies such as valuations and fairness opinions. In October 2003, we enhanced our investment banking product set by launching a Private Capital Group that provides advisory services for the private placement of securities.

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Private Client Services and Other Business Segments

        Other Business Segments principally comprises our Private Client Services group. Through this group, we offer a wide range of credit services to high-net-worth individuals using both long-term secured and short-term unsecured lines of credit. Those products and services include home equity lines of credit, secured lines of credit, restricted stock loans, airplane loans and capital call lines of credit. We also provide our clients with deposit account products and services to meet cash management needs, including checking accounts, deposit accounts, money market accounts and certificates of deposit. Through our subsidiary, Woodside Asset Management, Inc., we provide individual clients with personal investment advisory services, assisting clients in establishing and implementing investment strategies to meet their individual needs and goals. In January 2004, our Private Banking group changed its name to "Private Client Services Group."

Critical Accounting Policies and Estimates

        The accompanying management's discussion and analysis of results of operations and financial condition are based upon our interim consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management evaluates estimates on an ongoing basis, including those related to the marketable and non-marketable equity securities, allowance for loan losses, and goodwill. Management bases its estimates on historical experiences and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

        We believe the accounting policies discussed below are the most critical to our financial statements because their application places the most significant demands on management's judgments. Each estimate is discussed below. The financial impact of each estimate, to the extent significant to financial results, is discussed in the applicable sections of the management's discussion and analysis.

Marketable Equity Securities

        Our investments in marketable equity securities include:

    Unexercised warrants for shares of publicly-traded companies.

    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.

    Marketable equity securities related to Taurus Growth Partners, L.P. and Libra Partners, L.P. For information on these entities, see our 2003 Annual Report on Form 10-K under "Item 8. Consolidated Financial Statements and Supplementary Data—Note 2 to the Consolidated Financial Statements—Business Combinations."

        Unrealized gains on warrant and unrealized gains or losses on equity investment securities are recorded upon the establishment of a readily determinable fair value of the underlying security, as defined by 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 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'

23


      equity. We are often contractually restricted from selling equity securities, for a certain period of time, subsequent to the portfolio company's initial public offering. Often, the sale of equity securities held by us are not registered under the Securities Act of 1933. In such an event, we often seek exemption from the registration requirements of the Securities Act by effecting sales of equity securities of the portfolio company in compliance with the current public information, holding period, volume limitation and manner of sale requirements of Rule 144 under the Securities Act. In addition, as an inducement to the underwriter(s) to underwrite such an offering, security holders, including us, typically enter into an agreement with the underwriter(s) and/or the portfolio company, pursuant to which the security holder agrees to refrain from selling the securities held by such holder for a period of time after the initial public offering, often 180 days. As a result of such regulatory and contractual requirements, we are frequently restricted for some period of time in its ability to liquidate portfolio securities even after a portfolio company has completed an initial public offering. Gains or losses on these marketable equity instruments are recorded in our consolidated net income in the period the underlying securities are sold to a third party.

    If we possess a warrant that can be settled with a net cash payment to us, the warrant meets the definition of a derivative instrument. Changes in fair value of such derivative instruments are recognized as securities gains or losses in our consolidated net income.

        Marketable Equity Securities are recorded at fair value, which initially is the purchase cost of the securities. However, a decline in the fair value of any of these securities that is considered other than temporary is recorded in our consolidated net income in the period the impairment occurs. The cost basis of the underlying security is written down to fair value as a new cost basis.

        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.

Non-Marketable Equity Securities

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

    Unexercised warrants for shares of privately-held companies.

    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. and SVB Strategic Investors Fund II, L.P., which make investments in venture capital funds, which in turn, invest in privately held companies.

    Through our investment in Partners For Growth, L.P., which makes investments in privately held companies including equity and loans.

        Unexercised warrant securities in private companies are initially recorded at a nominal value on our consolidated balance sheets. They are carried at this value until they become marketable or expire, except in the following circumstance:

        Gains on warrant and gains or losses on equity investment securities that result from a portfolio company being acquired by a publicly-traded company are marked to market when the acquisition

24



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 securities, are excluded from consolidated net income 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 net income.

        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 Bancshares   Cost basis less identified impairment, if any
Owned by Silicon Valley BancVentures, L.P. and Partners For Growth, L.P. and SVB Strategic Investors Fund, L.P. and SVB Strategic Investors Fund II, L.P.   Investment company accounting, adjusted to fair value on a quarterly basis through net income

        Bancshares' wholly-owned non-marketable venture capital fund investments and other direct equity investments are recorded 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. are recorded at fair value using investment company accounting rules. The investments consist principally 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 strategies, and other pertinent information. The general partner, Silicon Valley BancVentures, Inc. is owned and controlled by Bancshares and has an ownership interest of 10.7% in Silicon Valley BancVentures, L.P. The limited partners do not have substantive participating rights. 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 net income. The portion of any gains or losses belonging to the limited partners is reflected in minority interest in net losses of consolidated affiliates and adjusts Bancshares' income to its percentage ownership.

        The SVB Strategic Investors Fund, L.P. and SVB Strategic Investors Fund, L.P. II (SIF I & II) portfolios consists primarily of investments in venture capital funds, which are recorded at fair value using investment company accounting rules. The carrying value of the investments is determined by the general partners based on the percentage of SIF I & II's interest in the total fair market value as provided by each venture capital fund investment. SVB Strategic Investors, LLC and SVB Strategic Investors II, LLC generally utilize the fair values assigned to the underlying respective 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,

25



operating results, financial conditions, exit strategy, and other pertinent information. The general partner of SVB Strategic Investors Fund, L.P., SVB Strategic Investors, LLC, is owned and controlled by Bancshares and has an ownership interest of 11.1%. The general partner of SVB Strategic Investors Fund II, L.P., SVB Strategic Investors II, LLC, is owned and controlled by Bancshares and has an ownership interest of 30.0%. The limited partners of these funds do not have substantive participating rights. Therefore, SIF I & II are 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 net income. The limited partner's share of any gains or losses is reflected in minority interest in net losses of consolidated affiliates and adjusts Bancshares' income to its percentage ownership.

        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 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 estimation of the allowance 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.

        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 that are probable but 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

26



account management functions. In addition, our management receives and approves an analysis for all impaired loans, as defined by the 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 rolling twelve-month periods as of the end of each quarter. Each of the loans charged-off over the twelve-month period is assigned a credit risk rating at the period end of each of the preceding four quarters. On an annual basis, the model calculates charged-off loans as a percentage of current period end loans by credit risk-rating category. The percentages are averaged and are aggregated to estimate our loan loss factors. The annual periods reviewed and averaged to form the loan loss factors are limited to twelve quarters of history. The current period end client loan balances are aggregated by risk-rating category. Loan loss factors for each risk-rating category are ultimately applied to the respective period end client loan balances for each corresponding risk-rating category, to provide an estimation of the allowance for loan losses.

Contingent and Macro 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.

        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:

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

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

    Changes in the nature of our loan portfolio

27


    Changes in experience, ability and depth of lending management and staff

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

    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 our analysis.

Goodwill

        Goodwill, which arises from the purchase price exceeding the assigned value of the net assets of an acquired business, represents the value attributable to unidentifiable intangible elements being acquired. The majority of our goodwill resulted from the acquisition of SVB Alliant (formerly known as Alliant Partners), a mergers and acquisitions firm. The value of this goodwill is supported ultimately by the free cash flows from the acquired businesses. A decline in earnings as a result of a decline in mergers and acquisitions transaction volume or a decline in the valuations of mergers and acquisitions clients could lead to impairment, which would be recorded as a write-down in our consolidated net income.

        On an annual basis or as circumstances dictate, management reviews goodwill and evaluates events or other developments that may indicate impairment in the carrying amount. The evaluation methodology for potential impairments is inherently complex, and involves significant management judgment in the use of estimates and assumptions. We evaluate impairment using a two-step process. First, we compare the aggregate fair value of the reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, no impairment exists. If the carrying amount of the reporting unit exceeds the fair value, then we compare the "implied" fair value, defined below, of the reporting unit's goodwill with its carrying amount. If the carrying amount of the goodwill exceeds the implied fair value, then goodwill impairment is recognized by writing goodwill down to the implied fair value.

        We primarily use a discounted future cash flows approach to value the reporting unit being evaluated for goodwill impairment. These estimates involve many assumptions, including expected results of operations, assumed discounts rates, and assumed growth rates for the reporting units. The discount rate used is based on standard industry practice, taking into account the expected equity risk premium, the size of the business, and the probability of the reporting unit achieving its financial forecasts. The implied fair value is determined by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit, as if the unit had been acquired in a business combination and the fair value of the unit was the purchase price.

        Events that may indicate goodwill impairment include significant or adverse changes in results of operations of the business, economic or political climate; an adverse action or assessment by a regulator; unanticipated competition; and a more likely-than-not expectation that a reporting unit will be sold or disposed of. More information about goodwill is included in "Part 1, Item 1—Interim Consolidated Financial Statements, Note 6. Goodwill" and in our 2003 Annual Report on Form 10-K, "Item 8. Consolidated Financial Statements and Supplementary Data" and "Item 7A. Quantitative and Qualitative Disclosures about Market Risk—Factors That May Affect Future Results."

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Results of Operations

Earnings Summary

        We reported net income of $15.7 million, or $0.43 per diluted common share, for the second quarter of 2004, compared with net losses of $(0.6) million, or $(0.02) per diluted common share, for the second quarter of 2003. Net income totaled $29.7 million, or $0.81 per diluted common share, for the six months ended June 30, 2004, versus $9.8 million or $0.25 per diluted common share, for the respective 2003 period. The annualized return on average assets (ROA) was 1.3% in the second quarter of 2004 compared with (0.1)% in the second quarter of 2003. The annualized return on average equity (ROE) for the second quarter of 2004 was 13.5%, compared with (0.4)% in the second quarter of 2003. For the first six months of 2004, ROA was 1.3% and ROE was 12.8% versus 0.5% and 3.6%, respectively for the comparable prior year period. The results of operations for the second quarter and first half of 2003 were lower than the comparable 2004 periods partially due to an impairment of goodwill charge of $17.0 million incurred in the 2003 second quarter.

        The major components of net income and changes in these components are summarized in the following table, and are discussed in more detail below.

 
  For the Three Months
Ended June 30

   
  For the Six Months
Ended June 30

   
 
(Dollars in thousands)

  %
Increase/
(Decrease)

  %
Increase/
(Decrease)

 
  2004
  2003
  2004
  2003
 
Net interest income   $ 55,029   $ 46,700   17.8   $ 105,849   $ 94,678   11.8  
Provision for loan losses     (2,759 )   1,162   (337.4 )   (2,742 )   4,546   (160.3 )
Noninterest income     31,508     17,505   80.0     56,394     34,951   61.4  
Noninterest expense     63,650     67,203   (5.3 )   116,819     117,311   (0.4 )
Minority interest in net (gains) losses of consolidated affiliates     (67 )   2,765   (102.4 )   (548 )   6,244   (108.8 )
   
 
 
 
 
 
 
Income (loss) before income taxes     25,579     (1,395 ) 1,933.6     47,618     14,016   239.7  
Income tax expense (benefit)     9,871     (819 ) 1,305.3     17,900     4,174   328.9  
   
 
 
 
 
 
 
Net income (loss)   $ 15,708   $ (576 ) 2,827.1   $ 29,718   $ 9,842   202.0  
   
 
 
 
 
 
 

        The foremost reasons for the increase in net income for the second quarter and six months ended June 30, 2004 compared to the same periods in 2003 were; an increase in net interest income, primarily due to improved yields on securities, a recovery of provision for loan losses and an increase in noninterest income, primarily due to corporate finance fees. Additionally, as stated above, we incurred a $17.0 million impairment of goodwill charge in the 2003 second quarter.

Net Interest Income and Margin

        Net interest income is defined as the difference between interest earned, primarily on loans, investment securities, federal funds sold, and 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 annualized 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 annualized taxable-equivalent interest income expressed as a percentage of average interest-earning assets. The average rate paid on funding sources is defined as annualized interest expense as a percentage of average interest-earning assets.

29


        The following table sets forth average assets, liabilities, minority interest, stockholders' equity, interest income, interest expense, annualized yields and rates, and the composition of our annualized net interest margin for the three and six months ended June 30, 2004 and 2003, respectively.


AVERAGE BALANCES, RATES AND YIELDS

 
  For the three months ended June 30,
 
 
  2004
  2003
 
(Dollars in thousands)

  Average
Balance

  Interest
Income/
Expense

  Yield/
Rate

  Average
Balance

  Interest
Income/
Expense

  Yield/
Rate

 
Interest-Earning Assets:                                  
Federal Funds Sold and Securities Purchased Under Agreement to Resell(1)   $ 479,701   $ 1,306   1.1 % $ 345,163   $ 1,129   1.3 %
  Investment Securities:                                  
    Taxable     1,811,929     17,989   4.0     1,151,524     8,557   3.0  
    Non-Taxable(2)     144,244     1,986   5.5     143,506     2,440   6.8  
  Loans:                                  
    Commercial     1,556,080     33,557   8.7     1,528,983     34,557   9.1  
    Real Estate Construction and Term     110,302     1,446   5.3     104,887     1,520   5.8  
    Consumer and Other     214,598     2,277   4.3     190,664     2,057   4.3  
   
 
 
 
 
 
 
  Total Loans     1,880,980     37,280   8.0     1,824,534     38,134   8.4  
   
 
 
 
 
 
 
Total Interest-Earning Assets     4,316,854     58,561   5.5     3,464,727     50,260   5.8  
   
 
 
 
 
 
 

Cash and Due From Banks

 

 

208,297

 

 

 

 

 

 

 

193,709

 

 

 

 

 

 
Allowance for Loan Losses     (65,612 )             (72,436 )          
Goodwill     37,551               100,386            
Other Assets     217,850               203,991            
   
           
           
Total Assets   $ 4,714,940             $ 3,890,377            
   
           
           

Funding Sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Interest-Bearing Liabilities:                                  
  NOW Deposits   $ 26,082     27   0.4   $ 26,897     31   0.5  
  Regular Money Market Deposits     555,939     695   0.5     277,872     424   0.6  
  Bonus Money Market Deposits     744,674     925   0.5     634,365     946   0.6  
  Time Deposits     321,365     477   0.6     522,807     989   0.8  
  Short-Term Borrowings     10,058     72   2.9     9,450     69   2.9  
  Long-Term Debt(3)     204,407     640   1.3     84,716     247   1.2  
   
 
 
 
 
 
 
Total Interest-bearing Liabilities     1,862,525     2,836   0.6     1,556,107     2,706   0.7  
Portion of Noninterest-bearing Funding Sources     2,454,329               1,908,620            
   
 
 
 
 
 
 
Total Funding Sources     4,316,854     2,836   0.3     3,464,727     2,706   0.3  
   
 
 
 
 
 
 
Noninterest-Bearing Funding Sources:                                  
  Demand Deposits     2,250,435               1,675,387            
  Other Liabilities     81,051               74,569            
  Trust Preferred Securities(3)                   38,708            
  Minority Interest in Capital of Consolidated Affiliates     53,853               31,821            
  Stockholders' Equity     467,076               513,785            
  Portion Used to Fund Interest-earning Assets     (2,454,329 )             (1,908,620 )          
   
           
           
Total Liabilities, Minority Interest and Stockholders' Equity   $ 4,714,940             $ 3,890,377            
   
           
           
Net Interest Income and Margin         $ 55,725   5.2 %       $ 47,554   5.5 %
         
 
       
 
 
Total Deposits   $ 3,898,495             $ 3,137,328            
   
           
           

(1)
Includes average interest-bearing deposits in other financial institutions of $11,940 and $1,824 for the three months ended June 30, 2004 and 2003, respectively.

(2)
Interest income on non-taxable investments is presented on a fully taxable-equivalent basis using the federal statutory income tax rate of 35% in 2004 and 2003. The tax equivalent adjustments were $696 and $854 for the three months ended June 30, 2004 and 2003, respectively.

(3)
Adoption of FIN No. 46 and SFAS No. 150 in the latter half of 2003 resulted in a change of classification of Trust Preferred Securities distribution expense from noninterest expense to interest expense. Additionally, the adoption of FIN No. 46 and SFAS No. 150 resulted in a change of classification of Trust Preferred Securities from noninterest bearing funding sources to interest-bearing liabilities. Prior to adoption of FIN No. 46 and SFAS No. 150, in accordance with accounting rules in effect at that time, the company recorded Trust Preferred Securities distribution expense as noninterest expense. On October 30, 2003, $50.0 million in cumulative 7.0% Trust Preferred Securities were issued through a newly formed special purpose trust, SVB Capital II. The companyWe received $51.5 million in proceeds from the issuance of 7.0% Junior Subordinated debentures to SVB Capital II. A portion of the net proceeds were used to redeem the existing $40.0 million of 8.25% Trust Preferred Securities.

30



AVERAGE BALANCES, RATES AND YIELDS

 
  For the six months ended June 30,
 
 
  2004
  2003
 
(Dollars in thousands)

  Average
Balance

  Interest
Income/
Expense

  Yield/
Rate

  Average
Balance

  Interest
Income/
Expense

  Yield/
Rate

 
Interest-Earning Assets:                                  
Federal Funds Sold and Securities Purchased Under Agreement to Resell(1)   $ 510,760   $ 2,750   1.1 % $ 297,041   $ 1,959   1.3 %
  Investment Securities:                                  
    Taxable     1,663,943     32,012   3.9     1,192,264     18,934   3.2  
    Non-Taxable(2)     144,328     4,233   5.9     144,113     4,895   6.8  
  Loans:                                  
    Commercial     1,535,101     66,860   8.8     1,538,298     68,798   9.0  
    Real Estate Construction and Term     103,306     2,682   5.2     102,894     2,957   5.8  
    Consumer and Other     205,629     4,370   4.3     199,234     4,215   4.3  
   
 
 
 
 
 
 
  Total Loans     1,844,036     73,912   8.1     1,840,426     75,970   8.3  
   
 
 
 
 
 
 
Total Interest-Earning Assets     4,163,067     112,907   5.5     3,473,844     101,758   5.9  
   
 
 
 
 
 
 

Cash and Due From Banks

 

 

210,316

 

 

 

 

 

 

 

189,580

 

 

 

 

 

 
Allowance for Loan Losses     (65,858 )             (72,763 )          
Goodwill     37,552               100,478            
Other Assets     223,216               201,319            
   
           
           
Total Assets   $ 4,568,293             $ 3,892,458            
   
           
           

Funding Sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Interest-Bearing Liabilities:                                  
  NOW Deposits   $ 24,778     52   0.4   $ 24,569     56   0.5  
  Regular Money Market Deposits     491,966     1,232   0.5     292,297     880   0.6  
  Bonus Money Market Deposits     724,593     1,816   0.5     621,804     1,849   0.6  
  Time Deposits     345,771     1,037   0.6     540,584     2,055   0.8  
  Short-Term Borrowings     9,717     142   2.9     9,302     138   3.0  
  Long-Term Debt(3)     204,237     1,297   1.3     51,269     389   1.5  
   
 
 
 
 
 
 
Total Interest-bearing Liabilities     1,801,062     5,576   0.6     1,539,825     5,367   0.7  
Portion of Noninterest-bearing Funding Sources     2,362,005               1,934,019            
   
 
 
 
 
 
 
Total Funding Sources     4,163,067     5,576   0.3     3,473,844     5,367   0.3  
   
 
 
 
 
 
 

Noninterest-Bearing Funding Sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Demand Deposits     2,172,234               1,669,196            
Other Liabilities     79,145               66,216            
Trust Preferred Securities(3)                   38,704            
Minority Interest in Capital of Consolidated Affiliates     50,411               34,155            
Stockholders' Equity     465,441               544,362            
Portion Used to Fund Interest-earning Assets     (2,362,005 )             (1,934,019 )          
   
           
           
Total Liabilities, Minority Interest and Stockholders' Equity   $ 4,568,293             $ 3,892,458            
   
           
           
Net Interest Income and Margin         $ 107,331   5.2 %       $ 96,391   5.6 %
         
 
       
 
 
Total Deposits   $ 3,759,342             $ 3,148,450            
   
           
           

(1)
Includes average interest-bearing deposits in other financial institutions of $8,238 and $1,569 for the six months ended June 30, 2004 and 2003, respectively.

(2)
Interest income on non-taxable investments is presented on a fully taxable-equivalent basis using the federal statutory income tax rate of 35% in 2004 and 2003. The tax equivalent adjustments were $1,482 and $1,713 for the six months ended June 30, 2004 and 2003, respectively.

(3)
Adoption of FIN No. 46 and SFAS No. 150 in the latter half of 2003 resulted in a change of classification of Trust Preferred Securities distribution expense from noninterest expense to interest expense. Additionally, the adoption of FIN No. 46 and SFAS No. 150 resulted in a change of classification of Trust Preferred Securities from noninterest bearing funding sources to interest-bearing liabilities. Prior to adoption of FIN No. 46 and SFAS No. 150, in accordance with accounting rules in effect at that time, the company, we recorded Trust Preferred Securities distribution expense as noninterest expense. On October 30, 2003, $50.0 million in cumulative 7.0% Trust Preferred Securities were issued through a newly formed special purpose trust, SVB Capital II. The companyWe received $51.5 million in proceeds from the issuance of 7.0% Junior Subordinated debentures to SVB Capital II. A portion of the net proceeds were used to redeem the existing $40.0 million of 8.25% Trust Preferred Securities.

31


        Net interest income is affected by changes in the amount and mix of interest-earnings assets and interest-bearing liabilities, referred to as "volume change." Net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities, referred to as "rate change." The following table sets forth changes in interest income and interest expense for each major category of interest-earning assets and interest-bearing liabilities. The table also reflects the amount of simultaneous change attributable to both volumes and rates for the periods 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 rate of 35% in 2004 and 2003.

 
  2004 Compared to 2003
 
 
  Three Months Ended June 30,
Increase (Decrease)
Due to Change in

  Six Months Ended June 30,
Increase (Decrease)
Due to Change in

 
(Dollars in thousands)

 
  Volume
  Rate
  Total
  Volume
  Rate
  Total
 
Interest income:                                      
  Federal funds sold and securities purchased under agreement to resell   $ 386   $ (209 ) $ 177   $ 919   $ (128 ) $ 791  
  Investment securities     5,936     3,042     8,978     8,571     3,845     12,416  
  Loans     1,114     (1,968 )   (854 )   21     (2,079 )   (2,058 )
   
 
 
 
 
 
 
Increase (decrease) in interest income     7,436     865     8,301     9,511     1,638     11,149  
   
 
 
 
 
 
 
Interest expense:                                      
  NOW deposits     (1 )   (3 )   (4 )       (4 )   (4 )
  Regular money market deposits     358     (87 )   271     402     (50 )   352  
  Bonus money market deposits     149     (170 )   (21 )   134     (167 )   (33 )
  Time deposits     (330 )   (182 )   (512 )   (640 )   (378 )   (1,018 )
  Short-term borrowings     4     (1 )   3     5     (1 )   4  
  Long-term debt     488     (95 )   393     1,015     (107 )   908  
   
 
 
 
 
 
 
Decrease (increase) in interest expense     668     (538 )   130     916     (707 )   209  
   
 
 
 
 
 
 
Increase (decrease) in net interest income   $ 6,768   $ 1,403   $ 8,171   $ 8,595   $ 2,345   $ 10,940  
   
 
 
 
 
 
 

Quarter ended June 30, 2004 compared to Quarter ended June 30, 2003

Net Interest Income

        Net interest income, on a fully taxable-equivalent basis, totaled $55.7 million for the quarter ended June 30, 2004, an increase of $8.2 million or 17.2% from the comparable 2003 period. The increase in net interest income was the result of an $8.3 million increase in interest income, offset slightly by a small increase in interest expense.

Interest Income—Net Increase in Interest-Earning Assets

        The $8.3 million increase in interest income was primarily the result of a $7.4 million favorable volume variance. The favorable volume variance resulted from an $852.1 million, or 24.6%, increase in average interest-earning assets. Increases in our sources of funding, largely deposits, were the main contributors to the increase in average interest-earning assets, which was primarily centered in highly-liquid federal funds sold and securities purchased under agreements to resell, and taxable investment securities, which collectively increased $795.7 million.

        We experienced an increase in average investment securities resulting in a $5.9 million favorable volume variance. Collectively, average investments increased by $661.1 million, and in particular,

32



relatively higher-yielding mortgage-backed securities increased by $681.1 million. We estimated the average duration of the investment portfolio at June 30, 2004 to be 3.0 years.

        In addition, average loans increased by $56.4 million resulting in a $1.1 million favorable volume variance. The growth in average loans was split fairly evenly between the commercial and consumer loan categories. The increase in average loans reflects an improvement in economic activity and in the markets served by us. Our strategy is to grow average loans modestly throughout 2004, as our corporate technology efforts continue to develop.

        Average federal funds sold and securities purchased under agreement to resell in the second quarter of 2004 increased, resulting in a $0.4 million favorable volume variance. The increase was mainly due to the aforementioned growth in funding sources, mainly deposits. However, the favorable volume variance was partially offset by an unfavorable rate variance of $0.2 million, as average yields decreased from 1.3% in the second quarter of 2003 to 1.1% in the second quarter of 2004.

Interest Income—Declining Market Interest Rates and Shift in Investment Portfolio Mix

        The average yield on taxable investment securities in the second quarter 2004 increased 100 basis points to 4.0% from 3.0% in the prior year second quarter, causing a $3.0 million favorable rate variance associated with our investment securities. This was primarily due to a shift in the composition of a portion of the investment portfolio to relatively higher yielding, mortgage-backed securities.

        We incurred a $2.0 million unfavorable rate variance associated with our loan portfolio, and a $0.2 million unfavorable rate variance associated with federal funds sold and securities under agreement to resell. This was largely due to a decline in the weighted-average prime rate of 25 basis points from 4.3% in the second quarter of 2003 to 4.0% in the second quarter of 2004. This decrease in prime rate reduced yields on floating rate loans, which represented approximately $1.7 billion, or 80.0% of our total loan portfolio as of June 30, 2004.

        The yield on average interest-earning assets declined 30 basis points in the second quarter of 2004 from the second quarter of 2003. The decrease in yield on interest-earning assets was primarily caused by the drop in the weighted-average prime rate and a decrease in short-term market rates, which resulted in decreased yields on loans and federal funds sold and securities purchased under agreement to resell. Many elements of our interest-earning assets are extremely interest rate sensitive, thus we expect that any future increase in market interest rates will be incremental to our earnings.

Interest Expense

        Total interest expense in the second quarter of 2004 increased only slightly from the second quarter of 2003, despite a $306.4 million, or 19.7% increase in our interest-bearing liabilities. The unfavorable volume variance of $0.7 million was due in large part to FASB Interpretation No. 46, "Consolidation of Variable—Interest Entities" and SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity" mandated classification of our 7.0% Junior Subordinated Debentures (and formerly, our Trust Preferred Securities) as interest-bearing liabilities beginning in the second quarter of 2003. In the fourth quarter of 2003, we entered into an interest rate swap agreement to swap our 7.0% fixed payment on the Debentures for a variable rate based on LIBOR plus a spread. The swap provided a $0.6 million benefit in the second quarter of 2004. Additionally, in the second quarter of 2003, we issued $150 million of zero-coupon, zero-yield, convertible subordinated notes, with a maturity date of June 15, 2008. See "Part 1. Financial Information—Item 1. Notes to the Interim Consolidated Financial Statements—Note 7 to the Consolidated Financial Statements—Short-term Borrowings and Long-term Debt," for further discussion of the convertible subordinated notes. Although no interest is paid on the convertible notes, the amortization of convertible debt issuance costs is reflected as interest expense.

33



        Average time deposits decreased by $201.4 million from the second quarter of 2003 to the second quarter of 2004, causing a $0.3 million favorable volume variance. Our clients may use time deposits as collateral for letters of credit issued by Silicon Valley Bank on their behalf, to certain third parties such as real estate lessors. We believe time deposits have decreased partly because of a softer real estate market, which generally reduces the frequency of these types of arrangements. Moreover, due to general improvement in the economic environment, borrowings secured by time deposits have decreased.

        We experienced a favorable rate variance of $0.5 million due to decreased market interest rates. The favorable rate variance primarily resulted from reductions in the average rates paid on our time deposit product and money market deposit products.

Six months ended June 30, 2004 compared to Six months ended June 30, 2003

Net Interest Income

        Net interest income, on a fully taxable-equivalent basis, totaled $107.3 million for the six months ended June 30, 2004, an increase of $10.9 million or 11.3% from the comparable 2003 period. The increase in net interest income was the result of a $11.1 million increase in interest income, offset slightly by a small increase in interest expense.

Interest Income—Net Increase in Interest-Earning Assets

        The $11.1 million increase in interest income for the first half of 2004, as compared to the first half of 2003, was primarily the result of a $9.5 million favorable volume variance. The favorable volume variance resulted from a $689.2 million, or 19.8%, increase in average interest-earning assets. Increases in our sources of funding, largely deposits, were the main contributors to the increase in average interest-earning assets, which was primarily centered in highly-liquid federal funds sold and securities purchased under agreements to resell, and taxable investment securities, which collectively increased $685.6 million.

        Average federal funds sold and securities purchased under agreement to resell in the first half of 2004 increased, resulting in a $0.9 million favorable volume variance. The increase was mainly due to the aforementioned growth in funding sources, mainly deposits. However, the favorable volume variance was partially offset by an unfavorable rate variance of $0.1 million, as average yields decreased from 1.3% in the first half of 2003 to 1.1% in the first half of 2004.

        We also experienced an increase in average investment securities resulting in a $8.6 million favorable volume variance. Collectively, average investments increased by $471.9 million, and in particular, relatively higher-yielding mortgage-backed securities increased by $531.5 million.

Interest Income—Declining Market Interest Rates and Shift in Investment Portfolio Mix

        The average yield on taxable investment securities increased 70 basis points to 3.9% from 3.2% in the prior year first half, causing a $3.8 million favorable rate variance associated with our investment securities. This was primarily due to a shift in the composition of a portion of the investment portfolio to relatively higher-yielding mortgage-backed securities.

        We incurred a $2.1 million unfavorable rate variance associated with our loan portfolio, and a $0.1 million unfavorable rate variance associated with federal funds sold and securities under agreement to resell. This was largely due to a decline in the weighted-average prime rate of 25 basis points from 4.3% in the first half of 2003 to 4.0% in the first half of 2004. This decrease in prime rate reduced yields on floating rate loans, which represented approximately $1.7 billion, or 80.0% of our total loan portfolio as of June 30, 2004.

34



        The yield on average interest-earning assets declined 40 basis points in the first half of 2004 from the first half of 2003. The decrease in yield on interest-earning assets was primarily caused by the drop in the weighted-average prime rate and a decrease in short-term market rates, which resulted in decreased yields on loans and federal funds sold and securities purchased under agreement to resell. Many elements of our interest-earning assets are extremely interest rate sensitive, thus we expect that any future increase in market interest rates will be incremental to our earnings.

Interest Expense

        Total interest expense in the first half of 2004 increased only slightly from the first half of 2003, despite a $261.2 million, or 17.0% increase in our interest-bearing liabilities. The unfavorable volume variance of $0.9 million was due in large part to FASB Interpretation No. 46 and SFAS No. 150-mandated classification of our 7.0% Junior Subordinated Debentures (and formerly, our Trust Preferred Securities) as interest-bearing liabilities beginning in the second half of 2003. In the fourth quarter of 2003, we entered into an interest rate swap agreement to swap our 7.0% fixed payment on the Debentures for a variable rate based on LIBOR plus a spread. The swap provided a $1.2 million benefit in the first half of 2004. Additionally, in the first half of 2003, we issued $150 million of zero-coupon, zero-yield, convertible subordinated notes, with a maturity date of June 15, 2008. See "Part 1. Financial Information—Item 1. Notes to the Interim Consolidated Financial Statements—Note 7 to the Consolidated Financial Statements—Short-term Borrowings and Long-term Debt," for further discussion of the convertible subordinated notes. Although no interest is paid on the convertible notes, the amortization of convertible debt issuance costs is reflected as interest expense.

        Average time deposits decreased by $194.8 million from the first half of 2003 to the first half of 2004, causing a $0.6 million favorable volume variance. Our clients may use time deposits as collateral for letters of credit issued by Silicon Valley Bank on their behalf, to certain third parties such as real estate lessors. We believe time deposits have decreased partly because of a softer real estate market, which generally reduces the frequency of these types of arrangements. Moreover, due to general improvement in the economic environment, borrowings secured by time deposits have decreased.

        We experienced a favorable rate variance of $0.7 million due to decreased market interest rates. The favorable rate variance primarily resulted from reductions in the average rates paid on our time deposit product and bonus money market deposit products.

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.

Quarter ended June 30, 2004 compared to Quarter ended June 30, 2003

        We realized a recovery of provision for loan losses of $2.8 million in the second quarter of 2004, compared to a provision for loan loss expense of $1.2 million in the 2003 second quarter. We benefited from net recoveries of $1.4 million in the 2004 second quarter and credit quality remained strong with nonperforming loans at 0.6% of total gross loans. See "Financial Condition—Credit Quality and the Allowance for Loan Losses" for additional related discussion.

Six months ended June 30, 2004 compared to Six months ended June 30, 2003

        We realized a recovery of provision for loan losses of $2.7 million in the first six months of 2004, compared to a provision for loan loss expense of $4.5 million in the first six months of 2003. We benefited from net recoveries of $0.1 million in the 2004 first half and credit quality remained strong with nonperforming loans at 0.6% of gross loans at June 30, 2004.

35


Noninterest Income

        The following table summarizes the components of noninterest income for the three and six months ended June 30, 2004 and 2003, and the percent changes from the 2003 periods to the 2004 periods:

 
  For the Three Months
Ended June 30

   
  For the Six Months
Ended June 30

   
 
(Dollars in thousands)

  %
Increase/
(Decrease)

  %
Increase/
(Decrease)

 
  2004
  2003
  2004
  2003
 
Corporate finance fees   $ 10,897   $ 4,641   134.8   $ 14,984   $ 8,785   70.6  
Client investment fees     6,399     6,034   6.1     12,667     12,366   2.4  
Letter of credit and foreign exchange income     3,805     3,128   21.6     7,534     6,631   13.6  
Deposit service charges     3,695     3,245   13.9     7,408     6,121   21.0  
Income from client warrants     3,310     1,051   214.9     6,218     3,013   106.4  
Investment gains (losses)     478     (3,839 ) (112.5 )   1,800     (8,544 ) (121.1 )
Credit card fees     604     988   (38.9 )   1,381     2,034   (32.1 )
Other     2,320     2,257   2.8     4,402     4,545   3.2  
   
 
 
 
 
 
 
Total noninterest income   $ 31,508   $ 17,505   80.0   $ 56,394   $ 34,951   61.4  
   
 
 
 
 
 
 

Quarter and Six Months ended June 30, 2004 compared to Quarter and Six Months ended June 30, 2003

        Substantially all of the increase in corporate finance fees was due to one significant transaction. SVB Alliant's business is highly variable and we expect significant changes in corporate finance fees on a quarter to quarter basis.

        Client investment fees increased slightly for the three and six months ended June 30, 2004 over the comparable prior year periods. We offer private label investments, sweep products, and asset management services to clients on which we earn fees on clients' average balances, ranging from 9 to 58 basis points in 2004, a decrease from the 10 to 90 basis points in the comparable prior year period. Client funds invested in private label investment, sweep products, and assets under management balances were as follows at June 30, 2004 and 2003:

(Dollars in millions)

  At
June 30,
2004

  At
June 30,
2003

Client Investment Funds:            
  Private Label Client Investment Funds   $ 7,761.3   $ 7,232.4
  Sweep Funds     1,187.5     921.6
  Client Investment Assets Under Management     2,007.5     195.6
   
 
Total Client Investment Funds(1)   $ 10,956.3   $ 8,349.6
   
 

(1)
Client Funds invested through Silicon Valley Bancshares, maintained at third party financial institutions.

        Total invested client funds increased by $2.6 billion between the period ends, however, the volume increase was partially offset by a decrease in average fees earned caused by a shift in client investment mix. The sustained low interest rate environment has caused lower priced investment products to become a more attractive investment strategy for many of our clients.

        The increase in letter of credit fees, foreign exchange fees, and other trade finance income was primarily due to a higher volume of client exchange transactions, which resulted from increased global economic activity associated with our client's markets.

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        Deposit service charges increased as we have expanded and enhanced our suite of fee-based financial (depository) services and client usage has increased. Clients compensate us for depository services, either through earnings credits computed on their demand deposit balances, or via explicit payments that we recognize 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 the three and six months ended June 30, 2004 compared to the respective prior year periods due to lower market interest rates. As such, our clients had fewer earnings credits to offset deposit service charges.

        An increase in client initial public offering and merger and acquisition activity resulted in an increase in income from client warrants for the three and six months ended June 30, 2004 over the respective prior year periods. We have historically obtained rights to acquire stock, in the form of warrants, in certain clients, primarily as part of negotiated credit facilities. The receipt of warrants does not change the loan pricing, 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 on factors beyond our control, including the general condition of the public equity markets as well as the merger and acquisition environment. We therefore cannot predict the timing and amount of warrant related income with any degree of accuracy and it is likely to vary materially from period to period.

        We recognized investment gains for the three months ended June 30, 2004, an improvement from the investment losses recognized for the same period in 2003. Investment gains in the second quarter of 2004 were concentrated in our managed fund of funds and our managed venture capital fund. Losses on our equity investments, excluding the impact of minority interest, were $0.3 million in the second quarter of 2004, compared to $1.5 million in the second quarter of 2003. Losses on our equity investments, excluding the impact of minority interest, were $0.4million in the first half of 2004, compared to $3.2 million in the first half of 2003. We expect continued volatility in the performance of our equity portfolio. Gains of approximately $1.0 million in the first half of 2004 were primarily due to the disposition of certain fixed income securities.

Noninterest Expense

        Noninterest expense in the second quarter of 2004 was $63.7 million, a decrease of $3.6 million from the $67.2 million incurred in the 2003 second quarter. The decrease was primarily due to a $17.0 million impairment of goodwill charge, incurred in the 2003 second quarter, partially offset by increase in compensation expense in the current year period. The following table presents the detail of

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noninterest expense, as well as the percent change in noninterest expense for the current year periods compared to the prior year periods:

 
  For the three months ended
June 30,

   
  For the six months ended
June 30,

   
 
(Dollars in thousands)

  %
Increase/
(Decrease)

  %
Increase/
(Decrease)

 
  2004
  2003
  2004
  2003
 
Compensation and benefits   $ 41,153   $ 29,486   39.6 % $ 75,256   $ 61,176   23.0 %
Net occupancy     4,587     4,103   11.8     9,110     8,505   7.1  
Professional services     4,876     3,985   22.4     8,215     7,424   10.7  
Furniture and equipment     3,450     2,710   27.3     6,359     4,904   29.7  
Business development and travel     2,180     2,296   (5.1 )   4,171     3,912   6.6  
Correspondent bank fees     1,243     1,094   13.6     2,524     2,134   18.3  
Data processing services     789     1,392   (43.3 )   1,874     2,483   (24.5 )
Telephone     902     857   5.3     1,684     1,635   3.0  
Postage and supplies     872     632   38.0     1,644     1,216   35.2  
Tax credit fund amortization     620     716   (13.4 )   1,240     1,431   (13.3 )
Advertising and promotion     924     357   (158.8 )   1,180     531   122.2  
Impairment of goodwill         17,000   (100.0 )       17,000   (100.0 )
Trust preferred securities distributions         313   (100.0 )       594   (100.0 )
Other     2,054     2,262   (9.2 )   3,562     4,366   (18.4 )
   
 
     
 
     
Total noninterest expense   $ 63,650   $ 67,203   (5.3 )% $ 116,819   $ 117,311   (0.4 )%
   
 
     
 
     

Quarter and Six Months ended June 30, 2004 compared to Quarter and Six Months ended June 30, 2003

        Compensation and benefits expenses increased for the three and six months ended June 30, 2004 over the respective prior year periods, partially due to incentive compensation expense, which can be attributed to our performance. In addition, we implemented a new combined performance and retention compensation plan at SVB Alliant. This plan provides for the payment of retention amounts in late 2004 and late 2005. The total incremental impact on our compensation due to these new plans at SVB Alliant, for the quarter end June 30, 2004, was approximately $3.3 million. We expect the accounting expense associated with these plans to decrease significantly in the fourth quarter of 2004. We expect "pay-for-performance" and other forms of incentive compensation to constitute a greater portion of aggregate compensation and benefits expense in future periods, causing such expense to fluctuate with our operating results. Full-time equivalent (FTE) personnel were 991 at June 30, 2004, an increase from 980 FTE personnel at June 30, 2003.

        Net occupancy expenses increased for the three and six months ended June 30, 2004, primarily due to increased premises lease expenses associated with the expansion of Silicon Valley Bank offices in certain growth markets.

        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 $4.9 million in the second quarter of 2004, a $0.9 million increase from the $4.0 million incurred in the second quarter of 2003. The increase was primarily due to a slight increase in corporate legal fees incurred in the ordinary course of business, as well as an increase in accounting fees partly due to the additional costs associated with meeting the requirements of the Sarbanes-Oxley Act of 2002. We experienced a similar increase between the six-month periods ended June 30, 2004 and 2003.

        Furniture and equipment expenses increased for the three and six months ended June 30, 2004 over the comparable prior year periods, primarily due to expensed assets associated with the consolidation of two California offices. Also, see data processing below.

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        Data processing expense decreased in both the three and six months ended June 30, 2004, compared to the equivalent prior year periods. In late 2003, we renegotiated the terms of a vendor relationship from outsourced data processing provider to a short-term software licensing arrangement. Hence the expenses associated with this vendor, which were classified as data processing in the first six months of 2003, have been classified as furniture and equipment in 2004. We intend to in-source this data processing application in late 2004.

        Correspondent bank fees increased for the three and six-month periods ended June 30, 2004 over the comparable prior year periods. Many of our correspondent banks provide earnings credits to offset the 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 the second quarter and first half of 2004 versus the comparable prior year periods, due to lower market interest rates. As a result, we had fewer earnings credits to offset bank fees we incurred. Thus, we incurred higher recognizable bank fees in 2004 as compared with 2003. Also, we made the decision to lower our average balances with correspondent banks because our investment alternatives yielded a higher return than our earnings credit rate.

        At June 30, 2003, we concluded SVB Alliant had an impairment of goodwill based on our market approach valuation and forecasted discounted cash flows for that reporting unit. As required by SFAS No.142 in measuring the amount of goodwill impairment, we made a hypothetical allocation of the reporting unit's estimated fair value to the tangible and intangible assets (other than goodwill) of the reporting unit. Based on this allocation, we concluded that $17.0 million of the related goodwill was impaired and was required to be expensed as a noncash charge to continuing operations during the second quarter of 2003. We conducted our annual valuation analysis of the SVB Alliant reporting unit as of the end of the second quarter of 2004 and 2003. The 2004 analysis indicated no impairment.

Minority Interest in Net (Gains) Losses of Consolidated Affiliates

        Investment gains or losses related to our managed funds, (see Part 1, Item 1, Interim Consolidated Financial Statements, Note 4. Investments Securities), are included in noninterest income. Minority interest primarily represents net investment gains or losses and management fees attributable to the minority interest holders in these managed funds.

        The minority interest share of net (gains) and losses, primarily relating to our managed funds, totaled $(0.1) million for the three months ended June 30, 2004 and $2.8 million of the three months ended June 30, 2004. This shift in minority interest results was mainly due to gains recognized on investment securities held by these limited partnerships.

Income Taxes

        Our effective tax rate was 38.6% for the second quarter and 37.6% for the first half of 2004 compared with (58.7)% for the second quarter of 2003 and 29.8% for the first half of 2003. We realized a tax benefit of $0.8 million in the second quarter of 2003, primarily due to the impact of the impairment of goodwill, recorded as noninterest expense during the period.

Operating Segment Results

Commercial Banking

Quarter ended June 30, 2004 compared to Quarter ended June 30, 2003

        Commercial Banking's second quarter pretax income of $15.6 million, represented a slight increase of $0.6 million or 4.0%, compared to $15.0 million for the same quarter in 2003. This increase was primarily attributable to a beneficial net change in the provision for loan losses, an increase in noninterest income, which were largely offset by an increase in noninterest expense.

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        Net interest income increased by $1.6 million. Commercial Banking's sources of funding, primarily average client deposits, exceeded the funding requirement of its loans. Each business segment receives a notional credit for excess sources of funding, or pays a notional credit for a shortfall in sources of funding. The notional credit is based on a U.S. Treasury Bill rate. Thus, Commercial Banking experienced a favorable volume variance of $3.1 million associated with its notional credit for its excess sources of funding. However, it experienced a $1.5 million unfavorable notional rate variance due to a decrease in the applicable U.S. Treasury Bill rate between the second quarter of 2003 and the second quarter of 2004.

        The beneficial net change of $2.8 million in the provision for loan losses resulted directly from net loan recoveries in the second quarter of 2004, which were related to the commercial bank's clients. Our segment reporting includes net charge-offs in lieu of provision expense to determine financial performance.

        The increase in noninterest income was primarily related to a $1.7 million increase in letter of credit and foreign exchange fees, a $0.5 million increase in deposit service charges, and a $0.4 million increase in sweep revenue, (see further discussion under Part I, Item 2., Management's Discussion and Analysis of Financial Condition and Results of Operations; Noninterest Income).

        The $7.2 million increase in noninterest expense was primarily driven by a $2.5 million increase in direct compensation and benefits expense, and increased allocated expenses of $4.9 million. The increase in direct compensation and benefits expense was largely due to incentive compensation, which increased by $1.0 million, or 71%, from $1.4 million in the second quarter.

Six months ended June 30, 2004 compared to Six months ended June 30, 2003

        Commercial Banking's first half pretax income of $31.4 million, represented an increase of $3.1 million, or 11.0%, compared to $28.3 million for the same period in 2003. This increase was primarily attributable to a beneficial net change in the provision for loan losses, an increase in noninterest income, which were largely offset by an increase in noninterest expense.

        Net interest income increased by $1.0 million. Commercial Banking's sources of funding, primarily average client deposits, exceeded the funding requirement of its loans. Each business segment receives a notional credit for excess sources of funding, or pays a notional credit for a shortfall in sources of funding. The notional credit is based on a U.S. Treasury Bill rate. Thus, Commercial Banking experienced a favorable volume variance of $5.1 million associated with its notional credit for its excess sources of funding. However, it experienced a $4.1 million unfavorable notional rate variance due to a decrease in the applicable U.S. Treasury Bill rate between the second quarter of 2003 and the second quarter of 2004.

        The beneficial net change of $5.5 million in the provision for loan losses resulted directly from net loan recoveries in the 2004 first half, which were related to the commercial bank's client. Recoveries in the 2004 first half include two asset-based lending credits totaling $2.1 million, and a non-technology niche loan of $1.1 million. Our segment reporting includes net charge-offs in lieu of provision expense to determine financial performance.

        The increase in noninterest income was primarily related to a $2.0 million increase in letter of credit and foreign exchange income and a $1.4 million increase in deposit service charges (see further discussion under Part I, Item 2., Management's Discussion and Analysis of Financial Condition and Results of Operations; Noninterest Income).

        The $8.2 million increase in noninterest expense was primarily driven by a $4.8 million increase in direct compensation and benefits expense, and increased allocated expenses of $3.2 million. The increase in compensation and benefits expense was largely due to incentive compensation, which increased by $1.9 million, or 70%, from $2.7 million in the 2003 second quarter.

40



Balance Sheet Analysis

        Commercial Banking had an increase in average deposits during the second quarter of 2004 compared to the second quarter of 2003. The increase in deposits reflects an improved funding environment for our venture capital-backed commercial clients, as well as an increase in client initial public offerings. Additionally, we are engaged in various marketing initiatives to attract and retain commercial clients at all stages of growth.

Merchant Banking (SVB Capital)

Quarter ended June 30, 2004 compared to Quarter ended June 30, 2003

        Merchant Banking's second quarter of 2004 pretax income of $2.5 million, represented a $3.0 million increase compared to a $0.5 million pretax loss for the same quarter in 2003. This was primarily attributable to an increase in noninterest income of $3.7 million, partially offset by the impact of an increase in noninterest expenses of $0.8 million.

        The increase in noninterest income was primarily due to an increase in income from client warrants. In addition, returns on investment securities improved to a $0.5 million gain in the 2004 second quarter from a loss of $3.8 million in the same 2003 period (see further discussion under Part I, Item 2., Management's Discussion and Analysis of Financial Condition and Results of Operations; Noninterest Income).

        The increase in noninterest expense is primarily attribute to a $0.5 million increase in direct compensation and benefits expense.

Six months ended June 30, 2004 compared to Six months ended June 30, 2003

        Merchant Banking's pretax income for the first six months 2004 of $4.6 million represented a $4.0 million increase compared to $0.6 million for the same period in 2004. This was primarily attributable to an increase in noninterest income of $6.0 million, partially offset by a decrease in net interest income of $0.7 million and an increase in noninterest expense of $1.3 million.

        The increase in noninterest income was primarily due to an increase in income from client warrants. In addition, returns on investment securities improved to a $0.7 million gain in the first half of 2004 from a loss of $8.3 million in the equivalent 2003 period (see further discussion under Part I, Item 2., Management's Discussion and Analysis of Financial Condition and Results of Operations; Noninterest Income).

        The decrease in net interest income was primarily attributable to lower short-term market interest rates in the first half of 2004 compared to the first half of 2003.

        The increase in noninterest expense is primarily attributable to a $1.1 million increase in direct compensation and benefits expense.

Balance Sheet Analysis

        Merchant Banking had an increase in average deposits during the second quarter of 2004 compared to the second quarter of 2003. The growth in deposits was due to various market factors, including an improved funds flow environment for Merchant Banking's client base, venture capital and private equity firms.

41



Investment Banking (SVB Alliant)

Quarter ended June 30, 2004 compared to Quarter ended June 30, 2003

        Investment Banking's second quarter of 2004 pretax income of $0.4 million, represented a $16.0 million increase compared to a $15.6 million pretax loss for the same quarter in 2003.

        The pretax loss in the second quarter of 2003 was primarily due to the impairment of goodwill charge of $17.0 million. See "Part 1.—Financial Information—Item 1. Interim Consolidated Financial Statements—Note 6. Goodwill" for further discussion.

        Noninterest income in the second quarter of 2004 of $10.9 million, represented a $6.3 million increase compared to noninterest income in the same quarter of 2003 of $4.6 million. The increase was substantially attributable to one significant transaction, which was completed in the second quarter of 2004.

        Noninterest expense in the second quarter of 2004 of $10.5 million, represented a $9.8 million decrease compared to noninterest expense in the same quarter of 2003 of $20.3 million. The decrease was primarily due to a $17.0 million impairment of goodwill charge incurred in the second quarter of 2003. This was partially offset by increased compensation and benefits expenses of $7.0 million in the second quarter of 2004 as compared to the same period in 2003. Of this $7.0 million increase, $5.6 million was attributable to increased incentive compensation, $0.5 was attributable to increased compensation, $0.6 million was attributable to increased employee benefits and $0.3 million was attributable to increased stock based compensation expense. Investment Banking's incentive compensation plans provide for approximately half of its revenues to be paid in compensation to its employees. In the second quarter of 2004, we implemented a new combined performance and retention compensation plan at SVB Alliant. This plan provides for the payment of retention amounts in late 2004 and late 2005. The total incremental impact on our compensation due to these new plans at SVB Alliant, for the quarter end June 30, 2004, was approximately $3.3 million. We expect the accounting expense associated with these plans to decrease significantly in the fourth quarter of 2004.

Six months ended June 30, 2004 compared to Six months ended June 30, 2003

        Investment Banking's first half of 2004 pretax income of $0.4 million, represented a $14.8 million increase compared to a $14.4 million pretax loss for the same period in 2003.

        The pretax loss in the first half of 2003 was primarily due to the goodwill impairment charge of $17.0 million recognized in the second quarter of 2003. Please see "Part 1. Financial Information—Item 1. Notes to the Interim Consolidated Financial Statements—Note 6. Goodwill" for further discussion.

        Noninterest income in the first half of 2004 of $15.0 million, represented a $6.2 million increase compared to noninterest income in the first half of 2003 of $8.8 million. The increase was substantially attributable to one significant transaction, which was completed in the second quarter of 2004.

        Noninterest expense in the first six months of 2004 of $14.6 million, represented a $8.6 million decrease compared to noninterest expense in the same period in 2003 of $23.2 million. The decrease was primarily due to a $17.0 million impairment of goodwill charge incurred in the second quarter of 2003. This was partially offset by increased compensation and benefits expenses of $8.2 million in the first six months of 2004 as compared to the same period in 2003. Of this $8.2 million increase, $5.8 million was attributable to increased incentive compensation, $1.3 was attributable to increased base compensation, $0.8 million was attributable to increased employee benefits and $0.2 million was attributable to increased stock based compensation expense.

42



Balance Sheet Analysis

        Investment Banking's average total assets were lower in the both the second quarter of 2004 and in the first half of 2004 due to the reduction in goodwill resulting from the $17.0 million impairment of goodwill charge recorded in the second quarter of 2003. Please see "Part 1. Financial Information—Item 1. Interim Consolidated Financial Statements—Note 6. Goodwill" for further discussion.

Private Client Services And Other Sectors

        The Private Client Services and Other column includes private client services banking and all other activities not allocated to clients. Our segment reporting is based on client data and is under continuous refinement. As a result the "Private Client Services and Other" segment column will be subject to large amounts of variability from period to period as our management reporting and cost allocation process evolves. Pretax profits for the three and six months ended June 30, 2004 improved from the respective prior periods.

Financial Condition

        Our total assets were $4.9 billion at June 30, 2004, an increase of $392.2 million, or 8.8%, compared to $4.5 billion at December 31, 2003.

        The growth in our total assets was primarily funded by an increase in client deposits. The increase in total assets was largely concentrated in investment securities and loans.

Federal Funds Sold and Securities Purchased Under Agreement to Resell

        Federal funds sold and securities purchased under agreement to resell totaled $331.1 million at June 30, 2004, a decrease of $211.4 million, or 39.0%, compared to the $542.5 million outstanding at December 31, 2003. Generally, we shifted investible funds into longer-term investment securities. Our plan is to continue the trend of managing federal funds sold and overnight repurchase agreements at appropriate levels.

Investment Securities

        Investment securities totaled $2.1 billion at June 30, 2004, an increase of $512.6 million, or 32.5% from December 31, 2003. The increase was largely attributable to mortgage-backed securities, which increased by $442.2 million and asset-backed securities, which increased by $44.7 million.

        The increase in interest rates across the 2, 3, 5 and 10 year segments of the market interest rate curve during the first half of 2004 resulted in pre-tax unrealized losses on our available-for-sale fixed income securities investment portfolio, of $19.2 million as of June 30, 2004. This unrealized loss on available-for-sale fixed income securities was partially offset by a pre-tax unrealized gain of $2.9 million associated with equity securities, which includes our warrant portfolio, venture capital fund, private equity and managed fund investments.

        Based on June 30, 2004 market valuations, we had $1.9 million in unrealized pre-tax warrant gains. We are restricted from exercising many of these warrants until later in 2004 and 2005. As of June 30, 2004, we directly held 1,877 warrants in 1,342 companies and made investments, directly and through its managed investment funds, in 289 venture capital funds, and had direct equity investments in 41 companies, many of which are private. We are typically contractually precluded from taking steps to secure any current unrealized gains associated with many of these equity instruments. Hence, the amount of income realized by us 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.

43


        Refer to our Annual Report on Form 10-K under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" for our accounting policies related to investment securities.

Loans

        Loans, net of unearned income, at June 30, 2004, totaled $2.1 billion, an increase of $125.2 million from the balance at December 31, 2003. Our strategy is to grow loans modestly throughout the remainder of 2004 in line with improved venture capital fund activity and as our later stage corporate technology efforts continue to develop.

Credit Quality and the Allowance for Loan Losses

        For a description of the accounting policies related to the allowance for loan losses, see "Part 1. Financial Information—Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates."

        We incurred $3.1 million and $7.1 million in gross loan charge-offs during the three and six months ended June 30, 2004, respectively. The gross charge-offs in the second quarter of 2004 included two life science term loans totaling $1.7 million and one software factoring credit totaling $0.7 million. We realized $4.4 million and $7.3 million in gross loan loss recoveries during the three and six months ended June 30, 2004, respectively. The gross recoveries in the second quarter of 2004 included two software asset based lending credits totaling $2.1 million. The remainder of gross charge-offs and recoveries for the second quarter of 2004 represented a diverse portfolio of relatively small loans.

        Nonperforming assets consist of well-secured loans that are past due 90 days or more but are still accruing interest and loans on nonaccrual status. The table below sets forth certain relationships between nonperforming assets and the allowance for loan losses:

(Dollars in thousands)

  June 30,
2004

  December 31,
2003

 
Nonperforming assets:              
Loans past due 90 days or more   $ 547   $  
Nonaccrual loans   $ 12,010   $ 12,350  
   
 
 
Total nonperforming assets   $ 12,557   $ 12,350  
   
 
 
Nonperforming loans as a percentage of total gross loans     0.6 %   0.6 %
Nonperforming assets as a percentage of total assets     0.3 %   0.3 %

Allowance for loan losses:

 

$

61,900

 

$

64,500

 
  As a percentage of total gross loans     2.9 %   3.2 %
  As a percentage of nonperforming loans     493.0 %   522.3 %

        In addition to the loans disclosed in the foregoing analysis, we have identified one media and one private client services loan which total $7.5 million, that, on the basis of information known to us, were judged to have a higher than normal risk of becoming nonperforming. We are not aware of any other loans where known information about possible problems of the borrower casts serious doubts about the ability of the borrower to comply with the loan repayment terms.

Deposits

        Deposits increased by $338.5 million to $4.0 billion at June 30, 2004, compared with $3.7 billion at December 31, 2003. The increase in deposits reflects an improved funding environment, increasing

44



venture capital fund activity, and our various initiatives, to drive new business. Noninterest-bearing demands deposits remained unchanged as a percentage of total deposits, at approximately 60%.

Liabilities

        Other liabilities at June 30, 2004 decreased from December 31, 2003, primarily due to a decrease in deferred taxes payable.

Short-term borrowing

        Short-term borrowings at June 30, 2004 increased by $25.1 million from $9.1 million at December 31, 2003, primarily due to our entering into federal funds purchase arrangements on June 30, 2004 with an average interest rate of 1.4% repayable on July 1, 2004.

Capital Resources

        Our management seeks to maintain adequate capital to support anticipated asset growth and credit risks, and to ensure that Silicon Valley Bancshares and Silicon Valley Bank are in compliance with all regulatory capital guidelines. Our primary sources of new capital include the issuance of common stock, as well as retained earnings.

        We did not repurchase any common stock in the first six months of 2004. See "Part 1. Financial Information—Item 1. Notes to the Interim Consolidated Financial Statements—Note 10 to the Consolidated Financial Statements—Common Stock Repurchase," for amounts of common stock repurchased in 2003.

        Stockholders' equity totaled $473.5 million at June 30, 2004, an increase of $26.5 million, or 5.9%, from the $447.0 million balance at December 31, 2003. This increase was primarily due to our earnings and the exercise of employee stock options, off set by a shift to a negative mark to market on our net unrealized position on available-for-sale investments. See "Financial Condition—Investment Securities" for additional discussion on the net unrealized loss or available-for-sale securities. We have not paid a cash dividend on our common stock since 1992, and we do not have any material commitments for capital expenditures as of June 30, 2004.

        Over time, funds generated through retained earnings are a significant source of capital and liquidity, and are currently 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 and recommends to the board of directors appropriate steps to utilize the excess capital. In the future, excess capital may be used for common share repurchases or to pay dividends. However, as of June 30, 2004, there are no plans for payment of dividends.

        Both Silicon Valley Bancshares 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.

        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. For further information on risk-based capital and leverage ratios as defined by the Federal Reserve Board, see our 2003 Annual Report on Form 10-K, under "Item 1. Business—Supervision and Regulation—Regulatory Capital."

45



        Both Silicon Valley Bancshares' and Silicon Valley Bank's capital ratios were in excess of regulatory guidelines for a well-capitalized depository institution as of June 30, 2004, and December 31, 2003. Capital ratios for Silicon Valley Bancshares are set forth below:

 
  June 30,
2004

  December 31,
2003

 
Silicon Valley Bancshares:          
Total risk-based capital ratio   16.7 % 16.6 %
Tier 1 risk-based capital ratio   13.1 % 12.0 %
Tier 1 leverage ratio   10.8 % 10.3 %

        The improvement in our total risk-based capital, tier 1 risk-based capital and tier 1 leverage ratios from December 31, 2003, to June 30, 2004, was attributable to an increase in Tier 1 capital from year-to-date earnings and from proceeds from the exercise of employee stock options, partially offset by growth in risk-weighted assets, particularly loans.

Liquidity

        An 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 Asset/Liability Committee provides oversight to the liquidity management process and recommends policy guidelines, subject to our board of directors' approval, and courses of action to address our actual and projected liquidity needs.

        The ability to attract a stable, low-cost deposit base is our primary source of liquidity. We continue to expand on opportunities to increase our liquidity and take steps to carefully manage our liquidity. In the third quarter of 2002, we became a member of the Federal Home Loan Bank of San Francisco, thereby 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 June 30, 2004, the Bank's ratio of liquid assets to total deposits was 51.0%. This ratio is well in excess of our minimum policy guidelines and was higher than the ratio of 48.6% as of December 31, 2003. In addition to monitoring the level of liquid assets relative to total deposits, we also utilize other policy measures in liquidity management activities. As of June 30, 2004, we were in compliance with all of these policy measures.

        In analyzing our liquidity during for the six months ended June 30, 2004, reference is made to our consolidated statement of cash flows for the six months ended June 30, 2004; see "Item 1. Interim Consolidated Financial Statements." The statement of cash flows includes separate categories for operating, investing, and financing activities. Operating activities included net income of $29.7 million for the first half of 2004, which was adjusted for certain non-cash items including a $2.7 million

46



recovery of provision for loan losses, depreciation, deferred tax assets, and an assortment of other miscellaneous items resulting in positive cash generated from operations. Investing activities consisted of transactions in investment securities resulting in a net cash outflow of $539.2 million and the net change in total loans, which resulted in a net cash outflow of $133.7 million during the first half of 2004. The net cash outflow from securities transactions were the net result of purchases of investment securities, offset by securities maturities and sales. The net cash outflow related to loans relate to loan originations offset by principal collections. Financing activities reflected cash inflows of $399.0 million primarily resulting from a $338.5 million increase in deposits. The net cash outflow from securities transactions were the net result of purchases of investment securities, offset by securities maturities and sales. In the first half of 2004, we did not repurchase any common stock. In total, the transactions noted above resulted in a net cash outflow of $250.4 million for the six months ended June 30, 2004 and total cash and cash equivalents, as defined in our consolidated statement of cash flows, of $544.6 million at June 30, 2004.

        On a stand-alone basis, Bancshares' primary liquidity channels include dividends from Silicon Valley Bank, its investment portfolio assets, and its ability to raise debt and capital. The ability of Silicon Valley Bank to pay dividends is subject to certain regulations described in "Item 1. Business—Supervision and Regulation—Restriction on Dividends" of our 2003 Annual Report on Form 10-K.

Forward-Looking Statements

        This discussion and analysis contained 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, without limitation:

    Projections of our revenues, income, earnings per share, cash flows, balance sheet, capital expenditures, capital structure or other financial items

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

    Forecasts of future economic performance

    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:

    Sensitivity of our interest-earning assets to interest rates, and impact to earnings from an increase in interest rates

    Realization, timing and performance of investments in equity securities

    Management of federal funds sold and overnight repurchase agreements at appropriate levels

    Development of our later-stage corporate technology lending efforts

    Growth in loan balances

    Credit quality of our loan portfolio

    Levels of nonperforming loans

    Liquidity provided by funds generated through retained earnings

    Activities for which capital will be required

47


    Ability to meet our liquidity requirements through our portfolio of liquid assets

    Ability to expand on opportunities to increase our liquidity

    Use of excess capital

        You can identify these and other forward-looking statements by the use of words such as "becoming," "may," "will," "should," "predicts," "potential," "continue," "anticipates," "believes," "estimates," "seeks," "expects," "plans," "intends," or the negative of such words, or comparable terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we have based these expectations on our beliefs as well as our assumptions, and 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.

        For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see the subsection below "Factors that May Affect Future Results." We urge investors to consider all of 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.

Factors That May Affect Future Results

         Our business faces significant risks. The factors described below may not be the only risks we face, and is not intended to serve as a comprehensive listing. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described in the following factors actually occur, our business, financial condition and/or results of operations could suffer.

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 effect 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 you 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.

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 increased 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 many 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

48



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.

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.

Decreases in the amount of equity 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. If the amount of capital available to such companies decreases, it is likely that the number of new clients and investor financial support to our existing borrowers could 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. Reduced capital markets valuations could reduce the amount of capital available to startup and emerging-growth companies, including companies within our technology and life science industry sectors.

Our business is dependent upon access to funds on attractive terms.

        We derive our net interest income through lending or investing capital on terms that provide returns in excess of our costs for obtaining that capital. As a result, our credit ratings are extremely important to our business. A reduction in our credit ratings could adversely affect our liquidity and competitive position, increase our borrowing costs (or trigger obligations under certain existing borrowings and other contracts), or increase the interest rates we pay our depositors. Further, our credit ratings and the terms upon which we have access to capital may be influenced by circumstances beyond our control, such as overall trends in the general market environment, perceptions about our creditworthiness or market conditions in the industries in which we focus.

49



In the event that we change our method of accounting for stock compensation expense, our cash flows and results of operations, as well as our ability to retain certain key employees, could be adversely affected.

        We account for our employee stock options in accordance with Accounting Principles Board Opinion No. 25 and related interpretations, which provide that any compensation expense relative to employee stock options be measured based on the intrinsic value of the stock options. As a result, when options are priced at the fair market value of the underlying stock on the date of grant, as is our practice, we incur no compensation expense. However, the Financial Accounting Standards Board has proposed in its exposure draft entitled "Proposed Statement of Financial Accounting Standards" new accounting requirements that, if adopted, would cause us to record compensation expense for all employee stock option grants. Any such expense, although it would not affect our cash flows, could have a material impact on our results of operations. Accordingly, if such accounting requirements are adopted, we may implement alternative employee compensation structures including, for example, the reduced use of equity compensation and increased employee cash compensation. We continue to evaluate different approaches in employee compensation. Any such changes in approach could adversely affect our cash flows and results of operations, and our ability to retain certain key employees.

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 or otherwise affect the activities in which Silicon Valley Bancshares, Silicon Valley Bank, and their subsidiaries may engage. A change in the applicable statutes, regulations, or regulatory policy may have a material effect on our business and that of our subsidiaries. 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. SVB Alliant and SVB Securities, both broker-dealer subsidiaries, are regulated by the SEC and the National Association of Securities Dealers, Inc. (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

50



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 lost value 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. Additionally, 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.

Adverse changes in domestic or global economic conditions, especially in the technology sector and particularly 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. Many of our technology clients would be harmed by a 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 businesses are harmed, they are more likely to default on their loans.

If we fail to retain our key employees, our growth and profitability could be adversely affected.

        We rely on experienced client relationship managers and on officers and employees with strong relationships with the venture capital community to generate new business. If a significant number of these employees were to leave us, our growth and profitability could be adversely affected. We believe that our employees frequently have opportunities for alternative employment with competing financial institutions and with our clients.

We cannot assure you that we will be able to maintain our historical levels of profitability in the face of sustained competitive pressures.

        Other banks and specialty and diversified financial services companies, many of which are larger and have more capital than we do, offer lending, leasing, other financial products and advisory services to our client 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 broader range of financial products to our clients. When new competitors seek to enter one of our markets, or when existing market participants seek to increase their market share, they sometimes undercut the pricing and/or credit terms prevalent in that market. Our pricing and credit terms could deteriorate if we act to meet these competitive challenges.

51



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, and/or contingent liabilities, which could have a material adverse effect 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.

        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 you 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 success of our acquisitions is dependent on the continued employment of several key employees. If acquired businesses do not meet projected revenue targets, or if certain key employees were to leave the businesses, we could conclude that the value of the businesses has decreased and that the related goodwill has been impaired. If we were to conclude that goodwill has been impaired that conclusion would result in an impairment of goodwill charge to us, which would adversely affect our results of operations.

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. 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 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

52



and managing foreign operations, longer payment cycles, different accounting practices, problems in collecting loan payments, 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 client demands. 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 effect on our business, profitability, or growth prospects.

Business interruptions due to natural disasters and other events beyond our control can adversely affect our business.

        Our operations can be subject to natural disasters and other events beyond our control, such as earthquakes, fires, power failures, telecommunication loss, terrorist attacks, and acts of war. Our corporate headquarters and a portion of our critical business offices are located in California, near major earthquake faults. Such events of disaster, whether natural or manmade, could cause severe destruction or interruption to our operations and as a result, our business could suffer serious harm.

53



ITEM 3—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 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. For further information see "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in our 2003 Annual Report on Form 10-K for disclosure of the quantitative and qualitative information regarding the interest rate risk inherent in interest rate risk sensitive instruments as of December 31, 2003. As of June 30, 2004, there have been no significant changes to the interest rate risk information contained in our 2003 Annual Report on Form 10-K and our policies in managing interest rate risk.

54



ITEM 4—CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

        Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control over Financial Reporting

        There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

55



PART II—OTHER INFORMATION

ITEM 1—LEGAL PROCEEDINGS

        There were no legal proceedings requiring disclosure pursuant to this item pending at June 30, 2004, or at the date of this report.


ITEM 2—CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

(e)
Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Period

  (a)
Total Number of
Shares Purchased

  (b)
Average Price Paid
per Share

  (c)
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs(1)

  (d)
Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the Plans
or Programs(1)

April 1, 2004-April 30, 2004         $ 46,800,000
May 1, 2004-May 31, 2004           46,800,000
June 1, 2004-June 30, 2004           46,800,000
   
 
 
 
Total         $ 46,800,000

(1)
On May 7, 2003, the Company announced that its board of directors authorized a stock repurchase program of up to $160.0 million, with no specified expiration date. This program became effective immediately and replaced previously announced stock repurchase programs. Stock repurchases under this program may be made from time to time. The Company did not repurchase any shares under this program during the first half of 2004. Under this program, the Company repurchased in aggregate 4.5 million shares of common stock totaling $113.2 million in 2003. The approximate dollar value of shares that may still be repurchased under this program totaled $46.8 million as of June 30, 2004.


ITEM 3—DEFAULTS UPON SENIOR SECURITIES

        None.


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

        The Annual Meeting of Shareholders was held on April 22, 2004. Each of the persons named in the Proxy Statement as a nominee for director was elected; the amendment to the Company's 1997 Equity Incentive Plan was approved; and the appointment of KPMG LLP as the Company's independent auditors for 2004 was ratified. The following are the voting results on each of these matters:

Election of Directors

  In Favor
  Withheld
James F. Burns, Jr.   31,649,512   406,912
G. Felda Hardymon   29,998,601   2,057,823
Alex W. Hart   30,671,669   1,384,755
James R. Porter   31,565,201   491,223
Michela K. Rodeno   31,571,297   485,127
Larry W. Sonsini   31,282,570   773,854
Kenneth P. Wilcox   31,761,403   295,021

56


       

Other Matters

  In Favor
  Opposed
  Abstained
Approval of an amendment to the Company's 1997 Equity Incentive Plan to reserve an additional 1,500,000 shares of common stock for issuance thereunder   18,280,057   6,183,595   103,064

Ratification of the appointment of KPMG LLP as the Company's independent auditors for 2004

 

31,429,049

 

580,673

 

46,702


ITEM 5—OTHER INFORMATION

        None.


ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K

(a)
Exhibits:

    See Index to Exhibits on page 59 hereof. Each management contract or compensatory plan or arrangement filed as an exhibit to this Report is identified in the "Index to Exhibits" with an asterisk before the exhibit number.

(b)
Reports on Form 8-K:

1.
On April 22, 2004, Silicon Valley Bancshares furnished to the SEC a Current Report on Form 8-K in connection with its announcement of financial results for the quarter ended March 31, 2004.

57



SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    SILICON VALLEY BANCSHARES

Date: August 9, 2004

 

/s/  
DONAL D. DELANEY       
Donal D. Delaney
Corporate Controller
(Principal Accounting Officer)

58



INDEX TO EXHIBITS

 
   
  Incorporated by Reference

   
Exhibit
Number

   
  Filed
Herewith

  Exhibit Description
  Form
  File No.
  Exhibit
  Filing Date
2.1   Asset Purchase Agreement between the registrant and SVB Alliant   8-K   000-15637   2.1   October 2, 2001    
3.1   Certificate of Incorporation   8-K   000-15637   3.1   April 26, 1999    
3.2   Certificate of Amendment to Certificate of Incorporation   10-Q   000-15637   3.1   May 13, 2003    
3.3   Amended and Restated Bylaws   10-K   000-15637   3.3   March 11, 2004    
3.4   Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock   8-A/A   000-15637   3.4   February 27, 2004    
4.1   Indenture dated as of May 20, 2003 between the Company and Wells Fargo Bank Minnesota, National Association   S-3   333-107994   4.1   August 14, 2003    
4.2   Form of Note (included in Exhibit 4.9)   S-3   333-107994   4.2   August 14, 2003    
4.3   Registration Rights Agreement dated as of May 20, 2003, between the Company and the initial purchasers named therein   S-3   333-107994   4.3   August 14, 2003    
4.4   Junior Subordinated Indenture, dated as of October 30, 2003 between Silicon Valley Bancshares and Wilmington Trust Company, as trustee   8-K   000-15637   4.12   November 19, 2003    
4.5   Junior Subordinated Deferrable Debenture due October 15, 2033 of Silicon Valley Bancshares   8-K   000-15637   4.13   November 19, 2003    
4.6   Amended and Restated Trust Agreement, dated as of October 30, 2003, by and among Silicon Valley Bancshares as depositor, Wilmington Trust Company as property trustee, Wilmington Trust Company as Delaware trustee, and the Administrative Trustees named therein.   8-K   000-15637   4.14   November 19, 2003    
4.7   Certificate Evidencing 7% Cumulative Trust Preferred Securities of SVB Capital II   8-K   000-15637   4.15   November 19, 2003    
4.8   Guarantee Agreement, dated October 30, 2003 between Silicon Valley Bancshares and Wilmington Trust Company, as trustee   8-K   000-15637   4.17   November 19, 2003    
4.9   Agreement as to Expenses and Liabilities, dated as of October 30, 2003, between Silicon Valley Bancshares and SVB Capital II   8-K   000-15637   4.17   November 19, 2003    
4.10   Certificate Evidencing 7% Common Securities of SVB Capital II   8-K   000-15637   4.18   November 19, 2003    
4.11   Silicon Valley Bancshares Officers' Certificate and Company Order, dated October 30, 2003   8-K   000-15637   4.19   November 19, 2003    
4.12   Amended and Restated Preferred Stock Rights Agreement dated as of January 29, 2004, between Silicon Valley Bancshares and Wells Fargo Bank Minnesota, N.A.   8-A/A   000-15637   4.20   February 27, 2004    
10.1   Lease Agreement Between Silicon Valley Bancshares and WRC Properties, Inc.; 3003 Tasman Drive, Santa Clara, CA 95054   10-K   000-15637   10.17   March 1994    
10.2   First Amendment dated June 10, 1997 to lease identified in Exhibit 10.1   10-Q   000-15637   10.17(a)   August 13, 1997    
*10.3   Amended and Restated Silicon Valley Bancshares 1989 Stock Option Plan   10-Q   000-15637   10.28   August 13, 1996    
*10.4   Silicon Valley Bank Money Purchase Pension Plan   10-Q   000-15637   10.29   August 13, 1996    
*10.5   Amendment and Restatement of the Silicon Valley Bank Money Purchase Pension Plan   10-Q   000-15637   10.30   August 13, 1996    
*10.6   Amendment and Restatement of Silicon Valley Bank 401(k) and Employee Stock Ownership Plan   10-Q   000-15637   10.31   August 13, 1996    
*10.7   Form of Change in Control Severance Benefits Policy for Non-Executives   10-Q   000-15637   10.33   November 13, 1996    
*10.8   Amended and Restated Silicon Valley Bancshares Retention Program Plan                   ý
                         

59


*10.9   Severance Agreement between the Company and John C. Dean related to Garage.com ™ as of August 12, 1998   10-Q   000-15637   10.40   November 13, 1998    
*10.10   Severance Agreement between the Company and Harry W. Kellogg related to Garage.com ™ as of August 12, 1998   10-Q   000-15637   10.41   November 13, 1998    
*10.11   1999 Employee Stock Purchase Plan   10-K   000-15637   10.44   March 17, 2000    
*10.12   Silicon Valley Bancshares 1998 Equity Incentive Plan, amended as of July 20, 2000   10-Q   000-15637   10.45   November 14, 2000    
*10.13   Change in Control Severance Benefits Policy of Silicon Valley Bank   10-Q   000-15637   10.46   November 14, 2000    
*10.14   Consulting Agreement between Silicon Valley Bancshares and John C. Dean, effective as of May 1, 2001   10-Q   000-15637   10.47   May 15, 2001    
*10.15   Silicon Valley Bancshares 1997 Equity Incentive Plan, as amended as of July 22, 2004                   ý
*10.16   Form of Indemnity Agreement between the Company and its directors and officers   10-Q   000-15637   10.50   November 14, 2003    
*10.17   Form of Severance Agreement between the Company and Lauren Friedman   10-Q   000-15637   10.51   November 14, 2003    
*10.18   Promissory Note Between Silicon Valley Bancshares and Marc Verissimo dated August 4, 2000   10-K   000-15637   10.52   March 11, 2004    
*10.19   Bonus Agreement Between Silicon Valley Bank and Marc Verissimo dated September 20, 2000   10-K   000-15637   10.53   March 11, 2004    
*10.20   Promissory Note Between Silicon Valley Bancshares and Ken Wilcox dated April 4, 2002   10-K   000-15637   10.54   March 11, 2004    
*10.21   Promissory Note Between Silicon Valley Bancshares and Marc Verissimo dated April 2, 2002   10-K   000-15637   10.55   March 11, 2004    
*10.22   Promissory Note Between Silicon Valley Bancshares and Greg Becker dated May 6, 2002   10-K   000-15637   10.56   March 11, 2004    
*10.23   Promissory Note Between Silicon Valley Bancshares and Greg Becker dated January 16, 2003   10-K   000-15637   10.57   March 11, 2004    
*10.24   Silicon Valley Bancshares Senior Management Incentive Compensation Plan   10-K   000-15637   10.58   March 11, 2004    
*10.25   Separation Agreement Between Silicon Valley Bank and Leilani Gayles dated July 16, 2003   10-K   000-15637   10.59   March 11, 2004    
*10.26   Offer Letter to Jack Jenkins-Stark dated February 20, 2004   10-Q   000-15637   10.26   May 7, 2004    
*10.27   Offer Letter to David C. Webb dated May 25, 2004                   ý
31.1   Rule 13a-14(a)/ 15d-14(a) Certification of Principal Executive Officer                   ý
31.2   Rule 13a-14(a)/ 15d-14(a) Certification of Principal Financial Officer                   ý
32.1   Section 1350 Certifications                   ý

*
Denotes management contract or any compensatory plan, contract or arrangement.

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EXHIBIT 10.8



AMENDED AND RESTATED

SILICON VALLEY BANCSHARES

RETENTION PROGRAM PLAN


PURPOSE

        The purpose of the Amended and Restated Silicon Valley Bancshares Retention Program Plan is to:


        The Plan is designed to allow individuals to share in: (i) returns from designated investments made by the Company and its Affiliates, including investments in certain venture capital funds (including the SVB Strategic Investors Funds and Silicon Valley BancVentures Funds) and certain direct equity investments; (ii) income realized from the exercise of, and the subsequent sale of underlying shares of, warrants held by the Company; and (iii) other designated amounts, as determined by the Committee.

        This Plan shall be effective as of January 1, 2004.

DEFINITIONS

        " Affiliate " means any parent corporation or subsidiary corporation (including Bank), whether now or hereafter existing, as those terms are defined in sections 424e) of the Internal Revenue Code of 1986, as amended.

        " Bank " means Silicon Valley Bank, a California corporation and a wholly-owned subsidiary of the Company.

        " Committee " means the Compensation Committee of the Board of Directors of the Company.

        " Company " means Silicon Valley Bancshares, a Delaware corporation.

        " Participant " means an employee chosen to participate in the Plan for any RP Year by the Committee in its sole discretion and who meets the eligibility requirements provided under this Plan.

        " Plan " means this Amended and Restated Silicon Valley Bancshares Retention Program Plan.

        " Pool " means in the case of any RP Year, the pool of returns on investments and other amounts designated by the Committee for such RP Year under this Plan.

        " Program " means the Company's Retention Program.

        " RP Year " means a full fiscal year of the Company.

        " Steering Committee " means the Steering Committee of the Company.

ADMINISTRATION

        The Committee shall administer the Plan and shall have full power and authority to construe, interpret and administer the Plan, including waiver of any requirements under the Plan. The Committee may, at its discretion, delegate its duties hereunder to the Steering Committee; provided , however , the following must be ratified by the Committee: (i) the allocated investments and other amounts to be included in the Plan for each respective RP Year, and (ii) the percentage interests in the Plan of all Steering Committee members.

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        All determinations and decisions of the Committee shall be final, conclusive and binding upon all persons.

ELIGIBILITY FOR PARTICIPATION

        To be eligible to participate in the Plan for any RP Year, employee Participants must: (i) be employed with the Company or its Affiliates prior to such RP Year, (ii) be at a senior management or partner level (or such equivalent level as determined by the Committee) prior to such RP Year, and (iii) be ineligible to participate in other separate variable pay plans or programs of the Company (such as Direct Drive Incentive Compensation Plan or other similar variable compensatory plans). Additionally, all Participants shall abide by the Company's Code of Conduct, Venture Capital Fund Investment Policies and Procedures, and any other applicable policies and procedures of the Company and/or its Affiliates as determined by the Committee.

        All Participants for each RP Year will be selected by the Committee, at its sole discretion. Participation by Steering Committee members must be ratified by the Committee if the Committee's administrative powers are delegated to the Steering Committee.

ANNUAL PROGRAM

        Under the Plan, the Committee will, on an annual basis, allocate certain investments and other amounts for inclusion in the Plan for the respective RP Year. Aggregate net returns on such designated investments and amounts will constitute the Pool from which distributions to Participants will be made based on the Participants' respective percentage interests in the Plan. Such allocations will be determined on or prior to March 1 of the applicable RP Year (or such later date as the Committee determines).

        The Company's obligation to make distributions under the Plan for an RP Year will be for ten (10) years. Final distributions from the Pool will be made to Participants on or before January 30 (or if such date is a Saturday or Sunday, the next business day) of the year following the tenth year after the RP Year.

        Each Participant's share of the Pool for each RP Year will be determined by the Steering Committee. Participants will be notified in writing of his or her percentage interest within sixty (60) days of such determination.

        All distributions out of the Pool will be made in January of the year following the Company's receipt. Distributions will be paid to Participants only to the extent returns are received by the Company, subject to the terms herein. If no returns are received by the Company on the investments allocated for a specific RP Year, then no distributions will be made in January of the following year.

        Any returns which the Company may receive in the form of stock will be retained by the Company until such time as the Company, in its sole discretion, liquidates the stock. The Participants' percentage interest in the proceeds realized from the liquidation of such stock will then be paid to the Participants in January following the year of liquidation.

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        Payment of any distributions under the Plan may be postponed, reduced and/or eliminated pursuant to applicable law or regulation or as otherwise determined by federal and state regulations to which the Company and its Affiliates are subject, as determined by the Committee.

        Distributions under the Plan are accrued on a quarterly basis.

        In order to be entitled to receive distributions, Participants must be employed by the Company or its Affiliates on the date distributions are paid to Participants, except as otherwise provided herein, and have satisfactory performance reviews.

        A Participant whose performance is unsatisfactory, as determined by such Participant's supervisor in his or her reasonable discretion, forfeits any distributions which the Participant would otherwise have received in January following the year of unsatisfactory performance. If the Participant's performance improves to satisfactory or above in a subsequent year, the Participant will again become eligible to receive distributions under the Plan for such subsequent year or years, until the expiration of the applicable 10-year term.

NO ASSURANCES OF DISTRIBUTIONS

        No assurances will be made by the Company or any of its Affiliates to any Participant as to payment of any distributions. No Participant may have any claim against the Company in the event such Participant does not receive a distribution because the Company did not realize any returns from the designated investments and amounts.

TERMINATION OF EMPLOYMENT

        Except as provided below, Participants must be employed by the Company on the date the distributions are actually paid for any RP Year. A Participant who terminates employment with the Company forfeits his or her interest in the Plan for all RP Years, whether or not accrued. A transfer of employment between the Company and its Affiliates shall not be deemed a termination of employment.

        Notwithstanding the foregoing, any Participant:

shall be entitled to continued participation in the Plan for the applicable RP Year(s), so long as Participant:

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PRIOR YEAR PLANS

        Nothing in this Plan shall be construed as reducing any benefits, or taking away any rights, granted to any Participant during any RP Year prior to January 1, 2004, unless consented to in writing by such Participant.

WITHHOLDING

        The Company will withhold from the payment of any distribution hereunder any amount required to be withheld for taxes.

NO RIGHTS TO EMPLOYMENT

        Nothing in this Plan shall interfere with or limit in any way the right of the Company or any Affiliate to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or any Affiliate.

NO ASSIGNMENT; CERTAIN RIGHTS OF PARTICIPANTS

        Except as otherwise required by applicable law, any interest, benefit, payment, claim or right of any participant under the Plan shall not be sold, transferred, assigned, pledged, encumbered or hypothecated by any Participant and shall not be subject in any manner in to any claims of any creditor of any Participant or beneficiary, and any attempt to take any such action shall be null and void. During the lifetime of any Participant, payment of a distribution shall only be made to such Participant. Notwithstanding the foregoing, the Committee may establish such procedures as it deems necessary for a Participant to designate a beneficiary to whom any amounts would be payable in the event of any Participant's death.

        To the extent a Participant or other person acquires a right to receive a distribution hereunder, such right shall be no greater than the right of an unsecured general creditor of the Company or any Affiliate.

ARBITRATION

        Any and all disputes or controversies arising from or regarding the interpretation, performance, enforcement or termination of the Plan will be resolved by final and binding arbitration under the procedures set forth in the Arbitration Procedures and the then existing rules of practice and procedure of the Judicial Arbitration and Mediation Services, Inc. (or its successor entity).

SUSPENSION, REVISION, AMENDMENT OR TERMINATION OF THE PLAN

        The Committee may, from time to time, suspend, revise, amend or terminate the Plan.

GOVERNING LAW

        The Plan shall be governed by the laws of California.

*    *    *

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AMENDED AND RESTATED SILICON VALLEY BANCSHARES RETENTION PROGRAM PLAN

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EXHIBIT 10.15

SILICON VALLEY BANCSHARES

1997 EQUITY INCENTIVE PLAN

Adopted December 19, 1996
Approved by Shareholders April 17, 1997
Amended as of September 8, 1997
Amended as of July 20, 2000
Amended as of February 15, 2001
Amended as of April 19, 2001
Amended as of May 16, 2001
Amended as of April 18, 2002
Amended as of January 16, 2003
Amended as of April 17, 2003
Amended as of April 22, 2004
Amended as of July 22, 2004

1.      PURPOSES.

         (a)    The purpose of the Plan is to provide a means by which selected Employees and Directors of and Consultants to the Company, and its Affiliates, may be given an opportunity to benefit from increases in value of the stock of the Company through the granting of (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses, (iv) rights to purchase restricted stock, (v) restricted stock units, and (vi) stock appreciation rights, all as defined below.

         (b)    The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors of or Consultants to the Company or its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates.

         (c)    The Company intends that the Stock Awards issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either (i) Options granted pursuant to Section 6 hereof, including Incentive Stock Options and Nonstatutory Stock Options, (ii) stock bonuses or rights to purchase restricted stock, or restricted stock units granted pursuant to Section 7 hereof, or (iii) stock appreciation rights granted pursuant to Section 8 hereof. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option.

2.      DEFINITIONS.

         (a)    "Affiliate" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code.

         (b)    "Board" means the Board of Directors of the Company.

         (c)    "Code" means the Internal Revenue Code of 1986, as amended.

         (d)    "Committee" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan.

         (e)    "Company" means Silicon Valley Bancshares, a Delaware corporation.

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         (f)     "Concurrent Stock Appreciation Right" or "Concurrent Right" means a right granted pursuant to subsection 8(b)(2) of the Plan.

         (g)    "Consultant" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors.

         (h)    "Continuous Status as an Employee, Director or Consultant" means that the service of an individual to the Company, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Board or the chief executive officer of the Company may determine, in that party's sole discretion, whether Continuous Status as an Employee, Director or Consultant shall be considered interrupted in the case of: (i) any leave of absence approved by the Board or the chief executive officer of the Company, including sick leave, military leave, or any other personal leave; or (ii) transfers between the Company, Affiliates or their successors.

         (i)     "Covered Employee" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to shareholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code.

         (j)     "Director" means a member of the Board.

         (k)    "Employee" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company.

         (l)     "Exchange Act" means the Securities Exchange Act of 1934, as amended.

         (m)   "Fair Market Value" means, as of any date, the value of the common stock of the Company determined as follows:

         (n)    "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

         (o)    "Independent Stock Appreciation Right" or "Independent Right" means a right granted pursuant to subsection 8(b)(3) of the Plan.

         (p)    "Non-Employee Director" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3.

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         (q)    Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option.

         (r)    "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

         (s)    "Option" means a stock option granted pursuant to the Plan.

         (t)     "Option Agreement" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan.

         (u)    "Optionee" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option.

         (v)    "Outside Director" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of the Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code.

         (w)   "Plan" means this 1997 Equity Incentive Plan.

         (x)    "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect with respect to the Company at the time discretion is being exercised regarding the Plan.

         (y)    "Securities Act" means the Securities Act of 1933, as amended.

         (z)    "Stock Appreciation Right" means any of the various types of rights which may be granted under Section 8 of the Plan.

         (aa) "Stock Award" means any award granted under the Plan, including any Option, any stock bonus, any right to purchase restricted stock, any restricted stock unit, and any Stock Appreciation Right.

         (bb) "Stock Award Agreement" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan.

         (cc) "Tandem Stock Appreciation Right" or "Tandem Right" means a right granted pursuant to subsection 8(b)(1) of the Plan.

3.      ADMINISTRATION.

         (a)    The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c).

         (b)    The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:

3


         (c)    The Board may delegate administration of the Plan to a committee or committees of the Board composed of one (1) or more members (the "Committee"). In the discretion of the Board, the Committee may be composed of two (2) or more Non-Employee Directors and/or Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, (and references in this Plan to the Board shall thereafter be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan.

4.      SHARES SUBJECT TO THE PLAN.

         (a)    Subject to the provisions of Section 13 relating to adjustments upon changes in stock, the stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate twelve-million—fifty thousand (12,050,000) shares of the Company's common stock. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. Shares subject to Stock Appreciation Rights exercised in accordance with Section 8 of the Plan shall not be available for subsequent issuance under the Plan.

         (b)    The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise.

         (c)    Effective February 24, 2004, and subject to the provisions of Section 13 relating to adjustments upon changes in stock, of the one million one hundred fifty-three thousand and twenty seven (1,153,027) shares of the Company's common stock available for issuance under the Incentive Plan, the total number of shares available to grant as stock bonus awards, under restricted stock purchase agreements, and restricted stock units shall not exceed four hundred and five thousand nine hundred eighty (405,980) shares of the Company's common stock.

         (d)    Effective April 22, 2004, and subject to the provisions of Section 13 relating to adjustments upon changes in stock, the one million five hundred thousand (1,500,000) shares of the Company's common stock were added to the Incentive Plan (the "2004 Share Reserve"). To the extent that a Stock Award is granted from the 2004 Share Reserve in the form of stock bonus awards, under restricted stock purchase agreements or restricted stock units, the 2004 Share Reserve will be reduced by an amount equal to 2.0 times the number of shares subject to that award. Further, if unvested shares acquired from the 2004 Share Reserve pursuant to a stock bonus award, restricted stock purchase agreement or restricted stock unit are forfeited or repurchased by the Company, 2.0 times the number of shares of common stock so forfeited or repurchased will return to the 2004 Share Reserve and will again become available for issuance.

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5.      ELIGIBILITY.

         (a)    Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees. Stock Awards other than Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees, Directors or Consultants.

         (b)    No person shall be eligible for the grant of an Incentive Stock Option if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant.

         (c)    Subject to the provisions of Section 13 relating to adjustments upon changes in stock, no person shall be eligible to be granted Options and Stock Appreciation Rights covering more than two hundred fifty thousand (250,000) shares of the Company's common stock in any calendar year.

6.      OPTION PROVISIONS.

        Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions:

         (a)   Term.     No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. Notwithstanding the foregoing, any Option granted between April 17, 2003 and April 21, 2004 shall not be exercisable after the expiration of five (5) years from the date of grant. Any Option granted on or after April 22, 2004 shall not be exercisable after the expiration of seven (7) years from the date of grant.

         (b)   Price.     The exercise price of each Incentive Stock Option or Nonstatutory Stock shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted; the exercise price of each Nonstatutory Stock Option shall be not less than one hundred percent (100%) 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. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code.

         (c)   Consideration.     The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised, or (ii) at the discretion of the Board or the Committee, at the time of the grant of the Option, (a) by delivery to the Company of other common stock of the Company, (b) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (c) in any other form of legal consideration acceptable to the Board. In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement.

         (d)   Transferability.     An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Incentive Stock Option is granted only by such person. A Nonstatutory Stock Option shall only be

5



transferable by the Optionee upon such terms and conditions as are set forth in the Option Agreement for such Nonstatutory Stock Option, as the Board or the Committee shall determine in its sole discretion. The person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option.

         (e)   Vesting.     The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised.

         (f)    Termination of Employment or Relationship as a Director or Consultant.     In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or disability or for Cause), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan.

        In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates for Cause, then the Option shall immediately terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. "Cause" shall be defined as an act of embezzlement, fraud, dishonesty, or breach of fiduciary duty to the Company, a deliberate disregard of the rules of the Company which results in loss, damage or injury to the Company, any unauthorized disclosure of any of the secrets or confidential information of the Company, inducing any client or customer of the Company to break any contract with the Company or inducing any principal for whom the Company acts as agent to terminate such agency relations, or engaging in any conduct which constitutes unfair competition with the Company, or any act which results in Optionee being removed from any office of the Company by any bank regulatory agency.

        An Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director, or Consultant (other than upon the Optionee's death or disability) would result in liability under Section 16(b) of the Exchange Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the Option Agreement, or (ii) the tenth (10th) day after the last date on which such exercise would result in such liability under Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (other than upon the Optionee's death or disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option, or (ii) the expiration of a period of three (3) months

6



after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant during which the exercise of the Option would not be in violation of such registration requirements.

         (g)   Disability of Optionee.     In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan.

         (h)   Death of Optionee.     In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of Optionee's death, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option as of the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date twelve (12) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan.

         (i)    Early Exercise.     The Option may, but need not, include a provision whereby the Optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate.

7.      TERMS OF STOCK BONUSES, PURCHASES OF RESTRICTED STOCK AND RESTRICTED STOCK UNITS.

        Each stock bonus, restricted stock unit, or restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate; provided, however, in no event may shares subject to stock bonus awards be issued for more than 5% of the aggregate number of shares of the Company's common stock reserved for issuance hereunder pursuant to Section 4(a). To the extent any shares issued pursuant to stock bonus awards are forfeited or otherwise return to the Plan, such shares will not count against the foregoing limit and may once again be issued pursuant to stock bonus awards as if the original award were never granted. The terms and conditions of stock bonuses, restricted stock units, or restricted stock purchase agreements may change from time to time, and the terms and conditions of separate agreements need not be identical, but each stock bonus, restricted stock unit or restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions as appropriate and will be issued in lieu of cash compensation:

         (a)   Purchase Price.     The purchase price under each restricted stock purchase agreement shall be such amount as the Board or Committee shall determine and designate in such Stock Award Agreement, but in no event shall the purchase price be less than eighty-five percent (85%) of the

7



stock's Fair Market Value on the date such award is made. Notwithstanding the foregoing, the Board or the Committee may determine that eligible participants in the Plan may be awarded stock pursuant to a Stock Award Agreement in consideration for past services actually rendered to the Company or for its benefit.

         (b)   Transferability.     Stock bonuses, restricted stock units, and restricted stock awards shall be transferable by the grantee only upon such terms and conditions as are set forth in the applicable Stock Award Agreement, as the Board or the Committee shall determine in its discretion, so long as stock awarded remains subject to the terms of the Stock Award Agreement.

         (c)   Consideration.     The purchase price of stock acquired pursuant to a stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board or the Committee, according to a deferred payment or other arrangement with the person to whom the stock is sold; or (iii) in any other form of legal consideration that may be acceptable to the Board or the Committee in its discretion. Notwithstanding the foregoing, the Board or the Committee to which administration of the Plan has been delegated may award stock bonuses and restricted stock bonus units in consideration for past services actually rendered to the Company or for its benefit.

         (d)   Vesting.     Shares of stock sold or awarded under the Plan may, but need not, be subject to a repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board or the Committee.

         (e)   Termination of Employment or Relationship as a Director or Consultant.     In the event a grantee's Continuous Status as an Employee, Director or Consultant terminates, the Company may repurchase or otherwise reacquire any or all of the shares of stock held by that person which have not vested as of the date of termination under the terms of the Stock Award Agreement between the Company and such person.

         (f)    Restricted Stock Units.     The Administrator is authorized to make restricted stock awards denominated in units of common stock on such terms and conditions and subject to such restrictions, if any, as the Administrator shall determine, in its sole discretion, which terms, conditions and restrictions shall be set forth in the instrument evidencing the restricted stock unit award. The terms, conditions and restrictions that the Administrator shall have the power to determine shall include, without limitation, the manner in which shares subject to restricted stock unit award are held during the periods they are subject to restrictions and the circumstances under which forfeiture of the restricted stock unit award shall occur by reason of termination of the grantee's employment or service relationship.

8.      STOCK APPRECIATION RIGHTS.

         (a)    The Board or Committee shall have full power and authority, exercisable in its sole discretion, to grant Stock Appreciation Rights under the Plan to Employees or Directors of or Consultants to, the Company or its Affiliates. To exercise any outstanding Stock Appreciation Right, the holder must provide written notice of exercise to the Company in compliance with the provisions of the Stock Award Agreement evidencing such right. Except as provided in subsection 5(c), no limitation shall exist on the aggregate amount of cash payments the Company may make under the Plan in connection with the exercise of a Stock Appreciation Right.

         (b)    Three types of Stock Appreciation Rights shall be authorized for issuance under the Plan:

8


9.      CANCELLATION AND RE-GRANT OF OPTIONS.

         (a)    Subject to Section 9(c), the Board or the Committee shall have the authority to effect, at any time and from time to time, (i) the repricing of any outstanding Options and/or any Stock Appreciation Rights under the Plan and/or (ii) with the consent of the affected holders of Options and/or Stock Appreciation Rights, the cancellation of any outstanding Options and/or any Stock Appreciation Rights under the Plan and the grant in substitution therefor of new Options and/or Stock Appreciation Rights under the Plan covering the same or different numbers of shares of stock, but having an exercise price per share not less than eighty-five percent (85%) of the Fair Market Value (one hundred percent (100%) of the Fair Market Value in the case of an Incentive Stock Option) or, in the case of a 10% shareholder (as described in subsection 5(b)) receiving a new grant of an Incentive Stock Option, not less than one hundred ten percent (110%) of the Fair Market Value) per share of stock on the new grant date.

         (b)    Shares subject to an Option or Stock Appreciation Right canceled under this Section 9 shall continue to be counted against the maximum award of Options and Stock Appreciation Rights permitted to be granted pursuant to subsection 5(c) of the Plan. The repricing of an Option and/or Stock Appreciation Right under this Section 9, resulting in a reduction of the exercise price, shall be

9



deemed to be a cancellation of the original Option and/or Stock Appreciation Right and the grant of a substitute Option and/or Stock Appreciation Right; in the event of such repricing, both the original and the substituted Options and Stock Appreciation Rights shall be counted against the maximum awards of Options and Stock Appreciation Rights permitted to be granted pursuant to subsection 5(c) of the Plan. The provisions of this subsection 9(b) shall be applicable only to the extent required by Section 162(m) of the Code.

         (c)    Notwithstanding the foregoing, the Board or Committee will need shareholder approval prior to effecting the repricing of any outstanding Options and/or any Stock Appreciation Rights under the Plan or the cancellation and re-granting under this Section 9 of any Option or Stock Appreciation Right.

10.    COVENANTS OF THE COMPANY.

         (a)    During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of stock required to satisfy such Stock Awards.

         (b)    The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Stock Award; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Stock Awards unless and until such authority is obtained.

11.    USE OF PROCEEDS FROM STOCK.

        Proceeds from the sale of stock pursuant to Stock Awards shall constitute general funds of the Company.

12.    MISCELLANEOUS.

         (a)    The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest pursuant to subsection 6(e), 7(d) or 8(b), notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest.

         (b)    Neither an Employee, Director or Consultant nor any person to whom a Stock Award is transferred under subsection 6(d), 7(b), or 8(b) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Stock Award unless and until such person has satisfied all requirements for exercise of the Stock Award pursuant to its terms.

         (c)    Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Employee, Director, Consultant or other holder of Stock Awards any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Director or Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee with or without cause the right of the Company's Board of Directors and/or the Company's shareholders to remove any Director as provided in the Company's Bylaws and the provisions of the California Corporations Code, or the right to terminate the relationship of any Consultant subject to the terms of such Consultant's agreement with the Company or Affiliate.

         (d)    To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during

10



any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options.

         (e)    The Company may require any person to whom a Stock Award is granted, or any person to whom a Stock Award is transferred pursuant to subsection 6(d), 7(b) or 8(b), as a condition of exercising or acquiring stock under any Stock Award, (1) to give written assurances satisfactory to the Company as to such person's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Stock Award for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise or acquisition of stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock.

         (f)     To the extent provided by the terms of a Stock Award Agreement, the person to whom a Stock Award is granted may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under a Stock Award by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the common stock otherwise issuable to the participant as a result of the exercise or acquisition of stock under the Stock Award; or (3) delivering to the Company owned and unencumbered shares of the common stock of the Company.

13.    ADJUSTMENTS UPON CHANGES IN STOCK.

         (a)    If any change is made in the stock subject to the Plan, or subject to any Stock Award (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the type(s) and maximum number of securities subject to the Plan pursuant to Section 4(a) and the maximum number of securities subject to award to any person during any calendar year pursuant to Section 5(c), and the outstanding Stock Awards will be appropriately adjusted in the type(s) and number of securities and price per share of stock subject to such outstanding Stock Awards. Such adjustments shall be made by the Board or the Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company.)"

         (b)    In the event of "Change in Control," unless otherwise determined by the Board or Committee at the time of grant, all outstanding Stock Awards shall immediately become one hundred percent (100%) vested, and the Board shall notify all participants that their outstanding Stock Awards shall be fully exercisable for a period of three (3) months (or such other period of time not exceeding six (6) months as is determined by the Board at the time of grant) from the date of such notice, and any unexercised Stock Awards shall terminate upon the expiration of such period.

11



        "Change in Control" means the consummation of any of the following transactions:

        "Incumbent Directors" shall mean directors who either

        Notwithstanding the foregoing, "Incumbent Directors" shall not include an individual whose election or nomination to the Board occurs in order to provide representation for a person or group of related persons who have initiated or encouraged an actual or threatened proxy contest relating to the election of directors of the Company.

14.    AMENDMENT OF THE PLAN AND STOCK AWARDS.

         (a)    The Board may amend, alter, or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would impair the rights of an optionee under any Award

12


theretofore granted without the optionee's or recipient's consent, except such an amendment made to cause the Plan to comply with applicable law, stock exchange rules or accounting rules. In addition, no such amendment shall be made without the approval of the Company's shareholders to the extent such approval is required by law or agreement or if such amendment would:

         (b)    The Board may amend the terms of any Stock Option or other Award theretofore granted, prospectively or retroactively, but no such amendment (a) shall cause a qualified award to cease to qualify for the Section 162(m) of the Code or (b) impair the rights of any holder without the holder's consent except such an amendment made to cause the Plan or Award to qualify for any exemption provided by Rule 16b-3 or (c) modify the terms of any Stock Option or other Award in a manner inconsistent with the provisions of this Plan.

         (c)    Subject to the above provisions, the Board shall have the authority to amend the Plan to take into account changes in law and tax and accounting rules as well as other developments, and to grant Awards which qualify for beneficial treatment under such rules without shareholder approval.

15.    TERMINATION OR SUSPENSION OF PLAN.

         (a)    The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on December 18, 2006 which shall be within ten (10) years from the date the Plan is adopted by the Board or approved by the shareholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated.

         (b)    Rights and obligations under any Stock Award granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the written consent of the person to whom the Stock Award was granted.

16.    EFFECTIVE DATE OF PLAN.

        The Plan shall become effective as determined by the Board, but no Stock Awards granted under the Plan shall be exercised unless and until the Plan has been approved by the shareholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board, and, if required, an appropriate permit has been issued by the Commissioner of Corporations of the State of California.

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EXHIBIT 10.27

[SVB Letterhead]

***Revised****

May 25, 2004

David C. Webb
95 Bedensbrook Road
Skillman, NJ 08558

Dear Dave:

My colleagues and I are very pleased to offer you the position of Chief Information Officer for Silicon Valley Bank. Your estimated start date for this position is to be determined.

SVB Base Compensation:
As the Chief Information Officer your base salary will be $225,000 annually ($18,750 per month).

SVB 2004 Incentive Compensation:
You will also be able to participate in Silicon Valley Bank's 2004 Incentive Compensation Plan (ICP). The ICP is funded with a pool of dollars generated by the Bank achieving or exceeding targeted levels of success and return. Your bonus target is 55% of your base salary. Profits must be high enough to support a minimal level of financial performance including earnings per share. Awards are paid out annually.

SVB Stock Options:
The Company will recommend to the Board of Directors that a total of 40,000 stock options be awarded to you. You will receive confirmation of your approved options with the price information upon Board approval. Your right to purchase your options shares will be subject to a vesting schedule that provides for 25% of your option shares to vest annually on the date approved over the next four years. Shortly after your stock options are approved you will receive our Stock Option Plan and Stock Option Terms and Conditions from our Stock Administration.

Restricted Stock or SVB Bonus:
The Company will recommend to the Board of Directors that a total of 6,000 shares of restricted stock be awarded to you. This award will vest equally, on your anniversary date, over the next three years. The vesting of your stock shares is subject to your continued employment with SVB during the vesting period.

SVB Bonus:
In addition to your base salary we are pleased to offer you a signing bonus of $100,000, which $40,000 will be paid to you within your first month of employment and $60,000 will be paid out by the end of the year. Should you voluntarily leave SVB or be terminated for cause prior to one year from your start date, you would be obligated to repay the entire amount.

SVB Retention Plan:
You will be eligible to participate in the Bank's Retention Plan. Under the Retention Plan, you share in distributions of Silicon Valley Bancshares' investments in certain Venture Capital funds (VC funds), direct equity investments, Alliant returns, and a portion of the income from warrant positions taken by SVB during the calendar year. Eligibility and allocations of the Bank's Retention Pool are established each calendar year and based on individual contribution levels.

Relocation Benefits Available:
SVB will provide you with relocation assistance from New Jersey to Headquarters as described in the enclosed "Executive Relocation Program". Please contact Linda Bader at (408) 654-7787 to initiate this benefit.



SVB Benefits:
Silicon Valley Bank offers a full range of benefits for you and your qualified dependents. In addition to our medical/dental and vision plans, you will receive 20 days of paid vacation (prorated), 10 days of sick leave, and 2 personal days. A detailed presentation of your benefits program will be given to you during new employee orientation.

To comply with the government-mandated confirmation of employment eligibility, please review the enclosed "Lists of Acceptable Documents" as approved by the United States Department of Justice for establishing identity and employment eligibility the "I-9" process. Please bring the required I-9 documents to your orientation.

Nothing in this offer, or your acceptance of it, alters your at will employment status with Silicon Valley Bank. You have the right to terminate your employment at any time with or without cause or notice, and Silicon Valley Bank reserves for itself an equal right.

To confirm your acceptance of our offer, please sign one copy of this letter, complete the enclosed Employment forms and return the four documents in the enclosed envelope. This offer supersedes any and all other written or verbal offers and is valid until June 1, 2004 unless earlier withdrawn; it is also contingent upon successful completion of the security background verification and reference checks.

Dave, we are very enthusiastic about your joining the Silicon Valley Bank team. We are sure you will find Silicon Valley Bank a stimulating and team-oriented company. The work environment is one of challenge, opportunity, and reward for success. If you have any questions, please do not hesitate to call Marc Verissimo at (408) 654-5582.

Sincerely,

/s/   KEN WILCOX     
Ken Wilcox
President & CEO


Accepted:

/s/  
DAVID WEBB       

 

Date:

June 13, 2004

Actual Start Date: July 6, 2004
     



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EXHIBIT 31.1


RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Kenneth P. Wilcox, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Silicon Valley Bancshares;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 9, 2004   /s/   KENNETH P. WILCOX       
Kenneth P. Wilcox
President and Chief Executive Officer
(Principal Executive Officer)



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EXHIBIT 31.2


RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Jack F. Jenkins-Stark, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Silicon Valley Bancshares;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 9, 2004   /s/   JACK F. JENKINS-STARK       
Jack F. Jenkins-Stark
Chief Financial Officer
(Principal Financial Officer)



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EXHIBIT 32.1


SECTION 1350 CERTIFICATIONS

I, Kenneth P. Wilcox, certify that, to my knowledge, the Quarterly Report of Silicon Valley Bancshares on Form 10-Q for the quarterly period ended June 30, 2004, (i) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) that the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Silicon Valley Bancshares.

Date: August 9, 2004   /s/   KENNETH P. WILCOX       
Kenneth P. Wilcox
President and Chief Executive Officer
(Principal Executive Officer)

I, Jack F. Jenkins-Stark, certify that, to my knowledge, the Quarterly Report of Silicon Valley Bancshares on Form 10-Q for the quarterly period ended June 30, 2004, (i) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) that the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Silicon Valley Bancshares.

Date: August 9, 2004   /s/   JACK F. JENKINS-STARK       
Jack F. Jenkins-Stark
Chief Financial Officer
(Principal Financial Officer)



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SECTION 1350 CERTIFICATIONS