ITEM 1. BUSINESS
General
Silicon Valley Bancshares is a bank holding company and a financial holding company. Our principal subsidiary, Silicon Valley Bank, is a California state-chartered bank and a member of the Federal Reserve System. Silicon Valley Bank's deposits are insured by the Federal Deposit Insurance Corporation. Our corporate headquarters is located at 3003 Tasman Drive, Santa Clara, California 95054 and our telephone number is 408.654.7400. When we refer to "Silicon Valley Bancshares," or "we" or similar words, we intend to include Silicon Valley Bancshares and all of its subsidiaries collectively, including Silicon Valley Bank. When we refer to "Silicon," we are referring only to Silicon Valley Bancshares.
Silicon Valley Bank's profitability, like most financial institutions, is primarily dependent on interest rate differentials. In general, the difference between the interest rates paid by Silicon Valley Bank on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received on its interest-earning assets, such as loans extended to its clients and securities held in its investment portfolio, comprise the major portion of its earnings. Silicon Valley Bank also provides a wide variety of fee-based financial services to its clients, including private label client investment and sweep products, foreign exchange products and deposit services. Over the long term, Silicon Valley Bank seeks to generate strong operating results by leveraging its lending practice to obtain warrant agreements to purchase equity in the technology and life sciences companies of the future.
Our strategy is to increase our revenues by marketing our full range of financial products and services to clients and venture capital industry contacts we originally developed through our commercial banking business. In addition to our commercial banking services, we engage in venture capital fund and direct equity investment activities, fee-based merger and acquisition services and venture capital fund and fund of funds management. We believe that our ability to successfully cross-sell our five lines of banking and financial services to our clients is one of the strengths of our business model.
We serve more than 9,500 clients across the country through 27 regional offices. We have 11 offices throughout California and operate regional offices across the country, including Arizona, Colorado, Florida, Georgia, Illinois, Massachusetts, Minnesota, New York, North Carolina, Oregon, Pennsylvania, Texas, Virginia, and Washington. We serve emerging-growth and mature companies in the technology and life sciences markets, as well as premium wineries. We believe our focus on specialized markets and extensive knowledge of the people and business issues driving them, that we provide a level of service and partnership that contributes to our clients' success.
Business Overview
Silicon Valley Bancshares is organized along five lines of banking and financial services as follows:
Commercial Banking
We provide cash management services including deposit services, collection services, disbursement services, electronic funds transfers, and online banking through SVBeConnect.
International banking services include trade services, foreign exchange services, export trade finance, and international cash management.
We also provide investment and advisory services through our broker-dealer, SVB Securities, which includes mutual funds, fixed income securities, and investment reporting and monitoring.
Our lending services include traditional term loans, commercial finance lending, and structured finance lending.
Investment Banking
We provide merger and acquisition and corporate partnering services through our broker-dealer subsidiary, Alliant Partners.
Private Banking
We provide a wide array of loan, personal asset management, mortgage services, trust and estate planning tailored for high-net-worth individuals. We also provide investment advisory services to these clients through our subsidiary, Woodside Asset Management, Inc.
Merchant Banking
We make private equity and venture capital fund investments, international alliances and manage two limited partnerships: a venture capital fund and a fund of funds.
Other Business Services
We provide Web-based business services, professional services, and executive placement services. Client Exchange™ is our online bulletin board, resume, and assets exchange service, and BenchmarkPro gives our clients the opportunity to see the financial performance of companies relative to their industry.
In each of the industry sectors we serve, our products and services are tailored to the client's business life cycle, from early stage through maturity.
Industry Sectors
Technology and Life Sciences
We serve a variety of clients in the technology and life sciences industries and markets. A key component of our technology and life sciences business strategy is to develop relationships with these clients at an early stage and offer them banking products and services throughout the business life cycle. We have cultivated strong relationships with venture capital firms, many of which are also clients, providing us access to many other potential clients.
Our early-stage clients generally keep large cash balances in their deposit accounts and usually do not borrow large amounts under their credit facilities. The primary source of funding for most early-stage clients is equity from venture capitalists and public markets. Lending to this market typically involves working capital lines of credit, equipment financing, asset acquisition loans, and bridge financing.
In the past few years, we expanded our target market within the technology and life sciences sector by adding an extended suite of financial products and services attractive to later-stage companies. From this initiative, we established our corporate technology practice, a network of senior lenders in every geographic region in which we operate, focused solely on the specific financial needs of our more mature clients. Today, we can comfortably address the financial needs of all companies in our target market, whether they are entrepreneurs with innovative ideas or multinational corporations with hundreds of millions of dollars in sales.
Our technology and life sciences clients generally fall into the following industries:
Communications and Electronics
The world's growing demand for faster, more convenient communication is driving entrepreneurs to create new telecommunications services, the infrastructure for delivering them and advanced electronics for accessing them. Companies in these fields face intense competitive pressures from established global corporations. Additionally, these companies are challenged with the complexity of mastering rapidly evolving optical and semiconductor technology. We help these companies gain access to the capital they need to bring their innovations to market and gain the critical mass required for long-term success.
Software and Services
Through our software and services practice, we are a full-service provider of banking solutions for companies in the Web-enabled applications, system integration and enterprise software industries. We help software companies capitalize on new opportunities with speed and financial flexibility by providing a wide range of credit facilities, international services and other support.
Life Sciences
Our life sciences practice serves companies in the biotechnology, drug discovery, medical software, and medical devices industries. The biotechnology industry includes companies involved in research and development of therapeutics and diagnostics for the medical and pharmaceuticals industries. The medical devices industry encompasses companies involved in the design, manufacturing, and distribution of surgical instruments and medical equipment.
Premium Wineries
Our premium wineries practice has become a leading provider of financial services to the rapidly expanding U.S. premium wine industry. We focus on vineyards and wineries that produce grapes and wines of the highest quality.
Industry Sectors Exited During 2002
For many years, Silicon Valley Bancshares pursued a strategy of niche expansion that translated into reaching beyond the boundaries of technology and life sciences sectors, to penetrate what we thought to be under-served markets. In late 2002, we decided to focus our resources on the most profitable industry sectors served by us, which are technology, life sciences and premium wineries. As a result of narrowing our focus, we deliberately exited three niches: real estate, media, and religious lending. We will continue to service our existing real estate, media and religious niche loans until they are paid-off. However, we will not seek any new lending opportunities in these niches. We expect the termination of these niches to enable us to focus on more profitable aspects of our business and improve overall profitability.
Equity Securities
We frequently obtain rights to acquire stock in the form of warrants in certain client companies as part of negotiated credit facilities. We also make investments in venture capital funds and direct equity investments in companies. As of December 31, 2002, we held 1,818 warrants in 1,355 companies, had investments in 244 venture capital funds, and had private equity investments in 25 companies. Additionally, we had private equity investments in 24 companies through our venture capital fund, Silicon Valley BancVentures, L.P. and made investments in 20 venture capital funds through our fund of funds, SVB Strategic Investors Fund, L.P.
Consolidated Managed Merchant Banking Activities
In 2000, we formed SVB Strategic Investors, LLC, the general partner of SVB Strategic Investors Fund, L.P. SVB Strategic Investors Fund, L.P. raised approximately $135.3 million in committed capital to invest as a limited partner in top-tier venture funds, leading regional venture funds, and venture funds with a unique niche. We have committed capital of $15.0 million to SVB Strategic Investors Fund, L.P., representing an ownership interest of 11.1%, of which $3.9 million has been funded as of December 31, 2002. Effective January 1, 2003, the agreement of limited partnership of SVB Strategic Investors Fund, L.P. was amended to reduce the amount of capital that can be called by 10% to $121.8 million as a result of reductions in the size of the underlying venture capital funds. Thus, our committed capital that can be called was reduced to $13.5 million.
In 2000, we formed Silicon Valley BancVentures, Inc., the general partner of Silicon Valley BancVentures, L.P. Silicon Valley BancVentures, L.P. raised $56.1 million in committed capital to make private equity investments in emerging growth technology and life sciences companies throughout the United States. We have committed capital of $6.0 million to Silicon Valley BancVentures, L.P., representing an ownership interest of 10.7%, of which $2.0 million has been funded as of December 31, 2002.
Business Combinations
On October 1, 2002, we acquired substantially all of the assets of Woodside Asset Management, Inc., an investment advisor firm, which has approximately $200 million under management for 70 clients. We are offering Woodside Asset Management's services as part of our private banking services. Additionally, as part of this acquisition, Silicon Valley Bancshares obtained the general partner interests in two limited partnerships, Taurus, L.P. and Libra, L.P., with total assets aggregating $12.4 million. We have less than a 1% ownership interest in each of these funds. The remaining ownership interest represents limited partners' funds invested on their behalf by the general partner in certain fixed income and marketable equity securities. However, due to our ability to control the investing activities of these limited partnerships, we have consolidated the related results of operations and financial condition into our consolidated financial statements as of and for the three-month period ended December 31, 2002. This acquisition did not have a material impact on goodwill and is not expected to materially impact our earnings in the short-term.
On September 28, 2001, a subsidiary of Silicon Valley Bank, SVB Securities, Inc., completed the acquisition of Alliant Partners, an investment banking firm providing merger and acquisition and corporate partnering services. Our investment banking business continues to do business under the name "Alliant Partners." See "Item 8. Consolidated Financial Statements and Supplementary Data-Notes 2 to the Consolidated Financial Statements-Business Combinations." On October 1, 2002, Alliant Partners was sold from Silicon Valley Bank to Silicon. This transfer allows Alliant Partners to operate under less restrictive bank holding company regulations and increasing our capital ratios at Silicon Valley Bank.
Competition
The banking and financial services industry is highly competitive. Our current competitors include other banks and specialty and diversified financial services companies that offer lending, leasing, and other financial products to our customer base. The principal competitive factors in our markets include product offerings, service and pricing. We believe we compete favorably in all our markets in all of these areas.
Employees
As of December 31, 2002, we employed approximately 1,019 full-time equivalent employees. None of our employees are represented by a labor union, and our employee relations are considered good. Competition for qualified personnel in our industry is significant, particularly for client relationship manager positions and officers and employees with strong relationships with the venture capital community. Our future success will depend in part on our continued ability to attract, hire, and retain qualified personnel.
Supervision and Regulation
Our operations are subject to extensive regulation by federal and state banking regulatory agencies. This regulatory framework is intended primarily to protect Silicon Valley Bank's depositors and the federal deposit insurance fund from losses and is not for the benefit of our stockholders. As a bank holding company and a financial holding company, Silicon is subject to the Federal Reserve Board's supervision and examination under the Bank Holding Company Act, or BHC Act, as revised by the Gramm-Leach-Bliley Act, discussed below. Silicon Valley Bank, as a California-chartered bank
and a member of the Federal Reserve System, is subject to primary supervision and examination by the Federal Reserve Board through the Federal Reserve Bank of San Francisco and the Commissioner of the California Department of Financial Institutions. The following summary describes some of the more significant laws, regulations and policies that affect our operations. This summary is not intended to be a complete listing of all laws that apply to us. Any change in the statutes, regulations, or policies that apply to our operations may have a material effect on our business.
Gramm-Leach-Bliley Act
On November 12, 1999, the Gramm-Leach-Bliley Act, or GLB Act, was signed into law, which significantly changed the regulatory structure and oversight of the financial services industry. The GLB Act repealed the provisions of the Glass-Steagall Act that restricted banks and securities firms from affiliating. It also revised the BHC Act to permit a qualifying bank holding company, called a financial holding company, to engage in a full range of financial activities, including banking, insurance, securities, and merchant banking activities. It permits financial holding companies to acquire many types of financial firms without the prior approval of the Federal Reserve Board. On November 14, 2000, Silicon became a financial holding company.
The GLB Act provides expanded financial affiliation opportunities for existing bank holding companies and permits other financial services providers to acquire banks and become bank holding companies without ceasing any existing financial activities. Previously, a bank holding company could only engage in activities that were "closely related to banking." This limitation no longer applies to bank holding companies that qualify to be treated as financial holding companies. To qualify as a financial holding company, a holding company's subsidiary depository institutions must be well capitalized and have at least satisfactory general, managerial and Community Reinvestment Act examination ratings. A nonqualifying bank holding company is limited to activities that were permissible under the BHC Act as of November 11, 1999.
The GLB Act changed the powers of national banks and their subsidiaries, and made similar changes in the powers of state bank subsidiaries. The GLB Act permits a national bank to underwrite, deal in and purchase state and local revenue bonds. It also allows a subsidiary of a national bank to engage in financial activities that the bank cannot, except for general insurance underwriting and real estate development and investment. In order for a subsidiary to engage in new financial activities, the national bank and its depository institution affiliates must be well capitalized; have at least satisfactory general, managerial, and Community Reinvestment Act examination ratings; and meet other qualification requirements relating to total assets, subordinated debt, capital, risk management, and affiliate transactions. Subsidiaries of state banks can exercise the same powers as national bank subsidiaries if they satisfy the same qualifying rules that apply to national banks. For state banks that are members of the Federal Reserve System like Silicon Valley Bank, prior approval of the Federal Reserve is required before a bank can create a subsidiary to capitalize on the additional financial activities empowered by the GLB Act.
The GLB Act also reformed the overall regulatory framework of the financial services industry. In order to implement its underlying purposes, the GLB Act pre-empted state laws that would restrict the types of financial affiliations that are authorized or permitted under the GLB Act, subject to specified exceptions for state insurance laws and regulations.
Separately, the GLB Act imposes customer privacy requirements on any company engaged in financial activities. Under these requirements, a financial company is required to protect the security and confidentiality of customer nonpublic personal information. Also, for customers who obtain a financial product such as a loan for personal, family, or household purposes, a financial company is required to disclose its privacy policy to the customer at the time the relationship is established and annually thereafter. The financial company must also disclose its policies concerning the sharing of the customer's nonpublic personal information with affiliates and third parties. If an exemption is not available, a financial company must provide consumers with a notice of its information-sharing practices that allows the consumer to reject the disclosure of its nonpublic personal information to
third parties. Third parties that receive such information are subject to the same restrictions as the financial company on the reuse of the information. Finally, a financial company is prohibited from disclosing an account number or similar item to a third party for use in telemarketing, direct mail marketing, or other marketing through electronic mail. Financial companies were required to be in compliance with these consumer privacy requirements no later than July 1, 2001.
As part of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act"), Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (IMLAFATA). IMLAFATA amended the Bank Secrecy Act and adopted certain additional measures that increase the obligation of financial institutions, including Silicon Valley Bank, to identify their customers, watch for and report upon suspicious transactions, respond to requests for information by federal banking regulatory authorities and law enforcement agencies, and share information with other financial institutions. The Secretary of the Treasury has adopted several regulations to implement these provisions. Silicon Valley Bank is also barred from dealing with foreign "shell" banks. In addition, IMLAFATA expands the circumstances under which funds in a bank account may be forfeited. IMLAFATA also amended the BHC Act and the Bank Merger Act to require the federal banking regulatory authorities to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing an application to expand operations. Silicon Valley Bank has in place a Bank Secrecy Act compliance program.
Capital Standards Applicable to Silicon and Silicon Valley Bank
Silicon
The Federal Reserve Board has adopted minimum risk-based capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and those recorded as off-balance sheet items. These include transactions, such as commitments, letters of credit, and recourse arrangements. Under these guidelines, dollar amounts of assets and credit-equivalent amounts of off-balance sheet items are adjusted by one of several conversion factors and/or risk adjustment percentages. The Federal Reserve Board requires bank holding companies generally to maintain a minimum ratio of qualifying total capital to risk-adjusted assets of 8% (10% to be well capitalized) and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4% (6% to be well capitalized). The Federal Reserve Board also requires Silicon Valley Bancshares to maintain a minimum amount of Tier 1 capital to total quarterly average assets, referred to as the Tier 1 leverage ratio. For a bank holding company in the highest of the five categories used by regulators to rate banking organizations, the minimum Tier 1 leverage ratio must be 3%. For all other institutions the ratio is 4% (5% to be well capitalized). In addition to these requirements, the Federal Reserve Board may set individual minimum capital requirements for specific institutions at rates substantially above the minimum guidelines and ratios. Under certain circumstances, Silicon must file written notice with, and obtain approval from, the Federal Reserve Board prior to purchasing or redeeming its equity securities. See "Item 1. Business-Supervision and Regulation-Prompt Corrective Action and Other Enforcement Mechanisms" for additional discussion of capital ratios.
Silicon is subject to rules that govern the regulatory capital treatment of equity investments in nonfinancial companies made on or after March 13, 2000, and that are held under certain specified legal authorities by a bank holding company. Under the rules, these equity investments will be subject to a separate capital charge that will reduce a bank holding company's Tier 1 capital and, correspondingly, will remove these assets from being taken into consideration in establishing a bank holding company's required capital ratios discussed above. Silicon's capital ratios exceeded the well-capitalized requirements, as defined above, at December 31, 2002. See "Item 8. Consolidated Financial Statements and Supplementary Data-Note 22 to the Consolidated Financial Statements-Regulatory Matters" for Silicon's capital ratios as of December 31, 2002.
The rules provide for the following incremental Tier 1 capital charges: 8% of the adjusted carrying value of the portion of such aggregate investments that are up to 15% of Tier 1 capital; 12% of the adjusted carrying value of the portion of such aggregate investments that are between 15% and 25% of Tier 1 capital; and 25% of the adjusted carrying value of the portion of such aggregate investments that exceed 25% of Tier 1 capital. The rules normally do not apply to unexercised warrants acquired by a bank as additional consideration for making a loan or to equity securities that are acquired in satisfaction of a debt previously contracted and that are held and divested in accordance with applicable law.
Silicon Valley Bank
The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% (10% to be well capitalized) and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4% (6% to be well capitalized). In addition to the risk-based guidelines, federal banking regulators also require banking organizations to maintain a minimum Tier 1 leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum Tier 1 leverage ratio must be 3%. For all other institutions the ratio is 4% (5% to be well capitalized). In addition to these uniform risk-based capital guidelines and leverage-ratio requirements that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates substantially above the minimum guidelines and ratios. Silicon Valley Bank's capital ratios exceeded the well-capitalized requirements, as defined above, at December 31, 2002. See "Item 8. Consolidated Financial Statements and Supplementary Data-Note 22 to the Consolidated Financial Statements-Regulatory Matters" for Silicon's and the Bank's capital ratios as of December 31, 2002.
Like Silicon, Silicon Valley Bank is subject to rules that govern the regulatory capital treatment of equity investments in non-financial companies made on or after March 13, 2000, but Silicon Valley Bank does not currently hold any such equity investments. See "Item 8. Consolidated Financial Statements and Supplementary Data-Note 22 to the Consolidated Financial Statements-Regulatory Matters" for Silicon Valley Bank's capital ratios as of December 31, 2002.
The federal banking agencies have also adopted a joint agency policy statement which provides that the adequacy and effectiveness of a bank's interest rate risk management process and the level of its interest rate exposures are critical factors in the evaluation of the bank's capital adequacy. A bank with material weaknesses in its interest rate risk management process or high levels of interest rate exposure relative to its capital will be directed by the federal banking agencies to take corrective actions. Financial institutions that have substantial amounts of their assets concentrated in high-risk loans or nontraditional banking activities and who fail to adequately manage these risks may be required to set aside capital in excess of the regulatory minimums.
Bank Holding Company Regulation of Silicon
As a registered bank holding company and a financial holding company, Silicon and its subsidiaries are subject to the Federal Reserve Board's supervision, regulation, examination, and reporting requirements under the BHC Act, as revised by the GLB Act. Prior to becoming a financial holding company under the BHC Act, Silicon was required to seek the prior approval of the Federal Reserve Board before acquiring ownership or control of more than 5% of the outstanding shares of any class of voting securities, or substantially all of the assets, of any company, including a bank or bank holding company. As a financial holding company, the prior approval of the Federal Reserve Board is not required to acquire ownership or control of entities engaged in specified financial activities, although the existing restrictions on directly or indirectly acquiring shares of a bank or savings association are still applicable. In addition, prior to becoming a financial holding company, Silicon was generally allowed to engage, directly or indirectly, only in banking and other activities that
were deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. As a financial holding company under the GLB Act, Silicon is permitted to engage in a full range of financial activities, including banking, insurance and securities activities, and additional activities that the Federal Reserve Board determines to be financial in nature, incidental to such financial activities, or complementary to a financial activity.
The Federal Reserve Board requires Silicon to maintain minimum capital ratios discussed above. Under Federal Reserve Board regulations, a bank holding company is also required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks or to observe established guidelines with respect to the payment of dividends by bank holding companies will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice, or a violation of the Federal Reserve Board's regulations, or both.
Silicon's ability to pay cash dividends is limited by generally applicable Delaware corporation law limits. In addition, there are statutory and regulatory limitations on the amount of dividends that may be paid to Silicon by Silicon Valley Bank. See "Item 1. Business-Supervision and Regulation-Restrictions on Dividends" for further discussion of current limitations on the ability of Silicon Valley Bank to pay dividends to Silicon.
Silicon is also treated as a bank holding company under the California Financial Code. As such, Silicon and its subsidiaries are subject to periodic examination by, and may be required to file reports with, the California Department of Financial Institutions.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 (the S-O Act) implementing legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board which will enforce auditing, quality control and independence standards, and will be funded by fees from all publicly traded companies, the law restricts provision of both auditing and consulting services by accounting firms. To ensure auditor independence, any non-audit services being provided to an audit client will require preapproval by a company's audit committee members. In addition, the audit partners must be rotated. Chief executive officers and chief financial officers, or their equivalent, are required to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the S-O Act, counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself. Longer prison terms and increased penalties will be applied to corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company's financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan "blackout" periods, and loans to company executives are restricted.
The S-O Act also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with a company's "registered public accounting firm" (RPAF). Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer. In addition, companies must disclose whether at least one member of the committee is a "financial expert" and if not, why
not. Under the S-O Act, a RPAF is prohibited from performing statutorily mandated audit services for a company if such company's chief executive officer, chief financial officer, comptroller, chief accounting officer, or any person serving in equivalent positions has been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. The S-O Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the audit of a company's financial statements for the purpose of rendering the financial statement's materially misleading.
The board is determined to continue a corporate governance structure that meets or exceeds the requirements of the Sarbanes-Oxley Act.
Regulation of Silicon Valley Bank
Silicon Valley Bank is a California-chartered bank and a member of the Federal Reserve System. It is subject to primary supervision, periodic examination, and regulation by the Commissioner of the California Department of Financial Institutions, or the Commissioner, the Federal Reserve Board, and the Federal Deposit Insurance Corporation. The Federal Reserve Board and the Commissioner require Silicon Valley Bank to maintain minimum capital levels discussed above. Both the Federal Reserve Board and the Commissioner also have broad powers and remedies available if they determine that the financial condition, capital resources, asset quality, management, earnings prospects, liquidity, sensitivity to market risk, or other aspects of Silicon Valley Bank's operations are unsatisfactory, or that Silicon Valley Bank is violating or has violated any law or regulation.
Restrictions on Dividends
Silicon is a legal entity separate and distinct from Silicon Valley Bank. Silicon Valley Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to Silicon. During 2002, Silicon Valley Bank paid dividends of $80.0 million to Silicon. Consequently, under these regulatory restrictions, the remaining amount available for payment of dividends to Silicon by Silicon Valley Bank totaled $13.7 million at December 31, 2002. During 2001, Silicon Valley Bank paid dividends of $140.0 million to Silicon. The Federal Reserve Board and the Commissioner have the authority to prohibit Silicon Valley Bank from engaging in activities that, in their opinion, constitute unsafe or unsound practices in conducting its business. Depending upon the financial condition of Silicon Valley Bank and other factors, the regulators could assert that the payment of dividends or other payments might, under some circumstances, be an unsafe or unsound practice. If Silicon Valley Bank fails to comply with its minimum capital requirements, its regulators could restrict its ability to pay dividends using prompt corrective action or other enforcement powers. The Commissioner may impose similar limitations on the conduct of California-chartered banks. See "Item 8. Consolidated Financial Statements and Supplementary Data-Note 23 to the Consolidated Financial Statements-Regulatory Matters" for further discussion on dividend restrictions.
Transactions with Affiliates
Silicon Valley Bank is subject to restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, Silicon or other affiliates; the purchase of, or investments in, stock or other securities of Silicon or other affiliates; and the taking of such securities as collateral for loans, and the purchase of assets of Silicon or other affiliates. These restrictions prevent Silicon and such other affiliates from borrowing from Silicon Valley Bank unless the loans are secured by specified amounts of collateral. Any such secured loans and investments by Silicon Valley Bank to, or in, Silicon or to, or in, any other affiliate are limited individually to 10% of Silicon Valley Bank's capital and surplus (as defined by federal regulations); and such secured loans and investments are limited to, in the aggregate, 20% of Silicon Valley Bank's capital and surplus (as defined by federal regulations). California law also imposes restrictions on transactions involving Silicon and other controlling persons of Silicon Valley Bank. Additional restrictions on transactions with affiliates may be imposed on Silicon Valley Bank under the prompt corrective action provisions of
federal law. See "Item 1. Business-Supervision and Regulation-Prompt Corrective Action and Other Enforcement Mechanisms" for related discussion regarding restrictions on transactions with affiliates.
Prompt Corrective Action and Other Enforcement Mechanisms
Federal banking agencies possess broad powers to take corrective and other supervisory action on an insured bank and its holding company. Federal laws require each federal banking agency to take prompt corrective action to resolve the problems of insured banks. Each federal banking agency has issued regulations defining five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.
Based upon its capital levels, a bank that is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. At each successive lower-capital category, an insured bank is subject to more restrictions, including restrictions on the bank's activities, operational practices or the ability to pay dividends. However, the federal banking agencies may not treat an institution as critically undercapitalized unless its capital ratios actually warrant such treatment.
In addition to measures taken under the prompt corrective action provisions, bank holding companies and insured banks may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses, or for violation of any law, rule, regulation, condition imposed in writing by the agency, or term of a written agreement with the agency. Enforcement actions may include the appointment of a conservator or receiver for the bank; the issuance of a cease and desist order that can be judicially enforced; the termination of the bank's deposit insurance; the imposition of civil monetary penalties; the issuance of directives to increase capital; the issuance of formal and informal agreements; the issuance of removal and prohibition orders against officers, directors, and other institution-affiliated parties; and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted.
Safety and Soundness Guidelines
The federal banking agencies have adopted guidelines to assist in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines establish operational and managerial standards relating to: (1) internal controls, information systems, and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) asset growth; and (5) compensation, fees, and benefits. In addition, the federal banking agencies have adopted safety and soundness guidelines for asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate capital and reserves.
Premiums for Deposit Insurance
Silicon Valley Bank's deposit accounts are insured by the Bank Insurance Fund (BIF), as administered by the Federal Deposit Insurance Corporation, up to the maximum permitted by law. The Federal Deposit Insurance Corporation's annual assessment for the insurance of BIF deposits as of December 31, 2002, ranged from 0 to 27 basis points per $100 of insured deposits. The amount charged is based on the regulatory capital of an institution and on a supervisory assessment of its operational risk profile. At December 31, 2002, Silicon Valley Bank's assessment rate was the statutory minimum assessment.
Silicon Valley Bank is also required to pay an annual assessment of approximately 1.7 basis points per $100 of insured deposits toward the retirement of U.S. government-issued financing orporation bonds.
The Federal Deposit Insurance Corporation may increase or decrease the assessment rate schedule on a semi-annual basis. Due to continued growth in deposits and some recent bank failures, the BIF is nearing its minimum ratio of 1.25% of insured deposits as mandated by law. If the ratio drops below 1.25%, it is likely the Federal Deposit Insurance Corporation will be required to assess premiums on all banks for the first time since 1996. Any increase in assessments or the assessment rate could have a material adverse effect on our earnings, depending on the amount of the increase.
Interstate Banking and Branching
Bank holding companies from any state may generally acquire banks and bank holding companies located in any other state, subject to nationwide and state-imposed deposit concentration limits and limits on the acquisition of recently established banks. Banks also have the ability, subject to specific restrictions, to acquire by acquisition or merger branches located outside their home state. The establishment of new interstate branches is also possible in those states with laws that expressly permit it. Interstate branches are subject to many of the laws of the states in which they are located.
Community Reinvestment Act and Fair Lending
Silicon Valley Bank is subject to a variety of fair lending laws and reporting obligations involving home mortgage lending operations and the Community Reinvestment Act, or CRA activities. The CRA generally requires the federal banking agencies to evaluate the record of a bank in meeting the credit needs of its local communities, including low- to moderate-income neighborhoods. In July 2002, the Federal Reserve Board approved Silicon Valley Bank's CRA Strategic Plan. This plan details our strategy in meeting our CRA obligations and is in effect from July 2002 through July 2005. The first CRA examination under this plan is scheduled for August 2003. In April 2001, the Federal Reserve Board rated Silicon Valley Bank "satisfactory" in complying with its CRA obligations. A bank can become subject to substantial penalties and corrective measures for a violation of certain fair lending laws. The federal banking agencies may take compliance with such laws and CRA obligations into account when regulating and supervising other activities or assessing whether to approve certain applications.
Regulation of Certain Subsidiaries
Two of our subsidiaries, Alliant Partners and SVB Securities, are registered as broker-dealers with the Securities and Exchange Commission ("SEC") and as such are subject to regulation by the SEC and by self-regulatory organizations, such as the National Association of Securities Dealers, Inc. (NASD).
Our broker-dealer subsidiaries are subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (the "Exchange Act"), which is designed to measure the general financial condition and liquidity of a broker-dealer. Under this rule, our broker-dealer subsidiaries are required to maintain the minimum net capital deemed necessary to meet broker-dealers' continuing commitments to customers and others. Under certain circumstances, this rule could limit the ability of Silicon Valley Bancshares to withdraw capital from Alliant Partners and limit the ability of Silicon Valley Bank to withdraw capital from SVB Securities.
As broker-dealers, Alliant Partners and SVB Securities are also subject to other regulations covering the operations of their respective businesses, including sales and trading practices; use of client funds and securities; and conduct of directors, officers, and employees. Broker-dealers are also subject to regulation by state securities administrators in the states where they do business. Violations of the stringent regulations governing the actions of a broker-dealer can result in the revocation of broker-dealer licenses; the imposition of censures or fines; the issuance of cease and desist orders; and the suspension or expulsion from the securities business of a firm, its officers, or its employees. The SEC and the national securities exchange emphasize in particular the need for supervision and control by broker-dealers of their employees.
Our investment advisory subsidiary, Woodside Asset Management, Inc., is registered with the SEC under the Investment Advisers Act of 1940, as amended, and is subject to that act and the rules and regulations promulgated there under.
Available Information
Our Internet address is http://www.svb.com. We make available free of charge through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Silicon Valley Bancshares was incorporated in Delaware in 1999.
ITEM 2.
ITEM 2. PROPERTIES
In 1995, we relocated our corporate headquarters and main branch and entered into a 10-year lease on a two-story office building located at 3003 Tasman Drive, Santa Clara, California. In July 1997 and June 2000, we finalized amendments to the original lease associated with our corporate headquarters. The amendments provide for the lease of two additional premises, approximating 56,000 square feet each, adjacent to the existing headquarters facility. We began occupying the first of these additional premises in August 1998 and the second in December 2000.
In 2002, we exited leased premises, located in Santa Clara, California, approximating 18,000 square feet. The lease on the building will expire in August 2005. Our management determined that the premises would have no future economic value to our operations, except for any potential future sub-lease arrangement. Therefore, during 2002, we incurred charge-offs of approximately $2.5 million related to the exit of these premises.
We currently operate 27 regional offices. We operate throughout the Silicon Valley in Fremont, Santa Clara, Palo Alto, and on Sand Hill Road, which is the center of the venture capital community in California. Other regional offices in California include: Irvine, Los Angeles, Napa Valley, San Diego, San Francisco, Santa Barbara, and Sonoma. Office locations outside of California include: Phoenix, Arizona; Boulder, Colorado; West Palm Beach, Florida; Atlanta, Georgia; Chicago, Illinois; Boston, Massachusetts; Minneapolis, Minnesota; New York, New York; Durham, North Carolina; Portland, Oregon; Philadelphia, Pennsylvania; Austin, Texas; Dallas, Texas; Northern Virginia; and Seattle, Washington. All of our properties are occupied under leases, which expire at various dates through October 2008, and in most instances include options to renew or extend at market rates and terms. We also own leasehold improvements, equipment, furniture, and fixtures at our offices, all of which are used in our business activities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item pending at December 31, 2002, or at the date of this report.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote by the stockholders of Silicon Valley Bancshares' common stock during the fourth quarter of 2002.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock is traded over the counter on the National Association of Securities Dealers Automated Quotation (Nasdaq) national market under the symbol "SIVB."
The following table shows the high and low sales prices for our common stock for each quarterly period during the last two years, based on the daily closing price as reported by the Nasdaq national market.
Stockholders
There were 775 registered holders of stock as of December 31, 2002. Additionally, we believe there were approximately 8,573 beneficial holders of common stock whose shares are held in the name of brokerage firms or other financial institutions. We are not provided with the number or identities of all of these stockholders, but we have estimated the number of such stockholders from the number of stockholder documents requested by these brokerage firms for distribution to their customers.
Dividends
We have not paid cash dividends on our common stock since 1992. Currently, we have no plan to pay cash dividends on our common stock. Periodically, we evaluate the decision of paying cash dividend in the context of our performance, general economic performance, and relevant tax and financial parameters. Our ability to pay cash dividends is limited by generally applicable corporate and banking laws and regulations. See "Item 1. Business-Supervision and Regulation-Restrictions on Dividends," and "Item 8. Consolidated Financial Statements and Supplementary Data-Note 23 to the Consolidated Financial Statements-Regulatory Matters" for additional discussion on restrictions and limitations on the payment of dividends imposed on us by government regulations.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and supplementary data as presented in Item 8 of this report. Certain reclassifications have been made to our prior years results to conform to 2002 presentations. Such reclassifications had no effect on the results of operations or stockholders' equity. In addition, the common stock summary information has been restated to reflect two-for-one stock splits affected on May 1, 1998 and May 15, 2000.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please read the following discussion and analysis of financial condition and results of operations in conjunction with our consolidated financial statements and supplementary data as presented in Item 8
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Silicon Valley Bancshares:
We have audited the accompanying consolidated balance sheets of Silicon Valley Bancshares and subsidiaries (the Company) as of December 31, 2002 and 2001, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Silicon Valley Bancshares and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
San Francisco, California
January 16, 2003
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
See notes to consolidated financial statements.
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See notes to consolidated financial statements.
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
See notes to consolidated financial statements.
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
The accounting and reporting policies of Silicon Valley Bancshares and its subsidiaries (the "Company") conform with accounting principles generally accepted in the United States of America. Certain reclassifications have been made to the Company's 2001 and 2000 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 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 headquartered in Santa Clara, California. The Bank serves more than 9,500 clients across the country, through its 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, life sciences and premium winery markets. Substantially all of the assets, liabilities, and earnings of the Company relate to its investment in the Bank. Additionally, the Company provides merger and acquisition services through its wholly-owned subsidiary, Alliant Partners ("Alliant").
Consolidation
The 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 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.
Similar accounting is applied to Woodside Financial, the general partner of Taurus, L.P. and Libra L.P., see "Item 8. Consolidated Financial Statements and Supplementary Data-Note 2 to the Consolidated Financial Statements-Business Combinations."
Basis of Financial Statement Presentation
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities as of the balance sheet date and the results of operations for the reported periods. 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 a range of possible changes cannot be made.
Revenue recognition
Revenues earned on mergers and acquisitions advisory services are recognized when Alliant Partners has fully completed its contractual and regulatory obligations related to its client service engagements.
Revenues related to client invest fees are recognized as earned.
Cash and Cash Equivalents
Cash and cash equivalents as reported in the 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 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 $2,880,000 at December 31, 2002 and 2001, respectively.
Investment Securities
Fixed Income Securities
Fixed income investment securities are classified as held-to-maturity, available-for-sale, trading, or non-marketable upon purchase or acquisition.
Securities purchased 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. The Company does not currently have any investments in the held-to-maturity portfolio as of December 31, 2002 or December 31, 2001. 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.
Securities that are held to meet investment objectives such as interest rate risk and liquidity management, and 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 reported in accumulated other comprehensive income, which is a separate component of stockholders' equity, until realized. Unrealized losses on available-for-sale securities becomes realized and are charged against earnings when it is determined that an other than temporary decline in value has occurred. Further, the cost basis of the individual security is written down to fair value as a new cost basis.
Amortization of premiums and accretion of discounts on debt securities are included in interest income over the contractual terms of the underlying investment securities using the straight-line method, which approximates the effective interest 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 does not have a trading portfolio as of December 31, 2002 and December 31, 2001.
Non-marketable securities include Federal Reserve Bank and Federal Home Loan Bank stock and tax credit funds.
Marketable Equity Securities
Investments in marketable equity securities include warrants for shares of publicly-traded companies and investments in shares of publicly-traded companies. 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."
Unrealized gains or losses after applicable taxes, on available-for-sale marketable 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 subsequent to the portfolio company's initial public offering. Gains or losses on these marketable equity instruments are recorded in the consolidated statements of income in the period the underlying securities are sold to a third party.
Gains or losses on marketable warrant and equity investment securities, which result from a portfolio company being acquired by a publicly-traded company, are marked to market when the acquisition occurs. 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 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 are measured from the acquisition price, are realized in the Company's consolidated statements of income.
Notwithstanding the foregoing, a decline in the fair value of any of these securities, which is considered other than temporary, is recorded in the Company's consolidated statements of income in the period the impairment occurs.
Summary financial data related to the Company's marketable equity securities at December 31, 2002 are presented in "Item 8. Consolidated Financial Statements and Supplementary Data-Note 6 to the Consolidated Financial Statements-Investment Securities."
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 its venture capital fund, Silicon Valley BancVentures, L.P., which makes investments in preferred or common stock of privately held companies
•Through its fund of funds SVB Strategic Investors Fund, L.P., which makes investments in venture capital funds, which in turn invest in 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.
The Company records wholly owned non-marketable venture capital fund investments and other direct private equity investments on a cost basis. The Company's interests are considered minor, as it owns less than 5% and has no influence over the company's operating and financial policies. The Company's cost basis in each investment is reduced by returns until the cost basis of the individual investment is fully recovered. Returns in excess of the cost basis are recorded as investment gains in noninterest income.
The values of the investments are reviewed at least quarterly, giving consideration to the facts and circumstances of each individual investment. The Company's review of private equity investments typically includes the relevant market conditions, offering prices, operating results, financial conditions, and exit strategies. A decline in the fair value that 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 investment losses.
Investments held by Silicon Valley BancVentures, L.P. are recorded at fair value 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 as determined by the general partner. The valuation generally remains at cost until such time that there is significant evidence of a change in values based upon consideration of the relevant market conditions, offering prices, operating results, financial conditions, exit strategy, 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. As such, Silicon Valley BancVentures, L.P. is fully consolidated and any gains or losses resulting from changes in the estimated fair value of the investments are recorded as investment gains or losses in our consolidated statements of income. The portion of any gains or losses belonging to the limited partners is reflected in minority interest and adjusts the Company's income to its percentage ownership.
The SVB Strategic Investors Fund, L.P. portfolio consists primarily of investments in venture capital funds. These funds are recorded at fair value using investment accounting rules. The carrying value of the investments are determined by the general partner based on the percentage of SVB Strategic Investors Fund, L.P.'s interest in the total fair market value as provided by each venture capital fund investment. SVB Strategic Investors, LLC generally utilizes the fair values assigned to the underlying portfolio investments by the management of the venture capital funds. The estimated fair value of the investments are determined after giving consideration to the relevant market conditions, offering prices, operating results, financial conditions, exit strategy, and other pertinent information. 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. As such, SVB Strategic Investors, LLC is fully consolidated, and any gains or losses resulting from changes in the estimated fair value of the venture capital fund investments are recorded as investment gains or losses in the Company's consolidated statements of income. The limited partner's share of any gains or losses is reflected in minority interest and adjusts the Company's income to its percentage ownership.
Summary financial data related to the Company's non-marketable equity securities at December 31, 2002 are presented in "Item 8. Consolidated Financial Statements and Supplementary Data-Note 6 to the Consolidated Financial Statements-Investment Securities."
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, adjusted for actual loan prepayment experience.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses charged to expense to provide for credit risk. The Company applies the following evaluation process to its loan portfolio to estimate the required allowance for loan losses.
The Company maintains a systematic process for the evaluation of individual loans and pools of loans for inherent risk of loan losses. On a quarterly basis, each loan in its portfolio is assigned a credit risk-rating. Credit risk-ratings are assigned on a scale of 1 to 10, 1 representing loans with a low risk of nonpayment, 9 representing loans with the highest risk of nonpayment, and 10 representing loans which have been charged-off. This credit risk-rating evaluation process 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 policies require certain credit relationships that exceed specific dollar values, be reviewed by a committee of senior management, at least quarterly. The Company's review process evaluates the appropriateness of the credit risk rating and allocation of allowance for loan losses, 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 by SFAS No. 114.
The Company's evaluation process is designed to determine the adequacy of the allowance for loan losses. The Company assesses the risk of losses inherent in the loan portfolio by utilizing modeling techniques. For this purpose the Company has developed a statistical model based on historical loan loss migration to estimate an appropriate allowance for outstanding loan balances. In addition, the Company applies macro and contingent allocations to the results of the aforementioned model to ascertain the total allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the establishment of the allowance for loan losses relies, to a great extent, on the judgment and experience of our management.
The Company's allowance for loan losses is established for loan losses not yet realized. The process of anticipating loan losses is imprecise. The Company's allowance for loan losses is its best estimate using the historical loan loss experience and its perception of variables potentially leading to deviation from the historical loss experience.
Nonaccrual Loans
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" requires the Company 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, "Accounting by Creditors for Impairment of a Loan."
When a loan is placed on nonaccrual status, the accrued interest is reversed against interest income and the loan is accounted for on the cash or cost recovery method thereafter until qualifying for return to accrual status. Generally, a loan will be returned to accrual status when all delinquent principal and interest become current in accordance with the terms of the loan agreement and full collection of the principal and interest appears probable.
Premises and Equipment
Premises and equipment are reported at cost, less accumulated depreciation and amortization computed using the straight-line method over the estimated useful lives of the assets or the terms of the related leases, whichever is shorter. This time period may range from one to 10 years. The Company had no capitalized lease obligations at December 31, 2002 and 2001.
Foreign Exchange Contracts
The Company enters into foreign exchange contracts with clients involved in international trade finance activities. The Company also enters into an opposite-way foreign exchange contract with a correspondent bank, which completely mitigates the risk of fluctuations in foreign currency exchange rates, for each of the contracts entered into with its clients. However, settlement, credit, and operational risks remain. The Company does not enter into foreign exchange 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.
Income Taxes
The Company files a consolidated federal income tax return, and consolidated or combined state income tax returns as appropriate. The Company's federal and state income tax provisions are based upon taxes payable for the current year as well as current year changes in deferred taxes related to temporary differences between the tax basis and financial statement balances of assets and liabilities. Deferred tax assets and liabilities are included in the consolidated financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are
expected to be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and related interpretations, in accounting for its employee stock options rather than the alternative fair value accounting allowed by SFAS No. 123, "Accounting for Stock-Based Compensation." APB No. 25 provides that the compensation expense relative to the Company's employee stock options is measured based on the intrinsic value of the stock option. SFAS No. 123 requires companies that continue to follow APB No. 25 to provide a pro forma disclosure of the impact of applying the fair value method of SFAS No. 123. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation." See "Item 8. Consolidated Financial Statements and Supplementary Data-Note 18 to the Consolidated Financial Statements-Employee Benefit Plans."
The following is a reconciliation of reported and pro forma net income and earning per share for the years ended December 31, 2002, 2001 and 2000:
Earnings Per Share
Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
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 Other Business Services. See "Item 8.
Consolidated Financial Statements and Supplementary Data-Note 14 to the Consolidated Financial Statements-Segment Reporting."
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. 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 "Item 8. Consolidated Financial Statements and Supplementary Data-Note 12 and Note 13 to the Consolidated Financial Statements-Trust Preferred Securities and Derivative Financial Instruments." 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.
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 "Item 8. Consolidated Financial Statements and Supplementary Data-Note 2 to the Consolidated Financial Statements-Business Combinations."
Goodwill and Other Intangibles
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 adopted the provisions of SFAS No. 142 on January 1, 2002.
Substantially all of the Company's goodwill pertains to the acquisition of Alliant Partners, discussed in "Item 8. Consolidated Financial Statements and Supplementary Data-Note 2 to
Consolidated Financial Statements-Business Combinations." In accordance with the provisions of SFAS No. 142, the goodwill balance was determined to be unamortizable. The Company completed its initial test for goodwill impairment in July 2002, the result of which concluded that the goodwill balance was not impaired. At December 31, 2002, the Company's goodwill totaled $100.5 million.
In testing for a potential impairment of goodwill, SFAS 142 requires the Company to: (1) allocate goodwill to the reporting units to which the acquired goodwill relates; (2) estimate the fair value of those reporting units to which goodwill relates; and (3) determine the carrying value (book value) of those reporting units. Furthermore, if the estimated fair value is less than the carrying value for a particular reporting unit, then the Company is required to estimate the fair value of all identifiable assets and liabilities of the reporting unit, in a manner similar to a purchase price allocation for an acquired business. Only after this process is completed is the amount of goodwill impairment determined.
Accordingly, the process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. In estimating the fair value of the reporting units with recognized goodwill for the purposes of our financial statements at December 31, 2002, the Company applied the fair value test using discounted estimated net cash flows. The Company's cash flow forecasts were based on assumptions that are consistent with the plans and estimates it is using to manage the underlying business.
Based on the Company's best estimates, it has concluded that there is no impairment of its goodwill. However, changes in these estimates could cause the businesses to be valued differently. If Alliant does not meet projected operating results, subsequent analyses could result in a non-cash goodwill impairment charge, depending on the estimated value of the Alliant business unit and the value of the other assets and liabilities attributed to the business.
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. Adopting 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 ("FASB") issued SFAS No. 147, "Acquisitions of Certain Financial Institutions," which addresses 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 adoption of SFAS 147 has had no material impact on the Company's results of operations or financial position.
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which amended SFAS No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based compensation. In addition, this statement amended the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the chosen method on reporting results. The provisions of SFAS No. 148 are effective for annual periods ending December 15, 2002, and for interim periods beginning after December 15, 2002. See "Item 8. Consolidated Financial Statements and Supplementary Data-Note 1 and Note 18 to the Consolidated Financial Statements-Significant Accounting policies-Stock Based Compensation, and Employee Benefit Plans."
In November 2002, FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." It addresses the accounting for the stand-ready obligation under guarantees. A guarantor is required to recognize a liability with respect to its stand-ready obligation under the guarantee even if the probability of future payments under the guarantee is remote. The initial liability will be measured as the fair value of the stand-ready obligation. Additionally, the Interpretation addresses disclosure requirements for guarantees including the nature and terms of the guarantees, maximum potential for future amounts and the carrying amount of the liabilities. The disclosure requirements are effective for interim and annual financial statements ending after December 15, 2002. The initial recognition and measurement provisions are effective for all guarantees within the scope of Interpretation 45 issued or modified after December 31, 2002. Commercial letters of credit and other loan commitments, which are commonly thought of as guarantees of funding were not included in the scope of the interpretation. The Bank has made relevant disclosures in the current year financial statements. The Bank does not expect the adoption of Interpretation No. 45 to have a material impact on its financials.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities (VIE)." It defined a VIE as a corporation, partnership, trust, or any other legal structure used for the business purpose that either a) does not have equity investors with voting rights or b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. This interpretation will require a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE's activities or entitled to receive a majority of the entity's residual return. The provisions of interpretation No. 46 are required to be applied immediately to VIEs created after January 31, 2003. As of December 31, 2002, the Company invested as a limited partner in six real estate limited partnerships. These partnership invest in affordable housing projects which provide its investors Low Income Housing Tax Credits. As of December 31, 2002, the Company committed approximately $24.6 million to these partnerships, of which approximately $20.4 million had been funded. One or more of these limited partnerships, may be deemed to be a VIE. These partnerships were not consolidated in the Company's financial statements at December 31, 2002. The Company does not expect the impact of consolidation of these partnerships to have a material impact on its financial statements.
Common Stock Split
In March 2000, the Board of Directors approved a two-for-one stock split, in the form of a stock dividend of the Company's common stock. Holders of the Company's $0.001 par value common stock as of the record date, April 21, 2000 received one additional share of $0.001 par value for every one share of common stock they owned as of the record date. Shares and per share amounts for all periods presented in the accompanying consolidated financial statements have been adjusted to give retroactive recognition to a two-for-one stock split distributed on May 15, 2000.
2. Business Combinations
On October 1, 2002, the Company acquired substantially all of the assets of Woodside Asset Management, Inc., an investment advisor firm, which has approximately $200 million under management for 70 clients. Woodside Asset Management, Inc. is expected to enable the Company to expand its product offerings in the private banking. Additionally, as part of this acquisition, Silicon Valley Bancshares obtained the general partner interests in two limited partnerships, Taurus, L.P., and Libra, L.P., with total assets aggregating $12.4 million. The Company has less than a 1% ownership interest in each of these funds. The remaining ownership interest represents limited partners' funds invested on their behalf by the general partner in certain fixed income and marketable equity securities. However, due to the Company's ability to control the investing activities of these limited partnerships, we have consolidated the related results of operations and financial condition into our consolidated financial statements, as of and for the three-month period ended December 31, 2002. This acquisition did not have a material impact on goodwill and is not expected to materially impact the Company's earnings in the short-term.
On September 28, 2001, the Company completed its acquisition of Alliant Partners and has included its results of operations in the Company's consolidated results of operations since that date. 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 in cash. The remaining $28.0 million was discounted at prevailing forward market interest rates ranging between 2.9% and 3.3% and was recorded as short-term and long-term 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 "Item 8. Consolidated Financial Statements and Supplementary Data-Note 1 and Note 11 to the Consolidated Financial Statements-Significant Accounting Policies and Borrowings."
3. Earnings Per Share
The following is a reconciliation of basic EPS to diluted EPS for the years ended December 31, 2002, 2001, and 2000.
4. Restrictions on Cash Balances
The Bank is required to maintain reserves against customer deposits by keeping balances with the Federal Reserve Bank of San Francisco in a noninterest-bearing cash account. The minimum required reserve amounts were $2.8 million and $12.3 million at December 31, 2002 and 2001, respectively. The average required reserve balance totaled $10.2 million in 2002 and $17.3 million in 2001. The Company has restricted cash related to the Trust Preferred Securities totaling $2.0 million and $0 at December 31, 2002 and 2001, respectively. See "Item 8. Consolidated Financial Statements and Supplementary Data-Note 12 to the Consolidated Financial Statements-Trust Preferred Securities."
5. Securities Purchased under Agreement to Resell
Securities purchased under agreement to resell at December 31, 2002 consisted of U.S. Treasury securities, U.S. agency securities, and private label mortgage-backed securities, which are rated A or better. The securities underlying the agreement are held in book-entry form in the Company's name in the custodian's account. Securities purchased under agreement to resell totaled $202.7 million at December 31, 2002, averaged $145.0 million in 2002, and the maximum amount outstanding at any month-end during 2002 was $304.9 million.
6. Investment Securities
The following tables detail the major components of the Company's investment securities portfolio at December 31, 2002 and 2001.
(1)Available-for-sale other private equity investments included $7.1 million related to investments owned by two consolidated limited partnerships, Taurus, L.P. and Libra, L.P. as of December 31, 2002. The Company has a controlling ownership interest of less than 1% in the funds.
(2)Non-marketable venture capital fund investments included $22.1 million and $16.5 million related to the Company's fund of funds, SVB Strategic Investors Fund, L.P., as of December 31, 2002 and 2001, respectively. The Company has a controlling ownership interest of 11.1% in the fund. Excluding the minority interest owned portion of SVB Strategic Investors Fund, L.P., the Company has non-marketable venture capital fund investments of $27.2 million and $24.0 million as of December 31, 2002, and 2001, respectively.
(3)Non-marketable other private equity investments included $10.0 million and $5.1 million related to the Company's venture capital fund, Silicon Valley BancVentures, L.P., as of December 31, 2002 and 2001, respectively. The Company has a controlling ownership interest of 10.7% in the fund. Excluding the minority interest owned portion of Silicon Valley BancVentures, L.P., the Company has non-marketable other private equity investments of $7.9 million and $9.1 million as of December 31, 2002, and 2001, respectively. The amortized cost and fair value of investment securities classified as available-for-sale at December 31, 2002, categorized by remaining contractual maturity, except for variable rate auction rate securities, which use the next reset date as the maturity date, are shown below. Expected remaining maturities of mortgage-backed securities, collateralized mortgage obligations and callable U.S. agency securities may differ significantly from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. Warrant securities, venture
capital fund investments, other private equity investments, Federal Home Loan Bank Stock, Federal Reserve Bank stock, and tax credit funds were included in the table below as due after ten years.
Investment securities with a fair value of $89.4 million and $87.5 million at December 31, 2002 and 2001, respectively, were pledged to secure certain public deposits and a line of credit at the Federal Reserve Bank of San Francisco discount window. For further information, see "Item 8. Consolidated Financial Statements and Supplementary Data-Note 11 to the Consolidated Financial Statements-Borrowings."
The cost of investment securities is determined on a specific identification basis. The following table presents the components of gains and losses on investment securities, excluding warrant gains, for the years ended December 31, 2002, 2001, and 2000.
(1)Net (losses) gains on investment securities included $(5.7) million and $(3.0) million related to the Company's fund of funds, SVB Strategic Investors Fund, L.P., for the years ended December 31, 2002 and 2001, respectively. The Company has a controlling ownership interest of 11.1% in the fund. In addition, net gains (losses) on investment securities included $(0.7) million and $(3.5) million related to the Company's venture capital fund, Silicon Valley BancVentures, L.P., for the years ended December 31, 2002 and 2001, respectively. The Company has a controlling ownership interest of 10.7% in the fund. Excluding the minority interest owned portions of SVB Strategic Investors Fund, L.P. and Silicon Valley BancVentures, L.P., the Company has net (losses) gains on investment securities of $(4.1) million and $(6.6) million for the years ended December 31, 2002, and 2001, respectively. Warrant gains totaled $1.7 million, $8.5 million, and $86.3 million in 2002, 2001, and 2000, respectively.
7. Loans and the Allowance for Loan Losses
The detailed composition of loans, net of unearned income of $11.8 million and $11.9 million at December 31, 2002 and 2001, respectively, is presented in the following table:
The Company's loan classifications for financial reporting purposes differ from those for regulatory reporting purposes. Loans are classified for financial reporting purposes based upon the purpose and primary source of repayment of the loans. Loans are classified for regulatory reporting purposes based upon the type of collateral securing the loans.
A substantial percentage of the Company's loans are commercial in nature, and such loans are generally made to emerging growth or middle-market companies in a variety of industries. As of December 31, 2002, the Company's software tools and applications industry subsector represented 16.2% of total loans, premium wineries industry sector represented 13.2% of total loans, venture capital industry subsector represented 11.8% of total loans, and our private banking industry subsector represented 10.3% of total loans. No other industry sector represented more than 10.0% of total loans at December 31, 2002.
The activity in the allowance for loan losses is summarized below:
The aggregate recorded investment in loans for which impairment has been determined in accordance with SFAS No. 114 totaled $20.4 million and $17.3 million at December 31, 2002 and 2001, respectively. The allowance for loan losses balance of $70.5 million, $72.4 million, and $73.8 million have been allocated to the total gross loans balance of $2.1 billion, $1.8 billion, and $1.7 billion as of December 31, 2002, 2001 and 2000, respectively. During 2002 and 2001, nonaccrual loans represented all impaired loans. Allocations of the allowance for loan losses related to impaired loans totaled $6.5 million at December 31, 2002 and $7.4 million at December 31, 2001. Average impaired loans for 2002, 2001, and 2000 totaled $19.6 million, $21.6 million, and $24.3 million, respectively. If these loans had not been impaired, $1.3 million, $2.1 million, and $1.4 million in interest income would have been realized during the years ended December 31, 2002, 2001, and 2000, respectively. The Company realized no interest income on such impaired loans during 2002 or 2001.
8. Premises and Equipment
Premises and equipment consist of the following:
The Company is obligated under a number of noncancelable operating leases for premises that expire at various dates through October 2008, and in most instances, include options to renew or extend at market rates and terms. Such leases may provide for periodic adjustments of rentals during the term of the lease based on changes in various economic indicators. The following table presents minimum payments under noncancelable operating leases as of December 31, 2002:
Rent expense for premises leased under operating leases totaled $13.7 million, $10.2 million, and $5.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. In 2002, the Company exited leased premises, located in Santa Clara, California, approximating 18,000 square feet. The lease on the building will expire in August 2005. The management determined that the premises would have no future economic value to the Company's operations, except for any potential future sub-lease arrangement. Therefore, during 2002, the Company incurred charge-offs of approximately $2.4 million related to the exit of these premises.
9. Goodwill
The goodwill balance at December 31, 2002 and December 31, 2001 was $100.5 million and $96.4 million, respectively. The increase of $4.2 million in 2002 over 2001 was related to $1.9 million for the acquisition of Woodside Asset Management, Inc., and $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, see "Item 8. Consolidated Financial Statements and Supplementary Data-Note 2 to the Consolidated Financial Statements-Business Combinations." In accordance with the provisions of SFAS 142, the goodwill balance was determined 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.
10. Deposits
The aggregate amount of time deposit accounts individually exceeding $100,000 totaled $530.5 million and $653.5 million at December 31, 2002 and 2001, respectively. At December 31, 2002, time deposit accounts, individually exceeding $100,000, totaling $530.2 million were scheduled to mature within one year.
11. Borrowings
As of December 31, 2002, the Company had $9.1 million, and $17.4 million in short-term borrowings and long-term debt, respectively. These borrowings were recorded in relation to the acquisition of Alliant Partners and are payable to the former owners, who are now employed by the Company. The short-term note payable, due September 30, 2003, has a face value of $9.3 million. Interest expense related to short-term borrowings was $1.1 million and $0.3 million for the years ended December 31, 2002 and 2001, respectively. The long-term note payable, due in two equal annual installments commencing September 28, 2004, has a face value of $18.7 million. Interest expense related to long-term debt was $0.6 million and $0.2 million for the years ended December 31, 2002 and 2001, respectively. These notes were discounted over their respective terms, based on market interest rates as of September 28, 2001; see "Item 8. Consolidated Financial Statements and Supplementary Data-Note 2 and Note 19-Business Combinations and Related Parties." The Company currently has available federal funds and lines of credit facilities totaling $120.0 million, which were unused at December 31, 2002.
12. Trust Preferred Securities
In May 1998, the Company issued $40.0 million in cumulative trust preferred securities through a newly formed special-purpose trust, SVB Capital I. The trust is a wholly owned consolidated subsidiary of the Company and its sole assets are the junior subordinated deferrable interest debentures. Distributions are cumulative and are payable quarterly at a rate of 8.25% per annum of the stated liquidation amount of $25 per preferred security. Distributions of $3.3 million were paid for each of the years ended December 31, 2002, 2001 and 2000. The obligations of the trust are fully and unconditionally guaranteed, on a subordinated basis, by the Company. The trust preferred securities are mandatorily redeemable upon the maturity of the debentures on June 15, 2028, or to the extent of any earlier redemption of any debentures by the Company, and are callable beginning June 15, 2003. Issuance costs of $1.6 million related to the trust preferred securities were deferred and are being amortized over the period until mandatory redemption of the securities in June 2028. Based on the Nasdaq closing price, the fair value of the trust preferred securities totaled $38.7 million and $36.6 million as of December 31, 2002 and 2001, respectively.
On June 3, 2002, the Company entered into a derivative agreement, that provided a $1.1 million decrease in trust preferred security distribution expense for 2002. See "Item 8. Consolidated Financial Statements and Supplementary Data-Note 13 to the Consolidated Financial Statements-Derivative Financial Instruments."
13. Derivative Financial Instruments
Derivative instruments that the Company uses as a part of its interest rate risk management may include interest rate swaps, caps, and floors and forward contracts. On June 3, 2002, Silicon 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. Consolidated Financial Statements and Supplementary Data-Note 12 to the Consolidated Financial Statements-Trust Preferred Securities." 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 that was recorded in other assets at December 31, 2002.
Because the swap meets the criteria for the short cut treatment, the benefit or expense is recorded in the period incurred. This derivative agreement provided a benefit of $1.1 million in 2002. The terms of the derivative agreement provide for quarterly receipt of a 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.
For the Company's Foreign Exchange Contracts and Foreign Currency Option Contracts, see "Item 8. Consolidated Financial Statements and Supplementary Data-Note 20 to the Consolidated Financial Statements-Financial Instruments with Off-Balance-Sheet Risk."
14. 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 Other Business Services. As of December 31, 2002, the Commercial Bank is the principal operating segment of the Company. The remaining segments do not meet segment reporting criteria. Therefore, separate reporting of financial segment information is not considered necessary. Segment data for 2002, 2001, and 2000 have been reflected below based on the current 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.
The Company's primary source of revenue is from net interest income. Thus, 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.
(1)Noninterest income (loss) presented in all other column included warrant income of $1.7 million, $8.5 million, and $86.3 million for years ended December 31, 2002, 2001, and 2000, respectively.
(2)Commercial Bank column included depreciation and amortization of $7.9 million, $8.5, and $3.8 million for years ended December 31, 2002, 2001, and 2000, respectively.
(3)Total assets presented in all other column included goodwill, which was primarily related to Alliant Partners of $100.6 million, $96.4 million, and $0 million for years ended December 31, 2002, 2001, and 2000, respectively. 15. Common Stock Repurchases
The Company has repurchased 3.3 million shares of common stock totaling $59.7 million during 2002, in conjunction with the $100.0 million share repurchase program authorized by the Board of Directors on September 16, 2002. Additionally, during 2002, the Company repurchased 2.3 million shares of common stock totaling $50.2 million in conjunction with the $50.0 million shares repurchase program authorized by the Board of Directors on March 21, 2002.
In November 2002, the Company entered into an accelerated stock repurchase (ASR) agreement to facilitate the repurchase of our shares of common stock. Pursuant to the agreement, the Company purchased approximately 2.25 million shares from the counterparty for approximately $40 million. The agreement has a five-year term. During the term of the agreement, the Company has an obligation to
sell shares to the counterparty equal to the number of shares the Company purchased from them at the outset of the agreement. The Company may fulfill this obligation either by buying shares in the open market and selling those shares to the counterparty at forward prices specified in the agreement or by issuing new shares and remitting them to the counterparty in exchange for the forward price. The forward price is based on a formula that begins with the price of the initial purchase and is adjusted for fees and commissions and the length of time from the initial purchase to when shares are sold or delivered to the counterparty. The Company has complete discretion as to the timing and number of shares that the Company sells to the counterparty subject to a cumulative minimum of 20% by the end of each year of the agreement. Thus, the Company is required to sell to the counterparty 20% of the shares in the ASR by the first anniversary date, 40% by the second anniversary date, and so on.
The Company accounted for the initial payment under the ASR as a purchase of treasury stock, and the Company subsequently retired those shares. The obligation under the forward contract is not recorded in the Company's financial statements, but, rather, treated as a contingent obligation. Under the agreement, the number of shares to be issued by the Company, if the Company were required to pay the counterparty and elected to net settle in shares, is capped at 6.7 million. As of the end of 2002, the Company had purchased in the open market and sold to the counterparty approximately 1.56 million shares leaving less than 700,000 shares remaining under the forward contract obligation.
Based on the Company's stock price at the end of the fourth quarter of 2002, it would pay approximately $356,000 in cash to the counterparty to settle the contract. However, for every one dollar of change in the average price of the Company's common stock during the valuation period, the settlement amount would change by approximately $700,000. Subsequent to the end of the year, but prior to filing its Report on Form 10-K, the Company completed all obligations under the ASR.
The Company repurchased approximately 4,462,000 shares of common stock totaling $99.9 million during 2001, in conjunction with the 5,000,000 share repurchase program authorized by the Board of Directors on April 5, 2001.
16. Income Taxes
The components of the Company's provision for income taxes consist of the following:
Reconciliation between the federal statutory income tax rate and the Company's effective income tax rate is shown below.
Deferred tax assets (liabilities) consist of the following:
The Company believes a valuation allowance is not needed to reduce the net deferred tax assets as it is more likely than not that the net deferred tax assets will be realized through recovery of taxes previously paid and/or future taxable income.
17. Comprehensive Income
Components of other comprehensive income (loss) including the related income tax expense or benefit, consist of the following:
18. Employee Benefit Plans
The Silicon Valley Bank 401(k) and Employee Stock Ownership Plan (the "Plan") is a combined 401(k) tax-deferred savings plan and employee stock ownership plan (ESOP) in which all employees of the Company are eligible to participate.
Effective January 1, 2003, employees participating in the 401(k) component of the Plan are allowed to contribute up to 75% of their pre-tax compensation as defined in the plan, up to a maximum of $12,000 in a fiscal year. The amount of salary deferred is not subject to federal or state income taxes at the time of deferral. As of December 31, 2002, the Company matched up to $1,000 of an employee's contributions, per annum, which vested at 20% per year. Effective January 1, 2003, the Company will match up to 5% of employee's contribution to the 401(k) plan, which will vest immediately. The Company's matching 401(k) contributions totaled $0.9 million in 2002, $0.8 million in 2001 and $0.7 million in 2000.
As of December 31, 2002, the Silicon Valley Bank Money Purchase Pension Plan (the "MPP Plan") guaranteed a quarterly contribution to all individuals that were employed by the Company on the first and last day of a fiscal quarter. The Company contributed cash in an amount equal to 5.0% of an eligible employee's quarterly base salary, less Internal Revenue Code (IRC) Section 401(k) and Section 125 deferrals. Effective January 1, 2003, the Company merged the MPP Plan balances into the 401(k) plan, which continue to vest at 20% per year. The Company will not make any future contribution towards the MPP plan. The Company's contributions to the MPP Plan totaled $3.4 million in 2002, $2.7 million in 2001 and $2.4 million in 2000.
The Company expects that contributions to the 401(k) plan in 2003 will approximate the sum of the payments to the 401(k) plan and the MPP plan in 2002.
Discretionary ESOP contributions, based on the Company's net income, are made by the Company to all eligible individuals employed by the Company on the last day of the fiscal year. The
Company may elect to contribute cash, or the Company's common stock, in an amount not exceeding 10.0% of the eligible employee's base salary earned in the fiscal year, less IRC Section 401(k) and Section 125 deferrals. The ESOP contributions vest in equal annual increments over five years.
The Company's contributions to the ESOP totaled $0.4 million in 2002, $0 in 2001, and $4.5 million in 2000. At December 31, 2002, the ESOP owned 1,445,173 equivalent shares of the Company's common stock. All shares held by the ESOP are treated as outstanding shares in both the Company's basic and diluted earnings per share computations. At December 31, 2002, the company had zero shares committed to the ESOP program.
The Company maintains an employee stock purchase plan (ESPP) under which participating employees may annually contribute up to 10.0% of their gross compensation to purchase shares of the Company's common stock at 85% of its fair market value at either the beginning or end of each six-month offering period, whichever price is less. All employees of the Company are eligible to participate in the ESPP. The ESPP is noncompensatory to the employees and results in no expense to the Company. For the first six-month offering period of 2002, 68,604 shares of the Company's common stock were issued at $22.24 per share, while 102,339 shares of the Company's common stock were issued at $15.51 per share for the second six-month offering period of 2002. At December 31, 2002, a total of 1,457,264 shares of the Company's common stock were reserved for future issuance under the ESPP Plan.
In 2002, the Company approved a benefit plan, the Employee Home Ownership Plan (EHOP), which provides for the issuance of mortgage loans to eligible employees at favorable interest rates. Eligible employees may apply for a fixed rate mortgage on their primary residence, which is amortized over 30 years and is due and payable in five years. Applicants must qualify for a loan through the usual mortgage review and approval process, which is typical of industry standards. The maximum loan amount cannot be greater than 80.0% of the lesser of the purchase price or the appraised value. The interest rate on the note is written at the then market rate of 5 year (5/1) mortgage loans as determined by the Company. However, provided that the applicant continues to meet all of the eligibility requirements, including employment at the Company, the actual rate charged to the borrower shall be 2.0% below the market rate. The loan rate shall not be less than 25 basis points over the greater of either the five-year Treasury Note rate or the monthly Applicable Federal Rate for medium term loans as published by the IRS. The Loan Rate will be fixed at the time of approval and locked for 30 days.
The following table includes EHOP loans to all employees:
Each of the Company's active stock option plans has been approved by its stockholders. The Company's 1997 Equity Incentive Plan (the "1997 Plan"), provides for the granting of incentive and nonstatutory stock options which entitle directors, employees, and certain other parties to purchase
shares of the Company's common stock at a price not less than 100% and 85% of the fair market value of the common stock on the date the option is granted for incentive and nonstatutory stock options, respectively. Options may vest over various periods not in excess of five years from the date of grant and expire five to ten years from the date of grant. Subsequent to December 31, 2002, the Board of Directors of the Company approved an amendment to the Plan, which provides that the exercise price of each nonstatutory stock option shall be not less than eighty-five percent (85%) of the fair market value of the stock subject to the option on the date the option is granted and will be in lieu of cash compensation.
The table below provides stock option information related to the 1983 and 1989 stock option plans and the 1997 Plan:
The following table summarizes information about stock options outstanding as of December 31, 2002:
At December 31, 2002, options for 1,035,725 shares were available for future grant under the Company's 1997 plan. There were no shares available for future grant under the Company's 1983 and 1989 stock option plans.
The Company's 1997 Plan provide for the granting of shares of the Company's common stock to directors, employees, and certain other parties. Shares granted to employees under these plans may be subject to certain vesting requirements and resale restrictions (restricted stock). For restricted stock, unearned compensation equivalent to the market value of the Company's common stock on the date of grant is charged to stockholders' equity and amortized into noninterest expense over the vesting term. In 2002 and 2001, the Company did not issue restricted stock. In 2000, 129,776 shares of restricted stock were issued to employees at a weighted-average fair value of $29.48 per share. At December 31, 2002, there were 244,503 shares of restricted stock outstanding, and the vesting of these shares occurs at various periods through the year 2004.
The Company recognized $1.0 million, $1.7 million and $2.2 million in employee stock-based compensation costs resulting from the amortization of unearned compensation related to restricted stock, stock options and other miscellaneous employee stock awards during 2002, 2001, and 2000, respectively.
The weighted-average fair values of options granted to employees, directors and certain other parties were $10.69, $14.96 and $22.40 per share in 2002, 2001, and 2000, respectively. Had compensation cost related to both the Company's stock option awards to employees and directors and to the ESPP been determined under the fair value method prescribed under SFAS No. 123, the Company's net income, basic earnings per share and diluted earnings per share would have been the pro forma amounts indicated below.
The fair value of the stock option grants in 2002, 2001, and 2000 used in determining the pro forma net income and the basic and diluted earnings per share amounts indicated above were estimated using the Black-Scholes option-pricing model with the following assumptions:
The expected volatility of the Company's underlying common stock and the expected risk-free interest rate were calculated using a term commensurate with the expected life of the options.
Compensation expense related to the ESPP in 2002, 2001 and 2000, used in determining the pro forma net income and basic and diluted earnings per share amounts indicated above, was equal to the difference between the fair value of the Company's common stock when issued under the ESPP and the actual price paid by employees to acquire the common stock.
19. Related Parties
Certain directors and employees have loan balances outstanding with the Company at December 31, 2002, and 2001. These loans have primarily been granted by the Company for the purpose of assisting employee relocations, and typically include terms more favorable than those prevailing at the time for comparable transactions with other borrowers. Additionally, the following table details the activity related to EHOP loans, see "Item 8. Consolidated Financial Statements and Supplementary Data-Note 18 to the Consolidated Financial Statements-Employee Benefit Plans," made by the Company to Executive Officers of the Company who are deemed to be subject to the requirements of Section 16 of the Securities and Exchange Act of 1934, as of December 31, 2002.
The borrowings described under "Item 8. Consolidated Financial Statements and Supplementary Data-Note 11 to the Consolidated Financial Statements-Borrowings" are due to the selling partners of Alliant who are employees of the Company.
20. Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, the Company uses financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit, commercial and standby letters of credit, foreign exchange options, and foreign exchange forward contracts. These instruments involve, to varying degrees, elements of credit risk. Credit risk is defined as the possibility of sustaining a loss because other parties to the financial instrument fail to perform in accordance with the terms of the contract.
Commitments to Extend Credit
A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of any condition established in the agreement. Such commitments generally have fixed expiration dates, or other termination clauses, and usually require a fee paid by the client upon the Company issuing the commitment. Commitments which are available for funding, due to clients meeting all collateral, compliance and financial covenants required under loan commitment agreements, totaled $1.5 billion and $1.4 billion at December 31, 2002 and 2001, respectively. Out of these available commitments balances, the fixed rate commitments were $133.1 million and
$281.3 million at December 31, 2002 and 2001, respectively. The Company's exposure arising from interest rate risk associated with fixed rate loan commitments is not considered material. Commitments which are unavailable for funding, due to clients not meeting all collateral, compliance and financial covenants required under loan commitment agreements, totaled $1.0 billion and $1.9 billion at December 31, 2002 and 2001, respectively. The Company's potential exposure to credit loss, in the event of nonperformance by the other party to the financial instrument, is the contractual amount of the available unused loan commitment. The Company uses the same credit approval and monitoring process in extending loan commitments as it does in making loans. The actual liquidity needs or the credit risk that the Company has experienced have historically been lower than the contractual amount of commitments to extend credit because a significant portion of these commitments expire without being drawn upon. The Company evaluates each potential borrower and the necessary collateral on an individual basis. The type of collateral varies, but may include real property, bank deposits or business and personal assets. The potential credit risk associated with these commitments is considered in management's evaluation of the adequacy of the allowance for loan losses.
Commercial and Standby Letters of Credit
Commercial and standby letters of credit represent conditional commitments issued by the Company on behalf of a client to guarantee the performance of the client to a third party when certain specified future events have occurred. Commercial letters of credit are issued primarily for inventory purchases by client and are typically short-term in nature. Standby letters of credit are typically issued as a credit enhancement for clients' contractual obligations to third parties such as landlords and often are cash-secured by the clients. Letters of credit have fixed expiration dates and generally require a fee paid by the customer upon the Company issuing the commitment. Fees generated from these letters of credit are recognized in noninterest income over the commitment period. At December 31, 2002 and 2001, commercial and standby letters of credit totaled a combined $584.8 million and $748.1 million, respectively.
The credit risk involved in issuing letters of credit is essentially the same as that involved with extending loan commitments to clients, and accordingly, the Company uses a credit evaluation process and collateral requirements similar to those for loan commitments. The actual liquidity needs or the credit risk that the Company has experienced have historically been lower than the contractual amount of letters of credit issued because a significant portion of these conditional commitments expire without being drawn upon.
Foreign Exchange Forward Contracts
The Company enters into foreign exchange forward contracts with clients involved in international trade finance activities, either as the purchaser or seller of foreign currency at a future date, depending upon the clients' need. The Company 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 foreign exchange forward contracts entered into with its clients. These contracts are short-term in nature, typically expiring in less than 90 days. At December 31, 2002 and 2001, the notional amounts of these contracts totaled $310.8 million and $97.9 million, respectively. The maximum credit exposure for counter-party nonperformance for foreign exchange forward contracts with both clients and correspondent banks amounted to $7.4 million at December 31, 2002 and $0.8 million at December 31, 2001. The Company has incurred no losses from counter-party nonperformance and anticipates performance by all counter-parties to such foreign exchange forward contracts.
Foreign Currency Option Contracts
The Company enters into foreign currency option contracts with clients involved in international trade finance activities, either as the purchaser or seller of foreign currency options, depending upon the clients' need. The Company enters into an opposite way foreign currency option contract with a correspondent bank, which completely mitigates the risk of fluctuations in foreign currency exchange rates, for each of the currency option contracts entered into with its clients. These contracts typically expire in less than one year. At December 31, 2002 and 2001, the notional amounts of these contracts totaled $49.5 million and $33.4 million, respectively. At December 31, 2002, and 2001, the Company did not have any credit exposure for counter-party nonperformance for currency option contracts with both clients and correspondent banks. The Company has incurred no losses from counter-party nonperformance and anticipates performance by all counter-parties.
Commitments to Invest in Venture Capital Funds
In the merchant banking business, we make commitments to venture capital fund investments, which in turn make investments in privately held companies. Commitments to invest in these funds are generally made up to a ten-year period from the inception of the venture capital fund. The timing of future cash requirements to fund such commitments is generally dependent upon the venture capital investment cycle, the overall market conditions, and the nature and type of industry in which the privately held companies operate. As of December 31, 2002, the Company had remaining unfunded commitments of $18.5 million to wholly-owned venture capital fund investments and $76.9 million to venture capital fund investments through the fund of funds, SVB Strategic Investors Fund, L.P. The Company has committed capital of $15.0 million to SVB Strategic Investors Fund, L.P., representing an ownership interest of 11.1%. As of December 31, 2002, our remaining unfunded commitment to the fund was $11.1 million. Effective January 1, 2003, the Company's committed capital that can be called by SVB Strategic Investors Fund, L.P. was reduced to $13.5 million, thereby reducing the remaining unfunded commitment to $9.6 million. In addition, the Company made a capital commitment of $6.0 million to our venture capital fund, Silicon Valley BancVentures, L.P. in which we have an ownership interest of 10.7%. The remaining unfunded commitment to the fund was $4.0 million as of December 31, 2002.
21. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions, set forth below for the Company's financial instruments, are made solely to comply with the requirements of SFAS No. 107 and should be read in conjunction with the Company's consolidated financial statements and related notes.
Fair values are based on estimates or calculations at the transaction level using present value techniques in instances where quoted market prices are not available. Because broadly traded markets do not exist for many of the Company's financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. Fair valuations are management's estimates of the values, and they are often calculated based on current pricing policies, the economic and competitive environment, the characteristics of the financial instruments, expected losses, and other such factors. These calculations are subjective in nature, involve uncertainties and matters of significant judgment, and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets, and may not be realized in an actual sale or immediate settlement of the instruments. There may be
inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein does not represent, and should not be construed to represent, the underlying value of the Company.
The following methods and assumptions have been used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value.
Cash and Cash Equivalents
This category includes cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold, and securities purchased under agreement to resell. The cash equivalents are readily convertible to known amounts of cash and present insignificant risk of changes in value due to maturity dates of 90 days or less. For these short-term financial instruments, the carrying amount is a reasonable estimate of fair value.
Investment Securities
For marketable investment securities classified as available-for-sale, fair values are based on quoted market prices provided by a known and reputable pricing service or dealer quotes. The Company records its wholly-owned non-marketable venture capital fund investments and other private equity investments on a cost basis less any identified impairment. For the Company's venture capital fund, Silicon Valley BancVentures, L.P., and its fund of funds, SVB Strategic Investors Fund, L.P., the Company records the non-marketable venture capital fund investments and other private equity investments at fair value using investment accounting rules. See "Item 8. Consolidated Financial Statements and Supplementary Data-Note 1 to the Consolidated Financial Statements-Significant Accounting Policies-Marketable Equity Securities."
Loans
The fair value of fixed and variable rate loans is calculated by discounting contractual cash flows using discount rates that reflect the Company's current pricing for loans and the forward yield curve.
Deposits
The fair value of interest bearing deposits is calculated by discounting the deposit balances using the Company's cost of borrowing funds in the market and the forward yield curve. The Demand deposits are stated at face value. The deposit portfolio was segregated by core and non-core deposits. In addition, the duration and interest rate sensitivity of the individual deposit accounts was taken into account in determining the fair value.
Short-term Borrowings and Long-term Debt
The fair value was calculated by discounting the contract cash flows using the forward yield curve.
Off-Balance Sheet Financial Instruments
For marketable off-balance sheet financial instruments that may include interest rate swaps, caps, and floors, the Company has estimated the fair value of the instrument(s) based on reputable market pricing sources or dealer quotes. The Company has not estimated the fair value of off-balance sheet commitments to extend credit and commercial letters of credit. Because of the uncertainty involved in attempting to assess the likelihood and timing of a commitment being drawn upon, coupled with the lack of an established market for these financial instruments, management does not believe it is meaningful or practicable to provide an estimate of fair value.
Limitations
The information presented herein is based on pertinent information available to the Company as of December 31, 2002 and 2001, respectively. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since the most recent year-end and the estimated fair values of these financial instruments may have changed significantly since that point in time.
The estimated fair values of the Company's financial instruments at December 31, 2002 and 2001 are presented below. Bracketed amounts in the estimated fair value columns represent estimated cash outflows required to settle the obligations at market rates as of the respective reporting dates.
22. Legal Matters
Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against the Company and/or the Bank. Based upon information available to the Company, its review of such claims to date and consultation with its legal counsel, management believes the liability relating to these actions, if any, will not have a material adverse effect on the Company's liquidity, consolidated financial position or results of operations.
23. Regulatory Matters
The Bank is subject to certain restrictions on the amount of dividends that it may declare without the prior approval of the Federal Reserve Board and the California Department of Financial Institutions. At December 31, 2002, approximately $13.7 million of the Bank's retained earnings were available for dividend declaration to the Company without prior regulatory approval.
The Company and the Bank are subject to capital adequacy guidelines issued by the Federal Reserve Board. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material impact on the Company's and/or the Bank's financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's balance sheet items, as well as certain off-balance sheet items, as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Under these capital guidelines, the minimum total risk-based capital ratio and Tier 1 risk-based capital ratio requirements are 10.0% and 6.0%, respectively, of risk-weighted assets and certain off-balance sheet items for a well capitalized depository institution.
The Federal Reserve Board has also established minimum capital leverage ratio guidelines for state member banks. The ratio is determined using Tier 1 capital divided by quarterly average total assets. The guidelines require a minimum of 5.0% for a well-capitalized depository institution.
The following table presents the capital ratios for the Company and the bank, as compared to the minimum regulatory capital requirements for an adequately capitalized depository institution, as of December 31, 2002 and 2001:
24. Stockholders' Rights Plan
On October 22, 1998, the Company's Board of Directors adopted a stockholders rights plan (the "Rights Plan") designed to protect the Company's stockholders from various abusive takeover tactics, including attempts to acquire control of the Company without offering a fair price to all stockholders. Under the Rights Plan, each stockholder received a dividend of one right for each outstanding share of common stock of the Company. The rights are attached to, and presently only traded with, the common stock and are currently not exercisable. Except as specified below, upon becoming exercisable, all rights holders will be entitled to purchase from the Company 1/1000th of a share of the Company's preferred stock at a price of $120.00 per share.
The rights become exercisable and will begin to trade separately from the common stock of the Company upon the earlier of 1. the tenth day after a person or group has acquired beneficial ownership of 10% or more of the outstanding common stock of the Company or 2. the tenth business day after a person or group announces a tender or exchange offer, the consummation of which would result in ownership by a person or group of 10% or more of the Company's common stock. Each right will entitle the holder to purchase common stock of the Company having a current market value of twice the exercise price of the right. If the Company is acquired through a merger or other business combination transaction or there is a sale of more than 50% of the Company's assets or earning power, each right will entitle the holder (other than rights held by the acquiring person) to purchase, at the exercise price, common stock of the acquiring entity having a value of twice the exercise price at the time.
The Company's Board of Directors has the option any time after a person or group becomes a 10% holder of the outstanding common stock of the Company to exchange all or part of the rights (other than rights held by the acquiring person) for shares of common stock of the Company provided that the Company may not make such an exchange after the person becomes the beneficial owner of 50% or more of the Company's outstanding common stock.
The Company may redeem the rights for $0.001 each at any time on, or prior to, public announcement that a person has acquired beneficial ownership of 10% or more of the Company's common stock. The rights will expire on October 22, 2008, unless earlier redeemed or exchanged. The rights will not have any voting rights, but will have the benefit of certain customary anti-dilution provisions. The dividend distribution of the rights was not taxable to the Company or its stockholders.
25. Parent Company Only Condensed Financial Information
The condensed balance sheets of Silicon Valley Bancshares (parent company only) at December 31, 2002 and 2001, and the related condensed statements of income and condensed statements of cash flows for the years ended December 31, 2002, 2001, and 2000 are presented below. Certain reclassifications have been made to the parent company's 2001 and 2000 financial information to conform to the 2002 presentations. Such reclassifications had no effect on the results of operations or stockholders' equity.
Condensed Balance Sheets
(1)The increase of $103.3 million in nonbank subsidiary investments between December 31, 2001 and December 31, 2002 related to the transfer of Alliant Partners from Silicon Valley Bank to Silicon Valley Bancshares.
(2)The parent company guaranteed all of SVB Capital I's obligations under the Trust Preferred Securities for all periods presented.
Condensed Statements of Income
Condensed Statements of Cash Flows
26. Unaudited Quarterly Financial Data
27. Subsequent Event
In January 2003, the Company entered into another ASR agreement for 1.7 million shares of common stock for $29.9 million. The terms of this second ASR arrangement are substantially the same as those in the first agreement. See "Item 8. Consolidated Financial Statements and Supplementary Data-Note 15 to the Consolidated Financial Statements-Common Stock Repurchases" for terms of the ASR agreement.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the sections titled "Proposal No. 1 Election of Directors," "Information on Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" contained in the definitive proxy statement for Silicon Valley Bancshares' 2003 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the sections titled "Information on Executive Officers," "Report of the Executive Committee of the Board on Executive Compensation," "Table 1. Summary Compensation Table," "Table 2. Option Grants in Last Fiscal Year," "Table 3. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values," "Termination Arrangements," "Return to Stockholders Performance Graph," and "Director Compensation" contained in the definitive proxy statement for Silicon Valley Bancshares' 2003 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information set forth under the sections titled "Security Ownership of Directors and Executive Officers" and "Security Ownership of Principal Stockholders" contained in the definitive proxy statement for Silicon Valley Bancshares' 2003 Annual Meeting of Stockholders is incorporated herein by reference.
Our stockholders have approved each of our active equity compensation plans. The following table provides certain information as of December 31, 2002 with respect to our equity compensation plans:
For additional information concerning our equity compensation plans, refer to "Item 8. Consolidated Financial Statements and Supplementary Data-Note 18 to the Consolidated Financial Statements-Employee Benefit Plans."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the section titled "Certain Relationships and Related Transactions" in the definitive proxy statement for Silicon Valley Bancshares' Annual Meeting of Stockholders to be held on April 17, 2003 is incorporated herein by reference.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Form 10-K, Silicon Valley Bancshares carried out an evaluation, under the supervision and with the participation of its management, including Silicon Valley Bancshares' President and Chief Executive Officer along with the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, Silicon Valley Bancshares' President and Chief Executive Officer along with the Chief Financial Officer concluded that Silicon Valley Bancshares' disclosure controls and procedures are effective in timely alerting them to material information relating to Silicon Valley Bancshares (including its consolidated subsidiaries) required to be included in Silicon Valley Bancshares' periodic Securities and Exchange Commission filings. There have been no significant changes in Silicon Valley Bancshares' internal controls or in other factors that could significantly affect internal controls subsequent to the date Silicon Valley Bancshares carried out its evaluation.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. and 2.
Financial Statements:
The consolidated financial statements and supplementary data contained in Item 8 of this report are filed as part of this report. All schedules other than as set forth above are omitted because of the absence of the conditions under which they are required or because the required information is included in the consolidated financial statements or related notes.
3.
Exhibits are listed in the Index to Exhibits beginning on page 113 of this report. Each management contract or compensatory plan or arrangement filed as an exhibit to this Report is identified in the "Index to Exhibits" with an asterisk before the exhibit number.
(b)Reports on Form 8-K.
1. On January 27, 2003, Silicon Valley Bancshares filed a report on Form 8-K to announce that on January 16, 2003, it held a conference call relating to its earning release for the three months ended December 31, 2002.
2. On January 16, 2003, Silicon Valley Bancshares filed a report on Form 8-K to announce its financial results for the quarter ended December 31, 2002.
3. On October 28, 2002, Silicon Valley Bancshares filed a report on Form 8-K to announce that on October 17, 2002, it held a conference call relating to its earnings release for the three months ended September 30, 2002.
4. On September 12, 2002, Silicon Valley Bancshares filed a report on Form 8-K to announce that in response to the SEC's adoption of Rule 10b5-1, the Board of Directors approved amendments to its insider trading policy to permit its officers and directors subject to
Silicon Valley Bancshares' insider trading guidelines to enter into written trading plans complying with SEC Rule 10b5-1.
1.Exhibits
See Item 15(a)3 above.
2.Schedules
See Item 15(a)1 and 15(a)2 above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Silicon Valley Bancshares
By:
/s/ KENNETH P. WILCOX Kenneth P. Wilcox
President and Chief Executive Officer
Dated: March 5, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:
Signature
Title
Date
/s/ JOHN C. DEAN John C. Dean
Chairman of the Board of Directors and Director
March 5, 2003
/s/ KENNETH P. WILCOX Kenneth P. Wilcox
President, Chief Executive Officer and Director (Principal Executive Officer)
March 5, 2003
/s/ LAUREN FRIEDMAN Lauren Friedman
Chief Financial Officer
(Principal Financial Officer)
March 5, 2003
/s/ DONAL D. DELANEY Donal D. Delaney
Controller
(Principal Accounting Officer)
March 5, 2003
/s/ GARY K. BARR Gary K. Barr
Director
March 5, 2003
/s/ JAMES F. BURNS, JR. James F. Burns, Jr.
Director
March 5, 2003
/s/ ALEX W. HART Alex W. Hart
Director
March 5, 2003
/s/ STEPHEN E. JACKSON Stephen E. Jackson
Director
March 5, 2003
/s/ JAMES R. PORTER James R. Porter
Director
March 5, 2003
/s/ MICHAELA K. RODENO Michaela K. Rodeno
Director
March 5, 2003
/s/ G. FELDA HARDYMON G. Felda Hardymon
Director
March 5, 2003
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Kenneth P. Wilcox, certify, that to my knowledge, the Annual Report of Silicon Valley Bancshares on Form 10-K for the annual period ended December 31, 2002, (i) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) that the information contained in such Form 10-K fairly presents in all material respects the financial condition and results of operations of Silicon Valley Bancshares.
Date: March 5, 2003 By:
/s/ KENNETH P. WILCOX Kenneth P. Wilcox
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Lauren Friedman, certify, that to my knowledge, the Annual Report of Silicon Valley Bancshares on Form 10-K for the annual period ended December 31, 2002, (i) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) that the information contained in such Form 10-K fairly presents in all material respects the financial condition and results of operations of Silicon Valley Bancshares.
Date: March 5, 2003 By:
/s/ LAUREN FRIEDMAN Lauren Friedman
Chief Financial Officer
(Principal Financial Officer)
ANNUAL CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth P. Wilcox, certify that:
1.I have reviewed this annual report on Form 10-K of Silicon Valley Bancshares;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 5, 2003 By:
/s/ KENNETH P. WILCOX Kenneth P. Wilcox
President and Chief Executive Officer
(Principal Executive Officer)
I, Lauren Friedman, certify that:
1.I have reviewed this annual report on Form 10-K of Silicon Valley Bancshares;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 5, 2003 By:
/s/ LAUREN FRIEDMAN Lauren Friedman
Chief Financial Officer
(Principal Financial Officer)
INDEX TO EXHIBITS
Exhibit
No.
Description
2.1
Alliant Partners Asset Purchase Agreement.(18)
3.1
Articles of Incorporation of Silicon Valley Bancshares (the "Company"), as amended(9)
3.1a
Certificate of Incorporation, as filed with the Delaware Secretary of State on March 22, 1999(13)
3.2
Bylaws of the Company, amended and restated effective as of August 21, 1997(7)
3.3
Certificate of Amendment of Bylaws of Silicon Valley Bancshares as of October 22, 1999(12)
3.4
Bylaws(13)
4.1
Article Three of Articles of Incorporation (included in Exhibit 3.1)(1)
4.2
Form of Subordinated Indenture(10)
4.3
Form of Junior Subordinated Debenture(10)
4.6
Form of Amended and Restated Trust Agreement of SVB Capital I(10)
4.7
Form of Trust Preferred Certificate of SVB Capital I (included as an exhibit to Exhibit 4.6)(10)
4.8
Form of Guarantee Agreement(10)
4.9
Form of Agreement as to Expenses and Liabilities (included as an exhibit to Exhibit 4.6)(10)
4.10
Form of Common Securities Certificate of SVB Capital I (included as an exhibit to Exhibit 4.6)(10)
4.11
Form of Officers' Certificate and Company Order(10)
10.3
Employment Agreement between Silicon Valley Bancshares and John C. Dean(2)
10.17
Lease Agreement between Silicon Valley Bank and WRC Properties, Inc.; 3003 Tasman Drive, Santa Clara, CA 95054(3)
10.17a
First amendment to lease outlined in Exhibit 10.17(6)
10.28
Amendment and Restatement of the Silicon Valley Bancshares 1989 Stock Option Plan(4)
10.29
Silicon Valley Bank Money Purchase Pension Plan(4)
10.30
Amendment and Restatement of the Silicon Valley Bank Money Purchase Pension Plan(4)
10.31
Amendment and Restatement of the Silicon Valley Bank 401(k) and Employee Stock Ownership Plan(4)
10.32
Executive Change in Control Severance Benefits Agreement(5)
10.33
Change in Control Severance Policy for Non-executives(5)
10.36
Relocation Agreement between Silicon Valley Bancshares and Kenneth P. Wilcox and Ruth Wilcox, as of December 18, 1997(8)
10.37
Bonus Agreement between Silicon Valley Bank and Kenneth P. Wilcox, as of December 18, 1997(8)
10.38
Promissory Note between Silicon Valley Bancshares and Christopher T. Lutes, as of June 10, 1998(10)
10.39
The 1998 Venture Capital Retention Program, Amended June 18, 1998(10)
10.40
Severance Agreement between Silicon Valley Bancshares and John C. Dean related to garage.com™ as of August 12, 1998(11)
10.41
Severance Agreement between Silicon Valley Bancshares and Harry W. Kellogg related to garage.com™ as of August 12, 1998(11)
10.43
Preferred Shares Rights Agreement, as of October 22, 1998(12)
10.44
1999 Employee Stock Purchase Plan(14)
10.45
Silicon Valley Bancshares 1998 Equity Incentive Plan, amended as of July 20, 2000(14)
10.46
Change in Control Severance Benefits Policy, effective August 18, 2001(14)
10.47
Consulting Agreement between Silicon Valley Bancshares and John C. Dean, effective as of May 1, 2001(16)
10.48
Part time Employment Agreement between Silicon Valley Bancshares and Christopher T. Lutes, effective as of July 1, 2001(17)
10.49
Silicon Valley Bancshares 1997 Equity Incentive Plan, Amended as of April 18, 2002(19)
21.1
Subsidiaries of Silicon Valley Bancshares
23.1
Consent of Independent Auditors
(1)Incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. (2)Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (3)Incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (4)Incorporated by reference to Exhibits 10.28, 10.29, 10.30, and 10.31 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (5)Incorporated by reference to Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. (6)Incorporated by reference to Exhibit 10.17(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. (7)Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. (8)Incorporated by reference to Exhibits 10.36 and 10.37 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (9)Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (10)Incorporated by reference to Exhibits 4.2, 4.3, 4.6, 4.7, 4.8, 4.9, 4.10, 4.11, 10.38, and 10.39 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. (11)Incorporated by reference to Exhibits 10.40 and 10.41 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. (12)Incorporated by reference to Exhibits 3.3 and 10.43 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. (13)Incorporated by reference to Exhibits 3.1a and 3.4 of the Company's Report on Form 8-K filed on April 26, 2000. (14)Incorporate by reference to Exhibit 10.44 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (15)Incorporated by reference to Exhibits 10.45 and 10.46 of the Company's Quarterly Report of Form 10-Q for the quarter ended September 30, 2001. (16)Incorporated by reference to Exhibits 10.47 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. (17)Incorporated by reference to Exhibits 10.48 and 10.49 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. (18)Incorporated by reference to Exhibits 2.1 of the Company's Report on Form 8-K filed on October 2, 2001. (19)Incorporated by reference to Exhibit 99.1 of the Company's Registration Statement on Form S-8 filed on July 15, 2002.
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SILICON VALLEY BANCSHARES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SILICON VALLEY BANCSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
SILICON VALLEY BANCSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SILICON VALLEY BANCSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SILICON VALLEY BANCSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SILICON VALLEY BANCSHARES AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. CONTROLS AND PROCEDURES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
ANNUAL CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
INDEX TO EXHIBITS