SVB Financial Group
SILICON VALLEY BANCSHARES (Form: 10-Q, Received: 11/14/2001 12:11:34)

 

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 September 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
incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

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 October 31, 2001, 46,208,033 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 FINANCIALCONDITION 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

 

 

 

September 30,

 

December 31,

 

(Dollars in thousands, except par value)

 

2001

 

2000

 

Assets:

 

 

 

 

 

Cash and due from banks

 

$

398,191

 

$

332,632

 

Federal funds sold and securities purchased under agreement to resell

 

61,384

 

1,389,734

 

Investment securities

 

1,843,362

 

2,107,590

 

Loans, net of unearned income

 

1,725,719

 

1,716,549

 

Allowance for loan losses

 

(73,500

)

(73,800

)

Net loans

 

1,652,219

 

1,642,749

 

Premises and equipment

 

22,431

 

18,493

 

Goodwill

 

95,435

 

-

 

Accrued interest receivable and other assets

 

74,863

 

135,577

 

Total assets

 

$

4,147,885

 

$

5,626,775

 

 

 

 

 

 

 

Liabilities, Minority Interest and Stockholders' Equity:

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing demand

 

$

1,635,787

 

$

2,448,758

 

NOW

 

23,866

 

57,857

 

Money market

 

892,922

 

1,519,563

 

Time

 

756,507

 

836,081

 

Total deposits

 

3,309,082

 

4,862,259

 

Short-term borrowings

 

40,937

 

-

 

Other liabilities

 

39,493

 

81,138

 

Long-term debt

 

25,475

 

-

 

Total liabilities

 

3,414,987

 

4,943,397

 

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

 

38,628

 

38,589

 

Minority interest

 

30,157

 

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; 47,432,042 and 48,977,906 shares outstanding at September 30, 2001 and December 31, 2000, respectively

 

47

 

49

 

Additional paid-in capital

 

241,071

 

280,008

 

Retained earnings

 

411,168

 

335,098

 

Unearned compensation

 

(2,026

)

(3,634

)

Accumulated other comprehensive income:

 

 

 

 

 

Net unrealized gains on available-for-sale investments

 

13,853

 

2,600

 

Total stockholders’ equity

 

664,113

 

614,121

 

Total liabilities, minority interest and stockholders’ equity

 

$

4,147,885

 

$

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 nine months ended

 

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

(Dollars in thousands, except per share amounts)

 

2001

 

2000

 

2001

 

2000

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans

 

$

44,583

 

$

47,743

 

$

145,105

 

$

139,125

 

Investment securities

 

20,875

 

30,035

 

71,905

 

83,695

 

Federal funds sold and securities purchased under agreement to resell

 

2,987

   

24,930

   

25,218

   

59,830

 

Total interest income

 

68,445

 

102,708

 

242,228

 

282,650

 

Interest expense

 

8,552

 

14,942

 

30,680

 

41,486

 

Net interest income

 

59,893

 

87,766

 

211,548

 

241,164

 

Provision for loan losses

 

5,890

 

22,679

 

16,724

 

46,309

 

Net interest income after provision for loan losses

 

54,003

 

65,087

 

194,824

 

194,855

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Client investment fees

 

10,699

 

9,324

 

31,735

 

23,180

 

Letter of credit and foreign exchange income

 

2,709

 

5,239

 

10,169

 

13,565

 

Disposition of client warrants

 

350

 

21,189

 

6,855

 

77,299

 

Deposit service charges

 

1,550

 

900

 

4,296

 

2,482

 

Investment (losses) gains

 

(2,365

)

3,817

 

(3,949

)

35,950

 

Other

 

4,043

 

2,589

 

9,974

 

6,311

 

Total noninterest income

 

16,986

 

43,058

 

59,080

 

158,787

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

21,053

 

28,359

 

65,919

 

80,102

 

Professional services

 

6,572

 

5,166

 

18,225

 

13,889

 

Net occupancy

 

3,987

 

2,305

 

11,580

 

6,351

 

Furniture and equipment

 

4,287

 

2,798

 

9,472

 

7,689

 

Business development and travel

 

2,280

 

2,954

 

7,673

 

7,689

 

Telephone

 

1,058

 

849

 

2,977

 

2,056

 

Postage and supplies

 

1,078

 

874

 

2,935

 

2,563

 

Trust preferred securities distributions

 

825

 

825

 

2,475

 

2,475

 

Advertising and promotion

 

546

 

1,152

 

2,383

 

2,455

 

Retention and warrant incentive plans

 

69

 

2,855

 

887

 

15,640

 

Other

 

1,667

 

1,887

 

9,721

 

5,635

 

Total noninterest expense

 

43,422

 

50,024

 

134,247

 

146,544

 

 

 

 

 

 

 

 

 

 

 

Minority interest

 

2,224

 

209

 

3,440

 

209

 

Income before income tax expense

 

29,791

 

58,330

 

123,097

 

207,307

 

Income tax expense

 

11,189

 

23,391

 

47,027

 

83,978

 

Net income

 

$

18,602

 

$

34,939

 

$

76,070

 

$

123,329

 

Basic earnings per share

 

$

0.39

 

$

0.74

 

$

1.57

 

$

2.68

 

Diluted earnings per share

 

$

0.38

 

$

0.69

 

$

1.52

 

$

2.54

 

 

See notes to interim consolidated financial statements.

 


SILICON VALLEY BANCSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

(Dollars in thousands)

 

2001

 

2000

 

2001

 

2000

 

Net income

 

$

18,602

 

$

34,939

 

$

76,070

 

$

123,329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) , net of tax:

 

 

 

 

 

 

 

 

 

Changes in unrealized gains (losses) on available-for-sale investments:

 

 

 

 

   

 

   

 

   

Unrealized holding gains

 

7,029

 

19,346

 

13,049

 

27,036

 

Less: Reclassification adjustment for (gains) losses included in net income

 

1,258

 

(14,979

)

(1,796

)

(67,372

)

Other comprehensive income (loss)

 

8,287

 

4,367

 

11,253

 

(40,336

)

Comprehensive income

 

$

26,889

 

$

39,306

 

$

87,323

 

$

82,993

 

 

See notes to interim consolidated financial statements.

 


SILICON VALLEY BANCSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

For the nine months ended

 

 

 

September 30,

 

September 30,

 

(Dollars in thousands)

 

2001

 

2000

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

76,070

 

$

123,329

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

16,724

 

46,309

 

Minority interest

 

(3,440

)

(209

)

Depreciation and amortization

 

5,632

 

2,797

 

Net loss (gain) on sales of investment securities

 

3,949

 

(35,950

)

Net gains on disposition of client warrants

 

(6,855

)

(77,299

)

Decrease in accrued interest receivable

 

16,474

 

1,908

 

Decrease (increase) in inventory

 

16,023

 

(12,267

)

Increase in prepaid expenses

 

(892

)

(1,179

)

Increase in unearned income

 

3,086

 

844

 

Increase (decrease) in taxes payable

 

15,149

 

(1,253

)

(Decrease) increase in retention, warrant and other incentive plan payable

 

(29,948

)

14,835

 

Other, net

 

(1,599

)

(8,113

)

Net cash provided by operating activities

 

110,373

 

53,752

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from maturities and paydowns of investment securities

 

1,259,994

 

742,335

 

Proceeds from sales of investment securities

 

8,821

 

212,499

 

Purchases of investment securities

 

(982,197

)

(1,178,200

)

Net increase in loans

 

(41,502

)

(26,522

)

Proceeds from recoveries of charged off loans

 

12,222

 

7,519

 

Payment for acquisition

 

(30,000

)

-

 

Purchases of premises and equipment

 

(9,381

)

(3,800

)

Net cash provided by (used in) investing activities

 

217,957

 

(246,169

)

Cash flows from financing activities:

 

 

 

 

 

Net (decrease) increase in deposits

 

(1,553,177

)

690,489

 

Proceeds from issuance of common stock, net of issuance cost

 

11,604

 

113,499

 

Repurchase of common stock

 

(52,477

)

-

 

Capital contributions from minority interest participants

 

2,929

 

17,564

 

Net cash (used in) provided by financing activities

 

(1,591,121

)

821,552

 

Net (decrease) increase  in cash and cash equivalents

 

(1,262,791

)

629,135

 

Cash and cash equivalents at January 1,

 

1,722,366

 

1,176,102

 

Cash and cash equivalents at September 30,

 

$

459,575

 

$

1,805,237

 

Supplemental disclosures:

 

 

 

 

 

Interest paid

 

$

30,827

 

$

40,630

 

Income taxes paid

 

$

32,979

 

$

98,362

 

Noncash financing activities:

 

 

 

 

 

Fair value of net assets acquired

 

$

978

 

$

-

 

Short-term borrowings

 

$

40,937

 

$

-

 

Long-term debt

 

$

25,475

 

$

-

 

 

See notes to interim consolidated financial statements.

 


SILICON VALLEY BANCSHARES AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

1.  Significant Accounting Policies

 

The accounting and reporting policies of Silicon Valley Bancshares and its subsidiaries (the “Company”) conform with accounting principles generally accepted in the United States 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

 

The accompanying financial data as of September 30, 2001 and for the three and nine months ended September 30, 2001 and September 30, 2000 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). 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 nine months ended September 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 includes interest-bearing deposits in other financial institutions of $536,000 and $549,000 at September 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.

 

Business Combinations

 

The Company accounts for business combinations in accordance with the provisions of SFAS No. 141, “Business Combinations.” 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 the 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.

 

Goodwill and Identifiable Intangible Assets

 

The Company accounts for Goodwill and identifiable intangibles assets in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires 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”.

 


Recent Accounting Pronouncements

 

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes both SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121.  For example, SFAS No. 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business).  Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never result in a write-down of goodwill.  Rather, goodwill is evaluated for impairment under SFAS No. 142, Goodwill and Other Intangible Assets.

 

The Company is required to adopt SFAS No. 144 no later than the year beginning after December 15, 2001, and plans to adopt its provisions for the quarter ending March 31, 2002.  Management does not expect the adoption of SFAS No. 144 for long-lived assets held for use to have a material impact on the Company’s financial statements because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121.  The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, management cannot determine the potential effects that adoption of SFAS No. 144 will have on the Company’s financial statements.

 

2.  Business Combination

 

On September 28, 2001, SVB Securities, Inc., a wholly owned subsidiary of the Bank completed its acquisition of Alliant Partners. The Bank agreed to purchase the assets of Alliant Partners for a total of $100.0 million, due in several installments of cash and common stock. These installments are payable over the four years, subject to conditions being satisfied. Alliant Partners will have an opportunity to receive consideration of up to an additional $85.0 million, subject to achieving financial performance criteria. The first installment payment of $30.0 million was paid in cash on September 28, 2001. The remaining $70.0 million was discounted at current market interest rates and recorded as debt. The purchase price has been allocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition. The excess of purchase price, totaling $95.4 million, over the estimated fair values of the net assets acquired has been recorded as goodwill.  The business combination was recorded in accordance with SFAS No. 141.

 


3.  Earnings Per Share

 

The Company computes net income per share in accordance with SFAS No. 128, “Earnings per Share.”  Under the provisions of SFAS No. 128, basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if financial instruments or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

 

The following is a reconciliation of basic EPS to diluted EPS for the three and nine months ended September 30, 2001 and 2000.

 

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

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

Net

 

 

 

Per Share

 

Net

 

 

 

Per Share

 

Income

 

Shares

 

Amount

 

Income

 

Shares

 

Amount

 

2001:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common Stockholders

 

$

 18,602

   

47,819

   

$

 0.39

   

$

 76,070

   

48,434

   

$

 1.57

   

Effect of Dilutive Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and restricted stock

 

-

 

1,155

 

-

 

-

 

1,492

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders plus assumed conversions

 

$

18,602

     

48,974

     

$

0.38

     

$

76,070

     

49,926

     

$

1.52

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2000:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders

 

$

 34,939

   

47,334

   

$

 0.74

   

$

 123,329

   

46,061

   

$

 2.68

   

Effect of Dilutive Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and restricted stock

 

-

 

2,952

 

-

 

-

 

2,563

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders plus assumed conversions

 

$

34,939

 

50,286

 

$

0.69

 

$

123,329

 

48,624

 

$

2.54

 

 


4.  Loans

 

The detailed composition of loans, net of unearned income of $11.5 million and $8.4 million at September 30, 2001, and December 31, 2000, respectively, is presented in the following table:

 

 

 

September 30,

 

December 31,

 

(Dollars in thousands)

 

2001

 

2000

 

Commercial

 

$

1,536,177

 

$

1,531,468

 

Real estate construction

 

31,535

 

62,253

 

Real estate term

 

33,358

 

38,380

 

Consumer and other

 

124,649

 

84,448

 

Total loans

 

$

1,725,719

 

$

1,716,549

 

 

5.  Allowance for Loan Losses

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2001

 

2000

 

2001

 

2000

 

Beginning balance

 

$

74,000

 

$

73,800

 

$

73,800

 

$

71,800

 

Provision for loan losses

 

5,890

 

22,679

 

16,724

 

46,309

 

Loans charged off

 

(7,874

)

(24,316

)

(29,246

)

(51,828

)

Recoveries

 

1,484

 

1,637

 

12,222

 

7,519

 

Ending balance

 

$

73,500

 

$

73,800

 

$

73,500

 

$

73,800

 

 

The aggregate recorded investment in loans for which impairment has been determined in accordance with SFAS No. 114 totaled $19.9 million and $18.5 million at September 30, 2001, and September 30, 2000, respectively. Allocations of the allowance for loan losses related to impaired loans totaled $8.5 million at September 30, 2001, and $8.3 million at September 30, 2000. Average impaired loans for the third quarters of 2001 and 2000 totaled $23.5 million and $29.1 million, respectively.

 

6.  Borrowings

 

As of September 30, 2001, the Company had $40.9 million, and $25.5 million in short-term borrowings and long-term debt, respectively. These borrowings were recorded in relation to the  acquisition of Alliant partners. The short-term note payable, due September 30, 2002, has a face value of $42.0 million. The long-term note payable, due in three equal annual installments commencing September 30, 2003, has a face value of $28.0 million. These notes were discounted over their respective terms, based on September 28, 2001 market rates.

 

7.  Common Stock Repurchase

 

The Company has repurchased approximately 2,339,500 shares of common stock totaling $52.5 million as of the end of the 2001 third 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 months 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 $18.6 million, or $0.38 per diluted share, for the third quarter of 2001, compared with net income of $34.9 million, or $0.69 per diluted share, for the third quarter of 2000. Net income totaled $76.1, or $1.52 per diluted share, for the nine months ended September 30, 2001, versus $123.3 million, or $2.54 per diluted share, for the comparable 2000 period. The annualized return on average assets (ROA) was 1.8% in the third quarter of 2001 versus 2.6% in the third quarter of 2000. The annualized return on average equity (ROE) for the third quarter of 2001 was 11.1%, compared to 27.0% in the 2000 third quarter. For the first nine months of 2001, ROA was 2.2% and ROE was 15.5% versus 3.2% and 37.4%, respectively, for the comparable 2000 period.

 


The decrease in net income during the three and nine months ended September 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 nine months periods ended September 30, 2001 and 2000, and are discussed in more detail below.

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2001

 

2000

 

2001

 

2000

 

Net interest income

 

$

59,893

 

$

87,766

 

$

211,548

 

$

241,164

 

Provision for loan losses

 

5,890

 

22,679

 

16,724

 

46,309

 

Noninterest income

 

16,986

 

43,058

 

59,080

 

158,787

 

Noninterest expense

 

43,422

 

50,024

 

134,247

 

146,544

 

Minority interest

 

2,224

 

209

 

3,440

 

209

 

Income before income taxes

 

29,791

 

58,330

 

123,097

 

207,307

 

Income tax expense

 

11,189

 

23,391

 

47,027

 

83,978

 

Net income

 

$

18,602

 

$

34,939

 

$

76,070

 

$

123,329

 

 

Net Interest Income and Margin

 

Net interest income is defined as the difference between interest earned, primarily on loans, federal funds sold, securities purchased under agreement to resell 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 nine months ended September 30, 2001 and 2000, respectively.

 


AVERAGE BALANCES, RATES AND YIELDS

 

 

 

For the three months ended September 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)

 

$

 323,628

 

$

 2,987

 

3.7

%

$

 1,500,532

 

$

24,930

 

6.6

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

1,454,370

 

18,004

 

4.9

 

1,830,899

 

28,204

 

6.1

 

Non-taxable (2)

 

326,064

 

4,417

 

5.4

 

169,207

 

2,817

 

6.6

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

1,439,677

 

40,719

 

11.2

 

1,379,895

 

42,912

 

12.4

 

Real estate construction and term

 

65,750

 

1,711

 

10.3

 

116,694

 

3,025

 

10.3

 

Consumer and other

 

119,338

 

2,153

 

7.2

 

72,509

 

1,806

 

9.9

 

Total loans

 

1,624,765

 

44,583

 

10.9

 

1,569,098

 

47,743

 

12.1

 

Total interest-earning assets

 

3,728,867

 

69,991

 

7.4

 

5,069,736

 

103,694

 

8.1

 

Cash and due from banks

 

262,485

 

 

 

 

 

258,205

 

 

 

 

 

Allowance for loan losses

 

(75,825

)

 

 

 

 

(75,887

 

 

 

 

Goodwill

 

3,112

 

 

 

 

 

-

 

 

 

 

 

Other assets

 

175,901

 

 

 

 

 

155,065

 

 

 

 

 

Total assets

 

$

4,094,540

 

 

 

 

 

$

5,407,119

 

 

 

 

 

Funding Sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW deposits

 

$

34,811

 

83

 

0.9

 

$

62,223

 

185

 

1.2

 

Regular money market deposits

 

252,331

 

631

 

1.0

 

359,571

 

1,657

 

1.8

 

Bonus money market deposits

 

659,974

 

1,650

 

1.0

 

1,275,729

 

6,222

 

1.9

 

Time deposits

 

779,910

 

6,188

 

3.1

 

664,168

 

6,878

 

4.1

 

Short-term borrowings

 

1,335

 

-

 

-

 

-

 

-

 

-

 

Long-term debt

 

831

 

-

 

-

 

-

 

-

 

-

 

Total interest-bearing liabilities

 

1,729,192

 

8,552

 

2.0

 

2,361,691

 

14,942

 

2.5

 

Portion of noninterest-bearing funding sources

 

1,999,675

 

 

 

 

 

2,708,045

 

 

   

 

   

Total funding sources

 

3,728,867

 

8,552

 

0.9

 

5,069,736

 

14,942

 

1.2

 

Noninterest-Bearing Funding Sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

1,595,746

 

 

 

 

 

2,399,315

 

 

 

 

 

Other liabilities

 

34,756

 

 

 

 

 

87,762

 

 

 

 

 

Trust preferred securities (3)

 

38,617

 

 

 

 

 

38,565

 

 

 

 

 

Minority interest

 

30,957

 

 

 

 

 

5,218

 

 

 

 

 

Stockholders’ equity

 

665,272

 

 

 

 

 

514,568

 

 

 

 

 

Portion used to fund interest-earning assets

 

(1,999,675

)

 

 

 

 

(2,708,045

)

 

   

 

   

Total liabilities, minority interest and stockholders’ equity

 

$

 4,094,540

 

 

   

 

   

$

 5,407,119

   

 

   

 

   

Net interest income and margin

 

 

 

$

61,439

 

6.5

%

 

 

$

88,752

 

7.0

%

Total deposits

 

$

3,322,772

 

 

 

 

 

$

4,761,006

 

 

 

 

 

 


(1)   Includes average interest-bearing deposits in other financial institutions of $535 thousand and $547 thousand for the three months ended September 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 $1,546 thousand and $986 thousand for the three months ended September 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 nine months ended September 30,

 

 

 

2001

 

2000

 

 

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

Average

 

 

 

Yield/

 

Averag

 

 

 

Yield/

 

(Dollars in thousands)

 

Balance

 

Interest

 

Rate

 

Balance

 

Interest

 

Rate

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and securities purchased under agreement to resell (1)

 

$

 669,414

 

$

 25,218

 

5.0

%

$

 1,272,057

 

$

 59,830

 

6.3

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

1,546,375

 

63,557

 

5.5

 

1,739,759

 

78,607

 

6.0

 

Non-taxable (2)

 

290,764

 

12,844

 

5.9

 

160,193

 

7,828

 

6.5

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

1,457,273

 

131,713

 

12.1

 

1,385,003

 

124,075

 

12.0

 

Real estate construction and term

 

84,169

 

7,011

 

11.1

 

125,781

 

9,877

 

10.5

 

Consumer and other

 

109,523

 

6,381

 

7.8

 

71,458

 

5,173

 

9.7

 

Total loans

 

1,650,965

 

145,105

 

11.8

 

1,582,242

 

139,125

 

11.7

 

Total interest-earning assets

 

4,157,518

 

246,724

 

7.9

 

4,754,251

 

285,390

 

8.0

 

Cash and due from banks

 

252,120

 

 

 

 

 

265,673

 

 

 

 

 

Allowance for loan losses

 

(76,573

)

 

 

 

 

(73,771

 

 

 

 

Goodwill

 

1,049

 

 

 

 

 

-

 

 

 

 

 

Other assets

 

188,181

 

 

 

 

 

156,144

 

 

 

 

 

Total assets

 

$

4,522,295

 

 

 

 

 

$

5,102,297

 

 

 

 

 

Funding Sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW deposits

 

$

45,571

 

308

 

0.9

 

$

57,710

 

629

 

1.5

 

Regular money market deposits

 

276,399

 

2,404

 

1.2

 

389,971

 

5,349

 

1.8

 

Bonus money market deposits

 

790,266

 

7,173

 

1.2

 

1,318,685

 

19,529

 

2.0

 

Time deposits

 

808,780

 

20,795

 

3.4

 

520,720

 

15,979

 

4.1

 

Short-term borrowings

 

450

 

-

 

-

 

-

 

-

 

-

 

Long-term debt

 

280

 

-

 

-

 

-

 

-

 

-

 

Total interest-bearing liabilities

 

1,921,746

 

30,680

 

2.1

 

2,287,086

 

41,486

 

2.4

 

Portion of noninterest-bearing funding sources

 

2,235,772

 

 

 

 

 

2,467,165

 

 

 

 

 

Total funding sources

 

4,157,518

 

30,680

 

1.0

 

4,754,251

 

41,486

 

1.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-Bearing Funding Sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

1,821,208

 

 

 

 

 

2,247,421

 

 

 

 

 

Other liabilities

 

54,155

 

 

 

 

 

87,490

 

 

 

 

 

Trust preferred securities (3)

 

38,604

 

 

 

 

 

38,552

 

 

 

 

 

Minority interest

 

30,566

 

 

 

 

 

1,752

 

 

 

 

 

Stockholders’ equity

 

656,016

 

 

 

 

 

439,996

 

 

 

 

 

Portion used to fund interest-earning assets

 

(2,235,772

)

 

 

 

   

(2,467,165

)

 

   

 

   

Total liabilities, minority interest and stockholders’ equity

 

$

 4,522,295

   

 

   

 

   

$

 5,102,297

   

 

   

 

   

Net interest income and margin

 

 

 

$

216,044

 

6.9

%

 

 

$

243,904

 

6.9

%

Total deposits

 

$

3,742,224

 

 

 

 

 

$

4,534,507

 

 

 

 

 

 


(1)   Includes average interest-bearing deposits in other financial institutions of $534 thousand and $485 thousand for the nine months ended September 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 $4,496 thousand and $2,740 thousand for the nine months ended September 30, 2001 and 2000, respectively.

(3)   The 8.25% annual distributions 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 September 30,

 

Nine Months Ended September 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

 

$

(13,988

)

$

(7,955

)

$

(21,943

)

$

(24,399

)

$

(10,213

)

$

(34,612

)

Investment securities

 

(2,975

)

(5,625

)

(8,600

)

(2,512

)

(7,522

)

(10,034

)

Loans

 

1,688

 

(4,848

)

(3,160

)

5,914

 

66

 

5,980

 

Decrease in interest income

 

(15,275

)

(18,428

)

(33,703

)

(20,997

)

(17,669

)

(38,666

)

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW deposits

 

(70

)

(32

)

(102

)

(115

)

(206

)

(321

)

Regular money market deposits

 

(404

)

(622

)

(1,026

)

(1,306

)

(1,639

)

(2,945

)

Bonus money market deposits

 

(2,272

)

(2,300

)

(4,572

)

(6,289

)

(6,067

)

(12,356

)

Time deposits

 

1,089

 

(1,779

)

(690

)

7,717

 

(2,901

)

4,816

 

Decrease in interest expense

 

(1,657

)

(4,733

)

(6,390

)

7

 

(10,813

)

(10,806

)

Decrease in net interest income

 

$

(13,618

)

$

(13,695

)

$

(27,313

)

$

(21,004

)

$

(6,856

)

$

(27,860

)

 

Net interest income, on a fully taxable-equivalent basis, totaled $61.4 million for the third quarter of 2001, a decrease of $27.3 million, or 30.8%, from the $88.8 million total for the third quarter of 2000. The decrease in net interest income was the result of a $33.7 million, or 32.5%, decline in interest income, offset by a $6.4 million, or 42.8%, decrease in interest expense over the comparable prior year period.

 

The $33.7 million decrease in interest income for the third quarter of 2001, as compared to the third quarter of 2000, was the result of a $15.3 million unfavorable volume variance and a $18.4 million unfavorable rate variance. The unfavorable volume variance resulted from a $1.3 billion, or 26.4%, decrease in average interest-earning assets over the comparable prior year period. The decrease in average interest-earning assets resulted primarily from a decline in client deposits, which decreased $1.4 billion, or 30.2%, compared to the third 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, which decreased $1.2 billion and investment securities, which decreased $219.7 million.

 

Average loans increased $55.7 million, or 3.5%, in the 2001 third quarter as compared to the 2000 third quarter, resulting in a $1.7 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 third quarter of 2001 decreased $219.7 million, or 11.0%, as compared to the 2000 third quarter, resulting in a $3.0 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 $1.2 billion or 78.4%, in the third quarter of 2001 over the prior year third quarter, resulting in a $14.0 million unfavorable volume variance. This decrease was also 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 $18.4 million in the third 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 nine months of 2001. As a result of this decrease, we earned lower yields during the third 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 $13.6 million unfavorable rate variance as compared to the prior year. In the 2001 third quarter, we incurred a $4.8 million unfavorable rate variance associated with our loan portfolio . The average yield on loans decreased 120 basis points to 10.9% in third quarter 2001 from 12.1% in the respective prior year third quarter due to decreases in the overall short-term market interest rates .

 

The yield on average interest-earning assets decreased 70 basis points in the third 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 each component of our interest-earning assets.

 

Total interest expense in the 2001 third quarter decreased $6.4 million from the third quarter of 2000. This decrease was due to a favorable rate variance of $4.7 million, combined with a favorable volume variance of $1.7 million. The favorable rate variance largely resulted from a reduction in the average rate paid on our bonus money market deposit from 1.9% to 1.0% and on our time deposit products from 4.1% to 3.1%. The favorable rate variances were due to a reduction in short-term market interest rates.

 

The average cost of funds paid in the third quarter of 2001 was 0.9%, down from the 1.2% paid in the third quarter of 2000. The decrease in the average cost of funds was largely due to a decrease of 90 basis points in the average rate paid on our bonus money market deposit product, and a decrease of 100 basis points in the average rate paid on our time deposits.

 

Net interest income, on a fully taxable-equivalent basis, totaled $216.0 million for the first nine months of 2001, a decrease of $27.9 million, or 11.4%, from the $243.9 million total for the first nine months of 2000. The decrease in net interest income was the result of a $38.7 million, or 13.5%, decrease in interest income, partially offset by a $10.8 million, or 26.0%, decrease in interest expense over the comparable prior year period.

 

The $38.7 million decrease in interest income for the first nine months of 2001, as compared to the first nine months of 2000, was the result of a $21.0 million unfavorable volume variance and a $17.7 million unfavorable rate variance. The unfavorable volume variance resulted from a $596.7 million, or 12.6%, 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 $665.5 million.

 


Average loans increased $68.7 million, or 4.3%, in the first nine months of 2001 as compared to the comparative prior year period, resulting in a $5.9 million favorable volume variance. This loan growth was primarily due to the current slowdown in our clients’ capital markets and venture capital funding.

 

The yield on average interest-earning assets decreased 10 basis points in the first nine months 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 each component of our interest-earning assets.

 

Total interest expense in the first nine months of 2001 decreased $10.8 million from the first nine months of 2000. This decrease was due to a favorable rate variance of $10.8 million. The favorable rate variance largely resulted from a reduction in the average rate paid on our bonus money market deposit products from 2.0% to 1.2% and a reduction on the average rates paid on our time deposit products from 4.1% to 3.4%.

 

The average cost of funds paid in the first nine months of 2001 was 1.0%, down from the 1.2% paid in the first nine months of 2000. The decrease in the average cost of funds was largely due to a decrease of 80 basis points in the average rate paid on our bonus money market deposit product and a decrease of 70 basis points paid on our time deposits.

 

Provision For Loan Losses

 

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

 

Our provision for loan losses totaled $5.9 million for the third quarter of 2001, a $16.8 million, or 74.0%, decrease compared to the $22.7 million provision for the third quarter of 2000. The provision for loan losses decreased $29.6 million, or 63.9%, to a total of $16.7 million for the first nine months of 2001 versus $46.3 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 nine months ended September 30, 2001 and 2000:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(Dollars in thousands)

 

2001

 

2000

 

2001

 

2000

 

Client investment fees

 

$

10,699

 

$

9,324

 

$

31,735

 

$

23,180

 

Letter of credit and foreign exchange income

 

2,709

 

5,239

 

10,169

 

13,565

 

Disposition of client warrants

 

350

 

21,189

 

6,855

 

77,299

 

Deposit service charges

 

1,550

 

900

 

4,296

 

2,482

 

Investment (losses) gains

 

(2,365

)

3,817

 

(3,949

)

35,950

 

Other

 

4,043

 

2,589

 

9,974

 

6,311

 

Total noninterest income

 

$

16,986