SVB Financial Group
SILICON VALLEY BANCSHARES (Form: 10-Q, Received: 08/13/2002 16:23:06)

As filed with the Securities and Exchange Commission on August 13, 2002

 

 

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, 2002

 

OR

 

o

 

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

 

 

For the transition period from                 to                .

 

Commission File Number: 33-41102


 

SILICON VALLEY BANCSHARES

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

 

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 July 31, 2002, 44,442,132 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

 

2



 

PART I - FINANCIAL INFORMATION

 

ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

SILICON VALLEY BANCSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except par value)

 

June 30,
2002

 

December 31,
2001

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

Cash and due from banks

 

$

231,247

 

$

228,318

 

Federal funds sold and securities purchased under agreement to resell

 

154,869

 

212,214

 

Investment securities

 

1,460,659

 

1,833,162

 

Loans, net of unearned income

 

1,868,877

 

1,767,038

 

Allowance for loan losses

 

(76,000

)

(72,375

)

Net loans

 

1,792,877

 

1,694,663

 

Premises and equipment

 

20,495

 

21,719

 

Goodwill

 

98,638

 

96,380

 

Accrued interest receivable and other assets

 

72,985

 

85,621

 

Total assets

 

$

3,831,770

 

$

4,172,077

 

 

 

 

 

 

 

Liabilities, Minority Interest, and Stockholders’ Equity:

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing demand

 

$

1,533,009

 

$

1,737,663

 

NOW

 

50,683

 

25,401

 

Money market

 

792,089

 

894,949

 

Time

 

617,398

 

722,964

 

Total deposits

 

2,993,179

 

3,380,977

 

Short-term borrowings

 

41,734

 

41,203

 

Other liabilities

 

42,573

 

29,781

 

Long-term debt

 

26,105

 

25,685

 

Total liabilities

 

3,103,591

 

3,477,646

 

 

 

 

 

 

 

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

 

38,780

 

38,641

 

Minority interest

 

30,556

 

28,275

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.001 par value, 20,000,000 shares authorized; none outstanding

 

 

 

 

 

Common stock, $0.001 par value, 150,000,000 shares authorized; 45,654,069 and 45,390,007 shares outstanding at June 30, 2002 and December 31, 2001, respectively

 

46

 

45

 

Additional paid-in capital

 

196,387

 

196,143

 

Retained earnings

 

451,597

 

423,252

 

Unearned compensation

 

(1,062

)

(1,600

)

Accumulated other comprehensive income:

 

 

 

 

 

Net unrealized gains on available-for-sale investments

 

11,875

 

9,675

 

Total stockholders’ equity

 

658,843

 

627,515

 

Total liabilities, minority interest, and stockholders’ equity

 

$

3,831,770

 

$

4,172,077

 

 

See notes to interim consolidated financial statements.

 

3



 

SILICON VALLEY BANCSHARES AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF INCOME

 

 

 

For the three months ended

 

For the six months ended

 

(Dollars in thousands, except per share amounts)

 

June 30,
2002

 

June 30,
2001

 

June 30,
2002

 

June 30,
2001

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans

 

$

39,652

 

$

49,617

 

$

77,977

 

$

100,522

 

Investment securities

 

13,468

 

22,850

 

29,283

 

51,030

 

Federal funds sold and securities purchased under agreement to resell

 

591

 

6,856

 

836

 

22,231

 

Total interest income

 

53,711

 

79,323

 

108,096

 

173,783

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

4,162

 

9,404

 

9,060

 

22,128

 

Other borrowings

 

476

 

 

961

 

 

Total Interest Expense

 

4,638

 

9,404

 

10,021

 

22,128

 

Net interest income

 

49,073

 

69,919

 

98,075

 

151,655

 

Provision for loan losses

 

(3,207

)

5,931

 

219

 

10,834

 

Net interest income after provision for loan losses

 

52,280

 

63,988

 

97,856

 

140,821

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Client investment fees

 

7,774

 

9,246

 

16,412

 

21,036

 

Corporate finance fees

 

4,424

 

679

 

7,386

 

949

 

Letter of credit and foreign exchange income

 

3,575

 

2,914

 

7,352

 

7,460

 

Deposit service charges

 

2,294

 

1,924

 

4,530

 

2,746

 

Disposition of client warrants

 

681

 

2,427

 

807

 

6,505

 

Investment losses

 

(2,001

)

(1,248

)

(4,598

)

(1,584

)

Other

 

2,107

 

2,277

 

3,866

 

4,982

 

Total noninterest income

 

18,854

 

18,219

 

35,755

 

42,094

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

28,821

 

22,034

 

53,749

 

44,866

 

Net occupancy

 

6,433

 

3,870

 

10,951

 

7,593

 

Professional services

 

4,367

 

6,113

 

7,403

 

11,653

 

Business development and travel

 

1,933

 

2,419

 

4,056

 

5,393

 

Furniture and equipment

 

1,571

 

2,774

 

3,667

 

5,185

 

Telephone

 

701

 

1,061

 

1,602

 

1,919

 

Postage and supplies

 

792

 

844

 

1,575

 

1,857

 

Trust preferred securities distributions

 

746

 

825

 

1,571

 

1,650

 

Advertising and promotion

 

65

 

809

 

640

 

1,837

 

Retention and warrant incentive plans

 

5

 

418

 

5

 

818

 

Other

 

3,584

 

3,505

 

7,117

 

8,054

 

Total noninterest expense

 

49,018

 

44,672

 

92,336

 

90,825

 

Minority interest

 

1,397

 

713

 

3,237

 

1,216

 

Income before income tax expense

 

23,513

 

38,248

 

44,512

 

93,306

 

Income tax expense

 

8,528

 

14,116

 

16,167

 

35,838

 

Net income

 

$

14,985

 

$

24,132

 

$

28,345

 

$

57,468

 

Basic earnings per share

 

$

0.33

 

$

0.50

 

$

0.63

 

$

1.18

 

Diluted earnings per share

 

$

0.32

 

$

0.48

 

$

0.61

 

$

1.14

 

 

See notes to interim consolidated financial statements.

 

4



 

SILICON VALLEY BANCSHARES AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

For the three months ended

 

For the six months ended

 

(Dollars in thousands)

 

June 30,
2002

 

June 30,
2001

 

June 30,
2002

 

June 30,
2001

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

14,985

 

$

24,132

 

$

28,345

 

$

57,468

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses)

 

5,546

 

(1,526

)

2,714

 

5,997

 

Reclassification adjustment for gains included in net income

 

(434

)

(744

)

(514

)

(3,031

)

Other comprehensive income (loss)

 

5,112

 

(2,270

)

2,200

 

2,966

 

Comprehensive income

 

$

20,097

 

$

21,862

 

$

30,545

 

$

60,434

 

 

See notes to interim consolidated financial statements.

 

5



 

SILICON VALLEY BANCSHARES AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

For the six months ended

 

(Dollars in thousands)

 

June 30,
2002

 

June 30,
2001

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

28,345

 

$

57,468

 

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

 

 

 

 

 

Provision for loan losses

 

219

 

10,834

 

Minority interest

 

(3,237

)

(1,216

)

Depreciation and amortization

 

3,512

 

2,850

 

Net loss on available for sale securities

 

4,598

 

1,584

 

Net gains on disposition of client warrants

 

(807

)

(6,505

)

Decrease in accrued interest receivable

 

4,752

 

12,985

 

Decrease in inventory

 

 

9,969

 

Decrease (increase) in prepaid expenses

 

357

 

(982

)

Decrease in taxes receivable

 

12,578

 

15,566

 

Increase in unearned income

 

(56

)

(3,186

)

Increase (decrease) in accrued retention, warrant, and other incentive plans

 

4,081

 

(30,618

)

Other, net

 

2,498

 

(200

)

Net cash provided by operating activities

 

56,840

 

68,549

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from maturities and paydowns of investment securities

 

1,622,094

 

945,951

 

Proceeds from sales of investment securities

 

23,818

 

7,966

 

Purchases of investment securities

 

(1,273,114

)

(692,271

)

Net increase in loans

 

(116,572

)

(31,267

)

Proceeds from recoveries of charged-off loans

 

18,195

 

10,738

 

Purchases of premises and equipment

 

(2,288

)

(7,186

)

Net cash provided by investing activities

 

272,133

 

233,931

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net decrease in deposits

 

(387,798

)

(1,211,981

)

Proceeds from issuance of common stock, net of issuance costs

 

7,172

 

8,301

 

Repurchase of common stock

 

(8,281

)

(29,975

)

Capital contributions from minority interest participants

 

5,518

 

875

 

Net cash used by financing activities

 

(383,389

)

(1,232,780

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(54,416

)

(930,300

)

Cash and cash equivalents at January 1,

 

440,532

 

1,722,366

 

Cash and cash equivalents at June 30,

 

$

386,116

 

$

792,066

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

Interest paid

 

$

10,441

 

$

22,061

 

Income taxes paid

 

$

1,304

 

$

32,784

 

 

See notes to interim consolidated financial statements.

 

6



 

SILICON VALLEY BANCSHARES AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

1.  Significant Accounting Policies

 

The accounting and reporting policies of Silicon Valley Bancshares and its subsidiaries (the “Company”) conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.  Certain reclassifications have been made to the Company’s 2001 interim Consolidated Financial Statements to conform to the 2002 presentations. Such reclassifications had no effect on the results of operations or stockholders’ equity. The following is a summary of the significant accounting and reporting policies used in preparing the interim Consolidated Financial Statements.

 

Nature of Operations

 

Silicon Valley Bancshares is a bank holding company and a financial holding company whose principal subsidiary is Silicon Valley Bank (the “Bank”), a California-chartered bank with headquarters in Santa Clara, California. The Bank has 11 offices throughout California and operates regional offices across the country, including Arizona, Colorado, Florida, Georgia, Illinois, Massachusetts, Minnesota, New York, North Carolina, Oregon, Pennsylvania, Texas, Virginia, and Washington. The Bank serves emerging growth and middle-market companies in targeted niches, focusing on technology and life sciences, 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.  Additionally, the Bank provides merger and acquisition services through its wholly-owned subsidiary, Alliant Partners (“Alliant”.)

 

Consolidation

 

The interim Consolidated Financial Statements include the accounts of Silicon Valley Bancshares and those of its wholly-owned subsidiaries.  Intercompany accounts and transactions have been eliminated in consolidation. SVB Strategic Investors, LLC and Silicon Valley BancVentures, Inc., as general partners, are considered to have significant influence over the operating and financing policies of SVB Strategic Investors Fund, L.P. and Silicon Valley BancVentures, L.P., respectively. Therefore, SVB Strategic Investors Fund, L.P. and Silicon Valley BancVentures, L.P. are included in the Company’s interim 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, 2002, the interim results of its operations for the three and six months ended June 30, 2002 and June 30, 2001, and interim cash flow for the six months ended June 30, 2002 and June 30, 2001. The December 31, 2001, Consolidated Balance Sheet was derived from audited financial statements, and certain information and footnote disclosures normally presented in annual financial statements prepared in accordance

 

7



 

with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry 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 2001 Annual Report on Form 10-K filed with the SEC on March 19, 2002. The results of operations for the three and six months ended June 30, 2002, 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 and prevailing practices within the banking industry, 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 $0 and $2.9 million at June 30, 2002 and December 31, 2001, respectively.

 

Investment Securities

 

Investment securities are classified as either “available-for-sale,” “held-to-maturity,” “trading,” or “non-marketable” upon acquisition. Securities that are held to meet investment objectives such as interest rate risk and liquidity management, but which may be sold by the Company as needed to implement management strategies, are classified as available-for-sale and are accounted for at fair value. Unrealized gains and losses on available-for-sale securities, after applicable taxes, are excluded from earnings and are reported in accumulated other comprehensive income, which is a separate component of stockholders’ equity, until realized.

 

Securities acquired with the ability and positive intent to hold to maturity are classified as held-to-maturity and are accounted for at historical cost, adjusted for the amortization of premiums or the accretion of discounts to maturity, where appropriate. Unrealized losses on held-to-maturity securities become realized and are charged against earnings when it is determined that an other-than-temporary decline in value has occurred. The Company has not classified any investments as held-to-maturity as of June 30, 2002 and December 31, 2001.

 

8



 

The amortization of premiums and the accretion of discounts are included in interest income over the contractual terms of the underlying investment securities using the interest method or the straight-line method, if not materially different. Gains and losses realized upon the sale of investment securities are computed on the specific identification method.

 

Securities acquired and held principally for the purpose of sale in the near term are classified as trading and are accounted for at fair value. Unrealized gains and losses resulting from fair value adjustments on trading securities, as well as gains and losses realized upon the sale of investment securities, are included in noninterest income. The Company has not classified any investments as trading as of June 30, 2002 and December 31, 2001.

 

Unrealized gains or losses on warrant securities, venture capital fund investments or other private equity investments are recorded upon the establishment of a readily determinable fair value of the underlying security. The Company records non-marketable warrant securities, venture capital fund investments and other private equity investments, on a cost basis less any identified impairment. The asset value of non-marketable equity securities is reduced when declines in value are considered to be other than temporary. Any estimated loss is recorded in noninterest income as a loss from equity securities along with income recognized on similar assets, if any.

 

Venture capital fund limited partner investment interests are reported under the cost method, as the Company’s interests are considered minor, in that we own less than 5%, and have no influence over the related venture capital fund’s operating and financial policies. The Company’s cost in these venture capital fund investments is reduced by distributions until fully recovered. Distributions in excess of the venture capital fund limited partner investment cost basis are recognized as investment gains in noninterest income.

 

Investments held by Silicon Valley BancVentures, L.P. are recorded using investment accounting rules and consist of stock in private companies that are not traded in a public market and are subject to restrictions on resale. These investments are carried at estimated fair value determined by the general partner after giving consideration to operating results, financial conditions, recent sales, prices of issuers’ securities and other pertinent information. The general partner, Silicon Valley BancVentures, Inc. is controlled by Silicon Valley Bancshares. Any gains or losses resulting from changes in the estimated fair value of the investments are recorded as investment gains or losses on the Company’s consolidated statements of income. Because of the inherent uncertainty of valuations, however, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Silicon Valley BancVentures, L.P. may also have risk associated with its concentration of investments in certain geographic areas and certain industries.

 

The investments in limited partnerships, held by SVB Strategic Investors Fund, L.P., are recorded using investment accounting rules, calculated as the percentage of its interest in the total fair market value of the partnerships. These partnerships are venture capital partnerships that hold investments in publicly traded securities. These stocks may be subject to selling restrictions and limitations or held in escrow. These stocks were valued by the general partners of these partnerships and may be discounted from market prices. These venture capital partnerships also hold investments which are not currently traded in a pubic market and are subject to restrictions

 

9



 

on resale. These investments are carried by the venture capital partnerships at estimated fair value as determined by the general partner after giving consideration to operating results, financial conditions, recent sales, prices of issuers’ securities, and other pertinent information. Any gains or losses resulting from changes in the estimated fair value of the investments are recorded as investment gains or losses on the Company’s consolidated statements of income. The general partner of SVB Strategic Investors Fund, L.P., SVB Strategic Investors, LLC is controlled by Silicon Valley Bancshares. SVB Strategic Investors, LLC generally utilizes the valuations assigned to the venture capital fund investments by their general partners. Because of the uncertainty of valuations, however, these estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. The partnerships may also have risk associated with its concentration of investments in certain geographic areas and certain industries.

 

Silicon Valley BancVentures, Inc., Silicon Valley BancVentures, L.P., SVB Strategic Investors, LLC, and SVB Strategic Investors Fund, L.P. are included in the Company’s interim consolidated financial statements. Silicon Valley BancVentures, Inc., and SVB Strategic Investors, LLC own interests of 10.7% and 11.0% in Silicon Valley BancVentures, L.P. and SVB Strategic Investors Fund, L.P., respectively.  The portion of any gains or losses on these funds attributable to the limited partnership interests is eliminated from the Company’s results and financial positions through minority interest.

 

Loans

 

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

 

Allowance for Loan Losses

 

The Company maintains a systematic process to evaluate individual loans for inherent risk of loan losses.  The process segregates risk of loan losses, primarily through an internal risk rating methodology. This evaluation includes, but is not limited to, such factors as payment status, the financial condition of the borrower, borrower compliance with loan covenants, underlying collateral values, potential loan concentrations, and general economic conditions.  The Company’s policy requires certain credit relationships, exceeding specific dollar values, be reviewed by a committee of senior management, at least quarterly. The Company’s review process evaluates the appropriateness of the risk rating and allowance for loan losses allocation, as well as, other account management functions.  In addition, Management receives and approves an analysis for all impaired loans, as defined by the Statement of Financial Accounting Standards (SFAS) No. 114 “Accounting by Creditors for Impairment of a Loan.” The allowance for loan losses is allocated based on a formula allocation for similarly risk-rated loans, or for specific risk issues, which suggest a probable loss factor exceeding the formula allocation for a specific loan, or for individual impaired loans as determined in accordance with SFAS No. 114. At Management’s discretion, judgmental allowance for loan losses may be established for loss expectations for specific lending industry sectors, for national or international economic conditions affecting the

 

10



 

loan portfolio, or for policy or personnel changes.  The judgmental allowance is not assigned to individual loans and may fluctuate, period to period, based on Management’s perception of changing risks in the lending environment.

 

Additions to the allowance for loan losses are made by charges to the provision for loan losses.  It is the Company’s policy to charge off loans that, in the judgment of Management, are deemed to have a substantial risk of loss.  Credit exposures deemed to be uncollectible are charged against the allowance for loan losses.  Recoveries of previously charged-off amounts are credited to the allowance for loan losses.

 

Our allowance for loan loss is established for loan losses not yet recognized. The process of anticipating loan losses is imprecise. Our allowance for loan losses is Management’s best estimate using the historical loan losses experience and Management’s perception of variables potentially leading to deviation from the historical loss experience.

 

Nonaccrual Loans

 

The Company is required to measure impairment of a loan based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company may measure impairment based on the loan’s observable market price or the fair value of the collateral if the loan is collateral-dependent. A loan is considered impaired when, based upon currently known information, it is deemed probable that the Company will be unable to collect all amounts due according to the contractual terms of the agreement.

 

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

 

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

 

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

 

11



 

of SFAS No. 123 and Financial Accounting Standards Board Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation.”

 

Derivative Financial Instruments

 

The Company accounts for derivative instruments in accordance with the provisions of  SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, and requires that all derivative instruments be recorded on the balance sheet at fair value. Additionally, the accounting for changes in fair value depends on whether the derivative instrument is designated and qualifies as part of a hedging relationship and, if so, the nature of the hedging activity. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of a particular hedge, must be recognized currently in earnings. The adoption of SFAS No. 133 did not result in a cumulative-type adjustment to net income or other comprehensive income. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period, unless the derivative instrument meets the definition of the short-cut treatment, as defined by SFAS No. 133. For derivative instruments that are designated and qualify as a cash flow hedge, changes in the fair value of the effective portion of the derivative instrument are recognized in Other Comprehensive Income (OCI). These amounts are reclassified from OCI and recognized in earnings when either the forecasted transaction occurs or it becomes probable that the forecasted transaction will not occur. The Company did not have any cash flow hedging instruments during the six months ended June 30, 2002.

 

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. SFAS No. 141 also specifies the criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately.  (See Note 2 to the interim Consolidated Financial Statements – Business Combination)

 

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

 

12



 

The Company’s only intangible asset is goodwill pertaining to the acquisition of Alliant, discussed in Note 2 – Business Combination. This acquisition was accounted for under SFAS No. 141.  In accordance with the provisions of SFAS 142, the goodwill balance was determined to be unamortizable.  As of the filing date of this report, the Company had completed its initial test for goodwill impairment.  The impairment analysis performed in July 2002 concluded that the goodwill was not impaired.

 

Recent Accounting Pronouncements

 

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

 

2.  Business Combination

 

On September 28, 2001, the Company completed its acquisition of Alliant. The acquisition will allow the Company to strengthen its investment banking platform for its clients. The Company agreed to purchase the assets of Alliant for a total of $100.0 million, due in several installments of cash and common stock. These installments are payable over four years between September 30, 2001 and September 30, 2005, subject to certain conditions being satisfied. In addition to the fixed purchase price, the sellers will receive certain contingent purchase price payments including 75% of the pre-tax income of Alliant for the twelve-month period ending September 28, 2002. Furthermore, the Company shall pay to the sellers an amount equal to fifteen times the amount by which Alliant’s cumulative after-tax net income from October 1, 2002 to September 30, 2005 exceeds $26,500,000, provided, however, that the aggregate amount of any deferred earnout payment payable shall not exceed $75,000,000. The Company shall also make retention payments aggregating $5,000,000 in equal annual installments on September 28, 2003, 2004 and 2005. The first payment of $30.0 million was paid in cash on September 28, 2001. The remaining $70.0 million was discounted at prevailing forward market interest rates ranging between 2.5% and 3.3% and recorded as debt on September 28, 2001. The purchase price has been allocated to the assets acquired and liabilities assumed based on the net estimated fair values at the date of acquisition of approximately $0.5 million. The excess of purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. The business combination was recorded in accordance with SFAS No. 141. (See Notes 1 and 7 to the interim Consolidated Financial Statements – Significant Accounting Policies and Borrowings)

 

13



 

3.  Earnings Per Share (EPS)

 

The following is a reconciliation of basic EPS to diluted EPS for the three and six months ended June 30, 2002 and 2001.

 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

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

 

Net
Income

 

Shares

 

Per Share
Amount

 

Net
Income

 

Shares

 

Per Share
Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2002:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders

 

$

14,985

 

45,389

 

$

0.33

 

$

28,345

 

45,283

 

$

0.63

 

Effect of Dilutive Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and restricted stock

 

 

1,586

 

 

 

1,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders plus assumed conversions

 

$

14,985

 

46,975

 

$

0.32

 

$

28,345

 

46,772

 

$

0.61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

14



 

4.  Investment Securities

 

The detailed composition of the Company’s available-for-sale and non-marketable investment securities is presented as follows:

 

(Dollars in thousands)

 

June 30,
2002

 

December 31,
2001

 

 

 

 

 

 

 

Available-for-sale securities, at fair value

 

$

1,369,712

 

$

1,760,942

 

Federal Reserve Bank stock and other

 

31,391

 

19,867

 

Venture capital fund investments

 

43,090

 

38,647

 

Private equity investments

 

16,466

 

13,706

 

Total investment securities

 

$

1,460,659

 

$

1,833,162

 

 

5.  Loans and Allowance for Loan Losses

 

The detailed composition of loans, net of unearned income of $12.0 million and $11.9 million, at June 30, 2002, and December 31, 2001, respectively, is presented in the following table:

 

(Dollars in thousands)

 

June 30,
2002

 

December 31,
2001

 

 

 

 

 

 

 

Commercial

 

$

1,616,330

 

$

1,536,845

 

Real estate construction

 

44,132

 

52,088

 

Real estate term

 

57,507

 

50,935

 

Consumer and other

 

150,908

 

127,170

 

Total loans

 

$

1,868,877

 

$

1,767,038

 

 

The activity in the allowance for loan losses for the three and six months ended June 30, 2002 and 2001 was as follows:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

(Dollars in thousands)

 

2002

 

2001

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

71,375

 

$

73,800

 

$

72,375

 

$

73,800

 

Provision for loan losses

 

(3,207

)

5,931

 

219

 

10,834

 

Loans charged off

 

(8,157

)

(9,026

)

(14,789

)

(21,372

)

Recoveries

 

15,989

 

3,295

 

18,195

 

10,738

 

Balance at June 30,

 

$

76,000

 

$

74,000

 

$

76,000

 

$

74,000

 

 

The aggregate recorded investment in loans for which impairment has been determined in accordance with SFAS No. 114 totaled $19.2 million and $24.3 million at June 30, 2002, and June 30, 2001, respectively. Allocations of the allowance for loan losses specific to impaired loans totaled $7.4 million at June 30, 2002, and $9.6 million at June 30, 2001. Average impaired loans for the second quarter of 2002 and 2001 totaled $21.2 million and $24.7 million, respectively.

 

15



 

6.  Goodwill

 

The goodwill balance at June 30, 2002 and December 31, 2001 was $98.6 million and $96.4 million, respectively.  The increase of $2.3 million related to certain contingent purchase price payments, which included 75% of the pre-tax income of Alliant for the six months ending June 30, 2002, pursuant to the terms of the acquisition agreement detailed in Note 2 to the interim Consolidated Financial Statements – Business Combination.

 

7.  Borrowings

 

As of June 30, 2002, the Company had $41.7 million and $26.1 million in short-term borrowings and long-term debt, respectively. These borrowings were recorded in relation to the acquisition of Alliant and are payable to the former owners, who are now employed by the Company. The short-term note payable, due September 28, 2002, has a face value of $42.0 million. The long-term note payable, due in three equal annual installments commencing September 28, 2003, has a face value of $28.0 million. These notes were discounted over their respective terms, based on market interest rates as of September 28, 2001.  (See Note 2 to the interim Consolidated Financial Statements – Business Combination)

 

8.  Derivative Financial Instrument

 

The Company is exposed to interest rate risk from client loans, interest-bearing client deposits, investments, and debt. On June 3, 2002, the Company entered into a derivative agreement with a notional amount of $40.0 million. The agreement hedges against the risk of changes in fair value associated with the Company’s $40.0 million, fixed rate, Trust Preferred Securities (see Item 8. - Note 12 to the Consolidated Financial Statements filed on Form 10-K with the Securities and Exchange Commission on March 19, 2002). Changes in the fair value of the derivative agreement and the Trust Preferred Securities are primarily dependent on changes in market interest rates.  The derivative instrument has a fair value of $0.1 million which was recorded in other assets at June 30, 2002.  Furthermore, the Company recorded an addition of $0.1 million to the Trust Preferred Securities, to reflect the increase in fair value of these instruments during the period the derivative contract was in force. The terms of the agreement provide for quarterly receipt of 8.25% fixed-rate and payment of London Inter-Bank Offer Rate (LIBOR) plus a spread, based on the $40.0 million notional amount.  The derivative agreement mirrors the terms of the Trust Preferred Securities and therefore is callable by the counter-party anytime after June 15, 2003.  The Company assumes no ineffectiveness as the interest rate swap agreement meets the short-cut method requirements under SFAS 133 for fair value hedges of debt instruments. As a result, changes in the fair value of the derivative agreement are offset by changes in the fair value of the Trust Preferred Securities, and no net gain or loss is recognized in earnings.

 

9.  Segment Reporting

 

Prior to January 1, 2002, the Company operated as one segment.  On January 1, 2002, the Bank reorganized into five lines of banking and financial services : Commercial Banking,  Merchant Banking, Private Banking, Mergers and Acquisitions Services, and Business Services. The Commercial Bank is the principal operating segment of the Company and represents more than

 

16



 

90% of the Company’s revenue. The remaining segments do not meet segment reporting criteria, therefore, separate reporting of financial segment information is not considered necessary. 2001 segment data has been reflected below based on the reorganized structure of the Company.

 

The Company’s reportable segments are strategic units that offer different services to different clients. They are managed separately because each segment appeals to different markets and, accordingly, requires different strategies.

 

Since the Company derives a significant portion of its revenue from net interest income, the Company’s segments are reported below using net interest income. The Company also evaluates performance based on noninterest income and noninterest expense goals, which are also presented as measures of segment profit and loss.  The Company does not allocate income taxes to the segments.

 

17



 

 

(Dollars in thousands)

 

Commercial
Banking

 

All
Others

 

Total

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

 

 

 

 

 

 

Second quarter of 2002

 

$

49,591

 

$

2,689

 

$

52,280

 

Second quarter of 2001

 

62,716

 

1,272

 

63,988

 

 

 

 

 

 

 

 

 

First half of 2002

 

92,913

 

4,943

 

97,856

 

First half of 2001

 

138,084

 

2,737

 

140,821

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

Second quarter of 2002

 

15,276

 

3,578

 

18,854

 

Second quarter of 2001

 

15,795

 

2,424

 

18,219

 

 

 

 

 

 

 

 

 

First half of 2002

 

30,959

 

4,796

 

35,755

 

First half of 2001

 

34,729

 

7,365

 

42,094

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

Second quarter of 2002

 

41,934

 

7,084

 

49,018

 

Second quarter of 2001

 

41,762

 

2,910

 

44,672

 

 

 

 

 

 

 

 

 

First half of 2002

 

79,204

 

13,132

 

92,336

 

First half of 2001

 

84,677

 

6,148

 

90,825

 

 

 

 

 

 

 

 

 

Minority interest

 

 

 

 

 

 

 

Second quarter of 2002

 

 

1,397

 

1,397

 

Second quarter of 2001

 

 

713

 

713

 

 

 

 

 

 

 

 

 

First half of 2002

 

 

3,237

 

3,237

 

First half of 2001

 

 

1,216

 

1,216

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

 

 

 

 

 

Second quarter of 2002

 

$

22,933

 

$

580

 

$

23,513

 

Second quarter of 2001

 

$

36,749

 

$

1,499

 

$

38,248

 

 

 

 

 

 

 

 

 

First half of 2002

 

$

44,668

 

$

(156

)

$

44,512

 

First half of 2001

 

$

88,136

 

$

5,170

 

$

93,306

 

 

 

 

 

 

 

 

 

Segment assets

 

 

 

 

 

 

 

Second quarter of 2002

 

$

3,259,913

 

$

571,857

 

$

3,831,770

 

Second quarter of 2001

 

4,255,264

 

167,497

 

4,422,761

 

 

18



 

10.  Common Stock Repurchase

 

The Company has repurchased approximately 272,500 shares of common stock totaling $8.3 million during 2002, in conjunction with the $50.0 million share repurchase program authorized by the Board of Directors on March 21, 2002.

 

During 2001, we completed the share repurchase program authorized by the Board of Directors on April 5, 2001, which resulted in the repurchase of 4.5 million shares of common stock for an aggregate purchase price of $99.9 million.

 

19



 

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 interim consolidated financial statements and supplementary data as presented in Part I - Item 1 of this report.

 

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

                  projections of our revenues, income, earnings per share, capital expenditures, capital structure or other financial items;

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

                  descriptions of products, services, and  industry sectors;

                  forecasts of future economic performance; and

                  descriptions of assumptions underlying or relating to any of the foregoing.

 

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

                  future earnings

                  future stock repurchases

                  future credit losses and nonperforming assets;

                  the future value of equity securities, including direct equity investments and those in our venture capital portfolios;

                  future changes  in short-term interest rates and their impact on our earnings;

                  future investments by venture capital funds in our clients;

                  future levels of noninterest expense;

                  future performance of our private label investment products; and

                  future investment banking revenues.

 

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

 

20



 

For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see the text under the caption “Risk Factors” included in Item 7, page 42, of our annual report on Form 10-K dated March 19, 2002. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this discussion and analysis. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this filing are made only as of the date of this filing. We do not intend, and undertake no obligation, to update these forward-looking statements.

 

Certain reclassifications have been made to prior years results to conform with 2002 presentations. Such reclassifications had no effect on our results of operations or stockholders’ equity.

 

Critical Accounting Policies

 

Our critical accounting policies relate to our marketable and non-marketable warrant, equity and venture capital fund investment securities and our allowance for loan losses.  These policies are included in Item 7 of our Report on Form 10-K dated March 19, 2002.

 

Earnings Summary

 

We reported net income of $15.0 million, or $0.32 per diluted share, for the second quarter of 2002, compared with net income of $24.1 million, or $0.48 per diluted share, for the second quarter of 2001.  Net income totaled $28.3 million, or $0.61 per diluted share, for the six months ended June 30, 2002, versus $57.5 million, or $1.14 per diluted share, for the respective 2001 period.  The annualized return on average assets (ROA) was 1.6% in the second quarter of 2002 compared with 2.2% in the second quarter of 2001. The annualized return on average equity (ROE) for the second quarter of 2002 was 9.3%, compared with 14.6% in the second quarter of 2001.  For the first six months of 2002, ROA was 1.5% and ROE was 8.9% versus 2.4% and 17.8%, respectively, for the comparable prior year period.

 

The decrease in net income for the second quarter of 2002, as compared with the second quarter of 2001, primarily resulted from a decline in net interest income, and an increase in noninterest expense, partially offset by a decrease in the provision for loan losses.  The decrease in net income for the six months ended June 30, 2002, as compared to the six months ended June 30, 2001, resulted primarily from a decline in both net interest income and noninterest income, which was partially offset by a decrease in the provision for loan losses. The decrease in net interest income was caused by a 200 basis points decline in the prime rate from 6.75% at June 30, 2001, to 4.75% at June 30, 2002.  Moreover, we experienced a decrease in our clients’ deposits, which lowered our investable funds.  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, 2002 and 2001, and are discussed in more detail below.

 

21



 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

(Dollars in thousands)

 

2002

 

2001

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

49,073

 

$

69,919

 

$

98,075

 

$

151,655

 

Provision for loan losses

 

(3,207

)

5,931

 

219

 

10,834

 

Noninterest income

 

18,854

 

18,219

 

35,755

 

42,094

 

Noninterest expense

 

49,018

 

44,672

 

92,336

 

90,825

 

Minority interest

 

1,397

 

713

 

3,237

 

1,216

 

Income before income taxes

 

23,513

 

38,248

 

44,512

 

93,306

 

Income tax expense

 

8,528

 

14,116

 

16,167

 

35,838

 

Net income

 

$

14,985

 

$

24,132

 

$

28,345

 

$

57,468

 

 

Net Interest Income and Margin

 

Net interest income is defined as the difference between interest earned on loans, investment securities, federal funds sold, securities purchased under agreement to resell, and interest paid on funding sources, primarily deposits. Net interest income is our principal source of recurring revenue. Net interest margin is defined as the amount of net interest income, on a fully taxable-equivalent basis, expressed as a percentage of average interest-earning assets. The average yield earned on interest-earning assets is the amount of taxable-equivalent interest income expressed as a percentage of average interest-earning assets. The average rate paid on funding sources is defined as interest expense as a percentage of average interest-earning assets.

 

The following table sets forth average assets, liabilities, minority interest, stockholders’ equity, interest income on a fully taxable-equivalent basis, interest expense, average yields and rates, and the composition of our net interest margin for the three and six months ended June 30, 2002 and 2001, respectively.

 

22



 

AVERAGE BALANCES, RATES AND YIELDS

 

 

 

For the three months ended June 30,

 

 

 

2002

 

2001

 

(Dollars in thousands)

 

Average
Balance

 

Interest

 

Average
Yield/
Rate

 

Average
Balance

 

Interest

 

Average
Yield/
Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

122,718

 

$

591

 

1.9

%

$

600,415

 

$

6,856

 

4.6

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

1,438,209

 

11,752

 

3.3

 

1,459,840

 

19,612

 

5.4

 

Non-taxable (2)

 

172,165

 

2,640

 

6.2

 

338,137

 

4,982

 

5.9

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

1,477,767

 

35,983

 

9.8

 

1,466,714

 

45,013

 

12.3

 

Real estate construction and term

 

104,657

 

1,931

 

7.4

 

83,992

 

2,499

 

11.9

 

Consumer and other

 

142,890

 

1,738

 

4.9

 

112,893

 

2,105

 

7.5

 

Total loans

 

1,725,314

 

39,652

 

9.2

 

1,663,599

 

49,617

 

12.0

 

Total interest-earning assets

 

3,458,406

 

54,635

 

6.3

 

4,061,991

 

81,067

 

8.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

185,545

 

 

 

 

 

259,684

 

 

 

 

 

Allowance for loan losses

 

(73,641

)

 

 

 

 

(75,675

)

 

 

 

 

Goodwill

 

97,365

 

 

 

 

 

 

 

 

 

 

Other assets

 

185,860

 

 

 

 

 

195,111

 

 

 

 

 

Total assets

 

$

3,853,535

 

 

 

 

 

$

4,441,111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funding Sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW deposits

 

$

40,836

 

60

 

0.6

 

$

43,778

 

97

 

0.9

 

Regular money market deposits

 

289,130

 

713

 

1.0

 

259,021

 

640

 

1.0

 

Bonus money market deposits

 

611,219

 

1,528

 

1.0

 

757,031

 

1,878

 

1.0

 

Time deposits

 

608,726

 

1,861

 

1.2

 

813,328

 

6,789

 

3.3

 

Short-term borrowings

 

41,570

 

266

 

2.6

 

 

 

 

Long-term debt

 

25,975

 

210

 

3.2

 

 

 

 

Total interest-bearing liabilities

 

1,617,456

 

4,638

 

1.2

 

1,873,158

 

9,404

 

2.0

 

Portion of noninterest-bearing funding sources

 

1,840,950

 

 

 

 

 

2,188,833

 

 

 

 

 

Total funding sources

 

3,458,406

 

4,638

 

0.5

 

4,061,991

 

9,404

 

0.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-Bearing Funding Sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

1,480,929

 

 

 

 

 

1,772,616

 

 

 

 

 

Other liabilities

 

39,305

 

 

 

 

 

62,043

 

 

 

 

 

Trust preferred securities (3)

 

38,657

 

 

 

 

 

38,604

 

 

 

 

 

Minority interest

 

27,821

 

 

 

 

 

30,205

 

 

 

 

 

Stockholders’ equity

 

649,367

 

 

 

 

 

664,485

 

 

 

 

 

Portion used to fund interest-earning assets

 

(1,840,950

)

 

 

 

 

(2,188,833

)

 

 

 

 

Total liabilities, minority interest, and stockholders’ equity

 

$

3,853,535

 

 

 

 

 

$

4,441,111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and margin

 

 

 

$

49,997

 

5.8

%

 

 

$

71,663

 

7.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

3,030,840

 

 

 

 

 

$

3,645,774

 

 

 

 

 

 


(1)                Includes average interest-bearing deposits in other financial institutions of $0 and $534 for the three months ended June 30, 2002 and 2001, respectively.

(2)                Interest income on non-taxable investments is presented on a fully taxable-equivalent basis using the federal statutory rate of 35% in 2002 and 2001.  The tax equivalent adjustments were $924 and $1,744 for the three months ended June 30, 2002 and 2001, respectively.

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

 

23



 

AVERAGE BALANCES, RATES AND YIELDS

 

 

 

For the six months ended June 30,

 

 

 

2002

 

2001

 

(Dollars in thousands)

 

Average
Balance

 

Interest

 

Average
Yield/
Rate

 

Average
Balance

 

Interest

 

Average
Yield/
Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

89,399

 

$

836

 

1.9

%

$

845,152

 

$

22,231

 

5.3

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

1,534,423

 

25,602

 

3.4

 

1,593,140

 

45,553

 

5.8

 

Non-taxable (2)

 

203,342

 

5,663

 

5.6

 

272,822

 

8,427

 

6.2

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

1,456,858

 

70,682

 

9.8

 

1,466,216

 

90,995

 

12.5

 

Real estate construction and term

 

103,693

 

3,844

 

7.5

 

93,531

 

5,300

 

11.4

 

Consumer and other

 

139,243

 

3,451

 

5.0

 

104,536

 

4,227

 

8.2

 

Total loans

 

1,699,794

 

77,977

 

9.3

 

1,664,283

 

100,522

 

12.2

 

Total interest-earning assets

 

3,526,958

 

110,078

 

6.3

 

4,375,397

 

176,733

 

8.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

197,937

 

 

 

 

 

246,851

 

 

 

 

 

Allowance for loan losses

 

(74,015

)

 

 

 

 

(76,953

)

 

 

 

 

Goodwill

 

96,885

 

 

 

 

 

 

 

 

 

 

Other assets

 

186,385

 

 

 

 

 

194,423

 

 

 

 

 

Total assets

 

$

3,934,150

 

 

 

 

 

$

4,739,718

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funding Sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW deposits

 

$

43,130

 

144

 

0.7

 

$

51,041

 

225

 

0.9

 

Regular money market deposits

 

314,997

 

1,547

 

1.0

 

288,632

 

1,773

 

1.2

 

Bonus money market deposits

 

626,209

 

3,104

 

1.0

 

856,492

 

5,523

 

1.3

 

Time deposits

 

641,047

 

4,265

 

1.3

 

823,455

 

14,607

 

3.6

 

Short-term borrowings

 

42,506

 

542

 

2.6

 

 

 

 

Long-term debt

 

25,869

 

419

 

3.3

 

 

 

 

Total interest-bearing liabilities

 

1,693,758

 

10,021

 

1.2

 

2,019,620

 

22,128

 

2.2

 

Portion of noninterest-bearing funding sources

 

1,833,200

 

 

 

 

 

2,355,777

 

 

 

 

 

Total funding sources

 

3,526,958

 

10,021

 

0.6

 

4,375,397

 

22,128

 

1.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-Bearing Funding Sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

1,494,112

 

 

 

 

 

1,935,807

 

 

 

 

 

Other liabilities

 

37,021

 

 

 

 

 

64,015

 

 

 

 

 

Trust preferred securities (3)

 

38,650

 

 

 

 

 

38,598

 

 

 

 

 

Minority interest

 

27,865

 

 

 

 

 

30,367

 

 

 

 

 

Stockholders’ equity

 

642,744

 

 

 

 

 

651,311

 

 

 

 

 

Portion used to fund interest-earning assets

 

(1,833,200

)

 

 

 

 

(2,355,777

)

 

 

 

 

Total liabilities, minority interest, and stockholders’ equity

 

$

3,934,150

 

 

 

 

 

$

4,739,718

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and margin

 

 

 

$

100,057

 

5.7

%

 

 

$

154,605

 

7.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

3,119,495

 

 

 

 

 

$

3,955,427

 

 

 

 

 

 


(1)                Includes average interest-bearing deposits in other financial institutions of $1,225 and $533 for the six months ended June 30, 2002 and 2001, respectively.

(2)                Interest income on non-taxable investments is presented on a fully taxable-equivalent basis using the federal statutory rate of 35% in 2002 and 2001.  The tax equivalent adjustments were $1,982 and $2,950 for the six months ended June 30, 2002 and 2001, respectively.

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

 

24



 

Net interest income is affected by changes in the amount and mix of interest-earnings assets and interest-bearing liabilities, referred to as “volume change.” Net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities, referred to as “rate change.” The following table sets forth changes in interest income and interest expense for each major category of interest-earning assets and interest-bearing liabilities. The table also reflects the amount of simultaneous change attributable to both volumes and rates for the periods indicated.  For this table, changes that are not solely due to either volume or rate are allocated in proportion to the percentage changes in average volume and average rate.  Changes relating to investments in non-taxable municipal securities are presented on a fully taxable-equivalent basis using the federal statutory rate of 35% in 2002 and 2001.

 

 

 

2002 Compared to 2001

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

(Decrease) Increase
Due to Change in

 

(Decrease) Increase
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

 

$

(3,625

)

$

(2,640

)

$

(6,265

)

$

(12,434

)

$

(8,961

)

$

(21,395

)

Investment securities

 

(2,811

)

(7,391

)

(10,202

)

(3,616

)

(19,099

)

(22,715

)

Loans

 

1,805

 

(11,770

)

(9,965

)

2,103

 

(24,648

)

(22,545

)

Decrease in interest income

 

(4,631

)

(21,801

)

(26,432

)

(13,947

)

(52,708

)

(66,655

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW deposits

 

(6

)

(31

)

(37

)

(32

)

(49

)

(81

)

Regular money market deposits

 

76

 

(3

)

73

 

152

 

(378

)

(226

)

Bonus money market deposits

 

(359

)

9

 

(350

)

(1,300

)

(1,119

)

(2,419

)

Time deposits

 

(1,399

)

(3,529

)

(4,928

)

(2,706

)

(7,636

)

(10,342

)

Short-term borrowings

 

266

 

 

266

 

542

 

 

542

 

Long-term debt

 

210

 

 

210

 

419

 

 

419

 

Decrease in interest expense

 

(1,212

)

(3,554

)

(4,766

)

(2,925

)

(9,182

)

(12,107

)

Decrease in net interest income

 

$

(3,419

)

$

(18,247

)

$

(21,666

)

$

(11,022

)

$

(43,526

)

$

(54,548

)

 

Net interest income, on a fully taxable-equivalent basis, totaled $50.0 million for the second quarter of 2002, a decrease of $21.7 million, or 30.2%, from the $71.7 million total for the second quarter of 2001.  The decrease in net interest income was the result of a $26.4 million, or 32.6%, decrease in interest income, offset by a $4.8 million, or 50.7%, decrease in interest expense over the comparable prior year period.

 

The $26.4 million decrease in interest income for the second quarter of 2002, as compared to the second quarter of 2001, was the result of a $4.6 million unfavorable volume variance and a $21.8 million unfavorable rate variance. The $4.6 million unfavorable volume variance resulted from a $603.6 million, or 14.9%, 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 and securities purchased under agreement to resell, which decreased $477.7 million, and investment securities which decreased $187.6 million.

 

25



 

Average loans increased $61.7 million, or 3.7%, in the 2002 second quarter as compared to the 2001 second quarter, resulting in a $1.8 million favorable volume variance. We grew our loan portfolio to a record level, in part, by refocusing on attracting middle-market and mature technology and life sciences clients, which are currently under-served by competitors exiting these industry sectors. The loans that contributed to growth in our loan portfolio were not concentrated in any client, industry sector or geographic region. Additionally, new loans continue to be subject to our sound underwriting practices.  We expect further growth in our loan balances to increase our net interest margin since it will shift liquid interest-earning assets from our investment portfolio, which currently yields 3.6%, to loans with yields ranging between approximately 4.9% to 9.8%.

 

Average investment securities for the second quarter of 2002 decreased $187.6 million, or 10.4%, as compared to the 2001 second quarter, resulting in a $2.8 million unfavorable volume variance. The decrease in average investment securities was primarily centered in non-taxable obligations of states and political subdivisions, which declined $166.0 million. These decreases resulted from a corresponding decrease in our clients’ deposits.  Our clients continue to experience reduced liquidity due to the current slowdown in the capital markets and lower levels of venture capital fund investment.

 

Average federal funds sold and securities purchased under agreement to resell in the second quarter of 2002 decreased $477.7 million or 79.6% over the comparable prior year period, resulting in an $3.6 million unfavorable volume variance.  We experienced this decline in investable funds due to lower average client deposit balances.

 

Unfavorable rate variances associated with each component of interest-earning assets combined to decrease interest income by $21.8 million in the second quarter of 2002, as compared to the comparable prior year period.  Short-term market interest rates decreased rapidly throughout 2001. Thus, we earned lower yields in the second quarter of 2002 on federal funds sold and securities purchased under agreements to resell, and our investment securities, a significant portion of which were short-term in nature.  The decrease in short-term market interest rates resulted in a combined $10.0 million unfavorable rate variance as compared with the second quarter of 2001. In the second quarter of 2002, we incurred a $11.8 million unfavorable rate variance associated with our loan portfolio.  The average yield on loans in second quarter 2002 decreased 280 basis points to 9.2% from 12.0% in the respective prior year second quarter . Our investment and loan portfolios are extremely asset sensitive, thus, we expect that any increase in short-term interest rates will be incremental to our earnings.

 

The yield on average interest-earning assets decreased 170 basis points in the second quarter of 2002 from the comparable prior year period. This decrease primarily resulted from a 200 basis points decline in the prime rate from June 30, 2001 to June 30, 2002, thus, we earned lower yields on each component of our interest-earning assets in the second quarter of 2002.

 

Total interest expense in the 2002 second quarter decreased $4.8 million from the second quarter of 2001. This decrease was due to a favorable volume variance of $1.2 million and a favorable rate variance of $3.6 million. The favorable rate variance primarily resulted from a reduction in the average rate paid on our time deposit product, from 3.3% in the second quarter 2001 to 1.2% in the second quarter of 2002.

 

26



 

The average cost of funds paid in the second quarter of 2002 was 0.5%, down from 0.9% paid in the second quarter of 2001. The decrease in the average cost of funds was largely due to a decrease of 210 basis points in the average rate paid on our time deposit product, and a 30 basis points decrease on the average rate paid on our NOW deposit product.

 

Net interest income, on a fully taxable-equivalent basis, totaled $100.1 million for the first half of 2002, a decrease of $54.5 million, or 35.3%, from the $154.6 million total for the first half of 2001.  The decrease in net interest income was the result of a $66.7 million, or 37.7%, decrease in interest income, offset by a $12.1 million, or 54.7%, decrease in interest expense over the comparable prior year period.

 

The $66.7 million decrease in interest income for the first half of 2002, as compared to the first half of 2001, was the result of a $13.9 million unfavorable volume variance and a $52.7 million unfavorable rate variance. The $13.9 million unfavorable volume variance resulted from a $848.4 million, or 19.4%, decrease in average interest-earning assets over the comparable period in the prior year. The decrease in average interest-earning assets was primarily centered in highly-liquid federal funds sold and securities purchased under agreement to resell, which decreased $755.8 million.

 

The yield on average interest-earning assets decreased 180 basis points in the first half of 2002 from the comparable prior year period. This decrease primarily resulted from a 200 basis points decline in the prime rate from 6.75% at June 30, 2001 to 4.75% at June 30, 2002, thus, we earned lower yields on each component of our interest-earning assets in the first half of 2002.

 

Total interest expense in the first half of 2002 decreased $12.1 million from the first half of 2001. This decrease was due to a favorable volume variance of $2.9 million and a favorable rate variance of $9.2 million. The favorable rate variance largely resulted from a reduction in the average rate paid on our time deposit product, from 3.6% in the first half of 2001 to 1.3% in the first half of 2002.

 

The average cost of funds paid in the first half of 2002 was 0.6%, down from 1.0% paid in the first half of 2001. The decrease in the average cost of funds was largely due to a decrease of 230 basis points in the average rate paid on our time deposit product, and a 30 basis points decrease on 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 ($3.2) million for the second quarter of 2002, a $9.1 million, or 154.1%, decrease compared to the $5.9 million provision for the second quarter of 2001.  We benefited from $7.8 million in net recoveries, due in large part to recoveries from entertainment loan litigation settlements, during the second quarter of 2002.  The net recovery resulted in a ($3.2) million provision for loan losses for the 2002 second quarter.  The provision for loan losses decreased $10.6 million, or 98.0%, to a total of $0.2 million for the first six

 

27



 

months of 2002, versus $10.8 million for the comparable 2001 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, 2002 and 2001:

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

(Dollars in thousands)

 

2002

 

2001

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

Client investment fees

 

$

7,774

 

$

9,246

 

$

16,412

 

$

21,036

 

Corporate finance fees

 

4,424

 

679

 

7,386

 

949

 

Letter of credit and foreign exchange income

 

3,575

 

2,914

 

7,352

 

7,460

 

Deposit service charges

 

2,294

 

1,924

 

4,530

 

2,746

 

Disposition of client warrants

 

681

 

2,427

 

807

 

6,505

 

Investment losses

 

(2,001

)

(1,248

)

(4,598

)

(1,584

)

Other

 

2,107

 

2,277

 

3,866

 

4,982

 

Total noninterest income

 

$

18,854

 

$

18,219

 

$

35,755

 

$

42,094

 

 

Noninterest income increased $0.6 million to a total of $18.9 million in the second quarter of 2002, versus $18.2 million in the prior year second quarter. This increase was primarily due to an increase of $3.7 million in corporate finance fees, which was partially offset by a decrease of $1.5 million in client investment fees and a $0.8 million increase in investment losses. Noninterest income totaled $35.8 million for the first six months of 2002, a decrease of $6.3 million, or 15.1%, from $42.1 million in the comparable 2001 period.  This decrease was primarily due to decreases of $5.7 million in disposition of client warrants, $4.6 million in client investment fees, and $3.0 million increase in investment losses.  These decreases were partially offset by a $6.4 million increase in corporate finance fees generated by Alliant.

 

Client investment fees totaled $7.8 million and $16.4 million for the three and six months ended June 30, 2002, compared to $9.2 million and $21.0 million in the similar prior year period. We offer private label investment and sweep products to clients on which we earn fees ranging from 11 to 107 basis points on the average balance of these products. At June 30, 2002, $8.7 billion in client funds were invested in private label investments and sweep products, including $6.9 billion in the mutual fund products compared to $9.4 billion and $7.2 billion for the comparative prior year periods, respectively. The decrease in client investment fees was a combination of a shift in investment mix and a decline in client balances. In June 1999, we began offering private label investment products in response to high levels of liquidity in our client base. The increase in client liquidity was precipitated by a strong inflow of investment capital into the venture capital community. Beginning in 2002, we commenced a short-term initiative to transfer the private label investment operations from Silicon Valley Bank into a wholly-owned, registered, broker-dealer subsidiary. Upon completion, this action will allow us to provide a more expansive and competitive array of investment pr