SVB Financial Group
SILICON VALLEY BANCSHARES (Form: 10-Q, Received: 08/14/2001 16:36:08)

.
As filed with the Securities and Exchange Commission on   August 14, 2001



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, 2001

OR

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

 

For the transition period from ________ to ________.

 

Commission File Number: 33-41102


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

 

Delaware 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  ý    No o

            

  At July 31, 2001, 48,440,449 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

  June 30,   December 31,  
(Dollars in thousands, except par value) 2001   2000  
 
 
 
Assets:        
Cash and due from banks $ 404,121   $ 332,632  
Federal funds sold and securities purchased under agreement to resell 387,945   1,389,734  
Investment securities 1,856,266   2,107,590  
Loans, net of unearned income 1,729,630   1,716,549  
Allowance for loan losses (74,000 ) (73,800 )
 
 
 
Net loans 1,655,630   1,642,749  
Premises and equipment 22,829   18,493  
Accrued interest receivable and other assets 95,970   135,577  
 
 
 
Total assets $ 4,422,761   $ 5,626,775  
 
 
 
Liabilities, Minority Interest and Stockholders' Equity:        
Liabilities:        
Deposits:        
  Noninterest-bearing demand $ 1,882,350   $ 2,448,758  
  NOW 27,462   57,857  
  Money market 949,083   1,519,563  
  Time 791,383   836,081  
   
 
 
Total deposits 3,650,278   4,862,259  
Other liabilities 48,524   81,138  
 
 
 
Total liabilities 3,698,802   4,943,397  
 
 
 
Company obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely junior subordinated debentures (trust preferred securities) 38,615   38,589  
Minority interest 30,327   30,668  
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; 48,517,814 and 48,977,906 shares outstanding at June 30, 2001 and December 31, 2000, respectively 49   49  
Additional paid-in capital 259,328   280,008  
Retained earnings 392,566   335,098  
Unearned compensation (2,492 ) (3,634 )
Accumulated other comprehensive income:        
  Net unrealized gains on available-for-sale investments 5,566   2,600  
   
 
 
Total stockholders' equity 655,017   614,121  
 
 
 
Total liabilities, minority interest and stockholders' equity $ 4,422,761   $ 5,626,775  
 
 
 

 

See notes to interim consolidated financial statements.


SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

  For the three months ended   For the six months ended  
 
 
 
  June 30,   June 30,   June 30,   June 30,  
(Dollars in thousands, except per share amounts) 2001   2000   2001   2000  
 
 
 
 
 
Interest income:                
  Loans $ 49,617   $ 47,089   $ 100,522   $ 91,382  
  Investment securities 22,850   29,104   51,030   53,660  
  Federal funds sold and securities                
    purchased under agreement to resell 6,856   18,873   22,231   34,900  
   
 
 
 
 
Total interest income 79,323   95,066   173,783   179,942  
Interest expense 9,404   13,168   22,128   26,544  
 
 
 
 
 
Net interest income 69,919   81,898   151,655   153,398  
Provision for loan losses 5,931   11,058   10,834   23,630  
 
 
 
 
 
Net interest income after provision                
  for loan losses 63,988   70,840   140,821   129,768  
   
 
 
 
 
Noninterest income:                
  Client investment fees 9,246   8,237   21,036   13,856  
  Letter of credit and foreign                
  exchange income 2,914   4,695   7,460   8,326  
  Disposition of client warrants 2,427   16,755   6,505   56,109  
  Deposit service charges 1,924   868   2,746   1,582  
  Investment (losses) gains (1,248 ) 2,245   (1,584 ) 32,133  
  Other 2,956   1,795   5,931   3,723  
   
 
 
 
 
Total noninterest income 18,219   34,595   42,094   115,729  
 
 
 
 
 
Noninterest expense:                
  Compensation and benefits 22,034   27,372   44,866   51,743  
  Professional services 6,113   6,277   11,653   8,723  
  Net occupancy 3,870   2,142   7,593   4,046  
  Business development and travel 2,419   2,292   5,393   4,735  
  Furniture and equipment 2,774   2,877   5,185   4,891  
  Telephone 1,061   711   1,919   1,207  
  Postage and supplies 844   901   1,857   1,689  
  Advertising and promotion 809   803   1,837   1,302  
  Trust preferred securities distributions 825   825   1,650   1,650  
  Retention and warrant incentive plans 418   2,936   818   12,786  
  Other 3,505   1,864   8,054   3,747  
   
 
 
 
 
Total noninterest expense 44,672   49,000   90,825   96,519  
Minority interest 713   -   1,216   -  
 
 
 
 
 
Income before income tax expense 38,248   56,435   93,306   148,978  
Income tax expense 14,116   22,700   35,838   60,588  
 
 
 
 
 
Net income $ 24,132   $ 33,735   $ 57,468   $ 88,390  
 
 
 
 
 
Basic earnings per share $ 0.50   $ 0.74   $ 1.18   $ 1.95  
Diluted earnings per share $ 0.48   $ 0.70   $ 1.14   $ 1.85  
 
 
 
 
 

See notes to interim consolidated financial statements.


SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

  For the three months ended   For the six months ended  
 
 
 
  June 30,   June 30,   June 30,   June 30,  
(Dollars in thousands) 2001   2000   2001   2000  
 
 
 
 
 
Net income $ 24,132   $ 33,735   $ 57,468   $ 88,390  
                 
                 
Other comprehensive loss, net of tax:                
  Changes in unrealized (losses) gains on available-for-sale investments:                
  Unrealized holding (losses) gains (1,526 ) 5,262   5,997   7,651  
  Less: Reclassification adjustment for gains included in net income                
    (744 ) (11,358 ) (3,031 ) (52,354 )
   
 
 
 
 
Other comprehensive loss (2,270 ) (6,096 ) 2,966   (44,703 )
 
 
 
 
 
Comprehensive income $ 21,862   $ 27,639   $ 60,434   $ 43,687  
 
 
 
 
 

 

See notes to interim consolidated financial statements.

SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

  For the six months ended  
 
 
  June 30,   June 30,  
(Dollars in thousands) 2001   2000  
 
 
 
Cash flows from operating activities:        
  Net income $ 57,468   $ 88,390  
  Adjustments to reconcile net income to net cash provided by operating activities:        
  Provision for loan losses 10,834   23,630  
  Minority interest (1,216 ) -  
  Depreciation and amortization 2,850   1,838  
  Net loss (gain) on sales of investment securities 1,584   (32,133 )
  Net gains on disposition of client warrants (6,505 ) (56,109 )
  Decrease (increase) in accrued interest receivable 12,985   (4,266 )
  Decrease in inventory 9,969   2,600  
  (Decrease) increase  in unearned income (3,186 ) 3,250  
  Decrease (increase) in taxes receivable 15,566   (152 )
  (Decrease) increase in retention, warrant and other incentive plan payable (30,618 ) 13,318  
  Other, net (1,182 ) 1,966  
   
 
 
Net cash provided by operating activities 68,549   42,332  
 
 
 
Cash flows from investing activities:        
  Proceeds from maturities and paydowns of investment securities 945,951   332,412  
  Proceeds from sales of investment securities 7,966   186,507  
  Purchases of investment securities (692,271 ) (941,157 )
  Net increase in loans (31,267 ) (6,291 )
  Proceeds from recoveries of charged off loans 10,738   5,882  
  Purchases of premises and equipment (7,186 ) (1,104 )
   
 
 
Net cash provided by (used in) investing activities 233,931   (423,751 )
 
 
 
Cash flows from financing activities:        
  Net (decrease) increase in deposits (1,211,981 ) 735,817  
  Proceeds from issuance of common stock, net of issuance costs 8,301   19,387  
  Repurchase of common stock (29,975 ) -  
  Capital contributions from minority interest participants 875   -  
   
 
 
Net cash (used in) provided by financing activities (1,232,780 ) 755,204  
 
 
 
Net (decrease) increase in cash and cash equivalents (930,300 ) 373,785  
Cash and cash equivalents at January 1, 1,722,366   1,176,102  
 
 
 
Cash and cash equivalents at June 30, $ 792,066   $ 1,549,887  
 
 
 
Supplemental disclosures:        
  Interest paid $ 22,061   $ 25,808  
  Income taxes paid $ 32,784   $ 21,380  
   
 
 

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 generally accepted accounting principles and prevailing practices within the banking industry. 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, New York, 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 June 30, 2001, the results of its operations and cash flows for the three and six months ended June 30, 2001, and June 30, 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 and six months ended June 30, 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 interim consolidated statements of cash flows includes cash on hand, cash balances due from banks, federal funds sold, and securities purchased under agreement to resell. The cash equivalents are readily convertible to known amounts of cash and present an insignificant risk of changes in value due to maturity dates of 90 days or less.

Federal Funds Sold and Securities Purchased Under Agreement to Resell

Federal funds sold and securities purchased under agreement to resell as reported in the consolidated balance sheets include interest-bearing deposits in other financial institutions of $535,000 and $546,000 at June 30, 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. 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 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.

Recent Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”.

The Company is required to adopt the provisions of SFAS No. 141 immediately. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS 142 accounting literature. As of June 30, 2001, the Company believes the adoption of SFAS No. 141 and No. 142 will not have a material impact on its consolidated financial position or results of operations.

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 and six months ended June 30, 2001 and 2000:

  Three Months Ended June 30,   Six Months Ended June 30,  
 
 
 
(Dollars and shares in thousands, Net       Per Share   Net       Per Share  
except per share amounts) Income   Shares   Amount   Income   Shares   Amount  
 
 
 
 
 
 
 
2001:                        
Basic EPS:                        
Income available to common stockholders $ 24,132   48,662   $ 0.50   $ 57,468   48,743   $ 1.18  
Effect of Dilutive Securities:                        
Stock options and restricted stock -   1,498   -   -   1,693   -  
 
 
 
 
 
 

 
Diluted EPS:                        
Income available to common stockholders plus assumed conversions $ 24,132   50,160   $ 0.48   $ 57,468   50,436   $ 1.14  
 
 
 
 
 
 
 
2000:                        
Basic EPS:                        
Income available to common stockholders $ 33,735   45,586   $ 0.74   $ 88,390   45,417   $ 1.95  
Effect of Dilutive Securities:                        
Stock options and restricted stock -   2,393   -   -   2,346   -  
 
 
 
 
 
 

 
Diluted EPS:                        
Income available to common stockholders plus assumed conversions $ 33,375   47,979   $ 0.70   $ 88,390   47,763   $ 1.85  
 
 
 
 
 
 
 

 

3.  Loans

The detailed composition of loans, net of unearned income of $5.2 million and $8.4 million at June 30, 2001, and December 31, 2000, respectively, is presented in the following table:

  June 30,   December 31,
(Dollars in thousands) 2001   2000
 
 
Commercial $ 1,536,771   $ 1,531,468
Real estate construction 37,785   62,253
Real estate term 35,644   38,380
Consumer and other 119,430   84,448
 
 
Total loans $ 1,729,630   $ 1,716,549
 
 

 

4.  Allowance for Loan Losses

The activity in the allowance for loan losses for the three and six months ended June 30, 2001 and 2000 was as follows:

 

  Three months ended June 30,   Six months ended June 30,  
 
 
 
(Dollars in thousands) 2001   2000   2001   2000  
 
 
 
 
 
Beginning balance $ 73,800   $ 72,900   $ 73,800   $ 71,800  
Provision for loan losses 5,931   11,058   10,834   23,630  
Loans charged off (9,026 ) (11,259 ) (21,372 ) (27,512 )
Recoveries 3,295   1,101   10,738   5,882  
 
 
 
 
 
Balance at June 30, $ 74,000   $ 73,800   $ 74,000   $ 73,800  
 
 
 
 
 

The aggregate recorded investment in loans for which impairment has been determined in accordance with SFAS No. 114 totaled $24.3 million and $26.8 million at June 30, 2001, and June 30, 2000, respectively. Allocations of the allowance for loan losses related to impaired loans totaled $9.6 and $10.4 million at June 30, 2000 and 2001, respectively. Average impaired loans for the second quarter of 2001 and 2000 totaled $24.7 million and $26.0 million, respectively.

5.  Common Stock Repurchase

The Company has repurchased approximately 1,200,000 shares of common stock totaling $30.0 million as of the end of the 2001 second quarter, in conjunction with the 5,000,000 share repurchase program authorized by the Board of Directors on April 5, 2001.

 

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

Results of Operations

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

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

For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see the text under the caption "Risk Factors" included in our Report on Form 10-K filed with the Securities and Exchange Commission on 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 $24.1 million, or $0.48 per diluted share, for the second quarter of 2001, compared with net income of $33.7 million, or $0.70 per diluted share, for the second quarter of 2000. Net income totaled $57.5 million, or $1.14 per diluted share, for the six months ended June 30, 2001, versus $88.4 million, or $1.85 per diluted share, for the respective 2000 period. The annualized return on average assets (ROA) was 2.2% in the second quarter of 2001 versus 2.7% in the second quarter of 2000. The annualized return on average equity (ROE) for the second quarter of 2001 was 14.6%, compared to 33.1% in the second quarter of 2000. For the first six months of 2001, ROA was 2.4% and ROE was 17.8% versus 3.6% and 44.2%, respectively, for the comparable prior year period.

The decrease in net income during the three and six months ended June 30, 2001, as compared with the prior year respective periods, resulted primarily from a decline in both net interest income and noninterest income, partially offset by decreases in the provision for loan losses and in noninterest expense. The major components of net income and changes in these components are summarized in the following table for the three and six months ended June 30, 2001 and 2000, and are discussed in more detail below.

  Three Months Ended June 30,   Six Months Ended June 30,  
 
 
 
(Dollars in thousands) 2001   2000   2001   2000  
 
 
 
 
 
Net interest income $ 69,919   $ 81,898   $ 151,655   $ 153,398  
Provision for loan losses 5,931   11,058   10,834   23,630  
Noninterest income 18,219   34,595   42,094   115,729  
Noninterest expense 44,672   49,000   90,825   96,519  
Minority interest 713   -   1,216   -  
 
 
 
 
 
Income before income taxes 38,248   56,435   93,306   148,978  
Income tax expense 14,116   22,700   35,838   60,588  
 
 
 
 
 
Net income $ 24,132   $ 33,735   $ 57,468   $ 88,390  
 
 
 
 
 

 

Net Interest Income and Margin

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

The following tables set forth average assets, liabilities, minority interest and stockholders' equity, interest income and interest expense, average yields and rates, and the composition of our net interest margin for the three and six months ended June 30, 2001 and 2000, respectively.

 


   
AVERAGE BALANCES, RATES AND YIELDS    

   
  For the three months ended June 30,    
 
   
  2001   2000    
 
 
   
          Average           Average    
  Average       Yield/   Average       Yield/    
(Dollars in thousands) Balance   Interest   Rate   Balance   Interest   Rate    
 
 
 
 
 
 
   
                           
Interest-Earning Assets:                          
  Federal funds sold and securities purchased under agreement to resell (1) $ 600,415   $ 6,856   4.6 % $ 1,211,928   $ 18,873   6.3 %  
  Investment securities:                          
  Taxable 1,459,840   19,612   5.4   1,799,231   27,291   6.1    
  Non-taxable (2) 338,137   4,982   5.9   168,234   2,789   6.7    
  Loans:                          
  Commercial 1,466,714   45,013   12.3   1,377,250   41,831   12.2    
  Real estate construction and term 83,992   2,499   11.9   124,773   3,372   10.9    
  Consumer and other 112,893   2,105   7.5   76,785   1,886   9.9    
   
 
 
 
 
 
   
  Total loans 1,663,599   49,617   12.0   1,578,808   47,089   12.0    
   
 
 
 
 
 
   
Total interest-earning assets 4,061,991   81,067   8.0   4,758,201   96,042   8.1    
 
 
 
 
 
 
   
Cash and due from banks 259,684           255,753            
Allowance for loan losses (75,675 )         (74,090            
Other assets 195,111           127,170            
 
         
           
Total assets $ 4,441,111           $ 5,067,034            
 
         
           
                           
Funding Sources:                          
Interest-Bearing Liabilities:                          
  NOW deposits $ 43,778   97   0.9   $ 58,260   184   1.3    
  Regular money market deposits 259,021   640   1.0   391,291   1,788   1.8    
  Bonus money market deposits 757,031   1,878   1.0   1,182,789   5,728   1.9    
  Time deposits 813,328   6,789   3.3   538,768   5,468   4.1    
 
 
 
 
 
 
   
Total interest-bearing liabilities 1,873,158   9,404   2.0   2,171,108   13,168   2.4    
Portion of noninterest-bearing funding sources 2,188,833           2,587,093            
 
 
 
 
 
 
   
Total funding sources 4,061,991   9,404   0.9   4,758,201   13,168   1.1    
 
 
 
 
 
 
   
Noninterest-Bearing Funding Sources:                          
Demand deposits 1,772,616           2,359,962            
Other liabilities 62,043           87,770            
Trust preferred securities (3) 38,604           38,552            
Minority interest 30,205           -            
Stockholders’ equity 664,485           409,642            
Portion used to fund interest-earning assets (2,188,833 )         (2,587,093 )          
 
         
           
Total liabilities, minority interest and stockholders’ equity $ 4,441,111           $ 5,067,034            
 
         
         
Net interest income and margin     $ 71,663   7.1 %     $ 82,874   7.0 %
     
 
     
 
 
Total deposits $ 3,645,774           $ 4,531,070          
 
         
         

(1) Includes average interest-bearing deposits in other financial institutions of $534 and $544 for the three months ended June 30, 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 $1,744 and $976 for the three months ended June 30, 2001 and 2000, respectively.
   
(3) The 8.25% annual distribution to SVB Capital I is recorded as a component of noninterest expense.

 


 
AVERAGE BALANCES, RATES AND YIELDS  

 
  For the six months ended June 30,  
 
 
  2001   2000  
 
 
 
          Average           Average  
  Average       Yield/   Average       Yield/  
(Dollars in thousands) Balance   Interest   Rate   Balance   Interest   Rate  
 
 
 
 
 
 
 
Interest-Earning Assets:                        
Federal funds sold and securities purchased under agreement to resell (1) $ 845,152   $ 22,231   5.3 % $ 1,156,563   $ 34,900   6.1 %
  Investment securities:                        
  Taxable 1,593,140   45,553   5.8   1,693,688   50,403   6.0  
  Non-taxable (2) 272,822   8,427   6.2   155,637   5,011   6.5  
  Loans:                        
  Commercial 1,466,216   90,995   12.5   1,387,585   81,163   11.8  
  Real estate construction and term 93,531   5,300   11.4   130,374   6,852   10.6  
  Consumer and other 104,536   4,227   8.2   70,927   3,368   9.5  
   
 
 
 
 
 
 
  Total loans 1,664,283   100,522   12.2   1,588,886   91,383   11.6  
   
 
 
 
 
 
 
Total interest-earning assets 4,375,397   176,733   8.1   4,594,774   181,697   8.0  
 
 
 
 
 
 
 
Cash and due from banks 246,851           269,448          
Allowance for loan losses (76,953 )         (72,701 )        
Other assets 194,423           156,691          
 
         
         
Total assets $ 4,739,718           $ 4,948,212          
 
         
         
Funding Sources:                        
Interest-Bearing Liabilities:                        
  NOW deposits $ 51,041   225   0.9   $ 55,428   445   1.6  
  Regular money market deposits 288,632   1,773   1.2   405,339   3,692   1.8  
  Bonus money market deposits 856,492   5,523   1.3   1,340,399   13,307   2.0  
  Time deposits 823,455   14,607   3.6   448,207   9,101   4.1  
   
 
 
 
 
 
 
Total interest-bearing liabilities 2,019,620   22,128   2.2   2,249,373   26,545   2.4  
Portion of noninterest-bearing funding sources 2,355,777           2,345,401          
   
 
 
 
 
 
 
Total funding sources 4,375,397   22,128   1.0   4,594,774   26,545   1.2  
 
 
 
 
 
 
 
Noninterest-Bearing Funding Sources:                        
Demand deposits 1,935,807           2,170,640          
Other liabilities 64,015           87,353          
Trust preferred securities (3) 38,598           38,546          
Minority interest 30,367           -          
Stockholders’ equity 651,311           402,300          
                         
Portion used to fund interest-earning assets (2,355,777 )         (2,345,401 )        
 
         
         
Total liabilities, minority interest and stockholders’ equity $ 4,739,718           $ 4,948,212          
 
         
         
Net interest income and margin     $ 154,605   7.1 %     $ 155,152   6.8 %
     
 
     
 
 
Total deposits $ 3,955,427           $ 4,420,013          
 
         
         

(1) Includes average interest-bearing deposits in other financial institutions of $533 and $454 for the six months ended June 30, 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 $2,950 and $1,754 for the six months ended June 30, 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-earning assets and interest-bearing liabilities, referred to as “volume change.”  Net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities, referred to as “rate change.”  The following table sets forth changes in interest income and interest expense for each major category of interest-earning assets and interest-bearing liabilities. The table also reflects the amount of change attributable to both volume and rate changes for the periods indicated. Because of the numerous simultaneous volume and rate changes during any period, it is not possible to allocate such changes between volume and rate. For this table, changes that are not solely due to either volume or rate are allocated in proportion to the percentage changes in average volume and average rate. Changes relating to investments in non-taxable municipal securities are presented on a fully taxable-equivalent basis using the federal statutory rate of 35% in 2001 and 2000.

  2001 Compared to 2000  
 
 
  Three Months Ended June 30,   Six Months Ended June 30,  
 
 
 
  Increase (Decrease)   Increase (Decrease)  
  Due to Change in   Due to Change in  
 
 
 
(Dollars in thousands) Volume   Rate   Total   Volume   Rate   Total  
 
 
 
 
 
 
 
                         
Interest income:                        
  Federal funds sold and securities purchased under agreement to resell $ (7,841 ) $ (4,176 ) $ (12,017 ) $ (8,686 ) $ (3,983 ) $ (12,669 )
  Investment securities (2,201 ) (3,285 ) (5,486 ) 511   (1,945 ) (1,434 )
  Loans 2,652   (124 ) 2,528   4,193   4,946   9,139  
   
 
 
 
 
 
 
Decrease in interest income (7,390 ) (7,585 ) (14,975 ) (3,982 ) (982 ) (4,964 )
 
 
 
 
 
 
 
   
Interest expense:                        
  NOW deposits (39 ) (48 ) (87 ) (33 ) (187 ) (220 )
  Regular money market deposits (486 ) (662 ) (1,148 ) (906 ) (1,013 ) (1,919 )
  Bonus money market deposits (1,633 ) (2,217 ) (3,850 ) (3,970 ) (3,814 ) (7,784 )
  Time deposits 2,434   (1,113 ) 1,321   6,730   (1,224 ) 5,506  
   
 
 
 
 
 
 
Increase (Decrease) in interest expense 276   (4,040 ) (3,764 ) 1,821   (6,238 ) (4,417 )
 
 
 
 
 
 
 
(Decrease) Increase in net interest income $ (7,666 ) $ (3,545 ) $ (11,211 ) $ (5,803 ) $ 5,256   $ (547 )
 
 
 
 
 
 
 

Net interest income, on a fully taxable-equivalent basis, totaled $71.7 million for the second quarter of 2001, a decrease of $11.2 million, or 13.5%, from the $82.9 million total for the second quarter of 2000. The decrease in net interest income was the result of a $15.0 million, or 15.6%, decrease in interest income, offset by a $3.8 million, or 28.6%, decrease in interest expense over the comparable prior year period.

The $15.0 million decrease in interest income for the second quarter of 2001, as compared to the second quarter of 2000, was the result of a $7.4 million unfavorable volume variance and a $7.6 million unfavorable rate variance. The unfavorable volume variance resulted from a $696.2 million, or 14.6%, decrease in average interest-earning assets over the comparable prior year period. The decrease in average interest-earning assets resulted from a decline in client deposits, which decreased $885.3 million, or 19.5%, compared to the second quarter of 2000. The decrease in average interest-earning assets was primarily centered in highly liquid, federal funds sold, securities purchased under agreement to resell and investment securities, which collectively decreased $781.0 million.

Average loans increased $84.8 million, or 5.4%, in the 2001 second quarter as compared to the 2000 second quarter, resulting in a $2.7 million favorable volume variance. This loan growth was primarily due to the current slowdown in our clients’ capital markets and venture capital funding.

Average investment securities for the second quarter of 2001 decreased $169.5 million, or 8.6%, as compared to the 2000 second quarter, resulting in a $2.2 million unfavorable volume variance. The decrease in investment securities was primarily centered in U.S. agency securities.

Average federal funds sold and securities purchased under agreement to resell decreased a combined $611.5 million, or 50.5%, in the second quarter of 2001 over the prior year second quarter, resulting in a $7.8 million unfavorable volume variance. This decrease was a result of the aforementioned decline in our clients’ average deposit balances.

Unfavorable rate variances associated with each component of interest-earning assets combined to decrease interest income by $7.6 million in the second quarter of 2001, as compared to the respective prior year period. Short-term market interest rates have decreased on an overall basis during the first half of 2001. As a result of this decrease, we earned lower yields during the second quarter of 2001 on federal funds sold, securities purchased under agreements to resell and our investment securities, a significant portion of which were short-term in nature, resulting in a $7.5 million unfavorable rate variance as compared to the prior year. In the 2001 second quarter we incurred a $0.1 million unfavorable rate variance associated with our loan portfolio. The average yield on loans of 12.0% in second quarter 2001 remained consistent with the respective prior year second quarter despite decreases in the overall short-term market interest rates. This is indicative of our efforts to negotiate 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 decreased 10 basis points in the second quarter of 2001 from the comparable prior year period. This decrease primarily resulted from a decline in short-term market rates, thus, we earned lower yields on federal funds sold and securities purchased under agreement to resell and investment securities.

Total interest expense in the 2001 second quarter decreased $3.8 million from the second quarter of 2000. This decrease was due to a favorable rate variance of $4.0 million, partially offset by an unfavorable volume variance of $0.3 million. The favorable rate variance largely resulted from a reduction in the average rate paid on our bonus money market deposit and time deposit products, from 1.9% and 4.1% in second quarter 2000 to 1.0% and 3.3% in second quarter 2001, respectively. The favorable rate variances were due to a reduction in short-term market interest rates.

The average cost of funds paid in the second quarter of 2001 was 0.9%, down from the 1.1% paid in the second quarter of 2000. The decrease in the average cost of funds was largely due to decreases of 90 basis points and 80 basis points in the average rate paid on our bonus money market and time deposit products, respectively.

Net interest income, on a fully taxable-equivalent basis, totaled $154.6 million for the first half  of  2001, a decrease of $0.5 million from the $155.2 million total for the first half of 2000. The decrease in net interest income was the result of a $5.0 million, or 2.7%, decrease in interest income, partially offset by a $4.4 million, or 16.6%, decrease in interest expense over the comparable prior year period.

The $5.0 million decrease in interest income for the first half of 2001, as compared to the first half of 2000, was the result of a $4.0 million unfavorable volume variance and a $1.0 million unfavorable rate variance. The unfavorable volume variance resulted from a $219.4 million, or 4.8%, decrease in average interest-earning assets over the comparable prior year period. The decrease in average interest-earning assets was primarily centered in highly liquid, federal funds sold, securities purchased under agreement to resell and investment securities, which collectively decreased $294.8 million.

The yield on average interest-earning assets increased 10 basis points in the first half 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 first half of 2001 decreased $4.4 million from the first half of 2000. This decrease was due to a favorable rate variance of $6.2 million, offset by an unfavorable volume variance of  $1.8 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 the first half of 2000 to 1.3% in the first half of 2001 due to a reduction in short-term market interest rates. The unfavorable volume variance resulted from a change in the mix of our interest-bearing liabilities.

The average cost of funds paid in the first half of 2001 was 1.0%, down from the 1.2% paid in the first half of 2000. The decrease in the average cost of funds was largely due to a decrease of 70 basis points in the average rate paid on our bonus money market deposit product.

Provision For Loan Losses

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

Our provision for loan losses totaled $5.9 million for the second quarter of 2001, a $5.1 million, or 46.4%, decrease compared to the $11.1 million provision for the second quarter of 2000. The provision for loan losses decreased $12.8 million, or 54.2%, to a total of $10.8 million for the first six months of 2001 versus $23.6 million for the comparable 2000 period. 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 three and six months ended June 30, 2001 and 2000:

  Three Months Ended June 30,   Six Months Ended June 30,  
 
 
 
(Dollars in thousands) 2001   2000   2001   2000  
 
 
 
 
 
   
Client investment fees $ 9,246   $ 8,237   $ 21,036   $ 13,856  
Letter of credit and foreign exchange income 2,914   4,695   7,460   8,326  
Disposition of client warrants 2,427   16,755   6,505   56,109  
Deposit service charges 1,924   868   2,746   1,582  
Investment (losses) gains (1,248 ) 2,245   (1,584 ) 32,133  
Other 2,956   1,795   5,931   3,723  
 
 
 
 
 
Total noninterest income $ 18,219   $ 34,595   $ 42,094   $ 115,729  
 
 
 
 
 

Noninterest income decreased $16.4 million, or 47.3%, to a total of $18.2 million in the second quarter of 2001 versus $34.6 million in the prior year second quarter. This decrease was largely due to a $14.3 million decrease in income from the disposition of client warrants and a $3.5 million decrease in investment gains. Noninterest income totaled $42.1 million for the first six months of 2001, a decrease of $73.6 million, or 63.6%, from $115.7 million in the comparable 2000 period. This decrease was largely due to a $49.6 million decline in income from the disposition of client warrants, combined with a $33.7 million decline in investment (losses) gains.

Client investment fees totaled $9.2 million and $21.0 million for the three and six months ended June 30, 2001, compared to $8.2 million and $13.9 million in the similar prior year periods. We offer off-balance sheet private label mutual fund products to clients on which we earn fees ranging from 42 to 107 basis points on the average balance in these products. At June 30, 2001, $9.4 billion in client funds were invested by clients off-balance sheet, including $7.2 billion in the mutual fund products compared to $10.2 billion and $7.1 billion for the comparative prior year period, respectively. The increase in client investment fees of $1.0 million reflects an increase in sales fees.

Letter of credit fees, foreign exchange fees and other trade finance income totaled $2.9 million in the second quarter of 2001, a decrease of $1.8 million, or 37.9%, from the $4.7 million earned in the second quarter of 2000. For the first six months of 2001, letter of credit fees, foreign exchange fees and other trade finance income totaled $7.5 million, a decrease of $0.9 million, or 10.4%, compared to the $8.3 million in the first six months of 2000. The decreases reflect a reduction in the volume of foreign exchange transactions during 2001 versus the comparable prior year periods.

Income from the disposition of client warrants totaled $2.4 million and $6.5 million for the three and six months ended June 30, 2001, compared to $16.8 million and $56.1 million for the respective 2000 periods. We have historically obtained rights to acquire stock, in the form of warrants, in certain clients, primarily as part of negotiated credit facilities. The receipt of warrants does not change the loan covenants or other collateral control techniques we 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.

Deposit service charges totaled $1.9 million for the three months ended June 30, 2001, an increase of $1.1 million, or 121.7%, from the $0.9 million reported in the second quarter of 2000. For the first six months of 2001 and 2000 deposit service charges totaled $2.7 million and $1.6 million, respectively. Clients compensate us for depository services either through earnings credits computed on their demand deposit balances, or via explicit payments recognized by us as deposit service charges income. The growth in deposit service charges was primarily due to lower client earnings credits which resulted from lower average client deposit balances. Thus, we earned higher explicit deposit service charge payments.

We incurred $1.2 million and $1.6 million in losses on investment securities during the three and six months ended June 30, 2001, primarily related to the write-off of certain venture capital fund and direct equity investments. The gains during the first half of 2000 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 $1.2 million, or 64.7%, to $3.0 million in the second quarter of 2001 from $1.8 million in the second quarter of 2000. For the six months ended June 30, 2001, other noninterest income increased $2.2 million, or 59.3%, to $5.9 million from $3.7 million in the comparable 2000 period. This increase in other noninterest income was primarily due to venture capital fund management fees of $0.6 million and $1.3 million for the three and six months ended June 30, 2001, respectively. Additionally, we earned a higher volume of cash management and loan documentation services related to our growing client base.

Noninterest Expense

Noninterest expense in the second quarter of 2001 totaled $44.7 million, a $4.3 million, or 8.8%, decrease from the $49.0 million incurred in the comparable 2000 period. Noninterest expense totaled $90.8 million for the first six months of 2001, a decrease of $5.7 million, or 5.9%, from the $96.5 million total for the comparable 2000 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, by adjusted revenues, defined as the total of net interest income and noninterest income, excluding income from the disposition of client warrants and gains or losses related to sales of investment securities. Our efficiency ratio for the 2001 second quarter was 50.9% versus 47.2% for the second quarter of 2000. Our efficiency ratio for the first six months of 2001 was 47.7%, versus 46.3% for the comparable 2000 period. The following table presents the detail of noninterest expense and the incremental contribution of each line item to our efficiency ratio:

 

  Three Months Ended June 30,  
 
 
  2001   2000  
 
 
 
      Percent of       Percent of  
      Adjusted       Adjusted  
(Dollars in thousands) Amount   Revenues   Amount   Revenues  
 
 
 
 
 
   
Compensation and benefits $ 22,034   25.3 % $ 27,372   28.1 %
Professional services 6,113   7.0   6,277   6.4  
Net occupancy 3,870   4.5   2,142   2.2  
Furniture and equipment 2,774   3.2   2,877   3.0  
Business development and travel 2,419   2.8   2,292   2.4  
Telephone 1,061   1.2   711   0.7  
Postage and supplies 844   1.0   901   0.9  
Trust preferred securities distributions 825   1.0   825   0.8  
Advertising and promotion 809   0.9   803   0.8  
Other 3,505   4.0   1,864   1.9  
 
 
 
 
 
Total, excluding cost of retention and warrant incentive plans 44,254   50.9 % 46,064   47.2 %
Retention and warrant incentive plans 418       2,936      
 
 
 
 
 
Total noninterest expense $ 44,672       $ 49,000      
 
 
 
 
 

 

  Six Months Ended June 30,  
 
 
  2001   2000  
 
 
 
      Percent of       Percent of  
      Adjusted       Adjusted  
(Dollars in thousands) Amount   Revenues   Amount   Revenues  
 
 
 
 
 
   
Compensation and benefits $ 44,866   23.8 % $ 51,743   28.6 %
Professional services 11,653   6.2   8,723   4.8  
Net occupancy 7,593   4.0   4,046   2.2  
Business development and travel 5,393   2.9   4,735   2.6  
Furniture and equipment 5,185   2.6   4,891   2.7  
Telephone 1,919   1.0   1,207   0.7  
Postage and supplies 1,857   1.0   1,689   1.0  
Advertising and promotion 1,837   1.0   1,302   0.7  
Trust preferred securities distributions 1,650   0.9   1,650   0.9  
Other 8,054   4.3   3,747   2.1  
 
 
 
 
 
                 
Total, excluding cost of retention and warrant incentive plans 90,007   47.7 % 83,733   46.3 %
Retention and warrant incentive plans 818       12,786      
 
 
 
 
 
Total noninterest expense $ 90,825       $ 96,519      
 
 
 
 
 

Compensation and benefits expenses totaled $22.0 million in the second quarter of 2001, a $5.3 million, or 19.5%, decrease from the $27.4 million incurred in the second quarter of 2000. For the first six months of 2001, compensation and benefits expenses totaled $44.9 million, a decrease of $6.9 million, or 13.3%, compared to $51.7 million for the comparable 2000 period. The decrease in compensation and benefits expenses was largely the result of a decrease in performance-based compensation associated with our incentive bonuses and employee stock ownership plan. Average FTE were approximately 965 for the three and six months ended June 30, 2001 versus 783 and 771 for the respective prior year periods. The increase in FTE personnel was primarily due to a combination of our efforts to develop and support new markets through geographic expansion, to develop and expand products, services and niches, and to build an infrastructure sufficient to support present and prospective business activities. Further growth in our FTE personnel is likely to slow for the remainder of 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 $6.1 million and $11.7 million for the three and six months ended June 30, 2001. The $11.7 million in professional services for the six months ended June 30, 2001 represented a $2.9 million or 33.6% increase over the comparable prior year period. 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.

Occupancy, furniture and equipment expenses totaled $6.6 million for the three months ended June 30, 2001, an increase of $1.6 million, or 32.4%, from the $5.0 million for the three months ended June 30, 2000. Occupancy, furniture and equipment expenses totaled $12.8 million and $8.9 million for the six months ended June 30, 2001 and 2000. The increase in occupancy, furniture and equipment expenses in 2001, as compared to 2000, was primarily the result of our continued geographic expansion to develop and support new markets during 2000. Further geographic expansion is likely to slow for the remainder of 2001 as a result of the current economic slowdown in our marketplace.

Business development and travel expenses totaled $2.4 million and $5.4 million for the three and six months ended June 30, 2001, an increase of $0.1 million, or 5.5%, and $0.7 million, or 13.9%, compared to $2.3 million and $4.7 million in the comparable 2000 periods. The increase in business development and travel expenses was largely attributable to overall growth in our business, including both an increase in the number of FTE personnel and expansion into new geographic markets.

Telephone expenses totaled $1.1 million and $1.9 million for the three and six months ended June 30, 2001, an increase of $0.4 million, or 49.2%, and $0.7 million, or 59.0%, compared to $0.7 million and $1.2 million in the comparable 2000 periods. The increase in telephone expense resulted from overall growth in our business, including both an increase in the number of FTE personnel and expansion into new geographic markets.

Trust preferred securities distributions totaled $0.8 million and $1.7 million for the three and six months ended June 30, 2001 and 2000. These amounts resulted from the issuance of $40.0 million in cumulative trust preferred securities during the second quarter of 1998. The trust preferred securities pay a fixed rate quarterly distribution of 8.25% and have a maximum maturity of 30 years.

Retention and warrant incentive plans expense totaled $0.4 million in the second quarter of 2001, a $2.5 million decrease from the $2.9 million incurred in the second quarter of 2000. Retention and warrant incentive plans expense totaled $0.8 million for the first six months of 2001, a $12.0 million decrease from the $12.8 million incurred in the first six months 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 increase in retention and warrant plans expense was directly related to the increase in warrant, venture capital fund and direct equity investment gains over the comparable 2000 period.

Other noninterest expense totaled $3.5 million and $8.1 million for the three and six months ended June 30, 2001, an increase of $1.6 million, or 88.0%, and $4.3 million, or 114.9%, compared to $1.9 million and $3.7 million for the respective 2000 periods. The increase for the three months ended June 30, 2001, as compared to the prior year period was primarily attributable to amortization of tax credit fund investments of $1.2 million. The six months ended June 30, 2001, as compared to the similar prior year period also includes a one-time $2.2 million operational loss related to a system issue associated with our off-balance sheet client funds incurred in the 2001 first quarter.

Income Taxes

Our effective tax rate was 36.9% and 38.4% for the second quarter and first half of 2001, respectively, compared to 40.2% and 40.7% for the equivalent three and six month prior year periods, respectively. The change in rate was primarily due to an increase in items giving rise to permanent tax benefits.

Financial Condition

Our total assets were $4.4 billion at June 30, 2001, a decrease of $1.2 billion, or 21.4%, 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 $387.9 million at June 30, 2001, a decrease of $1.0 billion, or 72.1%, compared to the $1.4 billion outstanding at December 31, 2000. This decrease was attributable to a decline in our clients’ deposit balances during the first half of 2001.

Investment Securities

Investment securities totaled $1.9 billion at June 30, 2001, a decrease of $251.3 million, or 11.9%, from the December 31, 2000 balance of $2.1 billion. This decrease resulted from a decline in our deposits during the first half of 2001, and primarily consisted of U.S. agency securities.

Based on July 31, 2001 market valuations, we had potential pre-tax warrant gains totaling $0.7 million related to 21 companies. We are restricted from exercising many of these warrants until the third and fourth quarters of 2001. As of June 30, 2001, we held 1,574 warrants in 1,203 companies, and had made investments in 227 venture capital funds and direct equity investments in 60 companies. Many of these companies are non-public. Thus, for those companies for which a readily determinable market value cannot be obtained, we value these equity instruments at cost less any identified impairment. Additionally, we are typically precluded from using any type of derivative instrument to secure the current unrealized gains associated with many of these equity instruments. Hence, the amount of income we realize from these equity instruments in future periods may vary materially from the current unrealized amount due to fluctuations in the market prices of the underlying common stock of these companies. Furthermore, we may reinvest some or all of the income realized from the disposition of these equity instruments in pursuing our business strategies.

Loans

Total loans, net of unearned income, at June 30, 2001, were $1.7 billion, a slight increase of $13.1 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.

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 $74.0 million at June 30, 2001, a slight increase of $0.2 million from the balance at December 31, 2000.

We incurred $9.0 million and $21.4 million in gross charge-offs during the three and six months ended June 30, 2001.

We believe our allowance for loan losses is adequate as of June 30, 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, loans on nonaccrual status and OREO and other foreclosed assets.

The table below sets forth certain relationships between nonperforming loans, nonperforming assets and the allowance for loan losses:

  June 30,   December 31,  
(Dollars in thousands) 2001   2000  
 
 
 
   
Nonperforming assets:        
Loans past due 90 days or more $ 305   $ 98  
Nonaccrual loans 24,321   18,287  
 
 
 
Total nonperforming assets $ 24,626   $ 18,385  
 
 
 
   
Nonperforming loans as a percentage of total loans 1.4 % 1.1 %
Nonperforming assets as a percentage of total assets 0.6 % 0.3 %
         
Allowance for loan losses: $ 74,000   $ 73,800  
  As a percentage of total loans 4.3 % 4.3 %
  As a percentage of nonaccrual loans 304.3. % 403.6 %
  As a percentage of nonperforming loans 300.5 % 401.4 %

Nonperforming loans totaled $24.6 million, or 1.4% of total loans, at June 30, 2001, an increase of $6.2 million, or 33.9%, from the prior year-end total of $18.4 million, or 1.1% of total loans. The increase in nonperforming loans was primarily due to one commercial credit, in our software niche, totaling $3.1 million. Our management believes nonperforming loans are adequately secured with collateral and reserves, and that any future charge-offs associated with these loans will not have a material impact on our future net income.

In addition to the loans disclosed in the foregoing analysis, we have identified three loans totaling $6.6 million, that, on the basis of information known to us, were judged to have a higher than normal risk of becoming nonperforming. We are not aware of any other loans where known information about possible problems of the borrower casts serious doubts about the ability of the borrower to comply with the loan repayment terms.

Deposits

Total deposits were $3.7 billion at June 30, 2001, a decrease of $1.2 billion, or 24.9%, from the prior year-end total of $4.9 billion. A significant portion of the decrease in deposits during the first half of 2001 was concentrated in our noninterest-bearing demand deposits and money market deposits, which decreased $566.4 million and $570.5 million, respectively. This decrease was explained by a slowdown in the capital markets and venture capital fundings which has reduced our clients’ 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 June 30, 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 June 30, 2001, the Bank’s ratio of liquid assets to total deposits was 55.7%. This ratio is well in excess of our minimum policy guidelines. 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, 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 common stock and 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.

During the first half of 2001, the Company repurchased approximately 1,200,000 shares of common stock totaling approximately $30.0 million, in conjunction with the 5,000,000 share repurchase program authorized by the Board of Directors on April 5, 2001.

Stockholders’ equity totaled $655.0 million at June 30, 2001, an increase of $40.9 million, or 6.7%, from the $614.1 million balance at December 31, 2000. This increase was primarily due to net income of $57.5 million for the six months ended June 30, 2001 and net proceeds from the issuance of common stock of $8.3 million, partially offset by a repurchase of 1.2 million shares of common stock totaling approximately $30.0 million. We have not paid a cash dividend on our common stock since 1992, and we do not have any material commitments for capital expenditures as of June 30, 2001.

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

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

Both Silicon's and Silicon Valley Bank's capital ratios were in excess of regulatory guidelines for a well capitalized depository institution as of June 30, 2001, and December 31, 2000. Capital ratios for Silicon are set forth below:

  June 30,   December 31,  
  2001   2000  
 
 
 
Silicon Valley Bancshares:        
Total risk-based capital ratio 19.3 % 17.7 %
Tier 1 risk-based capital ratio 18.0 % 16.5 %
Tier 1 leverage ratio 15.6 % 12.0 %

The increase in the total risk-based capital ratio and the Tier 1 risk-based capital ratio from December 31, 2000 to June 30, 2001 was primarily attributable to an increase in Tier 1 capital. This increase was due primarily to internally generated capital, primarily net income of $57.5 million. The Tier 1 leverage ratio also increased between December 31, 2000 and June 30, 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 June 30, 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

The Annual Meeting of Shareholders was held on April 19, 2001. Each of the persons named in the Proxy Statement as a nominee for director was elected; the amendment to the Company’s  Certificate of Incorporation to increase the number of shares of authorized; the amendment to the Company’s 1997 Equity Incentive Plan; and the appointment of KPMG LLP as the Company’s independent auditors for 2001 was ratified. The following are the voting results on each of these matters:

Election of Directors In Favor       Withheld  


     
 
             
Gary K. Barr 43,770,210       281,138  
James F. Burns, Jr. 43,755,768       295,580  
John C. Dean 37,451,722       6,599,626  
Alex W. Hart 43,769,160       282,188  
Stephen E. Jackson 43,772,210       279,138  
Daniel J. Kelleher 43,768,321       283,027  
James R. Porter 43,741,816       309,532  
Michela K. Rodeno 43,770,385       280,963  
Kenneth P. Wilcox 37,014,960       7,036,388  
             
Other Matters In Favor   Opposed   Abstained  


 
 
 
The amendment to the Company’s Certificate of Incorporation to increase the number of shares of authorized common stock, $0.001 par value per share, from 60,000,000 to 150,000,000 37,423,812   6,584,304   43,232  
             
Other Matters In Favor   Opposed   Abstained  


 
 
 
             
The amendment to the Company’s 1997 Equity Incentive Plan to reserve an additional 2,000,000 million  shares of common stock for issuance
thereunder was approved.
36,363,445   7,494,084   193,819  
             
Other Matters In Favor   Opposed   Abstained  


 
 
 
             
Ratification of the appointment of  KPMG LLP as the Company’s independent auditors for 2001. 42,745,998   1,283,860   21,490  

 

ITEM  5 - OTHER INFORMATION

None.

 

ITEM  6 - EXHIBITS AND REPORTS ON FORM 8-K

(a)              Exhibits:

10.48    Part-time Employment Agreement between Silicon Valley Bancshares and Christopher T. Lutes.

10.49    Silicon Valley Bancshares 1997 Equity Incentive Plan, Amended as of May 16, 2001.

(b)        Reports on Form 8-K:

             No reports on Form 8-K were filed by the Company during the quarter ended June 30, 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:  August 14, 2001   /s/ Donal D. Delaney
   
    Donal D. Delaney
    Controller
    (Principal Accounting Officer)

 

 

 

 

 

 

 

 

             May 24, 2001

Christopher T. Lutes
Chief Financial Officer

Dear Chris:

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

1.          Voluntary Resignation.   You’ve informed us that you will voluntarily resign from your full-time position as SVB’s Chief Financial Officer, effective June 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 part-time employment (“Part-time Employment”).  Your part-time employment period will be for twelve (12) months, beginning on July 1, 2001 and ending on June 30, 2002 (the “Part-time Employment Period”). Either party may terminate this Agreement at any time without cause with 30 days prior written notice.  Sections 4(d), 4(e), 17, 19, 22, 23, 24, 25, 26, 27, 28, and 29 survive any termination of this Agreement by either party without cause. SVB may terminate this Agreement immediately for cause.  Any decision by SVB to terminate this Agreement prior to June 30, 2002 will be made by Silicon Valley Bancshares’ Chief Executive Officer (the “CEO”) with the concurrence of the Board Executive Committee.

3.          Duties .

             a)          Standard Duties. During the Part-time Employment Period, you will work a maximum of twenty (20) hours per week.  Your duties will include being reasonably available to Ken Wilcox and other executives of SVB to provide advisory and other services related to the financial operations of SVB.

             b)          Special Engagements .  During the Part-time Employment 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)          Compensation.   You will be paid $ 87,500.00 during the Part-time Employment Period, payable bi-weekly on SVB’s normal payroll dates with all applicable federal and state withholding amounts deducted. If SVB terminates this Agreement without cause, you will continue to be paid for six (6) months from the date of the notice of termination (the “Six Month Payment Period”).

             b)          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 Part-time Employment Period.

             c)          Incentive Compensation.   You will be eligible in February 2002 for an incentive compensation award, in accordance with the applicable terms of the Bank’s Incentive Compensation Plan, pro rated for your time spent in 2001 as both a full-time and part-time employee. You will not be eligible for an incentive award in February 2003 for your time spent as a part-time employee in 2002.  Also, you will not be eligible to receive new Retention Program allocations under the 2003 Retention Programs.

             d)          Retention Program. You will be entitled to “Continued Participation” under the Retention Programs (as defined in SVB’s 1998, 1999, 2000, 2001 and 2002 Retention Programs) during the Part-time Employment Period, as well for the remainder of the Retention Programs’ terms, provided you:  (1) do not disclose Confidential Information (as defined in Section 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, 2001, and 2002 Retention Programs.

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

5.          Retirement Benefits. You will be eligible to participate in SVB’s Money Purchase Plan, the 401(k) and Employee Stock Ownership Plan, and Employee Stock Purchase Program during the Part-time Employment Period.

6.          Group Medical, Vision and Dental Benefits.   You will be eligible to continue your current SVB group health insurance benefits (including group medical, disability, life insurance, vision and dental benefits) during the Part-time Employment Period.  If SVB terminates this Agreement without cause, you will continue to be eligible for these benefits for the Six Month Payment Period.

7.          Change in Control Policy. You will continue to be eligible to receive benefits under SVB’s Change In Control Severance Benefits Policy during your Part-time Employment Period.  However, as you will no longer be a member of SVB’s Operating Committee, you will be entitled to benefits under such policy only to the extent provided to employees at Grade 16 level.  You will also 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.          Confidential Information/Competition with SVB

             a)          Disclosure of Confidential Information. SVB may immediately terminate the Part-time Employment Period, if you disclose “Confidential Information.”  “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 Part-time Employment Period, if, during your Part-time Employment 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 (with the concurrence of the Board Executive Committee):  (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 the CEO, with the concurrence of the Board 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, with such decision to be made by the CEO with the concurrence of the Board Executive Committee.

             c)          Nondisparagement.   SVB may immediately terminate the Part-time Employment Period, if, during your Part-time Employment Period, (1) 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, or (2) you 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 the conduct of their respective personal, business or professional affairs.

             d)          Consulting for a Non-Competitor.  During your Part-time Employment Period, prior to accepting a consulting position with a non-competitor of SVB, you will discuss the proposed consulting position with the CEO (who will report on the proposed position to the Executive Committee of the Board).  The CEO, in such CEO’s sole discretion, shall determine if you may pursue the consulting position, considering, among other factors, whether such consulting position will interfere with your part-time employment responsibilities.

9.          Expense Reimbursement. SVB will reimburse you for reasonable out-of-pocket expenses related to your SVB employment and incurred during the Part-time Employment Period, pursuant to SVB’s expense policies and procedures.

10.        Investments.    During the Part-time Employment 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.        Outside Boards/Outside Employment and Consulting Arrangements.   During the Part-time Employment Period, you may sit on the Board of Directors or Advisory Board or become an employee or consultant of an outside company with the approval of the CEO (who will report on the proposed position to the Executive Committee of the Board). You will be able to retain any compensation in connection with such role as a director, employee or consultant.  You will play such role in your individual capacity, and specifically, not as a representative of SVB.

12.        Remote Connectivity/Cubicle Space.   You will be provided with remote connectivity to SVB’s computer network and with access to guest cubicle space at SVB during the Part-time Employment Period.  If SVB terminates this Agreement without cause, SVB, in its sole discretion, may continue to provide these benefits during the Six Month Payment Period.

13.        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.

14.        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 15 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.

15.        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.

16.        Non-Insider .  During the Part-time Employment Period, you shall not be deemed an “insider” for purposes of compliance with SVB’s Insider Trading Policy .  Notwithstanding the foregoing, you shall continue to be bound by applicable provisions of federal and state securities laws, including, without limitation, (a) Section 16 of the Securities Exchange Act of 1934, (b) Rule 144 promulgated under the Securities Act of 1933, and (c) such laws prohibiting trading in Silicon Valley Bancshares’ stock while you then are in possession of material non-public information.

17.        Non-Solicitation .  During the Part-time Employment Period and for two (2) years from termination of the Part-time Employment 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).  Breach of this Section, in the discretion of the CEO, may lead to you forfeiting any right to then-future distributions under the 1998, 1999, 2000, 2001, and 2002 Retention Programs.

18.        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.

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

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

21.        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.

22.        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.

23.        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.

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

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

26.        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.

27.        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.

28.        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.

29.        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.

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

  Sincerely,    
       
  SILICON VALLEY BANK    
       
    /s/ John C. Dean    
       
  John C. Dean    
  Chairman of the Board of Directors    

 

 

 

    Agreed to and Accepted
       
       
       
       
    by: /s/ Christopher T. Lutes

 

Exhibit A

EMPLOYEE AGREEMENT AND RELEASE

             Except as otherwise set forth in this Agreement, effective on July 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 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 date this Agreement is signed, 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 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.

             In giving this release, which includes claims that may be unknown to me at present, 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 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 unknown or unsuspected claims I may have against the Company.

  By:
    Christopher T. Lutes
     
     
     
  Date:

 

 

 

 

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

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, and (v) 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 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.

             (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:

                           (1)                      If the common stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Company's common stock) on the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable.

                           (2)                      In the absence of such markets for the common stock, the Fair Market Value shall be determined in good faith by the Board.

 

             (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.

             (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 right granted under the Plan, including any Option, any stock bonus, any right to purchase restricted stock, 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:

                           (1)                      To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock, a Stock Appreciation Right, or a combination of the foregoing; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive stock pursuant to a Stock Award; whether a person shall be permitted to receive stock upon exercise of an Independent Stock Appreciation Right; and the number of shares with respect to which a Stock Award shall be granted to each such person.

                           (2)                      To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration.  The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.

                           (3)                      To amend the Plan or a Stock Award as provided in Section 14.

                           (4)                      Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan.


             (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 seven-million-eight-hundred thousand (7,800,000) 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.

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.


             (d)                      Subject to the provisions of Section 13 relating to adjustments upon changes in stock, the total number of shares available to grant as stock bonus awards or under restricted stock purchase agreements shall not exceed 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.

             (b)                      Price.  The exercise price of each Incentive Stock Option 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 eighty-five percent (85%) the Fair Market Value of the stock subject to the Option on the date the Option is granted.  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 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 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 AND PURCHASES OF RESTRICTED STOCK.

             Each stock bonus 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.  The terms and conditions of stock bonus 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 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:

             (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 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 bonus agreement in consideration for past services actually rendered to the Company or for its benefit.

             (b)          Transferability.   Rights under a stock bonus or restricted stock purchase agreement 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 under such Stock Award Agreement remains subject to the terms of the 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 pursuant to a stock bonus agreement 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 Participant'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 bonus or restricted stock purchase agreement between the Company and such person.

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:

                           (1)                      Tandem Stock Appreciation Rights.  Tandem Stock Appreciation Rights will be granted appurtenant to an Option, and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains.  Tandem Stock Appreciation Rights will require the holder to elect between the exercise of the underlying Option for shares of stock and the surrender, in whole or in part, of such Option for an appreciation distribution.  The appreciation distribution payable on the exercised Tandem Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the Option surrender) in an amount up to the excess of (A) the Fair Market Value (on the date of the Option surrender) of the number of shares of stock covered by that portion of the surrendered Option in which the Optionee is vested over (B) the aggregate exercise price payable for such vested shares.

                           (2)                      Concurrent Stock Appreciation Rights.  Concurrent Rights will be granted appurtenant to an Option and may apply to all or any portion of the shares of stock subject to the underlying Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains.  A Concurrent Right shall be exercised automatically at the same time the underlying Option is exercised with respect to the particular shares of stock to which the Concurrent Right pertains.  The appreciation distribution payable on an exercised Concurrent Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Concurrent Right) in an amount equal to such portion as shall be determined by the Board or the Committee at the time of the grant of the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Concurrent Right) of the vested shares of stock purchased under the underlying Option which have Concurrent Rights appurtenant to them over (B) the aggregate exercise price paid for such shares.

 

                           (3)                      Independent Stock Appreciation Rights.  Independent Rights will be granted independently of any Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to Nonstatutory Stock Options as set forth in Section 6.  They shall be denominated in share equivalents.  The appreciation distribution payable on the exercised Independent Right shall be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Independent Right) of a number of shares of Company stock equal to the number of share equivalents in which the holder is vested under such Independent Right, and with respect to which the holder is exercising the Independent Right on such date, over (B) the aggregate Fair Market Value (on the date of the grant of the Independent Right) of such number of shares of Company stock.  The appreciation distribution payable on the exercised Independent Right shall be in cash or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Independent Right.

9.                       CANCELLATION AND RE-GRANT OF OPTIONS.

             (a)                      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 (subject to shareholder approval) 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.  Notwithstanding the foregoing, the Board or the Committee may grant an Option and/or Stock Appreciation Right with an exercise price lower than that set forth above if such Option and/or Stock Appreciation Right is granted as part of a transaction to which section 424(a) of the Code applies.

             (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 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.  Further, the Board or Committee will need shareholder approval prior to the cancellation and re-granting under this Section 9 of any Option or Stock Appreciation Right, if such cancellation and re-granting is done within six (6) months of such cancellation.

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 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 subsection 4(a) and the maximum number of securities subject to award to any person during any calendar year pursuant to subsection 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.

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

                           (1)                      a merger or consolidation of the Company or Bancshares with any other corporation, other than a merger or consolidation which would result in beneficial owners of the total voting power in the election of directors represented by the voting securities ("Voting Securities") of the Company or Bancshares (as the case may be) outstanding immediately prior thereto continuing to beneficially own securities representing (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total Voting Securities of the Company or Bancshares, or of such surviving entity, outstanding immediately after such merger or consolidation;

                           (2)                      the filing of a plan of liquidation or dissolution of the Company or the closing of the sale, lease, exchange or other transfer or disposition by the Company or Bancshares of all or substantially all of the Company's assets;

                           (3)                      any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than (A) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or Bancshares, (B) a corporation owned directly or indirectly by the shareholders of Bancshares in substantially the same proportions as their beneficial ownership of stock in Bancshares, or (C) Bancshares (with respect to Bancshares' ownership of the stock of the Company), is or becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of the securities of the Company or Bancshares representing 50% or more of the Voting Securities; or

                           (4)                      any person (as such term is used in Sections 13(d) or 14(d) of the Exchange Act), other than (a) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or Bancshares, (b) a corporation owned directly or indirectly by the shareholders of Bancshares in substantially the same proportions as their ownership of stock in Bancshares, or (c) Bancshares (with respect to Bancshares' ownership of the stock of the Company) is or becomes the beneficial owner (within the meaning or Rule 13d-3 under the Exchange Act), directly or indirectly, of the securities of the Company or Bancshares representing 25% or more of the Voting Securities of such corporation, and within twelve (12) months of the occurrence of such event, a change in the composition of the Board of Directors of Bancshares occurs as a result of which sixty percent (60%) or fewer of the directors are Incumbent Directors.

                "Incumbent Directors" shall mean directors who either


                                        (A)         are directors of the Company as of the date hereof;

                                        (B)         are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors of the Company who are Incumbent Directors described in (A) above at the time of such election or nomination; or

                                        (C)         are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors of the Company who are Incumbent Directors described in (A) or (B) above at the time of such election or nomination.

             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 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:

                           (1)              Materially increase benefits accruing to participants under the Plan;

                           (2)              Increase the aggregate number of securities issued under the Plan;

                           (3)              Significantly modify the eligibility requirements for participants in the Plan; and

                           (4)              Reprice any Incentive Stock Options or Nonstatutory Options.

             (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.