SVB Financial Group
SILICON VALLEY BANCSHARES (Form: 10-Q, Received: 05/15/2001 17:18:57)

As filed with the Securities and Exchange Commission on May 15, 2001



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

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

          For the quarterly period ended March 31, 2001

OR

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

          For the transition period from ________ to ________.

 

Commission File Number: 33-41102


SILICON VALLEY BANCSHARES
(Exact name of registrant as specified in its charter)

 

Delaware 91-1962278
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  
   
3003 Tasman Drive
Santa Clara, California
95054-1191
(Address of principal executive offices) (Zip Code)

 

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

 

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

          Yes  x   No ¨

 

          At April 30, 2001, 49,344,885 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
 
 
PART II - OTHER INFORMATION
   
ITEM 1. LEGAL PROCEEDINGS
   
ITEM 2. CHANGES IN 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

PART I - FINANCIAL INFORMATION

ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except par value)
March 31,
2001

December 31,
2000

Assets:    
Cash and due from banks $243,078 $332,632
Federal funds sold and securities purchased under agreement to resell 1,076,102 1,389,734
Investment securities 1,724,119 2,107,590
Loans, net of unearned income 1,731,975 1,716,549
Allowance for loan losses (73,800)
(73,800)
Net loans 1,658,175 1,642,749
Premises and equipment 21,375 18,493
Accrued interest receivable and other assets 119,906
135,577
Total assets $4,842,755
$5,626,775
Liabilities, Minority Interest, and Stockholders' Equity:    
Liabilities:    
Deposits:    
    Noninterest-bearing demand $2,042,532 $2,448,758
    NOW 35,271 57,857
    Money market 1,138,068 1,519,563
    Time 826,334
836,081
Total deposits 4,042,205 4,862,259
Other liabilities 71,364
81,138
Total liabilities 4,113,569
4,943,397
Company obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely junior subordinated debentures (trust preferred securities) 38,602 38,589
Minority interest 30,614 30,668
Stockholders' equity:    
Preferred stock, $0.001 par value, 20,000,000 shares authorized; none outstanding    
Common stock, $0.001 par value, 60,000,000 shares authorized; 49,472,775 and 48,977,906 shares outstanding at March 31, 2001 and December 31, 2000, respectively 49 49
Additional paid-in capital 286,623 280,008
Retained earnings 368,434 335,098
Unearned compensation (2,972) (3,634)
Accumulated other comprehensive income:    
    Net unrealized gains on available-for-sale investments 7,836
2,600
Total stockholders' equity 659,970
614,121
Total liabilities, minority interest, and stockholders' equity $4,842,755
$5,626,775

See notes to interim consolidated financial statements.

SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

 

  For the three months ended
(Dollars in thousands, except per share amounts) March 31,
2001

March 31,
2000

Interest income:    
    Loans $50,905 $44,293
    Investment securities 28,180 24,556
    Federal funds sold and securities purchased under agreement to resell 15,375
16,027
Total interest income 94,460 84,876
Interest expense 12,724
13,376
Net interest income 81,736 71,500
Provision for loan losses 4,903
12,572
Net interest income after provision for loan losses 76,833
58,928
Noninterest income:    
    Client investment fees 11,790 5,619
    Letter of credit and foreign exchange income 4,546 3,631
    Disposition of client warrants 4,078 39,354
    Deposit service charges 822 714
    Investment (losses) gains (336) 29,888
    Other 2,975
1,928
Total noninterest income 23,875
81,134
Noninterest expense:    
    Compensation and benefits 22,832 24,371
    Professional services 5,540 2,446
    Net occupancy 3,723 1,904
    Business development and travel 2,974 2,443
    Furniture and equipment 2,411 2,014
    Advertising and promotion 1,028 499
    Postage and supplies 1,013 788
    Telephone 858 496
    Trust preferred securities distributions 825 825
    Retention and warrant incentive plans 400 9,850
    Other 4,549
1,883
Total noninterest expense 46,153 47,519
Minority interest 503
-
Income before income tax expense 55,058 92,543
Income tax expense 21,722
37,888
Net income $33,336
$54,655
Basic earnings per share $0.68 $1.21
Diluted earnings per share $0.65
$1.15

See notes to interim consolidated financial statements.

SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

  For the three months ended
(Dollars in thousands) March 31,
2001

March 31,
2000

                    
Net income $33,336 $54,655
     
Other comprehensive income (loss), net of tax:    
    Change in unrealized gains (losses) on available-for-sale investments:    
        Unrealized holding gains 7,502 2,287
        Less: Reclassification adjustment for gains included in net income (2,266)
(40,894)
Other comprehensive income (loss) 5,236
(38,607)
Comprehensive income $38,572
$16,048

See notes to interim consolidated financial statements.

SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

 

  For the three months ended
(Dollars in thousands) March 31,
2001

March 31,
2000

Cash flows from operating activities:    
    Net income $33,336 $54,655
    Adjustments to reconcile net income to net cash provided by operating activities:    
       Provision for loan losses 4,903 12,572
       Minority interest (503) -
       Depreciation and amortization 1,348 923
       Net loss (gain) on sales of investment securities 336 (29,888)
       Net gains on disposition of client warrants (4,078) (39,354)
       Decrease in accrued interest receivable 10,261 1,434
       Decrease in inventory 6,414 4,949
       Increase in prepaid expenses (707) (315)
       Increase in taxes payable 20,722 37,650
       (Decrease) increase in unearned income (3,489) 1,785
       Decrease in retention, warrant and other incentive plan payable (32,576) (1,628)
       Other, net (1,972)
1,738
Net cash provided by operating activities 33,995
44,521
Cash flows from investing activities:    
    Proceeds from maturities and paydowns of investment securities 557,360 260,911
    Proceeds from sales of investment securities 4,713 131,116
    Purchases of investment securities (165,779) (548,401)
    Net increase in loans (24,283) (26,475)
    Proceeds from recoveries of charged off loans 7,443 4,781
    Purchases of premises and equipment (4,230)
(451)
Net cash provided by (used in) investing activities 375,224
(178,519)
Cash flows from financing activities:    
    Net (decrease) increase in deposits (820,054) 406,446
    Proceeds from issuance of common stock, net of issuance costs 7,200 15,287
    Capital contributions from minority interest participants 449
-
Net cash (used in) provided by financing activities (812,405)
421,733
Net (decrease) increase in cash and cash equivalents (403,186) 287,735
Cash and cash equivalents at January 1, 1,722,366
1,176,102
Cash and cash equivalents at March 31, $1,319,180
$1,463,837
Supplemental disclosures:    
    Interest paid $12,808 $13,129
    Income taxes paid $2,062
$311

See notes to interim consolidated financial statements.

SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1.  Significant Accounting Policies

The accounting and reporting policies of Silicon Valley Bancshares and its subsidiaries (the “Company”) conform with accounting principles generally accepted in the United States of America. Certain reclassifications have been made to the Company’s 2000 consolidated financial statements to conform to the 2001 presentations. Such reclassifications had no effect on the results of operations or stockholders’ equity. The following is a summary of the significant accounting and reporting policies used in preparing the interim consolidated financial statements.

Nature of Operations

Silicon Valley Bancshares is a bank holding company whose principal subsidiary is Silicon Valley Bank (the "Bank"), a California-chartered bank with headquarters in Santa Clara, California. The Bank maintains regional banking offices in California, and additionally has loan offices in Arizona, Colorado, Florida, Georgia, Illinois, Massachusetts, Minnesota, North Carolina, Oregon, Pennsylvania, Texas, Virginia, and Washington. The Bank serves emerging growth and middle-market companies in targeted niches, focusing on the technology and life sciences industries, while also addressing other specific industries in which it can provide a higher level of service and better manage credit through specification and focus. Substantially all of the assets, liabilities and earnings of the Company relate to its investment in the Bank.

Consolidation

The consolidated financial statements include the accounts of Silicon Valley Bancshares and those of its wholly owned subsidiaries, the Bank, SVB Strategic Investors, LLC, Silicon Valley BancVentures, Inc., SVB Capital I, and SVB Leasing Company (inactive). Intercompany accounts and transactions have been eliminated in consolidation. SVB Strategic Investors, LLC and Silicon Valley BancVentures, Inc., as general partners, are considered to have significant influence over the operating and financing policies of SVB Strategic Investors Fund, L.P. and Silicon Valley BancVentures, L.P., respectively. Therefore, SVB Strategic Investors Fund, L.P. and Silicon Valley BancVentures, L.P. are included in the Company’s consolidated financial statements. Minority interest represents the minority participants’ share of the equity of SVB Strategic Investors Fund, L.P., and Silicon Valley BancVentures, L.P.

Interim Consolidated Financial Statements

In the opinion of Management, the interim consolidated financial statements contain all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the Company’s consolidated financial position at March 31, 2001, the results of its operations and cash flows for the three month periods ended March 31, 2001, and March 31, 2000. The December 31, 2000, consolidated financial statements were derived from audited financial statements, and certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted.

The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2000 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2001, may not necessarily be indicative of the Company’s operating results for the full year.

Basis of Financial Statement Presentation

The preparation of 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 period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to possible change in the near term relates to the determination of the allowance for loan losses. An estimate of possible changes or range of possible changes cannot be made.

Cash and Cash Equivalents

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

Federal Funds Sold and Securities Purchased Under Agreement to Resell

Federal funds sold and securities purchased under agreement to resell as reported in the consolidated balance sheets includes interest-bearing deposits in other financial institutions of $532,000 and $549,000 at March 31, 2001, and December 31, 2000, respectively.

Nonaccrual Loans

Loans are placed on nonaccrual status when they become 90 days past due as to principal or interest payments (unless the principal and interest are well secured and in the process of collection), when the Company has determined, based upon currently known information, that the timely collection of principal or interest is doubtful, or when the loans otherwise become impaired under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 114, “Accounting by Creditors for Impairment of a Loan.”

When a loan is placed on nonaccrual status, the accrued interest is reversed against interest income and the loan is accounted for on the cash or cost recovery method thereafter until qualifying for return to accrual status. Generally, a loan will be returned to accrual status when all delinquent principal and interest become current in accordance with the terms of the loan agreement and full collection of the principal appears probable.

Stock-Based Compensation

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

Segment Reporting

Management views the Company as one operating segment, therefore, separate reporting of financial segment information is not considered necessary. Management approaches the Company’s principal subsidiary, the Bank, as one business enterprise which operates in a single economic environment, since the products and services, types of customers and regulatory environment all have similar economic characteristics.

Derivative Financial Intsruments

On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, hedging activities, and exposure definition. SFAS No. 133 requires that all derivatives be recognized as either assets or liabilities at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The adoption of SFAS 133 did not result in a cumulative-effect-type adjustment to net income or other comprehensive income. Management does not believe that ongoing application of SFAS No. 133 will significantly alter the Company's hedging strategies. However, its application may increase the volatility of other income and expense and other comprehensive income.

For derivative instruments that hedge the exposure of variability in expected future cash flows that is attributable to a particular risk and that are designated as cash flow hedges, the effective portion of the net gain or loss on the derivative instrument is reported as a component of other comprehensive income in stockholders' equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining net gain or loss on the derivative instrument in excess of the cumulative change in the present value of the future cash flows on the hedged item, if any, is recognized in current earnings. The Company did not have any hedges at March 31, 2001. For derivative instruments that hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk and that are designated as fair value hedges, the net gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period. For derivative instruments not designated as hedging instruments, changes in fair value are recognized in earnings in the current period.

For foreign currency forward contracts designated as cash flow hedges, hedge effectiveness is measured based on changes in the fair value of the contract attributable to changes in the forward exchange rate. Changes in the expected future cash flows on the forecasted hedged transaction and changes in the fair value of the forward hedge are both measured from the contract rate to the forward exchange rate associated with the forward contract's maturity date.

Common Stock Split

In March 2000, the Board of Directors approved a two-for-one stock split, in the form of a stock dividend of the Company’s common stock. Holders of the Company’s $0.001 par value common stock as of the record date, April 21, 2000 received one additional share of $0.001 par value for every one share of common stock they owned as of the record date. Share and per share amounts for all periods presented in the accompanying consolidated financial statements have been adjusted to give retroactive recognition to a two-for-one stock split distributed on May 15, 2000.

2.           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 financial instruments or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

The following is a reconciliation of basic EPS to diluted EPS for the three month periods ended March 31, 2001 and 2000.

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

Shares
Per Share
Amount

Three months ended March 31, 2001:      
Basic EPS:      
Income available to common stockholders $33,336 48,826 $0.68
Effect of Dilutive Securities:      
Stock options and restricted stock -
2,250
-
Diluted EPS:      
Income available to common stockholders plus assumed conversions $33,336
51,076
$0.65
       
Three months ended March 31, 2000:      
Basic EPS:      
Income available to common stockholders $54,655 45,247 $1.21
Effect of Dilutive Securities:      
Stock options and restricted stock -
2,282
-
Diluted EPS:      
Income available to common stockholders plus assumed conversions $54,655
47,529
$1.15

 

3.  Loans

The detailed composition of loans, net of unearned income of $6.9 million and $8.4 million at March 31, 2001, and December 31, 2000, respectively, is presented in the following table:

(Dollars in thousands) March 31,
2001

December 31,
2000

Commercial $1,530,872 $1,531,468
Real estate construction 48,117 62,253
Real estate term 49,823 38,380
Consumer and other 103,163
84,448
Total loans $1,731,975
$1,716,549

4.  Allowance for Loan Losses

The activity in the allowance for loan losses for the quarters ended March 31, 2001 and 2000 was as follows:

  For the three months ended
(Dollars in thousands) March 31,
2001

March 31,
2000

Balance at January 1, $73,800 $71,800
Provision for loan losses 4,903 12,572
Loans charged off (12,346) (16,253)
Recoveries 7,443
4,781
Balance at March 31, $73,800
$72,900

The aggregate recorded investment in loans for which impairment has been determined in accordance with SFAS No. 114 totaled $20.1 million and $28.8 million at March 31, 2001, and March 31, 2000, respectively. Allocations of the allowance for loan losses specific to impaired loans totaled $0 at March 31, 2001, and $13.4 million at March 31, 2000. Average impaired loans for the first quarter of 2001 and 2000 totaled $18.2 million and $24.1 million, respectively.

5. Subsequent Event

At the Annual Meeting of Stockholders, held on April 19, 2001, the stockholders of a majority of the Company’s shares of common stock approved an increase in the Company’s authorized common stock, from 60,000,000 shares to 150,000,000 shares.

On April 5, 2001, the Company’s Board of Directors authorized a share repurchase program of up to 5 million shares of common stock.

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Results of Operations

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

You should read the following discussion and analysis of financial condition and results of operations in conjunction with our consolidated financial statements and supplementary data as presented in Part I - Item 1 of this report. This discussion and analysis includes "forward-looking statements" as that term is used in the securities laws. All statements regarding our expected financial position, business and strategies are forward-looking statements. In addition, in this discussion and analysis the words "anticipates," "believes," "estimates," "seeks," "expects," "plans," "intends" and similar expressions, as they relate to Silicon Valley Bancshares or our management, are intended to identify forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, and have based these expectations on our beliefs as well as our assumptions, such expectations may prove to be incorrect.

For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see the text under the caption "Risk Factors" included in Item 7 of our annual report on Form 10-K dated March 16, 2001. We urge investors to consider these factors carefully in evaluating the forward-looking statements contained in this discussion and analysis. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this filing are made only as of the date of this filing. We do not intend, and undertake no obligation, to update these forward-looking statements.

Certain reclassifications have been made to our prior years results to conform with 2001 presentations. Such reclassifications had no effect on our results of operations or stockholders' equity.

Earnings Summary

We reported net income of $33.3 million, or $0.65 per diluted share, for the first quarter of 2001, compared with net income of $54.7 million, or $1.15 per diluted share, for the first quarter of 2000. The annualized return on average assets (ROA) was 2.7% in the first quarter of 2001 compared with 4.6% in the same period of 2000. The annualized return on average equity (ROE) for the first quarter of 2001 was 21.2%, compared with 55.7% in the first quarter of 2000.

The decline in net income for the first quarter of 2001, as compared with the first quarter of 2000, primarily resulted from a decrease in income from the disposition of client warrants and gains on venture capital fund investments. This decrease in income was offset by an increase in net interest income and a decrease in the provision for loan losses. The major components of net income and changes in these components are summarized in the following table for the quarters ended March 31, 2001 and 2000, and are discussed in more detail below.

 

  For the Three Months Ended March 31,
(Dollars in thousands) 2001
2000
2000 to 2001
Increase (Decrease)

Net interest income $81,736 $71,500 $10,236
Provision for loan losses 4,903 12,572 (7,669)
Noninterest income 23,875 81,134 (57,259)
Noninterest expense 46,153 47,519 (1,366)
Minority interest 503
-
503
Income before income taxes 55,058 92,543 (37,485)
Income tax expense 21,722
37,888
(16,166)
Net income $33,336
$54,655
$(21,319)

Net Interest Income and Margin

Net interest income is defined as the difference between interest earned on interest-earning assets and interest paid on funding sources, primarily deposits. Net interest income is our principal source of recurring revenue. Net interest margin is defined as the amount of net interest income, on a fully taxable-equivalent basis, expressed as a percentage of average interest-earning assets. The average yield earned on interest-earning assets is the amount of taxable-equivalent interest income expressed as a percentage of average interest-earning assets. The average rate paid on funding sources is defined as interest expense as a percentage of average interest-earning assets.

The following table sets forth average assets, liabilities, minority interest, stockholders' equity, interest income and interest expense, average yields and rates, and the composition of our net interest margin for the three months ended March 31, 2001 and 2000.

 

AVERAGE BALANCES, RATES AND YIELDS

  For the three months ended March 31,
  2001
2000
(Dollars in thousands)
Average
Balance

Interest
Average
Yield/
Rate

Average
Balance

Interest
Average
Yield/
Rate

             
Interest-Earning Assets:            
    Federal funds sold and securities purchased under agreement to resell (1) $1,092,609 $15,375 5.7% $1,101,198 $16,027 5.9%
    Investment securities:            
       Taxable 1,727,919 25,941 6.1 1,588,349 23,112 5.9
       Non-taxable (2) 206,781 3,445 6.8 143,040 2,221 6.2
    Loans:            
       Commercial 1,465,713 45,981 12.7 1,397,920 39,331 11.3
       Real estate construction and term 103,175 2,801 11.0 135,975 3,480 10.3
       Consumer and other 96,086
2,123
9.0
65,069
1,482
9.2
    Total loans 1,664,974
50,905
12.4
1,598,964
44,293
11.1
Total interest-earning assets 4,692,283
95,666
8.3
4,431,551
85,653
7.8
Cash and due from banks 233,876     283,142    
Allowance for loan losses (78,245)     (71,312)    
Other assets 193,728
    186,009
   
Total assets $5,041,642
    $4,829,390
   
Funding Sources:            
Interest-Bearing Liabilities:            
    NOW deposits $58,384 128 0.9 $52,596 260 2.0
    Regular money market deposits 318,572 1,133 1.4 419,387 1,904 1.8
    Bonus money market deposits 957,058 3,646 1.6 1,498,010 7,579 2.0
    Time deposits 833,695
7,817
3.8
357,647
3,633
4.1
Total interest-bearing liabilities 2,167,709 12,724 2.4 2,327,640 13,376 2.3
Portion of noninterest-bearing funding sources 2,524,574
    2,103,911
   
Total funding sources 4,692,283
12,724
1.1
4,431,551
13,376
1.2
             
Noninterest-Bearing Funding Sources:            
    Demand deposits 2,100,812     1,981,318    
    Other liabilities 66,009     86,945    
    Trust preferred securities (3) 38,591     38,539    
    Minority interest 30,531     -    
    Stockholders’ equity 637,990     394,948    
    Portion used to fund interest-earning assets (2,524,574)
    (2,103,911)
   
Total liabilities, minority interest and stockholders’ equity $5,041,642
    $4,829,390
   
             
Net interest income and margin   $82,942
7.2%
  $72,277
6.6%
Total deposits $4,268,521
    $4,308,958
   

(1) Includes average interest-bearing deposits in other financial institutions of $532 and $364 for the three months ended March 31, 2001 and 2000, respectively.
   
(2) Interest income on non-taxable investments is presented on a fully taxable-equivalent basis using the federal statutory rate of 35% in 2001 and 2000.  The tax equivalent adjustments were $1,206 and $777 for the three months ended March 31, 2001 and 2000, respectively.
   
(3) The 8.25% annual distribution to SVB Capital I is recorded as a component of noninterest expense.

Net interest income is affected by changes in the amount and mix of interest-earnings assets and interest-bearing liabilities, referred to as "volume change." Net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities, referred to as "rate change." The following table sets forth changes in interest income and interest expense for each major category of interest-earning assets and interest-bearing liabilities. The table also reflects the amount of change attributable to both volume and rate changes for the periods indicated. Changes relating to investments in non-taxable municipal securities are presented on a fully taxable-equivalent basis using the federal statutory rate of 35% in 2001 and 2000.

  First Quarter 2001 Compared to First Quarter 2000
  Increase (Decrease)
Due to Change in

(Dollars in thousands) Volume
Rate
Total
Interest income:      
     Federal funds sold and securities purchased under agreement to resell $(155) $(497) $(652)
     Investment securities 2,973 1,080 4,053
     Loans 1,770
4,842
6,612
Increase in interest income 4,588
5,425
10,013
Interest expense:      
     NOW deposits 25 (157) (132)
     Regular money market deposits (411) (360) (771)
     Bonus money market deposits (2,360) (1,573) (3,933)
     Time deposits 4,451
(267)
4,184
Increase (decrease) in interest expense 1,705
(2,357)
(652)
Increasein net interest income $2,883
$7,782
$10,665

Net interest income, on a fully taxable-equivalent basis, totaled $82.9 million for the first quarter of 2001, an increase of $10.7 million, or 14.8%, from the $72.3 million total for the first quarter of 2000.  The increase in net interest income was the result of a $10.0 million, or 11.7%, increase in interest income, combined with a $0.7 million, or 4.9%, decrease in interest expense over the comparable prior year period.

The $10.0 million increase in interest income for the first quarter of 2001, as compared to the first quarter of 2000, was the result of a $4.6 million favorable volume variance and a $5.4 million favorable rate variance. The $4.6 million favorable volume variance resulted from a $260.7 million, or 5.9%, increase in average interest-earning assets over the comparable period in the prior year. The increase in average interest-earning assets was primarily centered in investment securities and loans, which increased $203.3 million and $66.0 million, respectively.

Average loans increased $66.0 million, or 4.1%, in the 2001 first quarter as compared to the 2000 first quarter, resulting in a $1.8 million favorable volume variance. This loan growth was primarily due to the current slowdown in the capital markets and venture capital funding.

Average investment securities for the first quarter of 2001 increased $203.3 million, or 11.7%, as compared to the 2000 first quarter, resulting in a $3.0 million favorable volume variance. The increase in average investment securities was primarily centered in municipal securities.

Favorable rate variances associated with investment securities and loans combined to increase interest income by $5.9 million in first quarter of 2001, as compared to the respective prior year period. The $1.1 million favorable rate variance associated with investment securities primarily relates to our decision to increase our investment in higher-yielding non-taxable municipal securities. In the 2001 first quarter we achieved a $4.8 million favorable rate variance associated with our loan portfolio. The average yield on loans in first quarter 2001 increased 130 basis points from the respective prior year first quarter. This favorable rate variance reflects our efforts to achieve improved loan pricing. Though we are currently experiencing reduced competition and client liquidity in the marketplace, and therefore believe we can maintain our improved loan pricing, the overall loan yield will be negatively impacted by further decreases in our prime rate.

The yield on average interest-earning assets increased 50 basis points in the first quarter of 2001 from the comparable prior year period. This increase primarily resulted from a rise in the average yield on loans, largely due to improved loan pricing and a shift in the composition of interest-earning assets to higher-yielding assets such as loans.

Total interest expense in the 2001 first quarter decreased $0.7 million from the first quarter of 2000. This decrease was due to a favorable rate variance of $2.4 million, partially offset by an unfavorable volume variance of $1.7 million. The favorable rate variance largely resulted from a reduction in the average rate paid on our bonus money market deposit product, from 2.0% in first quarter 2000 to 1.6% in first quarter 2001 due to a reduction in short-term market interest rates.

We experienced a $1.7 million unfavorable volume variance on interest-bearing liabilities despite a $159.9 million, or 6.9%, decrease in total interest-bearing liabilities. This unfavorable variance was primarily due to a shift in the composition of the deposit balances towards higher rate paying deposit products, such as time deposits.

The average cost of funds paid on interest-bearing liabilities in the first quarter of 2001 was 2.4%, up from 2.3% paid in the first quarter of 2000. The increase in the average cost of funds was largely due to a shift in the composition of the deposit balances towards higher rate paying deposit products, such as time deposits.

Provision For Loan Losses

The provision for loan losses is based on our evaluation of the adequacy of the existing allowance for loan losses in relation to total loans, and on our periodic assessment of the inherent and identified risk dynamics of the loan portfolio resulting from reviews of selected individual loans and loan commitments.

Our provision for loan losses totaled $4.9 million for the first quarter of 2001, a $7.7 million, or 61.0%, decrease compared to the $12.6 million provision for the first quarter of 2000. See “Financial Condition - Credit Quality and the Allowance for Loan Losses” for additional related discussion.

Noninterest Income

The following table summarizes the components of noninterest income for the quarters ended March 31, 2001 and 2000:

  Quarter Ended March 31,
(Dollars in thousands) 2001
2000
     
Client investment fees $11,790 $5,619
Letter of credit and foreign exchange income 4,546 3,631
Disposition of client warrants 4,078 39,354
Deposit service charges 822 714
Investment (losses) gains (336) 29,888
Other 2,975
1,928
Total noninterest income $23,875
$81,134

Noninterest income decreased $57.3 million to a total of $23.9 million in the first quarter of 2001, versus $81.1 million in the prior year first quarter. This decrease was largely due to a $35.3 million decrease in income from the disposition of client warrants, combined with a $30.2 million decrease in investment gains, partially offset by a $6.2 million increase in client investment fees.

Client investment fees totaled $11.8 million in the first quarter of 2001 compared to $5.6 million in the similar prior year period. We offer off-balance sheet private label mutual fund products to clients on which we earn fees ranging from 42 to 50 basis points on the average balance in these products. At March 31, 2001, $10.1 billion in client funds were invested by clients off-balance sheet, including $7.5 billion in the mutual fund products compared to $9.5 billion and $6.4 billion for the comparative prior year period, respectively. The increase in client investment fees of $6.2 million reflects an increase in sales fees.

Letter of credit fees, foreign exchange fees and other trade finance income totaled $4.5 million in the first quarter of 2001, an increase of $0.9 million, or 25.2%, from the $3.6 million earned in the first quarter of 2000. The growth reflects a concerted effort by our management to expand the penetration of trade finance-related products and services among our growing client base, a large percentage of which provide products and services in international markets.

Income from the disposition of client warrants totaled $4.1 million and $39.4 million in the first quarters of 2001 and 2000, respectively. We have historically obtained rights to acquire stock, in the form of warrants, in certain clients, primarily as part of negotiated credit facilities. The receipt of warrants does not change the loan covenants or other collateral control techniques we employee to mitigate the risk of a loan becoming nonperforming. The collateral requirements on loans with warrants are similar to lending arrangements where warrants are not obtained. The timing and amount of income from the disposition of client warrants typically depends upon factors beyond our control, including the general condition of the public equity markets as well as the merger and acquisition environment. We therefore cannot predict the timing and amount of income with any degree of accuracy and it is likely to vary materially from period to period. During the first quarter of 2001 and throughout 2000, a portion of the income from the disposition of client warrants was offset by expenses related to our efforts to build an infrastructure sufficient to support present and prospective business activities.

Deposit service charges totaled $0.8 million for the first quarter of 2001, a slight increase from the comparable period in 2000. Clients compensate us for depository services either through earnings credits computed on their demand deposit balances, or via explicit payments recognized by us as deposit service charges income.

We incurred $0.3 million in losses on investment securities during the first quarter of 2001, primarily related to the write-off of a few equity investments. The 2000 first quarter gains primarily related to a gain of $26.2 million realized on the sale of venture capital fund investment, which completed an initial public offering in 1999.

Other noninterest income largely consists of service-based fee income, and increased $1.0 million, or 54.3%, to $3.0 million in the first quarter of 2001 from $1.9 million in the first quarter of 2000. This increase in other noninterest income was primarily due to venture capital fund management fees of $0.6 million and a higher volume of cash management and loan documentation services related to our growing client base.

Noninterest Expense

Noninterest expense in the first quarter of 2001 totaled $46.2 million, a $1.4 million, or 2.9%, decrease from the $47.5 million incurred in the comparable prior year period. We closely monitor our level of noninterest expense using a variety of financial ratios, including the efficiency ratio. The efficiency ratio is calculated by dividing the amount of noninterest expense, excluding costs associated with retention and warrant incentive plans and other real estate owned, by adjusted revenues, defined as the total of net interest income and noninterest income, excluding income from the disposition of client warrants and gains or losses related to sales of investment securities. This ratio reflects the level of operating expense required to generate $1 of operating revenue. Our efficiency ratio was 44.9% for the first quarter of 2001, compared to 45.2% for the first quarter of 2000. The following table presents the detail of noninterest expense and the incremental contribution of each expense line item to our efficiency ratio:

 

  Three Months Ended March 31,
  2001
2000
         
(Dollars in thousands) Amount
Percent of
Adjusted
Revenues

Amount
Percent of
Adjusted
Revenues

Compensation and benefits $22,832 22.4% $24,371 29.2%
Professional services 5,540 5.4 2,446 2.9
Net occupancy 3,723 3.7 1,904 2.3
Business development and travel 2,974 2.9 2,443 2.9
Furniture and equipment 2,411 2.4 2,014 2.4
Advertising and promotion 1,028 1.0 499 0.6
Postage and supplies 1,013 1.0 788 1.0
Telephone 858 0.8 496 0.6
Trust preferred securities distributions 825 0.8 825 1.0
Other 4,549
4.5
1,883
2.3
Total, excluding retention and warrant incentive plans 45,753 44.9% 37,669 45.2%
Retention and warrant incentive plans 400

9,850

Total noninterest expense $46,153

$47,519

Compensation and benefits expenses totaled $22.8 million in the first quarter of 2001, a $1.5 million, or 6.3%, decrease from the $24.4 million incurred in the first quarter of 2000. This decline in compensation and benefits expenses was the result of a decrease in performance-based compensation, partially offset by costs associated with an increase in average full-time equivalent employees (FTE). Average FTE personnel increased from 713 in the first quarter 2000 to 960 in the first quarter of 2001. The increase in FTE personnel was primarily due to a combination of our efforts to develop and support new markets through geographic expansion, to develop and expand products, services and niches, and to build an infrastructure sufficient to support present and prospective business activities. Growth in our FTE personnel is likely to slow during 2001 as a result of the current economic slowdown in our marketplace.

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 $5.5 million in the first quarter of 2001, an increase of $3.1 million, or 126.5%, compared with the same period in 2000. The increase in professional services expenses reflects the extensive efforts undertaken by us to continue to build and support our infrastructure, as well as evaluate and pursue new business opportunities. It also reflects our efforts in outsourcing several corporate functions, such as internal audit, facilities management and credit review, where we believe we can achieve a combination of cost savings and increased quality of service.

Business development and travel expenses totaled $3.0 million in the first quarter of 2001, a $0.5 million, or 21.7%, increase from the $2.4 million incurred in the first quarter of 2000. The increase in business development and travel expenses was largely attributable to overall growth in our business, including both an increase in the number of FTE personnel and expansion into new geographic markets.

Occupancy, furniture and equipment expenses totaled $6.1 million in the first quarter of 2001, an increase of $2.2 million, or 56.6%, compared to $3.9 million incurred in the first quarter of 2000. This increase was primarily the result of our continued geographic expansion to develop and support new markets during 2000.

Trust preferred securities distributions totaled $0.8 million for the three months ended March 31, 2001 and 2000, and resulted from the issuance of $40.0 million in cumulative trust preferred securities during the second quarter of 1998. The trust preferred securities pay a fixed rate quarterly distribution of 8.25% and have a maximum maturity of 30 years.

Retention and warrant incentive plans expense totaled $0.4 million in the first quarter of 2001, a $9.5 million decrease from the $9.9 million incurred in the first quarter of 2000. Under the provisions of the retention and warrant incentive plans, employees are compensated with a fixed percentage of gains realized on warrant and certain venture capital fund and direct equity investments. The decrease in retention and warrant plans expense in the first quarter of 2001 was directly related to the decrease in warrant, venture capital fund and direct equity investment gains from the comparable 2000 period.

Other noninterest expense totaled $4.5 million in the first quarter of 2001, an increase of $2.7 million, or 141.6%, compared to $1.9 million incurred in the first quarter of 2000. The increase in noninterest expense was primarily due to a one-time $2.2 million operational loss related to a system issue associated with our off-balance sheet client funds.

Income Taxes

Our effective tax rate was 39.5% in the 2001 first quarter as compared to 40.9% in the prior year first quarter.  The change in rate was primarily due to an increase in items giving rise to permanent tax benefits.

Financial Condition

Our total assets were $4.8 billion at March 31, 2001, a decrease of $784.0 million, or 13.9%, compared to $5.6 billion at December 31, 2000.

Federal Funds Sold and Securities Purchased Under Agreement to Resell

Federal funds sold and securities purchased under agreement to resell totaled a combined $1.1 billion at March 31, 2001, a decrease of $313.6 million, or 22.6%, compared to the $1.4 billion outstanding at the prior year end. This decrease was attributable to a decline in deposit balances during the first quarter of 2001.

Investment Securities

Investment securities totaled $1.7 billion at March 31, 2001, a decrease of $383.5 million, or 18.2%, from the December 31, 2000, balance of $2.1 billion. This decrease resulted from a decline in our deposits during the first three months of 2001, and primarily consisted of U.S. agency securities and municipal securities.

Based on March 31, 2001 market valuations, we had potential pre-tax warrant gains totaling $1.1 million related to 22 companies. We are restricted from exercising many of these warrants until later in 2001. As of March 31, 2001, we held 1,475 warrants in 1,146 companies, and had made investments in 219 venture capital funds and direct equity investments in 64 companies. Many of these companies are non-public. Thus, for those companies for which a readily determinable market value cannot be obtained, we value those equity instruments at cost less any identified impairment. Additionally, we are typically precluded from using any type of derivative instrument to secure the current unrealized gains associated with many of these equity instruments. Hence, the amount of income we realize from these equity instruments in future periods may vary materially from the current unrealized amount due to fluctuations in the market prices of the underlying common stock of these companies. Furthermore, we may reinvest some or all of the income realized from the disposition of these equity instruments in pursuing our business strategies.

Loans

Loans, net of unearned income, at March 31, 2000, totaled $1.7 billion, a slight increase of $15.4 million compared to the balance at December 31, 2000. We continue to increase the number of client lending relationships in most of our technology and life sciences niche practices as well as in specialized lending products. As a result of the current slowdown in the capital markets and venture capital funding, we expect average loan growth during 2001 of approximately 10% or more.

Credit Quality and the Allowance for Loan Losses

Credit risk is defined as the possibility of sustaining a loss because other parties to the financial instrument fail to perform in accordance with the terms of the contract. While we follow underwriting and credit monitoring procedures which we believe are appropriate in growing and managing the loan portfolio, in the event of nonperformance by these other parties, our potential exposure to credit losses could significantly affect our consolidated financial position and earnings.

Lending money involves an inherent risk of nonpayment. Through the administration of loan policies and monitoring of the loan portfolio, our management seeks to reduce such risks. The allowance for loan losses is an estimate to provide a financial buffer for losses, both identified and unidentified, in the loan portfolio.

We regularly review and monitor the loan portfolio to determine the risk profile of each credit, and to identify credits whose risk profiles have changed. This review includes, but is not limited to, such factors as payment status, the financial condition of the borrower, borrower compliance with loan covenants, underlying collateral values, potential loan concentrations, and general economic conditions. We identify potential problem credits and, based upon known information, we develop action plans.

We have established an evaluation process designed to determine the adequacy of the allowance for loan losses. This process attempts to assess the risk of losses inherent in the loan portfolio by segregating the allowance for loan losses into three components: "specific," "loss migration," and "general." The specific component is established by allocating a portion of the allowance for loan losses to individual classified credits on the basis of specific circumstances and assessments. The loss migration component is calculated as a function of the historical loss migration experience of the internal loan credit risk rating categories. The general component, composed of allocated and unallocated portions that supplements the first two components, includes: our management’s judgment of the effect of current and forecasted economic conditions on the borrowers' abilities to repay, an evaluation of the allowance for loan losses in relation to the size of the overall loan portfolio, an evaluation of the composition of, and growth trends within, the loan portfolio, consideration of the relationship of the allowance for loan losses to nonperforming loans, net charge-off trends, and other factors. While this evaluation process uses historical and other objective information, the classification of loans and the establishment of the allowance for loan losses, relies, to a great extent, on the judgment and experience of our management.

The allowance for loan losses totaled $73.8 million at March 31, 2001, unchanged from the balance at December 31, 2000.

We incurred $12.3 million in gross charge-offs and realized $7.4 million in gross recoveries during the first quarter of 2001. Gross charge-offs for the 2001 first quarter included $3.8 million related to our final entertainment credit.

We believe our allowance for loan losses is adequate as of March 31, 2001. However, future changes in circumstances, economic conditions or other factors could cause us to increase or decrease the allowance for loan losses as deemed necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to make adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examination.

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

 

(Dollars in thousands) March 31,
2001

December 31,
2000

Nonperforming assets:    
Loans past due 90 days or more $- $98
Nonaccrual loans 20,149
18,287
Total nonperforming assets $20,149
$18,385
Nonperforming loans as a percentage of total loans 1.2% 1.1%
Nonperforming assets as a percentage of total assets 0.4% 0.3%
Allowance for loan losses: $73,800 $73,800
       As a percentage of total loans 4.3% 4.3%
       As a percentage of nonaccrual loans 366.3% 403.6%
       As a percentage of nonperforming loans 366.3% 401.4%

 

Nonperforming loans totaled $20.1 million, or 1.2% of total loans, at March 31, 2001, an increase of $1.8 million, or 9.6%, from the prior year-end total of $18.4 million, or 1.1% of total loans.  Nonperforming loans at the end of the 2001 first quarter included one commercial credit totaling $6.1 million in the Company’s Healthcare Services niche. This credit has been nonperforming since the 2000 first quarter. Our management believes this credit is adequately secured with collateral and reserves, and that any future charge-offs associated with this loan will not have a material impact on our future net income.

In addition to the loans disclosed in the foregoing analysis, we have identified three loans totaling $9.0 million, that, on the basis of information known to us, were judged to have a higher than normal risk of becoming nonperforming. We are not aware of any other loans where known information about possible problems of the borrower casts serious doubts about the ability of the borrower to comply with the loan repayment terms.

Deposits

Total deposits were $4.0 billion at March 31, 2001, a decrease of $820.0 million, or 16.9%, from the prior year-end total of $4.9 billion. A significant portion of the decrease in deposits during the first three months of 2001 was concentrated in our noninterest-bearing demand deposits and money market deposits, which decreased $406.2 million and $381.5 million, respectively. This decrease was explained by a slowdown in the capital markets and venture capital fundings which has reduced client liquidity levels.

Market Risk Management

Interest rate risk is the most significant market risk impacting us. Our monitoring activities related to managing interest rate risk include both interest rate sensitivity "gap" analysis and the use of a simulation model to measure the impact of market interest rate changes on the net present value of estimated cash flows from our assets, liabilities and off-balance sheet items, defined as our market value of portfolio equity (MVPE). See our 2000 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, 2000. There have been no changes in the assumptions used by us in monitoring interest rate risk as of March 31, 2001. Other types of market risk affecting us in the normal course of our business activities include foreign currency exchange risk and equity price risk. The impact on us, resulting from these other two types of market risks, is deemed immaterial. We do not maintain a portfolio of trading securities and do not intend to engage in such activities in the immediate future.

Liquidity

Another important objective of asset/liability management is to manage liquidity. The objective of liquidity management is to ensure that funds are available in a timely manner to meet loan demand and depositors' needs, and to service other liabilities as they come due, without causing an undue amount of cost or risk, and without causing a disruption to normal operating conditions.

We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual client funding needs, and existing and planned business activities. Our asset/liability committee (ALCO) provides oversight to the liquidity management process and recommends policy guidelines, subject to board of directors approval, and courses of action to address our actual and projected liquidity needs.

The ability to attract a stable, low-cost base of deposits is our primary source of liquidity. Other sources of liquidity available to us include short-term borrowings, which consist of federal funds purchased, security repurchase agreements and other short-term borrowing arrangements. Our liquidity requirements can also be met through the use of our portfolio of liquid assets. Our definition of liquid assets includes cash and cash equivalents in excess of the minimum levels necessary to carry out normal business operations, federal funds sold, securities purchased under resale agreements, investment securities maturing within six months, investment securities eligible and available for pledging purposes with a maturity in excess of six months, and anticipated near term cash flows from investments.

Our policy guidelines provide that liquid assets as a percentage of total deposits should not fall below 20.0%. At March 31, 2001, the Bank’s ratio of liquid assets to total deposits was 61.2%. This ratio is well in excess of our minimum policy guidelines and was slightly lower than the comparable ratio of 65.2% as of December 31, 2000. In addition to monitoring the level of liquid assets relative to total deposits, we also utilize other policy measures in liquidity management activities. As of March 31, 2001, we were in compliance with all of these policy measures.

Capital Resources

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

In December 1999, we issued 2.8 million shares of common stock at $21.00 per share. In January 2000, we issued an additional 0.4 million shares at $21.00 per share in relation to the exercise of an over-allotment option by the underwriters for that offering. Proceeds from the sale of these securities in December 1999 and January 2000 totaled $ 63.3 million, net of underwriting commissions and other offering expenses. In August 2000, we issued an additional 2.3 million shares of common stock at $42.19 per share. We received proceeds of $91.0 million related to the sale of these securities, net of underwriting commissions and other offering expenses.

Stockholders' equity totaled $660.0 million at March 31, 2001, an increase of $45.8 million, or 7.5%, from the $614.1 million balance at December 31, 2000. This increase was primarily due to net income of $33.3 million for the three months ended March 31, 2001, combined with an increase in the after-tax net unrealized gains on available-for-sale securities of $5.2 million. We have not paid a cash dividend on our common stock since 1992, and we do not have any material commitments for capital expenditures as of March 31, 2001.

On April 5, 2001, our board of directors authorized a share repurchase program of up to 5 million shares of common stock. We intend to repurchase shares under the program, from time to time, under conditions which allow such repurchases to be accretive to earnings while maintaining capital ratios that exceed the guidelines for a well capitalized financial institution.

Both Silicon and Silicon Valley Bank are subject to capital adequacy guidelines issued by the Federal Reserve Board. Under these capital guidelines, the minimum total risk-based capital ratio and Tier 1 risk-based capital ratio requirements are 10.0% and 6.0%, respectively, of risk-weighted assets and certain off-balance sheet items for a well capitalized depository institution.

The Federal Reserve Board has also established minimum capital leverage ratio guidelines for state member banks. The ratio is determined using Tier 1 capital divided by quarterly average total assets. The guidelines require a minimum of 5.0% for a well capitalized depository institution.

Both Silicon's and Silicon Valley Bank's capital ratios were in excess of regulatory guidelines for a well capitalized depository institution as of March 31, 2001, and December 31, 2000. Capital ratios for Silicon Valley Bancshares are set forth below:

  March 31,
2001

December 31,
2000

     
Silicon Valley Bancshares:    
Total risk-based capital ratio 19.2% 17.7%
Tier 1 risk-based capital ratio 17.9% 16.5%
Tier 1 leverage ratio 13.7% 12.0%

The increase in the total risk-based capital ratio and the Tier 1 risk-based capital ratio from December 31, 2000 to March 31, 2001 was primarily attributable to an increase in Tier 1 capital. This increase was due primarily to internally generated capital, primarily net income of $33.3 million. The Tier 1 leverage ratio also increased between December 31, 2000 and March 31, 2001, due to a decrease in quarterly average total assets.

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

There were no legal proceedings requiring disclosure pursuant to this item pending at March 31, 2001, or at the date of this report.

ITEM  2 - CHANGES IN SECURITIES

None.

ITEM  3 - DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM  5 - OTHER INFORMATION

None.

ITEM  6 - EXHIBITS AND REPORTS ON FORM 8-K

(a)         Exhibits:

             10.47    Consulting Agreement between Silicon Valley Bancshares and John C. Dean.

(b)        Reports on Form 8-K:

             No reports on Form 8-K were filed by the Company during the quarter ended March 31, 2001.

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    SILICON VALLEY BANCSHARES
     
Date:  May 15, 2001   /s/ Donal D. Delaney
    Donal D. Delaney
    Controller
    (Principal Accounting Officer)

 

January 18, 2001

John C. Dean
Chief Executive Officer, Silicon Valley Bancshares

Dear John:

This letter agreement (the “Agreement”) sets out the terms and conditions of your resignation from employment with Silicon Valley Bank and Silicon Valley Bancshares (collectively, “SVB”) and your subsequent consulting arrangement with SVB:

1.       Voluntary Resignation.   You’ve informed us that you will voluntarily resign from your position as Chief Executive Officer of Silicon Valley Bancshares, effective April 30, 2001.

2.       Term and Cancellation.   In exchange and consideration for your executing the release attached as Exhibit A to this Agreement (the “Release”), SVB is offering you a consulting position.  Your consulting period will be for three (3) years, beginning on May 1, 2001 and ending on April 30, 2004 (the “Consulting Period”).  SVB may immediately terminate the Consulting Period if you are in default of this Agreement (as discussed below). Any decision by SVB to terminate this Agreement prior to April 30, 2004 will be made by Silicon Valley Bancshares’ Chief Executive Officer (the “CEO”), with the concurrence of the Board Executive Committee.

3.       Services.

a)        Standard Consulting Services. You will be reasonably available to the CEO or his designee to provide advisory and other services related to SVB. These services are in addition to your duties as a member of SVB’s Boards of Directors.   This Agreement will remain in full force and effect even if you no longer are a member of SVB’s Boards of Directors.

b)        Special Engagements .  During the Consulting Period, SVB may engage you for projects (other than the standard duties contemplated above).  Such an engagement will be on terms (including fees) as then agreed upon by SVB and you.

4.        Compensation.

a)        Consulting Compensation.   You will be paid $250,000.00 annuallyfor your consulting services.  You will be paid at the end of each month for the services performed in the preceding month.

b)        Director Compensation. During the Consulting Period and for so long as you remain a director of SVB’s Boards of Directors, you will be eligible to receive any Retention Program compensation paid to SVB’s outside directors.  You will also be eligible to receive Board chair and Board Committee chair fees, if applicable.  Except as noted above, during the Consulting Period, you will not receive any additional compensation for sitting on SVB’s Boards of Directors that otherwise is payable to other outside directors.  Following the Consulting Period, and if you remain a member of SVB’s Boards of Directors, you will be eligible to receive all compensation (including the Retention Program compensation)that is payable to SVB’s outside directors.

c)        Stock Options.   Pursuant to the Silicon Valley Bancshares Stock Option Plans (the “Plans”), your SVB options and/or stock grants will continue to vest during the Consulting Period.

d)        Incentive Compensation.   You are eligible to receive an incentive compensation award in January 2001, in accordance with the applicable terms of SVB’s Incentive Compensation Plan.  In January 2001, you also are eligible to receive a new Retention Program allocation under the 2001 Retention Program.  You will not be eligible for an incentive compensation award during the Consulting Period. Also, you will not be eligible to receive new Retention Program allocations under the 2002, 2003 and 2004 Retention Programs.

e)        Retention Program.   You will be entitled to “Continued Participation” under the Retention Programs (as defined in SVB’s 1998, 1999, 2000, and 2001 Retention Programs) during the Consulting Period, as well for the remainder of the Retention Programs’ terms, provided you:  (1) do not disclose Confidential Information (as defined in 8(a) below), (2) do “not compete” with SVB (as defined in Section 8(b) below), and (3) do not disparage SVB (as discussed in Section 8(c) below), in each case for three (3) years following your termination of employment with SVB.  Provided you do comply with the three (3) provisions above for the requisite three (3) year period, you will thereafter be entitled to Continued Participation without limitation.  If you do breach any of these provisions during this three (3) year period, you will forfeit any right to then future distributions under the 1998, 1999, 2000, and 2001 Retention Programs.

f)         Qualified Investors Fund.   SVB agrees to waive any vesting requirements for your interest in the 2000 Qualified Investors Fund.

g)        No Withholding.  Your consulting fee will be paid out of SVB’s Accounts Payable Department, and specifically, not out of payroll.  SVB will not withhold any payments for taxes, unemployment or social security taxes.  You will be responsible for reporting and paying all taxes associated with your consulting fees.

You understand and acknowledge that SVB shall issue an annual IRS Form 1099 for "Miscellaneous Income" to you for compensation paid to you pursuant to this Agreement.  You further understand, agree and acknowledge that SVB has made no representations to you regarding the tax consequences of any compensation paid pursuant to this Agreement.  You agree that you will be responsible for payment of any and all tax obligations which may be required by law to be paid with respect to the compensation paid pursuant to this Agreement.  You further agree to indemnify and hold SVB harmless from any claims, demands, deficiencies, levies, penalties, assessments, executions, judgments, or recoveries by any governmental entity against SVB for any amounts claimed due on account of this Agreement or pursuant to claims made under any federal, state or local tax laws, and any costs, expenses, or damages sustained by SVB by reason of any such claims, including any amounts paid by SVB as taxes, attorneys' fees, deficiencies, levies, assessments, fines, penalties, interest, or otherwise.

h)        SVB Related Funds.   For so long as you continue to serve as a member of SVB’s Boards of Directors, you will have the same eligibility as other directors to invest in SVB related funds.

5.        Retirement Benefits.  Following your resignation from employment with SVB, you will not be eligible to participate in SVB’s Money Purchase Plan, the 401(k) and Employee Stock Ownership Plan, or Employee Stock Purchase Program.

6.        Group Medical, Vision and Dental Benefits.    SVB will use best efforts  to cause the underwriters of SVB’s group health insurance plans (including group medical, disability, life insurance, vision and dental benefits) to continue your benefits under these benefit programs during the Consulting Period.  If SVB is unsuccessful after using best efforts to continue your benefits under these benefit programs, you may elect COBRA coverage.

7.        Change in Control Policy.  You will not be eligible to receive benefits under SVB’s Change In Control Severance Benefits Policy following your resignation from SVB.  You will, however, be entitled to immediate vesting of Retention Program interests in the event of a change in control (as that term is defined in SVB’s Change In Control Severance Benefits Policy).

8.        Events of Default (Confidential Information/Competition with SVB/Disparagement)

a)        Disclosure of Confidential Information.   SVB may immediately terminate the Consulting Period, if you disclose “Confidential Information” during the Consulting Period or at any time thereafter, except as required in the course of your duties during the Consulting Period. “Confidential Information” includes all technical and non-technical information related to the current, future and proposed services of SVB, including financial information and business forecasts and strategies.

b)        Competition with SVB .  SVB may immediately terminate the Consulting Period if, during your Consulting Period, you become employed by, or become a consultant for, any entity that is in “competition with” SVB, unless you obtain the prior written approval of the CEO (who shall obtain the concurrence of the Executive Committee of the Board).  The CEO will use best efforts to respond to your approval request within thirty (30) days.  (While not required, you are encouraged to seek SVB’s approval on any prospective employment or consulting arrangement so you do not inadvertently breach this section of the Agreement.)    An entity will be deemed “in competition with” SVB if:  (1) the entity is a significant provider of financial products or services, or other products and services offered by SVB, to early-stage technology companies, whether nationally or in one or more regions served by SVB’s offices (with SVB determining in its reasonable discretion whether in fact an entity is a significant provider of such products or services);  (2) the entity is otherwise a direct competitor of SVB in any of SVB’s then-substantial lines of business, or (3) the entity has recruited you to create or build a business line which will be in direct competition with a substantial line of business of SVB.

Upon notice from SVB that you are in competition with SVB (the “Notice”), you may, in the sole discretion of the CEO (in consultation with SVB’s Executive Committee of the Board):  (1) be provided with up to thirty (30) days to leave such competing entity (the “Cure Period”); or (2) up to six (6) months to leave such competing entity, if you had obtained SVB’s prior written approval for the subject employment or consulting arrangement and SVB has since become competitive with such employing entity or consulting firm due to a change in SVB’s substantial line of business (with the length of such periods to be determined in the reasonable discretion of SVB’s Executive Committee) (also, the “Cure Period”).  If you leave such competitor within the Cure Period, this Agreement will remain in full force and effect.  If you do not leave such competitor within the Cure Period, SVB thereafter may immediately terminate this Agreement as set forth above, with such decision to be made by SVB’s CEO with the concurrence of the Board Executive Committee.

c)        Disparagement.   SVB may immediately terminate the Consulting Period, if, during your Consulting Period, you mention to any other person in a business-related context any negative or disparaging comments or statements about SVB, or any of its officers, agents or employees, including disparaging or negative comments regarding business practices, and you shall not communicate to any other person any facts or opinions that might tend to reflect adversely upon SVB or to harm the reputation of SVB or its officers, agents or employees in conducting their respective personal, business or professional affairs.

9.        Expense Reimbursement. SVB will reimburse you for reasonable out-of-pocket expenses related to your SVB consulting services during the Consulting Period. Additionally, SVB will reimburse you for: a) reasonable business development expenses related to your consulting services and b) charitable contributions made by you on behalf of SVB.  The business development expenses and charitable contributions, in the aggregate, shall not exceed $50,000, annually, during the Consulting Period.

10.      Investments.    During the Consulting Period, you maybuy  (i) stock of any private tech/life sciences company, or (ii) a venture capital fund, if you first offered the investment opportunity to SVB (and SVB has invested all that it chooses).  You may buy publicly traded stock of a SVB client.

11.      Remote Connectivity/Office Space/Secretarial Support.   During the Consulting Period, SVB will provide you with: (a) remote connectivity from two residences to SVB’s computer network or (b) with mutually acceptable off-site office accommodations.  In either case above, SVB will provide you with secretarial support equivalent up to one full-time employee (i.e., one full-time secretary or two half-time secretaries).

12.      Payment of Wages Due.   You acknowledge and represent that the consideration for this Agreement is not accrued salary, wages or vacation, and is in excess of any established severance practice or policy of SVB, and you further acknowledge that California Labor Code Section 206.5 is not applicable to this Agreement or to the parties hereto.  That section provides in pertinent part:

          No employer shall require the execution of any release of any claim or right on account of wages due, or to become due, or made as an advance on wages to be earned, unless payment of such wages has been made.

13.      No Reliance on Representations.   SVB and you represent that each has had the opportunity to consult with an attorney, and has carefully read and understand the scope and effect of the provisions of this Agreement.  In entering into this Agreement, SVB and you each rely upon their own judgement and have not been influenced by any statement made by the other or by any person representing or employed by the other.  You do not waive rights or claims that arise after the effective date of this Agreement as set forth in Paragraph 14 below.  You acknowledge that you were given a period of at least twenty-one (21) days within which to consider this Agreement and that you have specifically been advised to consult with an attorney before executing it.  In executing this Agreement, you waive said twenty-one (21) day consideration period. To the extent that you have taken less than twenty-one (21) days to consider this Agreement, you acknowledge that you are entering into this Agreement voluntarily and with knowledge of and a full understanding of its terms.

14.     Revocability/Effective Date of this Agreement.   For seven (7) days following the execution of this Agreement, you may revoke it by submitting written notice of such revocation to SVB on or before the 7 th day following the date of this Agreement.  This Agreement shall become effective or enforceable on the eighth (8 th ) calendar day after you have signed this Agreement.

15.     Insider.   During the Consulting Period, you shall be deemed an “insider” for purposes of compliance with SVB’s Insider Trading Policy, as long as you remain a member of SVB’s Boards of Directors.  You shall also continue to be bound by applicable provisions of federal and state securities laws, including, without limitation, such laws prohibiting trading in Silicon Valley Bancshares’ stock while you are then in possession of material non-public information.

16.     Non-Solicitation.   During the Consulting Period and for two (2) years from the termination of the Consulting Period, you shall not directly, or indirectly, cause any party to solicit (other than through a general solicitation not directed to SVB personnel), offer, engage, or employ either as an employee or independent contractor, any employee of SVB without the prior written approval of SVB.  This section will not apply if SVB personnel solicit employment from you (without you first soliciting them).

17.     Headings.   The various headings of this Agreement are inserted for convenience only and shall not be deemed a part of, or in any manner affect, this Agreement or any provision thereof.

18.     Governing Law.   This Agreement shall be governed by the laws of the State of California.

19.     Materiality.   This Agreement would not have been agreed upon but for the inclusion of each and every one of its conditions.

20.     Voluntary Execution of this Agreement.   You agree you have executed this Agreement voluntarily and without any duress or undue influence on the part of or on behalf of SVB with the full intent of releasing all claims.  You acknowledge that: (a) you have read this Agreement; (b) you have been given a reasonable period of time to consider the legal effects of this Agreement; (c) you have been given the opportunity to be represented in the preparation, negotiation, and execution of this Agreement by legal counsel of your own choice; (d) you understand the terms and consequences of this Agreement and of the releases it contains; and (e) you are fully aware of the legal and binding effects of this Agreement.

21.     Successors.   This Agreement and the respective rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives.  This provision, with respect to your right of successorship, shall, however, inure only to the benefit of your estate, executor, administrator, and heirs. You may assign the economic benefits conferred by this Agreement to a trust.  SVB makes no representations or warranties involving the tax implications of making such an assignment, and recommends that you consult your personal tax and legal advisors.

22.      Notices.   Any notices will be written and delivered by:  (i) personal delivery; (ii) overnight courier;  (iii) telecopy or facsimile transmission with acknowledgment of receipt; or (iv) certified or registered mail, return receipt requested.

23.      Severability.   If any provision of this Agreement is illegal, invalid or unenforceable, the legality, validity and enforceability of the remaining provisions continue.

24.      Waiver.   Waiver by SVB of a breach of this Agreement is not a waiver of any other breach.

25.      Entire Agreement .  This is the entire Agreement (including Exhibit A attached hereto) between the parties on this subject and supersedes all prior and contemporaneous understandings and agreements, whether oral or written.  This Agreement may only be modified in writing signed by you and SVB.

26.      Indemnity.   You will indemnify and hold harmless SVB against all liability to third parties (other than liability solely the fault of SVB) arising from or in connection with this Agreement.

27.      Arbitration.   Any dispute between the parties arising out of or in connection with this Agreement shall be submitted to binding arbitration in Santa Clara County, California in accordance with the Commercial Rules of the American Arbitration Association and pursuant to then prevailing California law.  The award shall be final and binding upon the parties and judgment for such award may be entered in any court having jurisdiction.

28.      Costs and Attorneys’ Fees.   Should any action be brought to enforce any of the rights or obligations set forth in this Agreement, the prevailing party shall be entitled to recover all costs and expenses incurred in the prosecution or defense of that action, including attorneys’ fees.

 

John, let me take this opportunity to thank you for your outstanding years of service to SVB.  We look forward to continuing to work with you.

 

  Sincerely,
   
  SILICON VALLEY BANCSHARES
   
   
  Daniel J. Kelleher
  Chairman of the Board of Directors
   
  Agreed and Accepted
   
  by:  ________________________
  John C. Dean

 

Exhibit A

EMPLOYEE AGREEMENT AND RELEASE

          Except as otherwise set forth in this Agreement, effective on May 1, 2001 and for any claims pending on that date, I hereby release, acquit and forever discharge Silicon Valley Bancshares and Silicon Valley Bank (collectively, the “Company”), its parents and subsidiaries, and its and their respective officers, directors, agents, servants, employees, attorneys, shareholders, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed, arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the execution date of this Agreement, including but not limited to:  all such claims and demands directly or indirectly arising out of or in any way connected with my employment with the Company or the termination of that employment; claims or demands related to salary, bonuses, commissions, stock, stock options, or any other ownership interests in the Company, vacation pay, fringe benefits, expense reimbursements, severance pay, or any other form of compensation; claims pursuant to any federal, state or local law, statute, or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Americans with Disabilities Act of 1990; the federal Age Discrimination in Employment Act of 1967, as amended (“ADEA”); the California Fair Employment and Housing Act, as amended; tort law; contract law; wrongful discharge; discrimination; harassment; fraud; defamation; emotional distress; and breach of the implied covenant of good faith and fair dealing.

          I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA, as amended.  I also acknowledge that the consideration given for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled.  I further acknowledge that I have been advised by this writing, as required by the ADEA, that:  (a) my waiver and release do not apply to any rights or claims that may arise after the execution date of this Agreement; (b) I have been advised hereby that I have the right to consult with an attorney prior to executing this Agreement; (c) I have twenty-one (21) days to consider this Agreement (although I may choose to voluntarily execute this Agreement earlier); (d) I have seven (7) days following the execution of this Agreement by the parties to revoke the Agreement; and (e) this Agreement shall not be effective until the date upon which the revocation period has expired, which shall be the eighth day after this Agreement is executed by me, provided that the Company has also executed this Agreement by that date (“Effective Date”).

          I UNDERSTAND THAT THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.  I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows:  “A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.” I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any claims I may have against the Company.

  By:  
    John C. Dean
     
  Date: