SVB Financial Group
SILICON VALLEY BANCSHARES (Form: 10-Q, Received: 11/14/2002 08:43:26)

As filed with the Securities and Exchange Commission on November 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 September 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 October 31, 2002, 42,830,604 shares of the registrant’s common stock ($0.001 par value) were outstanding.

 

 



 

TABLE OF CONTENTS

 

 

PART I - FINANCIAL INFORMATION

 

 

ITEM 1.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

CONSOLIDATED BALANCE SHEETS

 

 

 

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

 

ITEM 2.

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

 

 

ITEM 4.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

 

 

 

PART II - OTHER INFORMATION

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

 

ITEM 2.

CHANGES IN SECURITIES AND USE OF PROCEEDS

 

 

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

 

 

CERTIFICATIONS

 

2



 

PART I - FINANCIAL INFORMATION

 

ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

SILICON VALLEY BANCSHARES AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS

 

 

(Dollars in thousands, except par value)

 

September 30,
2002

 

December 31,
2001

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

Cash and due from banks

 

$

178,459

 

$

228,318

 

Federal funds sold and securities purchased under agreement to resell

 

355,573

 

212,214

 

Investment securities

 

1,322,999

 

1,833,162

 

Loans, net of unearned income

 

1,885,707

 

1,767,038

 

Allowance for loan losses

 

(73,800

)

(72,375

)

Net loans

 

1,811,907

 

1,694,663

 

Premises and equipment

 

19,380

 

21,719

 

Goodwill

 

98,638

 

96,380

 

Accrued interest receivable and other assets

 

76,643

 

85,621

 

Total assets

 

$

3,863,599

 

$

4,172,077

 

 

 

 

 

 

 

Liabilities, Minority Interest, and Stockholders’ Equity:

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing demand

 

$

1,639,096

 

$

1,737,663

 

NOW

 

18,311

 

25,401

 

Money market

 

859,674

 

894,949

 

Time

 

578,309

 

722,964

 

Total deposits

 

3,095,390

 

3,380,977

 

Short-term borrowings

 

9,058

 

41,203

 

Other liabilities

 

47,632

 

29,781

 

Long-term debt

 

17,256

 

25,685

 

Total liabilities

 

3,169,336

 

3,477,646

 

 

 

 

 

 

 

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

 

39,491

 

38,641

 

Minority interest

 

32,468

 

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; 42,972,104 and 45,390,007 shares outstanding at September 30, 2002 and December 31, 2001, respectively

 

43

 

45

 

Additional paid-in capital

 

143,897

 

196,143

 

Retained earnings

 

464,693

 

423,252

 

Unearned compensation

 

(938

)

(1,600

)

Accumulated other comprehensive income:

 

 

 

 

 

Net unrealized gains on available-for-sale investments

 

14,609

 

9,675

 

Total stockholders’ equity

 

622,304

 

627,515

 

Total liabilities, minority interest, and stockholders’ equity

 

$

3,863,599

 

$

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 nine months ended

 

(Dollars in thousands, except per share amounts)

 

September 30,
2002

 

September 30,
2001

 

September 30,
2002

 

September 30,
2001

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans

 

$

39,382

 

$

44,583

 

$

117,359

 

$

145,105

 

Investment securities

 

11,877

 

20,875

 

41,160

 

71,905

 

Federal funds sold and securities purchased under agreement to resell

 

1,251

 

2,987

 

2,087

 

25,218

 

Total interest income

 

52,510

 

68,445

 

160,606

 

242,228

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

3,848

 

8,552

 

12,908

 

30,680

 

Other borrowings

 

476

 

 

1,437

 

 

Total Interest Expense

 

4,324

 

8,552

 

14,345

 

30,680

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

48,186

 

59,893

 

146,261

 

211,548

 

Provision for loan losses

 

2,630

 

5,890

 

2,849

 

16,724

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

45,556

 

54,003

 

143,412

 

194,824

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Client investment fees

 

7,416

 

10,699

 

23,828

 

31,735

 

Letter of credit and foreign exchange income

 

4,354

 

2,709

 

11,706

 

10,169

 

Corporate finance fees

 

1,176

 

113

 

8,562

 

1,062

 

Deposit service charges

 

2,253

 

1,550

 

6,783

 

4,296

 

Disposition of client warrants

 

443

 

350

 

1,250

 

6,855

 

Investment losses

 

(2,063

)

(2,365

)

(6,661

)

(3,949

)

Other

 

2,684

 

3,930

 

6,550

 

8,912

 

Total noninterest income

 

16,263

 

16,986

 

52,018

 

59,080

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

27,246

 

21,053

 

80,995

 

65,919

 

Net occupancy

 

4,459

 

3,987

 

15,410

 

11,580

 

Professional services

 

4,613

 

6,572

 

12,016

 

18,225

 

Furniture and equipment

 

2,316

 

4,287

 

5,983

 

9,472

 

Business development and travel

 

1,872

 

2,280

 

5,928

 

7,673

 

Telephone

 

766

 

1,058

 

2,368

 

2,977

 

Postage and supplies

 

678

 

1,078

 

2,253

 

2,935

 

Trust preferred securities distributions

 

334

 

825

 

1,905

 

2,475

 

Advertising and promotion

 

242

 

546

 

882

 

2,383

 

Retention and warrant incentive plans

 

(511

)

69

 

(506

)

887

 

Other

 

4,083

 

1,667

 

11,200

 

9,721

 

Total noninterest expense

 

46,098

 

43,422

 

138,434

 

134,247

 

Minority interest

 

2,300

 

2,224

 

5,537

 

3,440

 

Income before income tax expense

 

18,021

 

29,791

 

62,533

 

123,097

 

Income tax expense

 

4,925

 

11,189

 

21,092

 

47,027

 

Net income

 

$

13,096

 

$

18,602

 

$

41,441

 

$

76,070

 

Basic earnings per share

 

$

0.30

 

$

0.39

 

$

0.92

 

$

1.57

 

Diluted earnings per share

 

$

0.29

 

$

0.38

 

$

0.90

 

$

1.52

 

 

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 nine months ended

 

(Dollars in thousands)

 

September 30,
2002

 

September 30,
2001

 

September 30,
2002

 

September 30,
2001

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13,096

 

$

18,602

 

$

41,441

 

$

76,070

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Change in unrealized gains on available-for-sale investments

 

3,056

 

7,029

 

5,762

 

13,049

 

Reclassification adjustment for (gains) losses included in net income

 

(322

)

1,258

 

(828

)

(1,796

)

Other comprehensive income

 

2,734

 

8,287

 

4,934

 

11,253

 

Comprehensive income

 

$

15,830

 

$

26,889

 

$

46,375

 

$

87,323

 

 

See notes to interim consolidated financial statements.

 

5



 

SILICON VALLEY BANCSHARES AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

For the nine months ended September 30,

 

(Dollars in thousands)

 

2002

 

2001

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

41,441

 

$

76,070

 

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

 

 

 

 

 

Provision for loan losses

 

2,849

 

16,724

 

Minority interest

 

(5,537

)

(3,440

)

Depreciation and amortization

 

5,277

 

5,632

 

Net loss on available for sale securities

 

6,661

 

3,949

 

Net gains on disposition of client warrants

 

(1,250

)

(6,855

)

Decrease in accrued interest receivable

 

4,615

 

16,474

 

Decrease in inventory

 

 

16,023

 

Decrease (increase) in prepaid expenses

 

78

 

(892

)

Decrease in taxes receivable

 

12,856

 

15,149

 

Decrease in unearned income

 

573

 

3,086

 

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

 

3,491

 

(29,948

)

Other, net

 

4,211

 

(1,599

)

Net cash provided by operating activities

 

75,265

 

110,373

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from maturities and paydowns of investment securities

 

2,523,476

 

1,259,994

 

Proceeds from sales of investment securities

 

24,406

 

8,821

 

Purchases of investment securities

 

(2,034,120

)

(982,197

)

Net increase in loans

 

(141,745

)

(41,502

)

Proceeds from recoveries of charged-off loans

 

21,079

 

12,222

 

Payment for acquisition

 

 

(30,000

)

Purchases of premises and equipment

 

(2,938

)

(9,381

)

Net cash provided by investing activities

 

390,158

 

217,957

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net decrease in deposits

 

(285,587

)

(1,553,177

)

Decrease in short-term borrowings

 

(32,145

)

 

Decrease in long-term debt

 

(8,429

)

 

Proceeds from issuance of common stock, net of issuance costs

 

8,169

 

11,604

 

Repurchase of common stock

 

(63,661

)

(52,477

)

Capital contributions from minority interest participants

 

9,730

 

2,929

 

Net cash used by financing activities

 

(371,923

)

(1,591,121

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

93,500

 

(1,262,791

)

Cash and cash equivalents at January 1,

 

440,532

 

1,722,366

 

Cash and cash equivalents at September 30,

 

$

534,032

 

$

459,575

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

Interest paid

 

$

14,716

 

$

30,827

 

Income taxes paid

 

$

6,799

 

$

32,979

 

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.

 

6



 

SILICON VALLEY BANCSHARES AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

1.  Summary of 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, rule 10-01 of regulation S-X, 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 material 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, founded in 1983, and headquarters in Santa Clara, California.  The Bank serves more than 9,500 clients across the country, through 27 regional offices.  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 mature companies in the technology and life sciences markets, as well as other targeted industries.  Through its focus on specialized markets and extensive knowledge of the people and business issues driving them, Silicon Valley Bank provides a level of service and partnership that measurably impacts its clients’ success.  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 September 30, 2002, the interim results of its operations for the three and nine months ended September 30, 2002 and September 30, 2001, and

 

7



 

interim cash flow for the nine months ended September 30, 2002 and September 30, 2001. The December 31, 2001 Consolidated Balance Sheet was derived from audited financial statements.  Certain information and footnote disclosures, normally presented therein, were prepared in accordance with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry, have been omitted from this report.  The results of operations for the three and nine months ended September 30, 2002, may not necessarily be indicative of the Company’s operating results for the full year.  The interim Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s 2001 Annual Report on Form 10-K filed with the SEC on March 19, 2002.

 

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 relates to the determination of the allowance for loan losses.

 

Cash and Cash Equivalents

 

Cash and cash equivalents as reported in the interim Consolidated Statements of Cash Flows include 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 $0.6 and $2.9 million at September 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-

 

8



 

than-temporary decline in value has occurred. The Company has not classified any investments as held-to-maturity as of September 30, 2002 and December 31, 2001.

 

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 September 30, 2002 and December 31, 2001.

 

Marketable Equity Securities

 

Investments in marketable equity securities include warrants for shares of publicly-traded companies and investments in shares of publicly-traded companies.  Marketable warrant and equity securities totaled $0.9 million at September 30, 2002 and $2.3 million at December 31, 2001.  These marketable equity instruments are classified as available-for-sale and are accounted for at fair value.  The Company recognized gains from disposition of client warrants in its consolidated statements of income of $1.3 million in the nine months ended September 30, 2002 and $8.5 million in 2001.  Equity securities in the Company’s warrant, direct equity and venture capital fund portfolios generally become marketable when a portfolio company completes an initial public offering on a publicly-reported market, or is acquired by a publicly-traded company.

 

Unrealized gains or losses on warrant and equity investment securities are recorded upon the establishment of a readily determinable fair value of the underlying security, as defined by Statement of Financial Accounting Standard (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Instruments.” Generally, a readily determinable fair value of a security can initially be ascertained upon a) an initial public offering or b) a merger or acquisition of the portfolio company by a publicly-traded company.

 

a)                           Unrealized gains or losses after applicable taxes, on available-for-sale equity securities, which result from initial public offerings, are excluded from earnings and are reported in accumulated other comprehensive income, which is a separate component of stockholders’ equity. The Company is often contractually restricted from selling equity securities for up to six months subsequent to the portfolio company’s initial public offering. Gains or losses on these marketable equity instruments are recorded in the Company’s consolidated statements of income in the period the underlying securities are sold to a third party.

 

b)                          Gains or losses on marketable warrant and equity investment securities, which result from an investment portfolio company being acquired by a publicly-traded company, are marked to market on the acquisition date.  The resulting gains or losses are recognized into income on that date, in accordance with Emerging Issues Task Force, Issue No. 91-5, “Nonmonetary Exchange of Cost-method Investments.” Further fluctuations in the market value of these marketable equity instruments, prior to eventual sale, are excluded from

 

9



 

earnings and are reported in accumulated other comprehensive income, which is a separate component of stockholders’ equity. Upon the sale of these equity securities, gains and losses, which is measured from the acquisition price, are realized in the Company’s consolidated statements of income in the period the underlying securities are sold to a third party.

 

Notwithstanding the foregoing, a decline in the fair value of any of these marketable equity instruments, which is considered other than temporary, is recorded in the Company’s consolidated statements of income in the period the impairment occurs.

 

The Company is typically contractually precluded from taking steps to secure the current unrealized gains associated with many of the Company’s marketable equity instruments. Hence, the amount of income the Company realizes from these equity instruments in future periods may vary materially from the current unrealized amount of $0.7 million, due to fluctuations in the market prices of the underlying common stock of these portfolio companies.

 

Non-Marketable Equity Securities

 

The Company invests in non-marketable equity securities in several ways:

                  Through the exercise of warrants obtained in the normal course of lending;

                  By direct purchases of preferred or common stock in privately-held companies;

                  By capital contributions to venture capital funds, which in turn, make investments in preferred or common stock of privately held companies;

                  Through the Company’s venture capital fund, Silicon Valley BancVentures, L.P., which makes investments in preferred or common stock of privately held companies; and

                  Through the Company’s ‘fund of funds’, SVB Strategic Investors Fund, L.P., which makes investments in venture capital funds, which in turn, make investments in preferred or common stock of privately held companies.

 

Unexercised warrant securities are recorded at a nominal value on the Company’s consolidated balance sheets. They are carried at this value until they become marketable or expire.

 

A summary of the Company’s accounting policies for other non-marketable equity securities is presented in the following table.  A complete description of the accounting follows the table.

 

 

 

Direct Investment

 

Venture Capital Fund Investment

Wholly-owned by Silicon Valley Bancshares

 

Cost Basis Less Identified Impairment, If Any

 

Cost Recovery Less Identified Impairment, If Any

 

 

 

 

 

Owned through Silicon Valley BancVentures, L.P. and SVB Strategic Investors Fund, L.P.

 

Investment Accounting, Adjust To Fair Value On A Quarterly Basis Through The Statement Of Income

 

Investment Accounting, Adjust To Fair Value On A Quarterly Basis Through The Statement Of Income

 

10



 

Non-marketable venture capital fund investments and other private equity investments, held by the Company, excluding investments held through SVB Strategic Investors Fund, L.P. and Silicon Valley BancVentures, L.P., totaled $32.3 million at September 30, 2002 and $30.8 million at December 31, 2001.  The Company records these investments, on a cost basis less any identified impairment.  The investments consist of stock in private companies that are not traded on a public market or investments in venture capital funds, which in turn, make investments in stock of private companies that are not traded on a public market and are subject to restrictions on resale.  In addition, the venture capital funds may hold, in part, investments in publicly-traded securities.  These stocks may be subject to selling restrictions and limitations or held in escrow.

 

The values of non-marketable venture capital fund and other private equity investment securities are reviewed by the Company, on a quarterly basis, giving consideration to the prices of issuers’ securities, operating results, financial conditions, recent sales and other pertinent information.  A decline in the fair value of these non-marketable equity instruments, which is considered other than temporary, is recorded in the Company’s consolidated statements of income in the period the impairment occurs.  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 investments are reported under the cost method as the Company’s interests are considered minor, in that the Company own less than 5%, and have no influence over the related venture capital fund’s operating and financial policies.  The Company’s cost basis in each venture capital fund investment is reduced by distributions from each respective fund, until the cost basis is fully recovered.  Distributions from each venture capital fund limited partner investment in excess of its cost basis are recognized as investment gains in noninterest income.  The valuation of the Company’s non-marketable venture capital fund investments and other private equity investments included in the Company’s interim consolidated financial statements at September 30, 2002, represents the Company’s best interpretation of the underlying equity securities performance at this time.  The Company may also have risk associated with its concentration of investments in certain geographic areas and certain industries.

 

Investments held by Silicon Valley BancVentures, L.P. totaled $9.7 million at September 30, 2002 and $5.1 million at December 31, 2001, and are recorded using investment accounting rules.  The investments consist of stock in private companies that are not traded on a public market and are subject to restrictions on resale.  These investments are carried at estimated fair value determined by the general partner after giving consideration to the prices of issuers’ securities, operating results, financial conditions, recent sales, and other pertinent information.  The general partner, Silicon Valley BancVentures, Inc. is owned and controlled by the Company and has an ownership interest of 10.7% in Silicon Valley BancVentures, L.P.  Any gains or losses resulting from changes in the estimated fair value of the investments are recorded as investment gains or losses in the Company’s consolidated statements of income.  Because of the inherent uncertainty of valuations, the 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 valuation of investments held by Silicon Valley BancVentures, L.P. included in the Company’s financial statements at September 30, 2002, represents the Company’s best interpretation of the underlying equity securities performance at this time.

 

11



 

SVB Strategic Investors Fund, L.P. held a portfolio of investments in venture capital fund limited partnership investments totaling $20.7 million at September 30, 2002 and $16.5 million at December 31, 2001, which are recorded using investment accounting rules, based on the percentage of SVB Strategic Investors Fund, L.P.’s interest in the total fair market value of the venture capital fund investments.  The general partner, SVB Strategic Investors, LLC, is owned and controlled by the Company, and has an ownership interest of 11.1% in SVB Strategic Investors Fund, L.P.  The portfolio of investments includes venture capital partnerships that hold investments in private companies, which are not currently traded in a public market and are subject to restrictions on resale.  In addition, the venture capital partnerships may hold, in part, investments in publicly-traded securities.  These stocks may be subject to selling restrictions and limitations or held in escrow.  These publicly-traded securities are valued by the general partners of the partnerships, in which SVB Strategic Investors Fund, L.P. invested, and may be discounted from market prices.  SVB Strategic Investors, LLC generally utilizes the valuations assigned to the portfolio venture capital fund investments by the partnership’s general partners.  These portfolio investments are carried by their venture capital partnerships at estimated fair value as determined by their general partner after giving consideration to the prices of issuers’ securities, operating results, financial conditions, recent sales, and other pertinent information.  Any gains or losses resulting from changes in the estimated fair value of the portfolio investments are recorded as investment gains or losses on the Company’s consolidated statements of income.  Because of the uncertainty of valuations, the 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.  The valuation of investments held by SVB Strategic Investors Fund, L.P. included in the Company’s financial statements at September 30, 2002, represents the Company’s best interpretation of the underlying equity securities performance at this time.

 

Summary financial data related to the Company’s non-marketable equity securities at September 30, 2002 are presented in Note 4 to the Consolidated Financial Statements – Investment Securities.

 

The Company considers its marketable and non-marketable warrant, equity and venture capital fund investment securities accounting policies to be critical, as the timing and amount of income, if any, from these instruments, typically depend upon factors beyond the company’s control. These factors include the general condition of the public equity markets, levels of mergers and acquisitions activity, and legal and contractual restrictions on the company’s ability to sell the underlying securities.  Therefore, the Company cannot predict future gains with any degree of accuracy and any gains are likely to vary materially from period to period.  In addition, the Company’s investments in marketable or non-marketable venture capital funds and equity investment securities could lose value or become worthless which would reduce its net income or could cause a net loss in any period.  Furthermore, the Company may not be able to realize gains from marketable warrant securities in future periods, or its realized gains may be materially less than the current level of unrealized gains disclosed in this filing, due to changes in investor demand for initial public offerings and fluctuations in the market prices of the underlying common stock of these companies.

 

12



 

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 approves an analysis for all impaired loans, as defined by the SFAS No. 114 “Accounting by Creditors for Impairment of a Loan.”  The allowance for loan losses is allocated based on a formula allocation for similarly risk-rated loans, or for specific risk issues, which suggest a probable loss factor exceeding the formula allocation for a specific loan, or for individual impaired loans as determined 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 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 uncollectable are charged against the allowance for loan losses.  Recoveries of previously charged-off amounts are credited to the allowance for loan losses.

 

The Company’s allowance for loan losses is established for loan losses not yet recognized.  The process of anticipating loan losses is imprecise.  The Company’s 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.

 

The Company considers its accounting policies related to its allowance for loan losses to be critical as it involves material estimates by Management and is particularly susceptible to possible change in the near term.  For further discussion of critical accounting policies, please refer to the Company’s 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2002, Item 7. - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies.

 

13



 

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 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.

 

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.

 

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 in their annual financial statements. 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.”

 

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

 

14



 

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 (See Note 8 to the interim Consolidated Financial Statements – Derivative Financial Instrument).  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 nine months ended September 30, 2002.

 

Foreign Exchange Forward Contracts

 

The Company enters into foreign exchange forward contracts with clients involved in international trade finance activities. The Company also enters into an opposite-way foreign exchange forward contract with a correspondent bank, which completely mitigates the risk of fluctuations in foreign currency exchange rates, for each of the forward contracts entered into with its clients. The Company does not enter into foreign exchange forward contracts for any other purposes. These contracts are not designated as hedging instruments and are recorded at fair value in the Company’s consolidated balance sheets. Changes in the fair value of these contracts are recognized immediately in non-interest income.

 

Business Combinations

 

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

 

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.

 

The Company’s only intangible asset is goodwill pertaining to the acquisition of Alliant, discussed in Note 2 — Business Combinations. This acquisition was accounted for under SFAS No. 141.  In accordance with the provisions of SFAS 142, the goodwill balance was determined

 

15



 

to be unamortizable.  The Company completed its initial test for goodwill impairment in July 2002, the results of which concluded that the goodwill balance 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 position.

 

In October 2002, the Financial Accounting Standards Board issued SFAS No.147, “Acquisitions of Certain Financial Institutions”, which addresses the accounting for the acquisition of certain financial institutions. The provisions of SFAS No. 147 rescind the specialized accounting guidance in paragraph 5 of SFAS No.72 and would require unidentifiable intangible assets to be reclassified to goodwill if certain criteria are met. Financial institutions meeting the conditions outlined in SFAS No.147 will be required to restate previously issued financial statements back to the date SFAS No.142 was initially applied. The provisions of SFAS No. 147 are effective for financial statements after September 30, 2002. The Company does not expect the adoptions of SFAS No. 147 to have a material impact on its financial statements

 

2.  Business Combinations

 

On September 28, 2001, the Company completed its acquisition of Alliant. The acquisition has allowed 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.  The first two installments aggregating $72.0 million have been paid.  The remaining $28.0 million was discounted at prevailing forward market interest rates ranging between 2.9% and 3.3% and was recorded as debt.  In addition to the fixed purchase price, the sellers received certain contingent purchase price payments including 75% of the pre-tax income of Alliant for the twelve-month period ended 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 $26.5 million, provided, however, that the aggregate amount of any deferred earnout payment payable shall not exceed $75.0 million. The Company shall also make retention payments aggregating $5.0 million in equal annual installments on September 28, 2003, 2004 and 2005. The purchase price was allocated to the assets acquired and liabilities assumed based on the estimated net fair values at the date of acquisition of approximately $0.5 million. The excess of purchase price over the estimated fair values of the net assets acquired was recorded as goodwill.  The business combinations were recorded in accordance with SFAS No. 141. (See Notes 1 and 7 to the interim Consolidated Financial Statements – Significant Accounting Policies and Borrowings.)

 

16



 

3.  Earnings Per Share (EPS)

 

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

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 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

 

$

13,096

 

43,993

 

$

0.30

 

$

41,441

 

44,849

 

$

0.92

 

Effect of Dilutive Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and restricted stock

 

 

895

 

 

 

1,242

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders plus assumed conversions

 

$

13,096

 

44,888

 

$

0.29

 

$

41,441

 

46,091

 

$

0.90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

17



 

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)

 

September 30,
2002

 

December 31,
2001

 

 

 

 

 

 

 

Available-for-sale securities, at fair value

 

$

1,231,383

 

$

1,760,942

 

Non-Marketable Investment Securities:

 

 

 

 

 

Federal Reserve Bank stock and tax credit funds

 

28,886

 

19,867

 

Venture capital fund investments(1)

 

45,515

 

38,647

 

Private equity investments(2)

 

17,215

 

13,706

 

Total investment securities

 

$

1,322,999

 

$

1,833,162

 

 


(1)           Non-marketable venture capital fund investments included $20.7 million and $16.5 million related to SVB Strategic Investors Fund, L.P., at September 30, 2002, and December 31, 2001, respectively.

 

(2)          Non-marketable private equity investments included $9.7 million and $5.1 million related to Silicon Valley BancVentures, L.P., at September 30, 2002, and December 31, 2001, respectively.

 

18



 

The following tables present the carrying value of the Company’s merchant banking equity securities at September 30, 2002.

 

 

 

(Gross, as Consolidated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned Merchant Banking Investments

 

Managed Funds
Merchant Banking Activities

 

 

 

Venture
Capital
Funds

 

Other Private
Equity

 

SVB Strategic
Investors
Fund, L.P.

 

Silicon Valley
BancVentures
L.P.

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments

 

$

54,984

 

$

14,877

 

$

108,189

 

$

13,269

 

$

191,319

 

Capital investment

 

35,296

 

14,877

 

28,484

 

13,269

 

91,926

 

Carrying value of investment securities

 

24,772

 

7,543

 

20,743

 

9,672

 

62,730

 

Inception-to-date securities net gains (losses)

 

35,920

 

(5,512

)

(7,336

)

(3,597

)

19,475

 

Year-to-date securities net losses

 

(694

)

(1,492

)

(4,334

)

(141

)

(6,661

)

 

 

 

 

(Net, Silicon Valley Bancshares Ownership Only)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned Merchant
Banking Investments

 

Managed Funds
Merchant Banking Activities

 

 

 

Venture
Capital
Funds

 

Other
Private
Equity

 

SVB Strategic
Investors
Fund, L.P.

 

Silicon Valley
BancVentures
L.P.

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments

 

$

54,984

 

$

14,877

 

$

15,000

 

$

6,000

 

$

90,861

 

Capital investment

 

35,296

 

14,877

 

3,900

 

1,800

 

55,873

 

Carrying value of investment securities

 

24,772

 

7,543

 

2,292

 

980

 

35,587

 

Inception-to-date securities net gains (losses)

 

35,920

 

(5,512

)

(811

)

(364

)

29,233

 

Year-to-date securities net losses

 

(694

)

(1,492

)

(478

)

(14

)

(2,678

)

Inception-to-date management fee revenue

 

 

 

2,819

 

2,142

 

4,961

 

Year-to-date management fee revenue

 

 

 

993

 

812

 

1,805

 

 

19



 

5.  Loans and Allowance for Loan Losses

 

The detailed composition of loans, net of unearned income of $11.4 million and $11.9 million, at September 30, 2002, and December 31, 2001, respectively, is presented in the following table:

 

(Dollars in thousands)

 

September 30,
2002

 

December 31,
2001

 

 

 

 

 

 

 

Commercial

 

$

1,624,821

 

$

1,536,845

 

Real estate construction

 

41,980

 

52,088

 

Real estate term

 

62,037

 

50,935

 

Consumer and other

 

156,869

 

127,170

 

Total loans

 

$

1,885,707

 

$

1,767,038

 

 

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

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

(Dollars in thousands)

 

2002

 

2001

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

76,000

 

$

74,000

 

$

72,375

 

$

73,800

 

Provision for loan losses

 

2,630

 

5,890

 

2,849

 

16,724

 

Loans charged off

 

(7,713

)

(7,874

)

(22,502

)

(29,246

)

Recoveries

 

2,883

 

1,484

 

21,078

 

12,222

 

Balance at September 30,

 

$

73,800

 

$

73,500

 

$

73,800

 

$

73,500

 

 

The aggregate recorded investment in loans for which impairment has been determined in accordance with SFAS No. 114 totaled $20.3 million and $19.9 million at September 30, 2002, and September 30, 2001, respectively. Allocations of the allowance for loan losses specific to impaired loans totaled $7.1 million at September 30, 2002, and $8.5 million at September 30, 2001. Average impaired loans for the third quarter of 2002 and 2001 totaled $18.2 million and $23.5 million, respectively.

 

6.  Goodwill

 

The goodwill balance at September 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 nine months ended September 30, 2002, pursuant to the terms of the acquisition agreement detailed in Note 2 to the interim Consolidated Financial Statements – Business Combinations.

 

7.  Borrowings

 

As of September 30, 2002, the Company had $9.1 million and $17.3 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

 

20



 

Company. The short-term note payable, due September 30, 2003, has a face value of $9.3 million. The long-term note payable, due in two equal annual installments commencing September 28, 2004, has a face value of $18.6 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 Combinations.)

 

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 $0.8 million which was recorded in other assets at September 30, 2002.  Furthermore, the Company recorded an addition of $0.8 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 derivative 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 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.

 

21



 

(Dollars in thousands)

 

Commercial
Banking

 

All
Others

 

Total

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

 

 

 

 

 

 

Third quarter of 2002

 

$

42,884

 

$

2,672

 

$

45,556

 

Third quarter of 2001

 

51,776

 

2,227

 

54,003

 

 

 

 

 

 

 

 

 

First nine months of 2002

 

135,797

 

7,615

 

143,412

 

First nine months of 2001

 

189,860

 

4,964

 

194,824

 

 

 

 

 

 

 

 

 

Noninterest income (loss)

 

 

 

 

 

 

 

Third quarter of 2002

 

15,511

 

752

 

16,263

 

Third quarter of 2001

 

17,989

 

(1,003

)

16,986

 

 

 

 

 

 

 

 

 

First nine months of 2002

 

46,470

 

5,548

 

52,018

 

First nine months of 2001

 

52,718

 

6,362

 

59,080

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

Third quarter of 2002

 

40,787

 

5,311

 

46,098

 

Third quarter of 2001

 

38,236

 

5,186

 

43,422

 

 

 

 

 

 

 

 

 

First nine months of 2002

 

119,991

 

18,443

 

138,434

 

First nine months of 2001

 

122,913

 

11,334

 

134,247

 

 

 

 

 

 

 

 

 

Minority interest

 

 

 

 

 

 

 

Third quarter of 2002

 

 

2,300

 

2,300

 

Third quarter of 2001

 

 

2,224

 

2,224

 

 

 

 

 

 

 

 

 

First nine months of 2002

 

 

5,537

 

5,537

 

First nine months of 2001

 

 

3,440

 

3,440

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

 

 

 

 

 

Third quarter of 2002

 

$

17,608

 

$

413

 

$

18,021

 

Third quarter of 2001

 

$

31,529

 

$

(1,738

)

$

29,791

 

 

 

 

 

 

 

 

 

First nine months of 2002

 

$

62,276

 

$

257

 

$

62,533

 

First nine months of 2001

 

$

119,665

 

$

3,432

 

$

123,097

 

 

 

 

 

 

 

 

 

Segment assets

 

 

 

 

 

 

 

Third quarter of 2002

 

$

3,327,566

 

$

536,033

 

$

3,863,599

 

Third quarter of 2001

 

3,873,447

 

274,438

 

4,147,885

 

 

22



 

10.  Common Stock Repurchase

 

The Company has repurchased 0.8 million shares of common stock totaling $13.5 million during the third quarter of 2002, in conjunction with the $100.0 million share repurchase program authorized by the Board of Directors on September 16, 2002.  Additionally, during the third quarter of 2002, the Company repurchased 1.9 million shares of common stock totaling $41.9 million in conjunction with the $50.0 million shares repurchase program authorized by the Board of Directors on March 21, 2002.

 

The Company repurchased 3.0 million shares of common stock during the nine months ended September 30, 2002, for an aggregate purchase price of $63.7 million.

 

During 2001, the Company 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.

 

23



 

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 changes in our average loan balances and their impact on our net interest margin;

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

      Future changes in private label investment product balances due to transferring of private label investment operations from Bank to its wholly owned broker-dealer subsidiary;

      Alliant’s future revenue;

      Future investment losses from private equity and venture capital fund investments;

      Future changes in trust preferred securities distributions expense due to changes in hedging interest rates;

      Impact on future warrant income due to changes in market prices of the underlying common stock of those companies;

      Future changes in allowance for loan losses balance;

      Future cost of funds savings from raising capital through real estate investment trust;

      Future tax benefits from real estate investment trust; and

      Future common stock repurchases

 

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

 

24



 

and financial performance could differ significantly from those expressed in or implied by our management’s forward-looking statements.

 

For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see the 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 material 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 $13.1 million, or $0.29 per diluted share, for the third quarter of 2002, compared with net income of $18.6 million, or $0.38 per diluted share, for the third quarter of 2001.  Net income totaled $41.4 million, or $0.90 per diluted share, for the nine months ended September 30, 2002, versus $76.1 million, or $1.52 per diluted share, for the respective 2001 period.  The annualized return on average assets (ROA) was 1.4% in the third quarter of 2002 compared with 1.8% in the third quarter of 2001. The annualized return on average equity (ROE) for the third quarter of 2002 was 8.2%, compared with 11.1% in the third quarter of 2001.  For the first nine months of 2002, ROA was 1.4% and ROE was 8.6% versus 2.2% and 15.5%, respectively, for the comparable prior year period.

 

The decrease in net income for the third quarter of 2002, as compared with the third quarter of 2001, primarily resulted from a decline in net interest income, and an increase in noninterest expense, partially offset by decreases in the provision for loan losses and income tax expense.  The decrease in net income for the nine months ended September 30, 2002, as compared with the nine months ended September 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 and income tax expense. The decrease in net interest income was caused by a 200 basis points decline in the prime rate from 6.75% in the 2001 third quarter, to 4.75% in the 2002 third quarter.  Additionally, we earned lower interest income on new floating-rate loans and new, renewed, and refinanced fixed-rate loans. Our fixed rate loans are priced by reference to U.S. Treasury securities. During third quarter of 2002, the treasury yield curve flattened dramatically and thus, the rates on new fixed-rate loans were significantly lower than earlier quarters. Also, we experienced a decrease in our clients’ deposit balances and we implemented stock repurchase programs, which lowered our investable funds.  The major components of net income and

 

25



 

changes in these components are summarized in the following table for the three and nine months ended September 30, 2002 and 2001, and are discussed in more detail below.

 

 

 

For the Three Months Ended September 30,

 

For the Nine Months Ended September 30,

 

(Dollars in thousands)

 

2002

 

2001

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

48,186

 

$

59,893

 

$

146,261

 

$

211,548

 

Provision for loan losses

 

2,630

 

5,890

 

2,849

 

16,724

 

Noninterest income

 

16,263

 

16,986

 

52,018

 

59,080

 

Noninterest expense

 

46,098

 

43,422

 

138,434

 

134,247

 

Minority interest

 

2,300

 

2,224

 

5,537

 

3,440

 

Income before income taxes

 

18,021

 

29,791

 

62,533

 

123,097

 

Income tax expense

 

4,925

 

11,189

 

21,092

 

47,027

 

Net income

 

$

13,096

 

$

18,602

 

$

41,441

 

$

76,070

 

 

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 annualized net interest income, on a fully taxable-equivalent basis, expressed as a percentage of average interest-earning assets. The average yield earned on interest-earning assets is the amount of taxable-equivalent annualized interest income expressed as a percentage of average interest-earning assets. The average rate paid on funding sources is defined as annualized interest expense as a percentage of average interest-earning assets.

 

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 nine months ended September 30, 2002 and 2001, respectively.

 

26



 

AVERAGE BALANCES, RATES AND YIELDS

 

 

 

For the three months ended September 30,

 

 

 

2002

 

2001

 

(Dollars in thousands)

 

Average
Balance

 

Interest

 

Yield/
Rate

 

Average
Balance

 

Interest

 

Yield/
Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

259,321

 

$

1,251

 

1.9

%

$

323,668

 

$

2,987

 

3.7

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

1,167,534

 

10,244

 

3.5

 

1,454,370

 

18,004

 

4.9

 

Non-taxable(2)

 

157,044

 

2,512

 

6.3

 

326,064

 

4,417

 

5.4

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

1,554,935

 

35,841

 

9.1

 

1,439,677

 

40,719

 

11.2

 

Real estate construction and term

 

100,137

 

1,688

 

6.7

 

65,750

 

1,711

 

10.3

 

Consumer and other

 

153,190

 

1,853

 

4.8

 

119,338

 

2,153

 

7.2

 

Total loans

 

1,808,262

 

39,382

 

8.6

 

1,624,765

 

44,583

 

10.9

 

Total interest-earning assets

 

3,392,161

 

53,389

 

6.2

 

3,728,867

 

69,991

 

7.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

150,160

 

 

 

 

 

262,485

 

 

 

 

 

Allowance for loan losses

 

(76,895

)

 

 

 

 

(75,825

)

 

 

 

 

Goodwill

 

98,628

 

 

 

 

 

3,112

 

 

 

 

 

Other assets

 

199,590

 

 

 

 

 

175,901

 

 

 

 

 

Total assets

 

$

3,763,644

 

 

 

 

 

$

4,094,540

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funding Sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW deposits

 

$

25,259

 

40

 

0.6

 

$

34,811

 

83

 

0.9

 

Regular money market deposits

 

253,763

 

641

 

1.0

 

252,331

 

631

 

1.0

 

Bonus money market deposits

 

584,190

 

1,475

 

1.0

 

659,974

 

1,650

 

1.0

 

Time deposits

 

588,876

 

1,692

 

1.1

 

779,910

 

6,188

 

3.1

 

Short-term borrowings

 

41,475

 

266

 

2.5

 

1,335

 

 

 

Long-term debt

 

26,084

 

210

 

3.2

 

831

 

 

 

Total interest-bearing liabilities

 

1,519,647

 

4,324

 

1.1

 

1,729,192

 

8,552

 

2.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Portion of noninterest-bearing funding sources

 

1,872,514

 

 

 

 

 

1,999,675

 

 

 

 

 

Total funding sources

 

3,392,161

 

4,324

 

0.5

 

3,728,867

 

8,552

 

0.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-Bearing Funding Sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

1,480,488

 

 

 

 

 

1,595,746

 

 

 

 

 

Other liabilities

 

56,042

 

 

 

 

 

34,756

 

 

 

 

 

Trust preferred securities(3)

 

38,677

 

 

 

 

 

38,617

 

 

 

 

 

Minority interest

 

32,507

 

 

 

 

 

30,957

 

 

 

 

 

Stockholders’ equity

 

636,283

 

 

 

 

 

665,272

 

 

 

 

 

Portion used to fund interest-earning assets

 

(1,872,514

)

 

 

 

 

(1,999,675

)

 

 

 

 

Total liabilities, minority interest, and stockholders’ equity

 

$

3,763,644

 

 

 

 

 

$

4,094,540

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and margin

 

 

 

$

49,065

 

5.7

%

 

 

$

61,439

 

6.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

2,932,576

 

 

 

 

 

$

3,322,772

 

 

 

 

 

 


(1)     Includes average interest-bearing deposits in other financial institutions of $7 and $535 for the three months ended September 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 $879 and $1,546 for the three months ended September 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.

 

27



 

AVERAGE BALANCES, RATES AND YIELDS

 

 

 

For the nine months ended September 30,

 

 

 

2002

 

2001

 

(Dollars in thousands)

 

Average
Balance

 

Interest

 

Yield/
Rate

 

Average
Balance

 

Interest

 

Yield/
Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

146,662

 

$

2,087

 

1.9

%

$

669,414

 

$

25,218

 

5.0

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

1,410,783

 

35,846

 

3.4

 

1,546,375

 

63,557

 

5.5

 

Non-taxable(2)

 

187,739

 

8,175

 

5.8

 

290,764

 

12,844

 

5.9

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

1,489,910

 

106,523

 

9.6

 

1,457,273

 

131,713

 

12.1

 

Real estate construction and term

 

102,495

 

5,532

 

7.2

 

84,169

 

7,011

 

11.1

 

Consumer and other

 

143,943

 

5,304

 

4.9

 

109,523

 

6,381

 

7.8

 

Total loans

 

1,736,348

 

117,359

 

9.0

 

1,650,965

 

145,105

 

11.8

 

Total interest-earning assets

 

3,481,532

 

163,467

 

6.3

 

4,157,518

 

246,724

 

7.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

181,837

 

 

 

 

 

252,120

 

 

 

 

 

Allowance for loan losses

 

(74,986

)

 

 

 

 

(76,573

)

 

 

 

 

Goodwill

 

97,472

 

 

 

 

 

1,049

 

 

 

 

 

Other assets

 

190,835

 

 

 

 

 

188,181

 

 

 

 

 

Total assets

 

$

3,876,690

 

 

 

 

 

$

4,522,295

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funding Sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW deposits

 

$

37,107

 

183

 

0.7

 

$

45,571

 

308

 

0.9

 

Regular money market deposits

 

294,361

 

2,188

 

1.0

 

276,399

 

2,404

 

1.2

 

Bonus money market deposits

 

612,049

 

4,579

 

1.0

 

790,266

 

7,173

 

1.2

 

Time deposits

 

623,466

 

5,958

 

1.3

 

808,780

 

20,795

 

3.4

 

Short-term borrowings

 

42,159

 

808

 

2.6

 

450

 

 

 

Long-term debt

 

25,942

 

629

 

3.2

 

280

 

 

 

Total interest-bearing liabilities

 

1,635,084

 

14,345

 

1.2

 

1,921,746

 

30,680

 

2.1

 

Portion of noninterest-bearing funding sources

 

1,846,448

 

 

 

 

 

2,235,772

 

 

 

 

 

Total funding sources

 

3,481,532

 

14,345

 

0.6

 

4,157,518

 

30,680

 

1.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-Bearing Funding Sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

1,489,521

 

 

 

 

 

1,821,208

 

 

 

 

 

Other liabilities

 

43,431

 

 

 

 

 

54,155

 

 

 

 

 

Trust preferred securities (3)

 

38,659

 

 

 

 

 

38,604

 

 

 

 

 

Minority interest

 

29,429

 

 

 

 

 

30,566

 

 

 

 

 

Stockholders’ equity

 

640,566

 

 

 

 

 

656,016

 

 

 

 

 

Portion used to fund interest-earning assets

 

(1,846,448

)

 

 

 

 

(2,235,772

)

 

 

 

 

Total liabilities, minority interest, and stockholders’ equity

 

$

3,876,690

 

 

 

 

 

$

4,522,295

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and margin

 

 

 

$

149,122

 

5.7

%

 

 

$

216,044

 

6.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

3,056,504

 

 

 

 

 

$

3,742,224

 

 

 

 

 

 


(1)     Includes average interest-bearing deposits in other financial institutions of $814 and $534 for the nine months ended September 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 $2,861 and $4,496 for the nine months ended September 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.

 

28



 

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 September 30,

 

Nine Months Ended September 30,

 

 

 

(Decrease) Increase
Due to Change in

 

(Decrease) Increase
Due to Change in

 

(Dollars in thousands)

 

Volume

 

Rate

 

Total

 

Volume

 

Rate

 

Total