<PAGE>
As filed with the Securities and Exchange Commission on November 13, 1996
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ________.
Commission File Number: 33-41102
SILICON VALLEY BANCSHARES
(Exact name of registrant as specified in its charter)
California 94-2856336
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3003 Tasman Drive
Santa Clara, California 95054-1191
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 654-7282
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
At October 31, 1996, 9,304,966 shares of the registrant's common stock
(no par value) were outstanding.
================================================================================
This report contains a total of 26 pages.
1
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
----
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED INCOME STATEMENTS 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
PART II - OTHER INFORMATION
----------------------------
ITEM 1. LEGAL PROCEEDINGS 25
ITEM 2. CHANGES IN SECURITIES 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 5. OTHER INFORMATION 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURES 26
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(Dollars in thousands) (Unaudited)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 85,478 $ 85,187
Federal funds sold and securities purchased under
agreement to resell 280,394 257,138
Investment securities, at fair value 493,132 321,309
Loans, net of unearned income 840,778 738,405
Allowance for loan losses (30,000) (29,700)
- -----------------------------------------------------------------------------------------
Net loans 810,778 708,705
Premises and equipment 4,127 4,697
Other real estate owned 2,720 4,955
Accrued interest receivable and other assets 27,141 25,596
- -----------------------------------------------------------------------------------------
Total assets $1,703,770 $1,407,587
=========================================================================================
Liabilities and Shareholders' Equity:
Liabilities:
Noninterest-bearing demand deposits $ 489,369 $ 451,318
Money market and NOW deposits 1,005,904 773,292
Time deposits 73,559 65,450
- -----------------------------------------------------------------------------------------
Total deposits 1,568,832 1,290,060
Other liabilities 9,813 12,553
- -----------------------------------------------------------------------------------------
Total liabilities 1,578,645 1,302,613
- -----------------------------------------------------------------------------------------
Shareholders' Equity:
Preferred stock, no par value:
20,000,000 shares authorized;
none outstanding
Common stock, no par value:
30,000,000 shares authorized;
9,296,293 and 8,963,662 shares outstanding at
September 30, 1996 and December 31, 1995, respectively 64,598 59,357
Retained earnings 61,440 45,855
Net unrealized loss on available-for-sale investments (547) (198)
Unearned compensation (366) (40)
- -----------------------------------------------------------------------------------------
Total shareholders' equity 125,125 104,974
- -----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,703,770 $1,407,587
=========================================================================================
</TABLE>
See notes to interim consolidated financial statements.
3
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans $23,236 $19,193 $65,536 $59,371
Investment securities 7,040 2,111 16,455 6,831
Federal funds sold and securities
purchased under agreement to resell 3,019 3,894 9,527 7,307
- -------------------------------------------------------------------------------------------------------------------
Total interest income 33,295 25,198 91,518 73,509
- -------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 10,353 7,282 27,438 19,062
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 10,353 7,282 27,438 19,062
- -------------------------------------------------------------------------------------------------------------------
Net interest income 22,942 17,916 64,080 54,447
Provision for loan losses 2,962 3,337 6,550 6,098
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 19,980 14,579 57,530 48,349
- -------------------------------------------------------------------------------------------------------------------
Noninterest income:
Disposition of client warrants 618 3,823 2,880 5,626
Letter of credit and foreign
exchange income 759 807 2,493 2,267
Deposit service charges 359 315 1,200 1,000
Investment gains (losses) - - 1 (770)
Other 277 153 825 434
- -------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,013 5,098 7,399 8,557
- -------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and benefits 7,914 6,517 23,259 20,374
Professional services 1,122 1,032 3,398 3,620
Equipment 859 1,473 2,452 2,678
Occupancy 706 1,007 2,329 2,655
Corporate legal and litigation 207 179 140 571
Data processing services 119 214 319 767
Client services 23 82 225 339
Cost of other real estate owned 19 23 345 37
FDIC deposit insurance 1 14 173 1,210
Other 2,237 1,370 6,314 4,143
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense 13,207 11,911 38,954 36,394
- -------------------------------------------------------------------------------------------------------------------
Income before income tax expense 8,786 7,766 25,975 20,512
Income tax expense 3,514 2,303 10,390 7,788
- -------------------------------------------------------------------------------------------------------------------
Net income $ 5,272 $ 5,463 $15,585 $12,724
===================================================================================================================
Net income per common and
common equivalent share $0.54 $0.59 $1.61 $1.40
===================================================================================================================
</TABLE>
See notes to interim consolidated financial statements.
4
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the nine months ended
------------------------------
September 30, September 30,
1996 1995
(Dollars in thousands) (Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,585 $ 12,724
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 6,550 6,098
Net (gain) loss on sales of investment securities (1) 770
Depreciation and amortization 880 1,633
Net gain on sales of other real estate owned (407) (124)
Provision for other real estate owned 551 -
Increase (decrease) in unearned income 1,182 (277)
Increase in accrued interest receivable (3,671) (429)
(Increase) decrease in accounts receivable 629 (362)
Increase (decrease) in accrued liabilities (2,804) 643
Other, net (3,369) 730
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 15,125 21,406
- -------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and paydowns of
investment securities 716,999 37,366
Proceeds from sales of investment securities 9,699 31,316
Purchases of investment securities (893,856) (83,569)
Net increase in loans (111,751) (1,406)
Proceeds from recoveries of charged off loans 1,946 5,224
Net proceeds from sales of other real estate owned 2,092 2,093
Purchases of premises and equipment (310) (5,151)
- -------------------------------------------------------------------------------------------------
Net cash applied to investing activities (275,181) (14,127)
- -------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 278,772 72,977
Proceeds from issuance of common stock,
net of issuance costs 4,831 4,333
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 283,603 77,310
- -------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 23,547 84,589
Cash and cash equivalents at January 1, 342,325 289,849
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at September 30, $ 365,872 $374,438
=================================================================================================
Supplemental disclosures:
Interest paid $ 27,405 $ 18,964
Income taxes paid $ 11,932 $ 9,124
=================================================================================================
</TABLE>
See notes to interim consolidated financial statements.
5
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Silicon Valley Bancshares (the
"Company") and its subsidiaries conform with generally accepted accounting
principles and prevailing practices within the banking industry. Certain
reclassifications have been made to the Company's 1995 consolidated financial
statements to conform to the 1996 presentations. Such reclassifications had no
effect on the results of operations or shareholders' equity. The following is a
summary of the significant accounting and reporting policies used in preparing
the interim consolidated financial statements.
Nature of Operations
- --------------------
The Company is a bank holding company whose principal subsidiary is Silicon
Valley Bank (the "Bank"), a California-chartered bank with headquarters in Santa
Clara, California. The Bank maintains regional banking offices in Northern and
Southern California, and additionally has loan offices in Colorado, Maryland,
Massachusetts, Oregon, Texas, and Washington. The Bank serves emerging and
middle-market growth companies in specific targeted niches and focuses on the
technology and life sciences industries, while identifying and capitalizing on
opportunities to serve other groups of clients with unique financial needs.
Substantially all of the assets, liabilities and earnings of the Company relate
to its investment in the Bank.
Consolidation
- -------------
The interim consolidated financial statements include the accounts of the
Company and those of its wholly owned subsidiaries, the Bank and SVB Leasing
Company (inactive). The revenues, expenses, assets, and liabilities of the
subsidiaries are included in the respective line items in the interim
consolidated financial statements after elimination of intercompany accounts and
transactions.
Interim Consolidated Financial Statements
- -----------------------------------------
In the opinion of Management, the interim consolidated financial statements
contain all adjustments (consisting of only normal, recurring adjustments)
necessary to present fairly the Company's consolidated financial position at
September 30, 1996, and the results of its operations and cash flows for the
three and nine month periods ended September 30, 1996 and September 30, 1995.
The December 31, 1995 consolidated financial statements were derived from
audited financial statements, and certain information and footnote disclosures
normally presented in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted.
The interim consolidated financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in the
Company's 1995 Annual Report on Form 10-K. The results of operations for the
three and nine month periods ended September 30, 1996 may not necessarily be
indicative of the Company's operating results for the full year.
6
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basis of Financial Statement Presentation
- -----------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and judgments that
affect the reported amounts of assets and liabilities as of the balance sheet
date and the results of operations for the period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
possible change in the near term relate to the determination of the allowance
for loan losses and the valuation of other real estate owned (OREO). An estimate
of possible changes or range of possible changes cannot be made.
Net Income Per Share Computation
- --------------------------------
Net income per common and common equivalent share is calculated using weighted
average shares outstanding, including the dilutive effect of stock options
outstanding during the period. Weighted average shares outstanding were
9,735,778 and 9,660,785 for the three and nine month periods ended September 30,
1996 and 9,305,261 and 9,073,862 for the three and nine month periods ended
September 30, 1995.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents as reported in the consolidated statements of cash
flows includes cash on hand, cash balances due from banks, federal funds sold,
and securities purchased under agreement to resell.
Federal Funds Sold and Securities Purchased Under Agreement to Resell
- ---------------------------------------------------------------------
Federal funds sold and securities purchased under agreement to resell as
reported in the consolidated balance sheets includes interest-bearing deposits
in other financial institutions of $394,000 and $138,000 at September 30, 1996
and December 31, 1995, respectively.
Nonaccrual Loans
- ----------------
Loans are placed on nonaccrual status when they become 90 days past due as to
principal or interest payments (unless the principal and interest are well
secured and in the process of collection), when the Company has determined that
the timely collection of principal or interest is doubtful, or when the loans
otherwise become impaired under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan." When a loan is placed on nonaccrual status, the accrued interest is
reversed against interest income and the loan is accounted for on the cash or
cost recovery method thereafter until qualifying for return to accrual status.
Generally, a loan will be returned to accrual status when all delinquent
interest and principal becomes current in accordance with the terms of the loan
agreement and full collection of the principal appears probable.
7
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements
- -----------------------------
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 establishes financial
accounting and reporting standards for stock-based compensation plans, including
employee stock purchase plans, stock options and restricted stock. SFAS No. 123
encourages all entities to adopt a fair value method of accounting for stock-
based compensation plans, whereby compensation cost is measured at the grant
date based on the fair value of the award and is realized as an expense over the
service or vesting period. However, SFAS No. 123 also allows an entity to
continue to measure compensation cost for these plans using the intrinsic value
method of accounting prescribed by Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," which is the method currently
being used by the Company. Under the intrinsic value method, compensation cost
is the excess, if any, of the quoted market price of the stock at the grant date
or other measurement date over the amount which must be paid to acquire the
stock.
The Company adopted SFAS No. 123 effective January 1, 1996, but will continue to
account for employee and director stock-based compensation plans under the
intrinsic value accounting methodology prescribed by APB Opinion No. 25. SFAS
No. 123 requires that stock-based compensation to other parties be accounted for
under the fair value method. The effect of adoption of this statement on the
interim consolidated financial position and results of operations of the Company
was not material.
2. LOANS
The detailed composition of loans is presented in the following table:
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1996 1995
- ----------------------------------------------------------
<S> <C> <C>
Commercial $711,355 $622,488
Real estate term 60,872 56,845
Real estate construction 35,865 17,194
Consumer and other 32,686 41,878
- ----------------------------------------------------------
Total loans (1) $840,778 $738,405
==========================================================
</TABLE>
(1) Loans are presented net of unearned income of $4,995 and $3,813 at September
30, 1996 and December 31, 1995, respectively.
3. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the three and nine month
periods ended September 30, 1996 and 1995 was as follows:
8
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3. ALLOWANCE FOR LOAN LOSSES (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Dollars in thousands) 1996 1995 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance $29,000 $22,500 $29,700 $20,000
Provision for loan losses 2,962 3,337 6,550 6,098
Loans charged off (2,502) (1,948) (8,196) (4,322)
Recoveries 540 3,111 1,946 5,224
- ------------------------------------------------------------------------------
Balance at September 30, $30,000 $27,000 $30,000 $27,000
==============================================================================
</TABLE>
The aggregate recorded investment in loans for which impairment has been
realized in accordance with SFAS No. 114 totaled $19.9 million at September 30,
1996. Allocations to the allowance for loan losses at September 30, 1996 related
to these loans were $6.5 million. Average impaired loans for the third quarter
of 1996 were $18.7 million.
4. REGULATORY MATTERS
During 1993, the Company and the Bank consented to a formal supervisory order by
the Federal Reserve Bank of San Francisco and the Bank consented to a formal
supervisory order by the California State Banking Department. The Federal
Reserve Bank removed its supervisory order effective March 27, 1996, and the
California State Banking Department terminated its supervisory order effective
April 9, 1996. These orders required, among other actions, the following:
suspension of cash dividends; restrictions on transactions between the Company
and the Bank without prior regulatory approval; development of a capital plan to
ensure the Bank maintains adequate capital levels subject to regulatory
approval; development of plans to improve the quality of the Bank's loan
portfolio through collection or improvement of the credits within specified time
frames; changes to the Bank's loan policies which require the Directors' Loan
Committee to approve all loans to any one borrower exceeding $3.0 million and
requiring the Board of Directors to become more actively involved in loan
portfolio management and monitoring activities; review of, and changes in, the
Bank's loan policies to implement (i) policies for controlling and monitoring
credit concentrations, (ii) underwriting standards for all loan products, and
(iii) standards for credit analysis and credit file documentation; development
of an independent loan review function and related loan review policies and
procedures; development of Board of Directors oversight programs to establish
and maintain effective control and supervision of Management and major Bank
operations and activities; development of a plan, including a written
methodology, to maintain an adequate allowance for loan losses, defined as a
minimum of 2.0% of total loans; development of business plans to establish
guidelines for growth and ensure maintenance of adequate capital levels; a
review and evaluation of existing compensation practices and development of
officer compensation policies and procedures by the Boards of Directors of the
Company and the Bank; policies requiring that changes in fees paid to directors
as well as bonuses paid to executive officers first receive regulatory approval;
and development of a detailed internal audit plan for approval by the Board of
Directors of the Bank. The California State Banking Department order further
required the Bank to maintain a minimum tangible equity-to-assets ratio of 6.5%.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Earnings Summary
- ----------------
The Company reported net income of $5.3 million, or $0.54 per share, for the
third quarter of 1996, compared with net income of $5.5 million, or $0.59 per
share, for the third quarter of 1995. Net income was $15.6 million, or $1.61 per
share, for the nine months ended September 30, 1996, versus $12.7 million, or
$1.40 per share, for the respective 1995 period. The annualized return on
average assets (ROA) was 1.3% in the third quarter of 1996 compared to 1.8% in
the 1995 third quarter. The annualized return on average equity (ROE) in the
third quarter of 1996 was 17.2%, compared to 22.4% in the third quarter of 1995.
For the first nine months of 1996, ROA was 1.4% and ROE was 17.9% versus 1.5%
and 19.3%, respectively, for the comparable prior year period.
The decrease in net income during the quarter ended September 30, 1996, as
compared with the prior year respective period, resulted from a decrease in
noninterest income, an increase in noninterest expense, and a higher effective
tax rate, offset by an increase in net interest income and a lower provision for
loan losses. The increase in net income for the nine month period ended
September 30, 1996, as compared with the prior year respective period, was due
to an increase in net interest income, offset by a higher provision for loan
losses, an increase in noninterest expense, and lower noninterest income. The
major components of net income as well as changes in these components are
summarized in the following table for the three and nine month periods ended
September 30, 1996 and 1995, and are discussed in more detail below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
(Dollars in thousands) 1996 1995 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $22,942 $17,916 $64,080 $54,447
Provision for loan losses 2,962 3,337 6,550 6,098
Noninterest income 2,013 5,098 7,399 8,557
Noninterest expense 13,207 11,911 38,954 36,394
- -------------------------------------------------------------------------------
Income before income taxes 8,786 7,766 25,975 20,512
Income tax expense 3,514 2,303 10,390 7,788
- -------------------------------------------------------------------------------
Net income $ 5,272 $ 5,463 $15,585 $12,724
===============================================================================
</TABLE>
10
<PAGE>
Net Interest Income and Margin
- ------------------------------
Net interest income represents the difference between interest earned, primarily
on loans and investments, and interest paid on funding sources, primarily
deposits, and is the principal source of revenue for the Company. Net interest
margin is the amount of net interest income, on a fully taxable-equivalent
basis, expressed as a percentage of average interest-earning assets. The average
yield earned on interest-earning assets is the amount of taxable-equivalent
interest income expressed as a percentage of average interest-earning assets.
The average rate paid on funding sources expresses interest expense as a
percentage of average interest-earning assets.
The following tables set forth average assets, liabilities and shareholders'
equity, interest income and interest expense, average yields and rates, and the
composition of the Company's net interest margin for the three and nine month
periods ended September 30, 1996 and 1995, respectively.
11
<PAGE>
- --------------------------------------------------------------------------------
AVERAGE BALANCES, RATES AND YIELDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the three months ended September 30,
------------------------------------------------------------------------
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Federal funds sold and securities
purchased under agreement to resell (1) $ 226,543 $ 3,019 5.3% $ 264,361 $ 3,894 5.9%
Investment securities:
Taxable 470,391 6,912 5.8 134,047 2,001 6.0
Non-taxable (2) 8,683 196 9.0 6,686 169 10.1
Loans:
Commercial 684,832 20,203 11.7 570,022 16,831 11.8
Real estate construction and term 90,841 2,062 9.0 72,497 1,843 10.2
Consumer and other 40,574 971 9.5 21,420 519 9.7
- ---------------------------------------- ----------------------------------- ---------------------------------
Total loans 816,247 23,236 11.3 663,939 19,193 11.6
- ---------------------------------------- ----------------------------------- ---------------------------------
Total interest-earning assets 1,521,864 33,363 8.7 1,069,033 25,257 9.5
- ---------------------------------------- ----------------------------------- ---------------------------------
Cash and due from banks 127,463 111,873
Allowance for loan losses (30,004) (24,549)
Other real estate owned 2,925 5,446
Other assets 28,515 26,519
- ---------------------------------------- ---------- ----------
Total assets $1,650,763 $1,188,322
======================================== ========== ==========
Funding sources:
Interest-bearing liabilities:
Money market and NOW deposits $ 991,521 9,601 3.9 $ 651,752 6,679 4.1
Time deposits 73,129 752 4.1 63,998 603 3.8
- ---------------------------------------- ----------------------------------- ---------------------------------
Total interest-bearing liabilities 1,064,650 10,353 3.9 715,750 7,282 4.1
Portion of noninterest-bearing
funding sources 457,214 353,283
- ---------------------------------------- ----------------------------------- ---------------------------------
Total funding sources 1,521,864 10,353 2.7 1,069,033 7,282 2.7
- ---------------------------------------- ----------------------------------- ---------------------------------
Noninterest-bearing funding sources:
Demand deposits 452,322 360,919
Other liabilities 11,957 15,015
Portion used to fund interest-earning
assets (457,214) (353,283)
Shareholders' equity 121,834 96,638
- ---------------------------------------- ---------- ----------
Total liabilities and shareholders'
equity $1,650,763 $1,188,322
======================================== ========== ==========
Net interest income and margin $ 23,010 6.0% $17,975 6.7%
======================================== ========== ======= ======= =====
Memorandum: Total deposits $1,516,972 $1,076,669
======================================== ========== ==========
</TABLE>
(1) Includes average interest-bearing deposits in other financial institutions
of $402 and $128 for the three months ended September 30, 1996 and 1995,
respectively.
(2) Interest income on non-taxable investments is presented on a fully taxable-
equivalent basis. The tax-equivalent adjustments were $68 and $59 for the
three months ended September 30, 1996 and 1995, respectively.
12
<PAGE>
- --------------------------------------------------------------------------------
AVERAGE BALANCES, RATES AND YIELDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the nine months ended September 30,
-----------------------------------------------
1996 1995
(Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Federal funds sold and securities
purchased under agreement to resell (1) $ 238,334 $ 9,527 5.3% $166,227 $ 7,307 5.9%
Investment securities:
Taxable 377,788 16,125 5.7 146,261 6,483 5.9
Non-taxable (2) 7,045 507 9.6 7,064 536 10.1
Loans:
Commercial 647,670 56,201 11.6 588,841 52,547 11.9
Real estate construction and term 79,534 6,421 10.8 69,269 5,287 10.2
Consumer and other 42,250 2,914 9.2 18,777 1,537 10.9
- --------------------------------------------- -------------------------------------- ---------------------------
Total loans 769,454 65,536 11.4 676,887 59,371 11.7
- --------------------------------------------- -------------------------------------- ---------------------------
Total interest-earning assets 1,392,621 91,695 8.8 996,439 73,697 9.9
- --------------------------------------------- -------------------------------------- ---------------------------
Cash and due from banks 127,426 115,424
Allowance for loan losses (30,266) (22,886)
Other real estate owned 3,948 5,939
Other assets 28,171 22,085
- --------------------------------------------- ---------- ----------
Total assets $1,521,900 $1,117,001
============================================= ========== ==========
Funding sources:
Interest-bearing liabilities:
Money market and NOW deposits $ 885,139 25,401 3.8 $595,922 17,372 3.9
Time deposits 68,461 2,037 4.0 64,034 1,690 3.5
- --------------------------------------------- -------------------------------------- ---------------------------
Total interest-bearing liabilities 953,600 27,438 3.8 659,956 19,062 3.9
Portion of noninterest-bearing funding sources 439,021 336,483
- ---------------------------------------------- -------------------------------------- ---------------------------
Total funding sources 1,392,621 27,438 2.6 996,439 19,062 2.6
- --------------------------------------------- -------------------------------------- ---------------------------
Noninterest-bearing funding sources:
Demand deposits 440,851 355,606
Other liabilities 11,508 13,157
Portion used to fund interest-earning assets (439,021) (336,483)
Shareholders' equity 115,941 88,282
- --------------------------------------------- ---------- ----------
Total liabilities and shareholders' equity $1,521,900 $1,117,001
============================================= ========== ==========
Net interest income and margin $ 64,257 6.2% $ 54,635 7.3%
============================================= ========== ========== ========== =====
Memorandum: Total deposits $1,394,451 $1,015,562
============================================= ========== ==========
</TABLE>
(1) Includes average interest-bearing deposits in other financial institutions
of $341 and $459 for the nine months ended September 30, 1996 and 1995,
respectively.
(2) Interest income on non-taxable investments is presented on a fully taxable-
equivalent basis. The tax-equivalent adjustments were $177 and $188 for the
nine months ended September 30, 1996 and 1995, respectively.
13
<PAGE>
Net interest income is affected by changes in the amount and mix of interest-
earnings assets and interest-bearing liabilities, referred to as "volume
change." Net interest income is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing liabilities, referred
to as "rate change." The following table sets forth changes in interest income
and interest expense for each major category of interest-earning assets and
interest-bearing liabilities. Changes which are the combined result of volume
and rate changes have been allocated to volume. Changes relating to investment
securities are presented on a fully taxable-equivalent basis using the federal
statutory rate of 35% in 1996 and 1995.
<TABLE>
<CAPTION>
1996 Versus 1995
---------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
---------------------------------------------------------------
(Dollars in thousands) Volume Rate Total Volume Rate Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Federal funds sold and securities
purchased under agreement to resell $ (515) $(360) $ (875) $ 2,889 $ (669) $ 2,220
Investment securities 5,014 (76) 4,938 10,012 (399) 9,613
Loans 4,283 (240) 4,043 7,939 (1,774) 6,165
- -------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest income 8,782 (676) 8,106 20,840 (2,842) 17,998
- -------------------------------------------------------------------------------------------------------------------------
Interest expense:
Money market and NOW deposits 3,272 (350) 2,922 8,316 (287) 8,029
Time deposits 92 57 149 133 214 347
- -------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense 3,364 (293) 3,071 8,449 (73) 8,376
- -------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income $5,418 $(383) $5,035 $12,391 $(2,769) $ 9,622
=========================================================================================================================
</TABLE>
Net interest income, on a fully taxable-equivalent basis, totaled $23.0 million
for the third quarter of 1996, an increase of $5.0 million, or 28.0%, from the
$18.0 million total for the third quarter of 1995. The increase in net interest
income was the result of a $8.1 million, or 32.1%, increase in interest income,
offset by a $3.1 million, or 42.2%, increase in interest expense over the
comparable prior year period.
The $8.1 million increase in interest income for the third quarter of 1996, as
compared to the third quarter of 1995, was the result of a $8.8 million
favorable volume variance offset by a $0.7 million unfavorable rate variance.
The favorable volume variance resulted from a $452.8 million, or 42.4%, increase
in average interest-earning assets over the comparable prior year period. The
increase in average interest-earning assets resulted from growth in the
Company's deposits and was composed of increases in loans and investment
securities, offset by a decline in federal funds sold and securities purchased
under agreement to resell. The growth in average loans, which were up $152.3
million, or 22.9%, compared to the third quarter of 1995, primarily resulted
from an increase in commercial loans and personal lines of credit offered to
executives of clients. Average investment securities for the third quarter of
1996 increased $338.3 million, or 240.4%, over the respective prior year period.
This growth largely consisted of investments in notes issued by U.S. agencies as
well as in commercial paper. Average federal funds sold and securities purchased
under agreement to resell decreased $37.8 million, or 14.3%, over the comparable
1995 period, as a portion of funds previously invested in federal funds sold
were shifted to short-term investment securities. The change in the mix of
average investment securities and average federal funds sold and securities
purchased under agreement to resell was
14
<PAGE>
the result of Management's decision to further diversify the Company's portfolio
of short-term investments in connection with its liquidity management
activities. Further, the increase in average investment securities reflected
Management's decision to lengthen the average life of the Company's investment
portfolio in an effort to obtain the higher yields available due to the
steepening of the yield curve during 1996.
Interest income for the third quarter of 1996 decreased $0.7 million from the
comparable prior year period due to an unfavorable rate variance. The
unfavorable rate variance was the result of a decline in market interest rates
during the last half of 1995 and the first quarter of 1996. Lower yields on
loans in the 1996 third quarter accounted for $0.2 million of the total
unfavorable rate variance, as a substantial portion of the Company's loans are
prime rate-based. This unfavorable rate variance would have been higher had the
Company not realized $1.2 million in loan interest income that resulted from the
payoff of two nonperforming loans during the 1996 third quarter. The remaining
$0.5 million portion of the total unfavorable rate variance was attributable to
lower yields on federal funds sold and securities purchased under agreement to
resell, and investment securities.
The overall decrease in the yield on average interest-earning assets of 80 basis
points for the third quarter of 1996, as compared to the third quarter of 1995,
was due to a combination of the decline in market interest rates and a shift in
the composition of average interest-earning assets towards a higher percentage
of short-term investment securities. This shift in the composition of average
interest-earning assets resulted from growth in the Company's deposits combined
with the Company's liquidity and investment management activities.
Total interest expense in the 1996 third quarter increased $3.1 million from the
total for the 1995 third quarter. This increase was due to an unfavorable volume
variance of $3.4 million slightly offset by a $0.3 million favorable rate
variance. The unfavorable volume variance resulted from a $348.9 million, or
48.7%, increase in average interest-bearing liabilities in the third quarter of
1996 as compared with the third quarter of 1995. This increase was concentrated
in higher-rate money market deposits, and was attributable to market conditions
combined with the successful business development efforts of the Company.
Changes in the rates paid on interest-bearing liabilities had a $0.3 million
favorable impact on interest expense in the third quarter of 1996 versus the
1995 third quarter, as the average rate paid on interest-bearing liabilities
decreased 20 basis points from the third quarter of 1995. This slight decrease
resulted from a reduction in the rates paid on the Company's higher-rate money
market deposits on account of the declining interest rate environment during the
last half of 1995 and the first quarter of 1996, offset by the aforementioned
growth of higher-rate money market deposits.
Net interest income, on a fully taxable-equivalent basis, totaled $64.3 million
for the first nine months of 1996, an increase of $9.6 million, or 17.6%, from
the $54.6 million total for the first nine months of 1995. The increase in net
interest income was the result of an $18.0 million, or 24.4%, increase in
interest income, offset by a $8.4 million, or 43.9%, increase in interest
expense over the comparable prior year period.
The $18.0 million increase in interest income for the first nine months of 1996,
as compared to the first nine months of 1995, was the result of a $20.8 million
favorable volume variance offset by a $2.8 million unfavorable rate variance.
The favorable volume variance resulted from a $396.2 million, or 39.8%, increase
in average interest-earning assets over the comparable prior year period. The
increase in average interest-earning assets for the first nine months of 1996,
15
<PAGE>
compared with the first nine months of 1995, was composed of increases in loans,
investment securities, and liquid investments in federal funds sold and
securities purchased under agreement to resell, and resulted from the
aforementioned growth in deposits. The unfavorable rate variance was
attributable to the previously mentioned decline in market interest rates during
the last half of 1995 and the first quarter of 1996, offset by the
aforementioned loan interest income realized in connection with the payoff of
two nonperforming loans during the 1996 third quarter.
The overall decrease in the yield on average interest-earning assets of 110
basis points for the first nine months of 1996, over the comparable period in
1995, was due to a combination of the decline in market interest rates and a
shift in the composition of average interest-earning assets towards a higher
percentage of short-term investment securities. This shift in the composition of
average interest-earning assets resulted from growth in the Company's deposits
combined with the Company's liquidity and investment management activities.
Total interest expense for the first nine months of 1996 increased $8.4 million
from the total for the first nine months of 1995. This increase was due to an
unfavorable volume variance of $8.5 million offset by a favorable rate variance
of $0.1 million. The unfavorable volume variance resulted from a $293.6 million,
or 44.5%, increase in average interest-bearing liabilities for the first nine
months of 1996 over the comparable prior year period. This increase was
concentrated in higher-rate money market deposits, and was attributable to
market conditions combined with the successful business development efforts of
the Company. Changes in the rates paid on interest-bearing liabilities had a
$0.1 million favorable impact on interest expense for the first nine months of
1996, as compared to the respective 1995 period. This slight decrease in
interest expense resulted from a reduction in the rates paid on the Company's
higher-rate money market deposits on account of the declining interest rate
environment during the last half of 1995 and the first quarter of 1996, offset
by the aforementioned growth of higher-rate money market deposits.
Provision For Loan Losses
- -------------------------
The provision for loan losses is based on Management's evaluation of the
adequacy of the existing allowance for loan losses in relation to total loans,
and on Management's continuous assessment of the inherent and identified risk
dynamics of the loan portfolio resulting from reviews of selected individual
loans and loan commitments.
The provision for loan losses totaled $3.0 million for the third quarter of
1996, a $0.4 million, or 11.2%, decrease compared to the $3.3 million provision
for the third quarter of 1995. The provision for loan losses increased $0.5
million, or 7.4%, to $6.6 million for the first nine months of 1996, versus $6.1
million for the comparable 1995 period. See "Financial Condition - Credit
Quality and the Allowance for Loan Losses" for additional related discussion.
Noninterest Income
- ------------------
The following table summarizes the components of noninterest income for the
three and nine month periods ended September 30, 1996 and 1995:
16
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Dollars in thousands) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Disposition of client warrants $ 618 $3,823 $2,880 $5,626
Letter of credit and foreign exchange income 759 807 2,493 2,267
Deposit service charges 359 315 1,200 1,000
Investment gains (losses) - - 1 (770)
Other 277 153 825 434
- ---------------------------------------------------------------------------------------------
Total noninterest income $2,013 $5,098 $7,399 $8,557
=============================================================================================
</TABLE>
Total noninterest income for the three and nine month periods ended September
30, 1996 amounted to $2.0 million and $7.4 million, a decrease of $3.1 million
and $1.2 million, respectively, from the $5.1 million and $8.6 million totals
for the comparable 1995 periods. The decrease in noninterest income during 1996
was primarily explained by a decrease in income from the disposition of client
warrants.
Income from the disposition of client warrants was $0.6 million in the third
quarter of 1996 and $2.9 million for the first nine months of 1996 versus $3.8
million and $5.6 million for the respective 1995 periods. The Company has
historically obtained rights to acquire stock (in the form of warrants) in
certain nonpublic clients as part of negotiated credit facilities. The receipt
of warrants does not change the loan covenants or other collateral control
techniques employed by the Company to mitigate the risk of a loan becoming
nonperforming. Interest rates, loan fees and collateral requirements on loans
with warrants are similar to lending arrangements where warrants are not
obtained. The timing and amount of income from the disposition of client
warrants typically depends upon factors beyond the control of the Company,
including the general condition of the capital markets, and therefore cannot be
predicted with any degree of accuracy and is likely to vary materially from
period to period.
Letter of credit fees, foreign exchange fees and other trade finance income was
$0.8 million during both the 1996 and 1995 third quarters, and $2.5 million for
the first nine months of 1996, compared to $2.3 million for the first nine
months of 1995. The slight growth in this category of noninterest income in 1996
was due to increased foreign exchange fees, offset by lower letter of credit
fees on account of a decline in transaction volume resulting from increased
competition.
Deposit service charges totaled $0.4 million and $1.2 million for the three and
nine month periods ended September 30, 1996, respectively, versus $0.3 million
and $1.0 million for the comparable 1995 periods. Clients compensate the Company
for depository services either through earnings credits computed on their demand
deposit balances or via explicit payments recognized as deposit service charges.
The increase during 1996 was primarily related to growth in the Company's client
base.
The Company incurred no gains or losses on sales of investment securities in
both the 1996 and 1995 third quarters. The Company realized a nominal gain on
sales of investment securities during the first nine months of 1996, and
incurred $0.8 million in losses through such sales during the first nine months
of 1995. The securities sold during the first nine months of 1995 were primarily
mortgage-backed securities. All sales of investment securities were conducted as
a normal component of the Company's interest rate risk and liquidity management
activities.
17
<PAGE>
Other noninterest income is composed primarily of service-based fee income, and
increased to $0.3 million and $0.8 million for the 1996 third quarter and the
first nine months of 1996, respectively, from $0.2 million and $0.4 million for
the comparable prior year periods. The increase during 1996 was primarily due to
increased examination fees on client accounts receivable.
Noninterest Expense
- -------------------
Noninterest expense during the third quarter of 1996 totaled $13.2 million, a
$1.3 million, or 10.9%, increase from the $11.9 million incurred in the
comparable 1995 period. Noninterest expense was $39.0 million for the first nine
months of 1996, an increase of $2.6 million, or 7.0%, over the $36.4 million
total for the comparable 1995 period. Management closely monitors the level of
noninterest expense using a variety of financial ratios, including the
efficiency ratio. The efficiency ratio is calculated by dividing the amount of
noninterest expense, excluding costs associated with other real estate owned, by
adjusted revenues, defined as the total of net interest income and noninterest
income, excluding income from the disposition of client warrants and gains or
losses incurred through sales of investment securities. This ratio reflects the
level of operating expense required to generate $1 of operating revenue. The
Company's efficiency ratio improved to 54.2% for the 1996 third quarter, down
from 61.9% for the third quarter of 1995. The Company's efficiency ratio for the
first nine months of 1996 was 56.3%, versus 62.5% for the comparable 1995
period. The following tables present the detail of noninterest expense and the
incremental contribution of each line item to the Company's efficiency ratio:
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------
1996 1995
------------------- --------------------
Percent of Percent of
Adjusted Adjusted
(Dollars in thousands) Amount Revenues Amount Revenues
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Compensation and benefits $ 7,914 32.5% $ 6,517 34.0%
Professional services 1,122 4.6 1,032 5.4
Equipment 859 3.5 1,473 7.7
Occupancy 706 2.9 1,007 5.2
Corporate legal and litigation 207 0.9 179 0.9
Data processing services 119 0.5 214 1.1
Client services 23 0.1 82 0.4
FDIC deposit insurance 1 0.0 14 0.1
Other 2,237 9.2 1,370 7.1
- --------------------------------------------------------------------------------
Total excluding cost of other
real estate owned 13,188 54.2% 11,888 61.9%
Cost of other real estate owned 19 23
- --------------------------------------------------------------------------------
Total noninterest expense $13,207 $11,911
================================================================================
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------
1996 1995
------------------- --------------------
Percent of Percent of
Adjusted Adjusted
(Dollars in thousands) Amount Revenues Amount Revenues
- --------------------------------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Compensation and benefits $23,259 33.9% $20,374 35.0%
Professional services 3,398 4.9 3,620 6.2
Equipment 2,452 3.6 2,678 4.6
Occupancy 2,329 3.4 2,655 4.6
Data processing services 319 0.5 767 1.3
Client services 225 0.3 339 0.6
FDIC deposit insurance 173 0.3 1,210 2.1
Corporate legal and litigation 140 0.2 571 1.0
Other 6,314 9.2 4,143 7.1
- --------------------------------------------------------------------------------
Total excluding cost of other
real estate owned 38,609 56.3% 36,357 62.5%
Cost of other real estate owned 345 37
- --------------------------------------------------------------------------------
Total noninterest expense $38,954 $36,394
================================================================================
</TABLE>
Compensation and benefits expenses totaled $7.9 million in the third quarter of
1996, a $1.4 million, or 21.4%, increase over the $6.5 million incurred in the
third quarter of 1995. For the first nine months of 1996, compensation and
benefits expenses totaled $23.3 million, an increase of $2.9 million, or 14.2%,
over the $20.4 million total for the comparable 1995 period. The increase during
1996 in compensation and benefits expenses was largely the result of an increase
in the number of average full-time equivalent (FTE) staff employed by the
Company. Average FTE were 369 and 358 for the three and nine month periods ended
September 30, 1996, respectively, compared to 339 and 331 for the respective
prior year periods. The increase in FTE was primarily attributable to the
expansion of the Company's lending staff in an effort to develop new markets, as
well as in response to the Company's growing client base.
19
<PAGE>
Professional services expenses totaled $1.1 million in the third quarter of
1996, a $0.1 million, or 8.7%, increase from the $1.0 million incurred in the
third quarter of 1995. This increase was the result of higher accounting and
auditing fees, offset by lower legal expenses on account of client
reimbursements received by the Company in connection with the previously
mentioned payoff of two nonperforming loans during the 1996 third quarter.
Professional services expenses decreased $0.2 million, or 6.1%, to a total of
$3.4 million for the first nine months of 1996 versus $3.6 million for the
comparable 1995 period. This decrease was primarily related to lower legal
expenses resulting from the client reimbursements discussed above.
Equipment expenses in the third quarter of 1996 totaled $0.9 million, a decrease
of $0.6 million, or 41.7%, from the 1995 third quarter total of $1.5 million.
Equipment expenses for the first nine months of 1996 totaled $2.5 million, a
decrease of $0.2 million, or 8.4%, from the $2.7 million incurred in the
comparable prior year period. The lower equipment expenses in 1996, compared to
1995, were primarily the result of the Company recognizing certain non-recurring
costs in connection with a move into a new headquarters facility in the third
quarter of 1995, offset by higher equipment costs in 1996 due to investments in
computer equipment as well as other costs associated with the Company's growth
in personnel.
Occupancy expenses totaled $0.7 million and $2.3 million for the three and nine
month periods ended September 30, 1996. This was a decrease of $0.3 million, or
29.9%, and $0.3 million, or 12.3%, from the $1.0 million and $2.7 million totals
incurred in the respective 1995 periods. This decrease in occupancy expenses was
the result of the aforementioned non-recurring costs incurred in connection with
the Company's move into a new headquarters facility in the third quarter of
1995, offset by additional rent expense associated with several new loan offices
opened by the Company during the first half of 1996.
Corporate legal and litigation expenses totaled $0.2 million for both the third
quarter of 1996 and 1995. Total corporate legal and litigation expenses were
$0.1 million for the first nine months of 1996, versus $0.6 million for the
first nine months of 1995. This decrease in expenses during 1996 was the result
of the Company realizing a $0.4 million gain in the 1996 second quarter related
to the net proceeds received from a legal settlement.
Data processing services expenses were $0.1 million and $0.3 million for the
three and nine month periods ended September 30, 1996, a decrease of $0.1
million, or 44.4%, and $0.4 million, or 58.4%, compared to the $0.2 million and
$0.8 million totals for the comparable 1995 periods. The decrease during 1996 in
data processing services expenses was due to the Company's conversion to an in-
house data processing center during late 1995.
Client services expenses include courier expenses and related costs of loan and
deposit operations. Total client services expenses were nominal during the third
quarter of 1996, compared to $0.1 million incurred in the third quarter of 1995.
Client services expenses totaled $0.2 million for the first nine months of 1996,
versus $0.3 million for the comparable prior year period. The year-to-year
decrease in these expenses from 1995 to 1996 was due to the timing of
reimbursements from clients.
The Company realized minimal FDIC deposit insurance expense in both the third
quarter of 1996 and 1995. Total FDIC deposit insurance expense for the first
nine months of 1996 amounted to $0.2 million, a $1.0 million, or 85.7%, decrease
from the $1.2 million incurred in the first nine months of 1995. This decrease
was attributable to reductions in the Bank's assessment rate during both the
third quarter of 1995 and the first quarter of 1996 due to completion of the
recapitalization of the Bank Insurance Fund. The Bank's assessment rate was
further reduced to the statutory minimum annual assessment of $2,000, effective
July 1, 1996.
Other noninterest expenses in the third quarter of 1996 totaled $2.2 million, a
$0.9 million, or 63.3%, increase from the $1.4 million incurred in the third
quarter of 1995. For the first nine months of 1996, other noninterest expenses
increased $2.2 million, or 52.4%, to a total of $6.3 million compared to $4.1
million for the first nine months of 1995. The increase during 1996 largely
resulted from increased marketing and business development efforts combined with
an increase in other miscellaneous expenses resulting from the Company's growth
in personnel.
Net costs associated with other real estate owned were minimal in both the third
quarter of 1996 and 1995. For the first nine months of 1996, net costs
associated with OREO increased $0.3 million from the comparable 1995 period,
primarily due to the 1996 first quarter write-down of one property owned by the
Company. The costs associated with OREO include: maintenance expenses; property
taxes; marketing costs; net operating expense or income associated with income-
producing properties; property write-downs; and gains or losses on the sales of
such properties.
20
<PAGE>
Income Taxes
- ------------
The Company's effective tax rate was 40.0% in the 1996 third quarter, compared
to 29.7% in the third quarter of the prior year. For the nine months ended
September 30, 1996, the Company's effective tax rate was 40.0%, versus 38.0% in
the comparable 1995 period. The lower effective tax rates in 1995, as compared
to 1996, were attributable to a 1995 third quarter adjustment in the Company's
estimate of its tax liabilities.
FINANCIAL CONDITION
- -------------------
The Company's total assets were $1.7 billion at September 30, 1996 compared to
$1.4 billion at December 31, 1995.
Federal Funds Sold and Securities Purchased Under Agreement to Resell
- ---------------------------------------------------------------------
Federal funds sold and securities purchased under agreement to resell totaled
$280.4 million at September 30, 1996, an increase of $23.3 million, or 9.0%,
compared to the $257.1 million balance at December 31, 1995. This increase was
the result of growth in the Company's deposits during 1996, offset by loan
growth and by Management's decision to invest a significant portion of the
deposit growth in investment securities in connection with the Company's
liquidity and investment management activities.
Investment Securities
- ---------------------
Investment securities totaled $493.1 million at September 30, 1996. This
represented a $171.8 million, or 53.5%, increase over the December 31, 1995
balance of $321.3 million. The increase in investment securities was related to
growth in the Company's total deposits coupled with the Company's liquidity and
investment management activities, and was primarily centered in notes issued by
U.S. agencies as well as in commercial paper. The Company's liquidity and
investment management activities involved Management's decisions to further
diversify the Company's portfolio of short-term investments as well as lengthen
the average life of the investment portfolio in an effort to obtain the higher
yields available due to the steepening of the yield curve during 1996.
Loans
- -----
Total loans, net of unearned income, at September 30, 1996 were $840.8 million,
a $102.4 million, or 13.9%, increase compared to the $738.4 million balance
outstanding at December 31, 1995. The increase in loans from the 1995 year-end
total was largely concentrated in the commercial loan portfolio, and can be
attributed to the Company's increased business development efforts.
Credit Quality and the Allowance for Loan Losses
- ------------------------------------------------
Lending money involves an inherent risk of nonpayment. Through the
administration of loan policies and monitoring of the portfolio, Management
seeks to reduce such risks. The allowance for loan losses is an estimate to
provide a financial buffer for losses, both identified and unidentified, in the
loan portfolio.
21
<PAGE>
Management regularly reviews and monitors the loan portfolio to determine the
risk profile of each credit and to identify credits whose risk profiles have
changed. This review includes, but is not limited to, such factors as payment
status, the financial condition of the borrower, borrower compliance with loan
covenants, underlying collateral values, potential loan concentrations, and
general economic conditions. Potential problem credits are identified and, based
upon known information, action plans are developed.
The allowance for loan losses was $30.0 million at September 30, 1996, an
increase of $0.3 million, or 1.0%, compared to the $29.7 million balance at
December 31, 1995. This increase was due to additional provisions to the
allowance for loan losses of $6.6 million, offset by net charge-offs of $6.3
million for the first nine months of 1996. Gross charge-offs for the first nine
months of 1996 were $8.2 million, and primarily related to four commercial
credits.
In general, Management believes, based on currently known information, that the
allowance for loan losses is adequate as of September 30, 1996. However, future
changes in circumstances, economic conditions or other factors could cause
Management to increase or decrease the allowance for loan losses as deemed
necessary.
Nonperforming assets consist of loans that are past due 90 days or more but
still accruing interest, loans on nonaccrual status and OREO. The table below
sets forth certain relationships between nonperforming loans, nonperforming
assets and the allowance for loan losses:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(Dollars in thousands) (Unaudited)
- ------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming assets:
Loans past due 90 days or more $ 359 $ 906
Nonaccrual loans 19,936 27,867
- ------------------------------------------------------------------------------------
Total nonperforming loans 20,295 28,773
OREO 2,720 4,955
- ------------------------------------------------------------------------------------
Total nonperforming assets $23,015 $33,728
====================================================================================
Nonperforming loans as a percent of total loans 2.4% 3.9%
OREO as a percent of total assets 0.2% 0.4%
Nonperforming assets as a percent of total assets 1.4% 2.4%
Allowance for loan losses: $30,000 $29,700
As a percent of total loans 3.5% 4.0%
As a percent of nonaccrual loans 150.5% 106.6%
As a percent of nonperforming loans 147.8% 103.2%
</TABLE>
Nonperforming loans were $20.3 million, or 2.4% of total loans, at September 30,
1996. This was down from the total of $28.8 million or 3.9% of total loans, at
the prior year-end. Nonperforming loans at September 30, 1996 included two
credits, one of which is collateralized with real estate, totaling $11.1
million. Management believes each of these two credits, based on currently known
information, is adequately covered with collateral and specific reserves.
22
<PAGE>
Management has identified one loan in excess of $1.5 million, that, on the basis
of information known by Management as of September 30, 1996, was judged to have
a higher than normal risk of becoming nonperforming. The Company is not aware of
any other loans at September 30, 1996 where known information about possible
problems of the borrower casts serious doubts about the ability of the borrower
to comply with the loan repayment terms.
OREO totaled $2.7 million at September 30, 1996, a decrease of $2.2 million, or
45.1%, from the $5.0 million balance at December 31, 1995. This decrease
primarily resulted from the previously mentioned write-down of one property
combined with sales of several properties during the first nine months of 1996.
Deposits
- --------
Total deposits were $1.6 billion at September 30, 1996, an increase of $278.8
million, or 21.6%, from the prior year-end total of $1.3 billion. The majority
of this increase was in interest-bearing deposits, which increased $240.7
million, or 28.7%, to $1.1 billion at September 30, 1996 from $838.7 million as
of December 31, 1995. This increase was largely concentrated in higher-rate
money market deposits and resulted from market conditions combined with
increased business development efforts by the Company. Noninterest-bearing
demand deposits were $489.4 million at September 30, 1996, representing a $38.1
million, or 8.4%, increase from the $451.3 million balance at December 31, 1995.
LIQUIDITY
- ---------
Management regularly reviews general economic and financial conditions, both
external and internal, and determines whether the positions taken with respect
to liquidity and interest rate sensitivity are appropriate. The objectives of
liquidity management are to provide funds, at an acceptable cost, to meet loan
demand and depositors' needs, and to service other liabilities as they come due.
The Company assesses the likelihood of projected funding requirements by
reviewing historical funding patterns, current and forecasted economic
conditions and individual client funding needs. One measure Management uses to
assess the Company's liquidity is the level of liquid assets (as defined by the
Company) relative to total deposits. Liquid assets include cash and due from
banks, federal funds sold, securities purchased under agreement to resell, and
investment securities maturing within one year. At September 30, 1996, the
Company's liquid assets as a percentage of deposits were 34.9% compared to 41.0%
at December 31, 1995. This decrease resulted primarily from growth in the
Company's deposits combined with Management's decision to lengthen the average
life of the investment portfolio.
CAPITAL RESOURCES
- -----------------
Management seeks to maintain adequate capital to support anticipated asset
growth and credit risks and to ensure that the Company and the Bank are in
compliance with all regulatory capital guidelines. The primary source of new
capital for the Company has been the retention of earnings. Aside from current
earnings, an additional source of new capital for the Company has been proceeds
from the issuance of common stock under the Company's employee benefit plans,
including the Company's 1983 and 1989 stock option plans, the employee stock
ownership plan and the employee stock purchase plan.
23
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Shareholders' equity was $125.1 million at September 30, 1996, an increase of
$20.2 million, or 19.2%, from the $105.0 million balance at December 31, 1995.
This increase resulted from net income of $15.6 million and capital generated
through the Company's employee benefit plans of $4.9 million in the first nine
months of 1996, slightly offset by a $0.3 million increase in the unrealized
loss on available-for-sale investments.
The Company and the Bank are subject to capital adequacy guidelines issued by
the Federal Reserve Board. Under these guidelines, the minimum total risk-based
capital requirement is 10.0% of risk-weighted assets and certain off-balance
sheet items for a "well capitalized" depository institution. At least 6.0% of
the 10.0% total risk-based capital ratio must consist of Tier 1 capital, defined
as tangible common equity, and the remainder may consist of subordinated debt,
cumulative preferred stock, and a limited amount of the allowance for loan
losses.
The Federal Reserve Board has established minimum capital leverage ratio
guidelines for banking organizations. This 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 Company's risk-based capital ratios were in excess of regulatory guidelines
for a "well-capitalized" depository institution as of September 30, 1996 and
December 31, 1995. Capital ratios for the Company are set forth below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
September 30, December 31,
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Total risk-based capital ratio 12.1% 11.9%
Tier 1 risk-based capital ratio 10.8% 10.6%
Tier 1 leverage ratio 7.6% 8.0%
================================================================================
</TABLE>
The increase in the Company's total and Tier 1 risk-based capital ratios from
December 31, 1995 to September 30, 1996 was attributable to growth in the
Company's capital, combined with the Company investing a substantial portion of
the deposit growth during 1996 in lower risk-weighted assets. The decrease in
the Company's Tier 1 leverage ratio from December 31, 1995 to September 30, 1996
was attributable to an increase in quarterly average assets that resulted from
the aforementioned 1996 deposit growth.
24
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item
pending at September 30, 1996, or at the date of this report.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
--------
10.32 Executive Change in Control Severance Benefits Agreement
10.33 Change in Control Severance Policy For Non-executives
27 Financial Data Schedule
(b) Reports on Form 8-K:
-------------------
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 1996.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SILICON VALLEY BANCSHARES
Date: November 13, 1996 /s/ Christopher T. Lutes
------------------------
Christopher T. Lutes
Senior Vice President and Controller
(Principal Accounting Officer)
26
<PAGE>
EXHIBIT 10.32
EXECUTIVE
CHANGE IN CONTROL
SEVERANCE BENEFITS AGREEMENT
THIS EXECUTIVE CHANGE IN CONTROL SEVERANCE BENEFITS AGREEMENT (the
"AGREEMENT") is entered into this 12th day of August, 1996 between
______________ ("EXECUTIVE") and SILICON VALLEY BANK, a California corporation
(the "COMPANY"), a wholly owned subsidiary of Silicon Valley Bancshares, a
California corporation ("BANCSHARES"). This Agreement is intended to provide
Executive with the compensation and benefits described herein upon the
occurrence of specific events.
Certain capitalized terms used in this Agreement are defined in Article VI.
The Company and Executive hereby agree as follows:
ARTICLE 1
EMPLOYMENT BY THE COMPANY
1.1 Executive is currently employed as an executive vice president of the
Company.
1.2 This Agreement shall remain in full force and effect for the two year
period specified in Article VII; provided, however, that the rights and
obligations of the parties hereto contained in Articles II through VII shall
survive any termination for the longer of (i) two (2) years from the date of the
Agreement or (ii) twenty-four (24) months following a Change in Control (as
hereinafter defined) or such later period as may be required so that all
benefits to which Executive is entitled under this Agreement are paid or
otherwise provided to Executive.
1.3 The Company and Executive wish to set forth the compensation and
benefits which Executive shall be entitled to receive in the event that there is
a Change in Control or Executive's employment with the Company terminates
following a Change in Control under the circumstances described in Article II of
this Agreement.
1.4 The duties and obligations of the Company to Executive under this
Agreement shall be in consideration for Executive's past services to the
Company, Executive's continued employment with the Company, and Executive's
execution of the general waiver and release described in Section 3.2.
1.5 This Agreement shall supersede any other agreements relating to any
compensation, benefits, severance or other amounts to be paid to Executive in
the event of Executive's termination of employment following the occurrence of a
Change in Control, including but not limited to any Termination Agreement
entered into between Executive and the Company, but shall not supersede any
agreement between Executive and the Company or any personnel policies of the
Company relating to other aspects of Executive's employment relationship with
the Company, including but not limited to the Company's personnel policies
addressing severance payments to Executive in the
1
<PAGE>
event of a termination of Executive's employment which is not proximately
related to the occurrence of a Change in Control.
By executing this Agreement, both Executive and the Company agree that
any Termination Agreement previously entered into between the parties which
addressed as part of its provisions compensation to be paid to the Executive
upon the termination of Executive's employment with the Company, shall terminate
immediately and shall be of no further force and effect.
ARTICLE 2
SEVERANCE BENEFITS
2.1 ENTITLEMENT TO SEVERANCE BENEFITS. If Executive's employment terminates
due to an Involuntary Termination or a Constructive Termination within twenty-
four (24) months following a Change in Control, the termination of employment
will be a Covered Termination and the Company shall pay Executive the
compensation and benefits described in this Article II. If Executive's
employment terminates, but not due to an Involuntary Termination or a
Constructive Termination within twenty-four (24) months following a Change in
Control, or for any reason prior to a Change in Control or after twenty-four
(24) months or more following a Change in Control, then the termination of
employment will not be a Covered Termination and Executive will not be entitled
to receive any payments or benefits under this Article II.
Payment of any benefits described in this Article II shall be subject to
the restrictions and limitations set forth in Article III.
2.2 LUMP SUM SEVERANCE PAYMENT. Within thirty (30) days following a Covered
Termination, or such longer period as is administratively reasonable following
the close of the maximum period provided by law for consideration and revocation
of the employee agreement and release described in Section 3.2, Executive shall
receive a lump sum payment determined by the Executive's Total Compensation
multiplied by the appropriate factor applied from the table attached as Exhibit
A (which factor shall be based upon (1) the Executive's title or grade within
the Company and (2) the relationship between the valuation of the Company at the
time of the transaction (or series of related transactions) causing the
occurrence of a Change in Control and the Book Value of the Company at that
time). This lump sum payment shall be called the Executive's "CIC Benefit."
If the Executive's Covered Termination occurs on or before the
expiration of twelve (12) months from the occurrence of a Change in Control, the
Executive shall be entitled to receive 100% of his or her CIC Benefit. If the
Executive's Covered Termination occurs after the expiration of twelve (12)
months from the occurrence of a Change in Control, the Executive shall be
entitled to receive a CIC Benefit based upon the following table:
2
<PAGE>
NUMBER OF MONTHS
FOLLOWING CHANGE IN CONTROL PERCENTAGE OF CIC BENEFIT
15 75%
18 50%
21 25%
24 0%
In the event that an Executive's Covered Termination occurs on a date
between two of these quarterly benchmarks, then the percentage of the CIC
Benefit to which Executive shall be entitled shall be equal to the sum of two
percentages (rounded to the nearest whole percentage): (1) the Percentage of CIC
Benefit for the quarterly benchmark next following the occurrence of the Covered
Termination, and (2) twenty five percent (25%) multiplied by a fraction, the
numerator of which is the number of days after the date of Covered Termination
and on or before the date on which the subsequent quarterly benchmark falls, and
the denominator of which is ninety one (91). For example, if the date on which a
Change of Control occurs is September 1, 1996 and the Executive incurs a Covered
Termination on November 15, 1997, then the Percentage of CIC Benefit to which
Executive is entitled shall be 79% (75% + (16/91 x 25%)) or (75% + 4.4%) or
79.4%, as rounded to the nearest whole percentage. Executive's CIC Benefit may
be further reduced as a result of the limits on payment of aggregate CIC
Benefits described in Exhibit A to this Agreement.
2.3 STOCK OPTIONS AND STOCK. All stock options held by the Executive with
respect to Bancshares stock that are unvested at the time of a Change in Control
shall become fully vested and exercisable upon a Change in Control (regardless
of whether a Covered Termination occurs) and all Bancshares stock held by the
Executive that is unvested at the time of a Change in Control shall become fully
vested upon a Change in Control (regardless of whether a Covered Termination
occurs).
2.4 EVA INCENTIVE RESERVE. Within ninety (90) days of the occurrence of a
Covered Termination, Executive shall receive a lump sum payment of the entire
amount of Executive's incentive reserve under the EVA Plan, as determined under
the terms of the Company's Incentive Plan at Silicon Valley Bank (known as the
"EVA Plan") or under other, similar incentive or bonus plans that preceded the
EVA Plan or that may replace the EVA Plan.
2.5 TAX-QUALIFIED RETIREMENT PLANS. Upon the occurrence of a Covered
Termination, the Executive's benefits under any pension, profit sharing, or
stock bonus plan intended to satisfy the requirements of Section 401(a) of the
Internal Revenue Code, specifically including, but not limited to, the Silicon
Valley Bank 401(k) and Employee Stock Ownership Plan and the Silicon Valley Bank
Money Purchase Pension Plan, shall become fully vested.
2.6 WELFARE BENEFITS. Following a Covered Termination, Executive and his or
her covered dependents will be eligible to continue their Welfare Benefit
coverage under any Welfare Benefit plan or program maintained by the Company
only to the extent provided under the terms and conditions of such Welfare
Benefit plan or program. Except for the foregoing, no continuation of Welfare
Benefits shall be provided under this Agreement, except to the extent
continuation of health
3
<PAGE>
insurance coverage is required under the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA").
This Section 2.6 is not intended to affect, nor does it affect, the
rights of Executive, or Executive's covered dependents, under any applicable law
with respect to health insurance continuation coverage.
2.7 OUTPLACEMENT SERVICES. The Company shall provide Executive with
outplacement services under the terms and conditions of the Company's personnel
policies in effect immediately prior to the occurrence of a Change in Control.
2.8 MITIGATION. Except as otherwise specifically provided herein, Executive
shall not be required to mitigate damages or the amount of any payment provided
under this Agreement by seeking other employment or otherwise, nor shall the
amount of any payment provided for under this Agreement be reduced by any
compensation earned by Executive as a result of employment by another employer
or by retirement benefits received after the date of the Covered Termination, or
otherwise.
2.9 BASIS OF PAYMENTS. All benefits under this Agreement shall be paid by
the Company. This Agreement shall be unfunded, and benefits hereunder shall be
paid only from the general assets of the Company.
ARTICLE 3
LIMITATIONS AND CONDITIONS ON BENEFITS
3.1 WITHHOLDING OF TAXES. The Company shall withhold appropriate federal,
state or local income and employment taxes from any payments hereunder.
3.2 EMPLOYEE AGREEMENT AND RELEASE PRIOR TO RECEIPT OF BENEFITS. Upon the
occurrence of a Covered Termination, and prior to the receipt of any benefits
under this Agreement on account of the occurrence of a Covered Termination,
Executive shall, as of the date of a Covered Termination, execute an employee
agreement and release substantially in the form attached hereto as Exhibit B.
Such employee agreement and release shall specifically relate to all of
Executive's rights and claims in existence at the time of such execution. In
the event Executive does not execute such employee agreement and release within
the time period specified in such employee agreement and release or if Executive
revokes such employee agreement and release within the revocation period
provided in such employee agreement and release no benefits shall be payable
under this Agreement to Executive.
3.3 LIMITS IMPOSED BY APPLICABLE BANKING LAW. Notwithstanding any other
provision to the contrary, the Company shall not be obligated under this
Agreement to pay any CIC Benefit to the extent that such payment would violate
any prohibition or limitation on termination payments under any applicable
federal or state statute, rule or regulation promulgated, or effective order
issued, by any federal or state regulatory agency having jurisdiction over the
Company or Bancshares. Without limiting the foregoing, the Company and
Executive acknowledge and agree that the Federal Deposit Insurance Corporation
(the "FDIC") has issued a regulation that prohibits payment of the CIC Benefit
under certain circumstances, unless such payments were approved by the
4
<PAGE>
FDIC, the Federal Reserve Bank of San Francisco (the "FRB") and the California
State Banking Department (the "SBD").
ARTICLE 4
OTHER RIGHTS AND BENEFITS
4.1 NONEXCLUSIVITY. Nothing in the Agreement shall prevent or limit
Executive's continuing or future participation in any benefit, bonus, incentive
or other plans, programs, policies or practices provided by the Company and for
which Executive may otherwise qualify, nor, except as specifically provided
herein, shall anything herein limit or otherwise affect such rights as Executive
may have under any stock option or other agreements with the Company. Except as
otherwise expressly provided herein, amounts which are vested benefits or which
Executive is otherwise entitled to receive under any plan, policy, practice or
program of the Company at or subsequent to the date of a Covered Termination
shall be payable in accordance with such plan, policy, practice or program.
4.2 PARACHUTE PAYMENTS.
(a) In the event that any payment received or to be received by Executive
pursuant to this Agreement ("Payment") would (i) constitute a "parachute
payment" within the meaning of Section 280G of the Internal Revenue Code (the
"Code") and (ii) but for this subsection (a), be subject to the excise tax
imposed by Section 4999 of the Code (the "Excise Tax"), then,
subject to the provisions of subsection (b) hereof, such Payment shall be
reduced, if at all, to the largest amount which Executive, in his or her
discretion, determines would result in maximizing Executive's net proceeds with
respect to such Payments (after taking into account the payment of any
appropriate federal, state or local income and employment taxes and the payment
of any Excise Tax imposed on such Payment). The determination by Executive of
any required reduction pursuant to this subsection (a) shall be conclusive and
binding upon the Company. The Company shall reduce a Payment in accordance with
this subsection (a) only upon written notice by Executive indicating the amount
of such reduction, if any. If the Internal Revenue Service (the "IRS")
determines that a Payment is subject to the Excise Tax, then subsection (b)
hereof shall apply, and the enforcement of subsection (b) shall be the exclusive
remedy to the Company for a failure by Executive to reduce the Payment so that
no portion thereof is subject to the Excise Tax.
(b) If, notwithstanding any reduction described in subsection (a) hereof (or
in the absence of any such reduction), the IRS determines that Executive is
liable for the Excise Tax as a result of the receipt of one or more Payments,
then Executive shall be obligated to pay back to the Company, within 30 days
after final IRS determination, an amount of such Payments equal to the
"Repayment Amount." The Repayment Amount with respect to such Payments shall be
the smallest such amount, if any, as shall be required to be paid to the Company
so that Executive's net proceeds with respect to such Payments (after taking
into account the payment of the Excise Tax imposed on such Payments) shall be
maximized. Notwithstanding the foregoing, the Repayment Amount with respect to
such Payments shall be zero if a Repayment Amount of more than zero would not
eliminate the Excise Tax imposed on such Payments. If the Excise Tax is not
eliminated pursuant to this subsection (b), Executive shall pay the Excise Tax.
5
<PAGE>
4.3 STOCK OPTIONS. The Company shall take all actions necessary to amend
all stock agreements evidencing outstanding stock options granted to Executive
to provide for full vesting of stock options upon a Change in Control or to
otherwise conform such stock agreements, as required, to the terms of this
Agreement.
ARTICLE 5
NON-ALIENATION OF BENEFITS
No benefit hereunder shall be subject to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance or charge, and any attempt to so
subject a benefit hereunder shall be void.
ARTICLE 6
DEFINITIONS
For purposes of the Agreement, the following terms shall have the meanings
set forth below:
6.1 AGREEMENT" means this Executive Change in Control Severance Benefits
Agreement.
6.2 "ANNUAL BASE SALARY" means the amount of compensation provided by the
Company to Executive as base salary. Such amount shall be determined by
annualizing the highest base rate in effect for Executive at any time
immediately prior to, on, or after the date of the Change in Control, exclusive
of any bonus or other incentive cash compensation, income from any stock options
or other stock awards, supplemental deferred compensation contributions made by
the Company, pension or profit sharing contributions or distributions (except as
provided below), insurance payments or proceeds, fringe benefits, or other form
of additional compensation, but specifically including any amounts withheld from
base salary to provide benefits pursuant to section 125, 401(k), or 402(g) of
the Internal Revenue Code or pursuant to any other plan or program of deferred
compensation.
6.3 "CHANGE IN CONTROL" means the consummation of any of the following
transactions during the term of this Agreement:
(a) the shareholders of the Company or Bancshares approve a merger or
consolidation of the Company or Bancshares with any other corporation, other
than a merger or consolidation which would result in beneficial owners of the
total voting power in the election of directors represented by the voting
securities ("Voting Securities") of the Company or Bancshares (as the case may
be) outstanding immediately prior thereto continuing to beneficially own
securities representing (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than fifty percent (50%) of
the total Voting Securities of the Company or Bancshares, or of such surviving
entity, outstanding immediately after such merger or consolidation;
(b) the shareholders of the Company or Bancshares approve a plan of
liquidation or dissolution of the Company or approve an agreement for the sale,
lease, exchange or other transfer or disposition by the Company or Bancshares of
all or substantially all of the Company's assets;
6
<PAGE>
(c) any person (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than
(A) a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or Bancshares, (B) a corporation owned directly or
indirectly by the shareholders of Bancshares in substantially the same
proportions as their beneficial ownership of stock in Bancshares, or (C)
Bancshares (with respect to Bancshares' ownership of the stock of the Company),
is or becomes the beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act), directly or indirectly, of the securities of the Company or
Bancshares representing 50% or more of the Voting Securities; or
(d) (A) (1) the shareholders of the Company or Bancshares approve a merger or
consolidation of the Company or Bancshares with any other corporation, other
than a merger or consolidation which would result in beneficial owners of Voting
Securities of the Company or Bancshares (as the case may be) outstanding
immediately prior thereto continuing to beneficially own securities representing
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) more than twenty-five percent (25%) of the total Voting
Securities of the Company or Bancshares, or of such surviving entity,
outstanding immediately after such merger or consolidation, or (2) any person
(as such term is used in Sections 13(d) or 14(d) of the Exchange Act), other
than (a) a trustee or other fiduciary holding securities under an employee
benefit plan of the Company or Bancshares, (b) a corporation owned directly or
indirectly by the shareholders of Bancshares in substantially the same
proportions as their ownership of stock in Bancshares, or (c) Bancshares (with
respect to Bancshares' ownership of the stock of the Company) is or becomes the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act),
directly or indirectly, of the securities of the Company or Bancshares
representing 25% or more of the Voting Securities of such corporation, and
(B) within twelve (12) months of the occurrence of such event, a change
in the composition of the Board of Directors of Bancshares occurs as a result of
which sixty percent (60%) or fewer of the directors are Incumbent Directors.
"Incumbent Directors" shall mean directors who either
(A) are directors of Bancshares as of the date hereof;
(B) are elected, or nominated for election, to the Board of Directors of
Bancshares with the affirmative votes of at least a majority of the directors of
Bancshares who are Incumbent Directors described in (A) above at the time of
such election or nomination; or
(C) are elected, or nominated for election, to the Board of Directors of
Bancshares with the affirmative votes of at least a majority of the directors of
Bancshares who are Incumbent Directors described in (A) or (B) above at the time
of such election or nomination.
Notwithstanding the foregoing, "Incumbent Directors" shall not include an
individual whose election or nomination to the Board of Directors of Bancshares
occurs in order to provide representation for a person or group of related
persons who have initiated or encouraged an actual or threatened proxy contest
relating to the election of directors of Bancshares.
6.4 "COMPANY" means Silicon Valley Bank, a California corporation, and any
successor thereto.
7
<PAGE>
6.5 "CONSTRUCTIVE TERMINATION" means that the Executive voluntarily
terminates his or her employment after any of the following are undertaken
without Executive's express written consent:
(a) the material, involuntary reduction in Executive's responsibilities,
authorities or functions as an employee of the Company as in effect immediately
prior to a Change in Control, except in connection with the termination of
Executive's employment for death, disability, retirement, fraud,
misappropriation, embezzlement or any listed exclusion from the definition of
Involuntary Termination;
(b) a reduction in Executive's Annual Base Salary;
(c) reduction in Executive's Total Compensation to less than 85% of the
amount provided to Executive for the last full calendar year immediately
preceding the occurrence of a Change in Control; or
(d) a relocation of Executive to a location more than fifty (50) miles
from the location at which Executive performed Executive's duties prior to a
Change in Control, except for required travel by Executive on the Company's
business to an extent substantially consistent with Executive's business travel
obligations at the time of a Change in Control.
6.6 "COVERED TERMINATION" means an Involuntary Termination or a Constructive
Termination within twenty-four (24) months following a Change in Control. No
other event shall be a Covered Termination for purposes of this Agreement.
6.7 "INVOLUNTARY TERMINATION" means Executive's dismissal or discharge by
the Company (or, if applicable, by the successor entity) for reasons other than
for one of the following reasons:
(a) the commission by Executive of an act of deliberately criminal or
fraudulent misconduct in the line of duty to the Company or Bancshares
(including, but not limited to, the willful violation of any material law, rule,
regulation, or cease and desist order applicable to Executive, the Company or
Bancshares), a deliberate act that constitutes a conflict of interest with the
Company, Bancshares, or Bancshares' shareholders, or a deliberate breach of a
fiduciary duty owed by Executive to the Company, Bancshares, or Bancshares'
shareholders;
(b) Executive's habitual absence from work, intentional failure to
perform stated duties, gross negligence, or gross incompetence in the
performance of stated duties;
(c) Executive's chronic alcohol or drug abuse that results in a material
impairment of Executive's ability to perform his or her duties as an employee of
the Company after reasonable accommodation;
(d) the rendering of a verdict of guilty against Executive for any
criminal offense (other than a law relating to a traffic violation or similar
offense), whether or not in the line of duty; or
8
<PAGE>
(e) Executive's removal from his or her office with the Company or
Bancshares pursuant to an effective order under Section 8(e) of the Federal
Deposit Insurance Act 12 U.S.C.(S) 1818(e).
The termination of an Executive's employment will not be deemed to be an
"Involuntary Termination" if such termination occurs as a result of the death or
disability of Executive.
6.8 "TOTAL COMPENSATION" means the amount of compensation paid by the
Company to Executive with respect to the calendar year immediately preceding the
occurrence of a Change in Control. Such amount shall include the following
amounts paid with respect to such calendar year: Executive's Annual Base Salary,
any annual incentive compensation most recently declared (whether or not
actually paid, and specifically including any amounts which may be transferred
into Executive's incentive reserve), and any amounts withheld from Executive's
base salary or bonus to provide benefits pursuant to section 125, 401(k), or
402(g) of the Internal Revenue Code or pursuant to any other plan or program of
deferred compensation. Such amount shall exclude any bonus declared or paid
from the warrant incentive plan of the Company, any income from any stock
options or other stock awards, supplemental deferred compensation contributions
made by the Company, pension or profit sharing contributions or distributions
(except included above), insurance payments or proceeds, fringe benefits, and
other forms of additional compensation. Notwithstanding the foregoing, any
annual incentive compensation declared for the calendar year immediately
preceding the occurrence of a Change in Control shall relate to the Executive's
performance in the preceding calendar year.
6.9 "WELFARE BENEFITS" means benefits providing for coverage or payment in
the event of Executive's death, disability, illness or injury that were provided
to Executive immediately before a Change in Control, whether taxable or non-
taxable and whether funded through insurance or otherwise.
ARTICLE 7
TERM OF AGREEMENT
This Agreement shall have a term of two (2) years, commencing as of the date
of execution of this Agreement set forth on page 1 of this Agreement.
ARTICLE 8
GENERAL PROVISIONS
8.1 EMPLOYMENT STATUS. This Agreement does not constitute a contract of
employment or impose on Executive any obligation to remain as an employee, or
impose on the Company any obligation (i) to retain Executive as an employee,
(ii) to change the status of Executive as an at-will employee, or (iii) to
change the Company's policies regarding termination of employment.
8.2 NOTICES. Any notices provided hereunder must be in writing and such
notices or any other written communication shall be deemed effective upon the
earlier of personal delivery (including personal delivery by telex or facsimile)
or the third day after mailing by first class mail,
9
<PAGE>
to the Company at its primary office location and to Executive at his or her
address as listed in the Company's payroll records. Any payments made by the
Company to Executive under the terms of this Agreement shall be delivered to
Executive either in person or at his or her address as listed in the Company's
payroll records.
8.3 SEVERABILITY. Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
8.4 WAIVER. If either party should waive any breach of any provisions of
this Agreement, such party shall not thereby be deemed to have waived any
preceding or succeeding breach of the same or any other provision of this
Agreement.
8.5 COMPLETE AGREEMENT. This Agreement, including Exhibits A, B and C and
any other written agreements expressly referred to in this Agreement,
constitutes the entire agreement between Executive and the Company and it is the
complete, final, and exclusive embodiment of their agreement with regard to this
subject matter. It is entered into without reliance on any promise or
representation other than those expressly contained herein.
8.6 AMENDMENT OR TERMINATION OF AGREEMENT. This Agreement may be changed or
terminated only upon the mutual written consent of the Company and Executive.
The written consent of the Company to a change or termination of this Agreement
must be signed by an executive officer of the Company after such change or
termination has been approved by an authorized committee of the Company's Board
of Directors.
8.7 COUNTERPARTS. This Agreement may be executed in separate counterparts,
any one of which need not contain signatures of more than one party, but all of
which taken together will constitute one and the same Agreement.
8.8 HEADINGS. The headings of the Articles and Sections hereof are inserted
for convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
8.9 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to
the benefit of and be enforceable by Executive and the Company, and their
respective successors, assigns, heirs, executors and administrators, except that
Executive may not assign any of his duties hereunder and he may not assign any
of his rights hereunder without the written consent of the Company, which
consent shall not be withheld unreasonably.
8.10 ARBITRATION. Any and all disputes or controversies, arising from or
regarding the interpretation, performance, enforcement or termination of this
Agreement shall be resolved by final and binding arbitration under the
procedures set forth in the Arbitration Procedure attached hereto as Exhibit C
and the then existing Judicial Arbitration and Mediation Services, Inc. ("JAMS")
Rules of Practice and Procedure or the rules of practice and procedure of any
successor entity to JAMS
10
<PAGE>
(except insofar as they are inconsistent with the procedures set forth in the
enclosed Arbitration Procedure). Nothing in this section is intended to prevent
either party from obtaining either injunctive relief in court to prevent
irreparable harm pending the conclusion of any such arbitration or in lieu of
arbitration or from utilizing any judicial court system to seek enforcement of
an arbitration award.
8.11 ATTORNEY FEES. In the event of any arbitration or litigation or any
other action or proceeding relating to the interpretation, performance,
enforcement or termination of this Agreement, the prevailing party shall be
entitled to an award requiring payment by the other party of such prevailing
party's reasonable fees and costs, including reasonable attorneys' fees,
incurred as a result of such action or proceeding.
8.12 CHOICE OF LAW. All questions concerning the construction, validity and
interpretation of this Agreement will be governed by the laws of the State of
California applicable to contracts executed and to be performed solely in the
State of California.
8.13 NON-PUBLICATION. The parties mutually agree not to disclose publicly
the terms of this Agreement except to the extent that disclosure is mandated by
applicable law.
8.14 TRANSFER OF SERVICES TO AFFILIATE. This Agreement shall not prohibit
the Company from transferring Executive's services to an affiliate of the
Company, provided that the rights and obligations of the parties hereto shall
not terminate in the event of such transfer, and provided further that the new
entity for which Executive is performing services also shall be bound hereby
without the need for further written agreement and without release of the
Company.
8.15 NO VIOLATION OF GOVERNING BANKING LAW. Nothing in this Agreement is
intended to require or shall be construed as requiring the Company to do or fail
to do any act in violation of applicable law, rule, regulation or order. The
Company's inability, pursuant to court or regulatory order, to perform its
obligations under this Agreement or the modification of this Agreement by the
FRB, the SBD or other bank regulatory agency through administrative action shall
not constitute a breach of this Agreement. Except to the extent provided in
Section 3.3, the provisions of this Agreement shall be severable. If this
Agreement or any portion hereof shall be invalidated on any ground by any court
of competent jurisdiction, then the Company shall nevertheless perform its
obligations hereunder to the full extent permitted by any applicable portion of
this Agreement that shall not have been invalidated, and the balance of this
Agreement not so invalidated shall be enforceable in accordance with its terms.
8.16 OPPORTUNITY FOR INDEPENDENT COUNSEL AND ADVISORS. Executive
acknowledges that he or she has had an opportunity to retain independent counsel
and tax advisors to review this Agreement.
8.17 CONSTRUCTION OF AGREEMENT. In the event of a conflict between the text
of the Agreement and any summary, description or other information regarding the
Agreement, the text of the Agreement shall control.
11
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year written above.
SILICON VALLEY BANK,
a California corporation Executive
By:
--------------------------- ---------------------------
John C. Dean
President and Chief Executive Officer
Exhibit A: CIC Benefit Table
Exhibit B: Employee Agreement and Release
Exhibit C: Arbitration Procedure
12
<PAGE>
CIC BENEFIT/1/
<TABLE>
<CAPTION>
Multiple of Total Cash Compensation
Selling Price -----------------------------------
Multiple of Executive Non-Exec. Committee
Book Value Committee** MC Members
- ----------------------------------------------------------
<S> <C> <C>
1.00 0.000 0.000
1.05 0.125 0.100
1.10 0.250 0.200
1.15 0.375 0.300
1.20 0.500 0.400
1.25 0.625 0.500
1.30 0.750 0.600
1.35 0.875 0.700
1.40 1.000 0.800
1.45 1.125 0.900
1.50 1.250 1.000
1.55 1.375 1.100
1.60 1.500 1.200
1.65 1.625 1.300
1.70 1.750 1.400
1.75 1.875 1.500
1.80 2.000 1.600
1.85 2.125 1.700
1.90 2.250 1.800
1.95 2.375 1.900
2.00 2.500 2.000
2.05 2.625 2.100
2.10 2.750 2.200
2.15 2.875 2.300
2.20 3.000 2.400
2.25 3.125 2.500
2.30 3.250 2.600
2.35 3.375 2.700
2.40 3.500 2.800
2.45 3.625 2.900
2.50 3.750 3.000
2.55 3.875 3.100
2.60 4.000 3.200
2.65 4.125 3.300
2.70 4.250 3.400
2.75 4.375 3.500
2.80 4.500 3.600
2.85 4.625 3.700
2.90 4.750 3.800
2.95 4.875 3.900
3.00 5.000 4.000
</TABLE>
/1/ This table reflects CIC benefits for sales up to 3.00 times SVB's then
book value. For sales above this, the multiples (of total cash
compensation) must appropriately be extrapolated from the multiples (of
total cash compensation) shown.
** Executive Committee members are the CEO and such other persons
determined by the CEO and Board. For purposes of this grid, "Executive
Committee" members are not necessarily SVB's Reg. O Officers.
13
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EXHIBIT A
For purposes of this table, the following definitions shall apply:
1. "BOOK VALUE" shall mean the amount of the Company's stockholders'
equity, as determined in accordance with generally accepted accounting
principles, as of the date immediately preceding a Change in Control, excluding
the Company's allowance for loan losses.
2. "SELLING PRICE" shall mean the valuation of the Company as determined by
the Company in good faith at the time of the occurrence of the transaction (or
series of related transactions) as a result of which a Change in Control occurs.
Furthermore, notwithstanding any provision in this table, the Executive's
Agreement, and any personnel policy of the Company to the contrary, the
cumulative CIC Benefit paid to all employees of the Company shall not exceed
5.8% of the difference between the Selling Price and the Book Value assuming
one-third (1/3rd) of the Company's employees at the time of a Change in Control
incur a Covered Termination, shall not exceed 11.7% of the difference between
the Selling Price and the Book Value assuming two-thirds (2/3rds) of the
Company's employees at the time of a Change in Control incur a Covered
Termination, and in no event shall exceed 17.5% of the difference between the
Selling Price and the Book Value. For purposes of the potential reduction in
CIC Benefits provided for in this paragraph, the determination shall be made at
the time of the Change in Control and the determination of whether the
cumulative CIC Benefit to be paid exceeds the relevant limits specified herein
also shall be determined at the time of the Change in Control. If, at the time
of the Change in Control, it is determined that the limits specified in this
paragraph are exceeded, then the potential CIC Benefits of all employees of the
Company incurring a Covered Termination shall be proportionately decreased such
that the resulting potential aggregate payouts will not exceed the relevant
limit.
14
<PAGE>
EXHIBIT B.1
EMPLOYEE AGREEMENT AND RELEASE
I UNDERSTAND AND AGREE COMPLETELY TO THE TERMS SET FORTH IN THE FOREGOING.
Except as otherwise set forth in this Agreement, I hereby release, acquit and
forever discharge the Company, its parents and subsidiaries, and their officers,
directors, agents, servants, employees, shareholders, attorneys, successors,
assigns and affiliates, of and from any and all claims, liabilities, demands,
causes of action, costs, expenses, attorneys fees, damages, indemnities and
obligations of every kind and nature, in law, equity, or otherwise, known and
unknown, suspected and unsuspected, disclosed and undisclosed (other than any
claim for indemnification which I may have as a result of any third party action
against me based on my employment with the Company), arising out of or in any
way related to agreements, events, acts or conduct at any time prior to and
including the effective date of this Agreement, including but not limited to:
all such claims and demands directly or indirectly arising out of or in any way
connected with my employment with the Company or the termination of that
employment, including but not limited to, claims of intentional and negligent
infliction of emotional distress, any and all tort claims for personal injury,
claims or demands related to salary, bonuses, commissions, stock, stock options,
or any other ownership interests in the Company, vacation pay, fringe benefits,
expense reimbursements, severance pay, or any other form of compensation; claims
pursuant to any federal, state or local law, statute or cause of action
including, but not limited to, the federal Civil Rights Act of 1964, as amended;
the federal Americans with Disabilities Act of 1990; the California Fair
Employment and Housing Act, as amended; tort law; contract law; wrongful
discharge; discrimination; harassment; fraud; defamation; emotional distress;
and breach of the implied covenant of good faith and fair dealing; provided,
however, that nothing in this paragraph shall be construed in any way to release
the Company from its obligation to indemnify me pursuant to any Indemnification
Agreement between me and the Company which is currently in effect.
In giving this release, which includes claims which may be unknown to me at
present, I acknowledge that I have read and understand Section 1542 of the
California Civil Code which reads as follows: "A GENERAL RELEASE DOES NOT
EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS
FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I hereby expressly waive
and relinquish all rights and benefits under that section and any law of any
jurisdiction of similar effect with respect to my release of any claims I may
have against the Company.
By: ___________________________________
[Employee Name]
Date: _________________________, 199___
[FOR PARTICIPANTS UNDER AGE 40]
15
<PAGE>
EXHIBIT B.2
EMPLOYEE AGREEMENT AND RELEASE
I UNDERSTAND AND AGREE COMPLETELY TO THE TERMS SET FORTH IN THE FOREGOING
AGREEMENT.
I acknowledge that I have read and understand Section 1542 of the California
Civil Code which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS
WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR." I hereby expressly waive and relinquish all rights
and benefits under that section and any law of any jurisdiction of similar
effect with respect to my release of any claims I may have against the Company.
Except as otherwise set forth in this Agreement, I hereby release, acquit and
forever discharge the Company, its parents and subsidiaries, and their officers,
directors, agents, servants, employees, shareholders, attorneys, successors,
assigns and affiliates, of and from any and all claims, liabilities, demands,
causes of action, costs, expenses, attorneys fees, damages, indemnities and
obligations of every kind and nature, in law, equity, or otherwise, known and
unknown, suspected and unsuspected, disclosed and undisclosed (other than any
claim for indemnification I may have as a result of any third party action
against me based on my employment with the Company), arising out of or in any
way related to agreements, events, acts or conduct at any time prior to and
including the Effective Date of this Agreement, including but not limited to:
all such claims and demands directly or indirectly arising out of or in any way
connected with my employment with the Company or the termination of that
employment, including but not limited to, claims of intentional and negligent
infliction of emotional distress, any and all tort claims for personal injury,
claims or demands related to salary, bonuses, commissions, stock, stock options,
or any other ownership interests in the Company, vacation pay, fringe benefits,
expense reimbursements, severance pay, or any other form of compensation; claims
pursuant to any federal, state or local law or cause of action including, but
not limited to, the federal Civil Rights Act of 1964, as amended; the federal
Age Discrimination in Employment Act of 1967, as amended ("ADEA"); the federal
Americans with Disabilities Act of 1990; the California Fair Employment and
Housing Act, as amended; tort law; contract law; wrongful discharge;
discrimination; fraud; defamation; emotional distress; and breach of the implied
covenant of good faith and fair dealing; provided, however, that nothing in this
paragraph shall be construed in any way to release the Company from its
obligation to indemnify me pursuant to any Indemnification Agreement between me
and the Company which is currently in effect.
I acknowledge that I am knowingly and voluntarily waiving and releasing any
rights I may have under ADEA. I also acknowledge that the consideration given
for the waiver and release in the preceding paragraph hereof is in addition to
anything of value to which I was already entitled. I further acknowledge that I
have been advised by this writing, as required by the ADEA, that: (A) my waiver
and release do not apply to any rights or claims that may arise after the
Effective Date of this Agreement; (B) I have the right to consult with an
attorney prior to executing this Agreement; (C) I have twenty-one (21) days to
consider this Agreement (although I may choose to voluntarily execute this
Agreement earlier); (D) I have seven (7) days following the execution of this
Agreement by the parties to revoke the Agreement; and (E) this Agreement shall
not be effective until the date upon which the revocation period has expired,
which shall be the eighth day after this Agreement is executed by me, provided
that the Company has also executed this Agreement by that date ("Effective
Date").
By: _______________________________________________
[Executive]
Date: _____________________________________________
[FOR EXECUTIVES WHO ARE AGE 40 AND OLDER]
16
<PAGE>
EXHIBIT C
ARBITRATION PROCEDURE
1. The parties agree that any dispute that arises in connection with the
payment of benefits under this Agreement or the termination of this Agreement
shall be resolved by binding arbitration in the manner described below.
2. A party intending to seek resolution of any dispute under the Agreement
by arbitration shall provide a written demand for arbitration to the other
party, which demand shall contain a brief statement of the issues to be
resolved.
3. The arbitration shall be conducted in Santa Clara County, California, by
a mutually acceptable retired judge from the panel of Judicial Arbitration and
Mediation Services, Inc. or any entity performing the same type of services that
succeeds to its business ("JAMS"). At the request of either party, arbitration
proceedings will be conducted in the utmost secrecy and, in such case, all
documents, testimony and records shall be received, heard and maintained by the
arbitrator in secrecy under seal, available for inspection only by the parties
to the arbitration, their respective attorneys, and their respective expert
consultants or witnesses who shall agree, in advance and in writing, to receive
all such information confidentially and to maintain such information in secrecy,
and make no use of such information except for the purposes of the arbitration,
unless compelled by legal process.
4. The arbitrator is required to disclose any circumstances that might
preclude the arbitrator from rendering an objective and impartial determination.
In the event the parties cannot mutually agree upon the selection of a JAMS
arbitrator, the President of JAMS shall designate the arbitrator.
5. The party demanding arbitration shall promptly request that JAMS conduct
a scheduling conference within fifteen (15) days of the date of that party's
written demand for arbitration or on the first available date thereafter on the
arbitrator's calendar. The arbitration hearing shall be held within thirty (30)
days after the scheduling conference or on the first available date thereafter
on the arbitrator's calendar. Nothing in this paragraph shall prevent a party
from at any time seeking temporary equitable relief, from JAMS or any court of
competent jurisdiction, to prevent irreparable harm pending the resolution of
the arbitration.
6. Discovery shall be conducted as follows: (a) prior to the arbitration
any party may make a written demand for lists of the witnesses to be called and
the documents to be introduced at the hearing; (b) the lists must be served
within fifteen days of the date of receipt of the demand, or one day prior to
the arbitration, whichever is earlier; and (c) each party may take no more than
two depositions (pursuant to the procedures set forth in the California Code of
Civil Procedure) with a maximum of five hours of examination time per
deposition, and no other form of pre-arbitration discovery shall be permitted.
7. It is the intent of the parties that the Federal Arbitration Act ("FAA")
shall apply to the enforcement of this provision unless it is held inapplicable
by a court with jurisdiction over the dispute, in which event the California
Arbitration Act ("CAA") shall apply.
17
<PAGE>
8. The arbitrator shall apply California law, including the California
Evidence Code, and shall be able to decree any and all relief of an equitable
nature, including but not limited to such relief as a temporary restraining
order, a preliminary injunction, a permanent injunction, or replevin of Company
property. The arbitrator shall also be able to award actual, general or
consequential damages, but shall not award any other form of damage (e.g.,
punitive damages).
18
<PAGE>
EXHIBIT 10.33
CHANGE IN CONTROL
SEVERANCE BENEFITS POLICY
FOR NON-EXECUTIVES
THIS CHANGE IN CONTROL SEVERANCE BENEFITS POLICY FOR NON-EXECUTIVES
(the "POLICY") is adopted this 18th day of July, 1996 by SILICON VALLEY BANK, a
California corporation (the "COMPANY"), a wholly owned subsidiary of Silicon
Valley Bancshares, a California corporation ("BANCSHARES"). This Policy is
intended to provide Eligible Employees with the compensation and benefits
described herein upon the occurrence of specific events.
Certain capitalized terms used in this Policy are defined in Article
VI.
I
ELIGIBLE EMPLOYEES
.1 Eligible Employees are those employees of the Company who
are classified by the Company in Grades 13 and below. Notwithstanding the
foregoing, the employees of any other wholly owned subsidiary of Bancshares also
shall be Eligible Employees under this Policy if such wholly owned subsidiary is
so designated by the Company and agrees in writing to be bound by the terms and
conditions of this Policy.
.2 The rights and obligations of the Eligible Employees and
the Company contained in Articles II through VI shall survive any termination of
an Eligible Employee for twenty-four (24) months following a Change in Control
(as hereinafter defined), or such later period as may be required so that all
benefits to which the Eligible Employee is entitled under this Policy are paid
or otherwise provided to the Eligible Employee.
.3 The Company intends to set forth the compensation and
benefits which an Eligible Employee shall be entitled to receive in the event
that there is a Change in Control or the Eligible Employee's employment with the
Company terminates following a Change in Control under the circumstances
described in Article II of this Policy.
.4 As a condition of receiving benefits under this Policy, an
Eligible Employee shall be required to execute a general waiver and release in
the form provided by the Company and as further described in Section 3.2.
.5 This Policy shall supersede any other policies relating to
any compensation, benefits, severance or other amounts to be paid to an Eligible
Employee in the event of the Eligible Employee's termination of employment
following the occurrence of a Change in Control, but shall not supersede any
agreement between the Eligible Employee and the Company or any personnel
policies of the Company relating to other aspects of the Eligible Employee's
employment
1
<PAGE>
relationship with the Company, including but not limited to the
Company's personnel policies addressing severance payments to the Eligible
Employee in the event of a termination of the Eligible Employee's employment
which is not proximately related to the occurrence of a Change in Control.
II
SEVERANCE BENEFITS
.1 ENTITLEMENT TO SEVERANCE BENEFITS. If an Eligible
Employee's employment terminates due to an Involuntary Termination or a
Constructive Termination within twenty-four (24) months following a Change in
Control, the termination of employment will be a Covered Termination and the
Company shall pay the Eligible Employee the compensation and benefits described
in this Article II. If the Eligible Employee's employment terminates, but not
due to an Involuntary Termination or a Constructive Termination within twenty-
four (24) months following a Change in Control, or for any reason prior to a
Change in Control or after twenty-four (24) months or more following a Change in
Control, then the termination of employment will not be a Covered Termination
---
and Eligible Employee will not be entitled to receive any payments or benefits
---
under this Article II.
Payment of any benefits described in this Article II shall be subject
to the restrictions and limitations set forth in Article III.
.2 LUMP SUM SEVERANCE PAYMENT AND BENEFITS. An Eligible
Employee entitled to benefits under this Policy shall receive the lump sum
severance payment and other benefits described in Exhibit A of this Policy.
.3 TAX-QUALIFIED RETIREMENT PLANS. Upon the occurrence of a
Covered Termination, the Eligible Employee's benefits accrued under any pension,
profit sharing, or stock bonus plan intended to satisfy the requirements of
Section 401(a) of the Internal Revenue Code, specifically including, but not
limited to, the Silicon Valley Bank 401(k) and Employee Stock Ownership Plan and
the Silicon Valley Bank Money Purchase Pension Plan, shall become fully vested.
.4 WELFARE BENEFITS. Following a Covered Termination, an
Eligible Employee and his or her covered dependents will be eligible to continue
their Welfare Benefit coverage under any Welfare Benefit plan or program
maintained by the Company only to the extent provided under the terms and
conditions of such Welfare Benefit plan or program. Except for the foregoing,
no continuation of Welfare Benefits shall be provided under this Policy except
to the extent continuation of health insurance coverage is required under the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA").
2
<PAGE>
This Section 2.4 is not intended to affect, nor does it affect, the
rights of an Eligible Employee, or an Eligible Employee's covered dependents,
under any applicable law with respect to health insurance continuation coverage.
.5 OUTPLACEMENT SERVICES. The Company shall provide an
Eligible Employee with outplacement services under the terms and conditions of
the Company's personnel policies in effect immediately prior to the occurrence
of a Change in Control.
.6 MITIGATION. Except as otherwise specifically provided
herein, an Eligible Employee shall not be required to mitigate damages or the
amount of any payment provided under this Policy by seeking other employment or
otherwise, nor shall the amount of any payment provided for under this Policy be
reduced by any compensation earned by an Eligible Employee as a result of
employment by another employer or by retirement benefits received after the date
of the Covered Termination, or otherwise.
ARTICLE III
LIMITATIONS AND CONDITIONS ON BENEFITS
.7 WITHHOLDING OF TAXES. The Company shall withhold
appropriate federal, state or local income and employment taxes from any
payments hereunder.
.8 EMPLOYEE AGREEMENT AND RELEASE PRIOR TO RECEIPT OF BENEFITS.
Upon the occurrence of a Covered Termination, and prior to the receipt of any
benefits under this Policy on account of the occurrence of a Covered
Termination, Eligible Employee shall, as of the date of a Covered Termination,
execute an employee agreement and release in the form provided by the Company.
In the event an Eligible Employee does not execute such employee agreement and
release within the time period specified in such employee agreement and release
or if the Eligible Employee revokes such employee agreement and release within
the revocation period provided in such employee agreement and release no
benefits shall be payable under this Policy to such Eligible Employee. The
Company reserves the right to include in the employment agreement and release a
representation regarding non-publication of the terms of this Policy.
.9 LIMITS IMPOSED BY APPLICABLE BANKING LAW. Notwithstanding
any other provision to the contrary, the Company shall not be obligated under
this Policy to pay any benefit to the extent that such payment would violate any
prohibition or limitation on termination payments under any applicable federal
or state statute, rule or regulation promulgated, or effective order issued, by
any federal or state regulatory agency having jurisdiction over the Company or
Bancshares. Without limiting the foregoing, the Company and Eligible Employee
acknowledge and agree that the Federal Deposit Insurance Corporation (the
"FDIC") has issued a regulation that prohibits payment of the benefit under
certain circumstances, unless such payments were approved by the FDIC, the
Federal Reserve Bank of San Francisco (the "FRB") and the California State
Banking Department (the "SBD").
3
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III
OTHER RIGHTS AND BENEFITS
.1 NONEXCLUSIVITY. Nothing in the Policy shall prevent or
limit an Eligible Employee's continuing or future participation in any benefit,
bonus, incentive or other plans, programs, policies or practices provided by the
Company and for which the Eligible Employee may otherwise qualify, nor, except
as specifically provided herein, shall anything herein limit or otherwise affect
such rights as the Eligible Employee may have under any stock option or other
agreements with the Company. Except as otherwise expressly provided herein,
amounts which are vested benefits or which the Eligible Employee is otherwise
entitled to receive under any plan, policy, practice or program of the Company
at or subsequent to the date of a Covered Termination shall be payable in
accordance with such plan, policy, practice or program.
.2 PARACHUTE PAYMENTS.
(a) In the event that any payment received or to be received by an
Eligible Employee pursuant to this Policy ("Payment") would (i) constitute a
"parachute payment" within the meaning of Section 280G of the Internal Revenue
Code (the "Code") and (ii) but for this subsection (a), be subject to the excise
tax imposed by Section 4999 of the Code (the "Excise Tax"), then, subject to the
provisions of subsection (b) hereof, such Payment shall be reduced, if at all,
to the largest amount which the Eligible Employee, in his or her discretion,
determines would result in maximizing the Eligible Employee's net proceeds with
respect to such Payments (after taking into account the payment of any
appropriate federal, state or local income and employment taxes and the payment
of any Excise Tax imposed on such Payment). The determination by the Eligible
Employee of any required reduction pursuant to this subsection (a) shall be
conclusive and binding upon the Company. The Company shall reduce a Payment in
accordance with this subsection (a) only upon written notice by the Eligible
Employee indicating the amount of such reduction, if any. If the Internal
Revenue Service (the "IRS") determines that a Payment is subject to the Excise
Tax, then subsection (b) hereof shall apply, and the enforcement of subsection
(b) shall be the exclusive remedy to the Company for a failure by the Eligible
Employee to reduce the Payment so that no portion thereof is subject to the
Excise Tax.
(b) If, notwithstanding any reduction described in subsection (a)
hereof (or in the absence of any such reduction), the IRS determines that the
Eligible Employee is liable for the Excise Tax as a result of the receipt of one
or more Payments, then the Eligible Employee shall be obligated to pay back to
the Company, within 30 days after final IRS determination, an amount of such
Payments equal to the "Repayment Amount." The Repayment Amount with respect to
such Payments shall be the smallest such amount, if any, as shall be required to
be paid to the Company so that the Eligible Employee's net proceeds with respect
to such Payments (after taking into account the payment of the Excise Tax
imposed on such Payments) shall be maximized. Notwithstanding the foregoing, the
Repayment Amount with respect to such Payments shall be zero if a Repayment
Amount of more than zero would not eliminate the Excise Tax imposed on such
4
<PAGE>
Payments. If the Excise Tax is not eliminated pursuant to this subsection (b),
the Eligible Employee shall pay the Excise Tax.
IV
NON-ALIENATION OF BENEFITS
No benefit hereunder shall be subject to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to so
subject a benefit hereunder shall be void.
V
DEFINITIONS
For purposes of the Policy, the following terms shall have the
meanings set forth below:
.1 "ANNUAL BASE SALARY" means the amount of compensation
provided by the Company to an Eligible Employee as base salary. Such amount
shall be determined by annualizing the highest base rate in effect for the
Eligible Employee at any time immediately prior to, on, or after the date of the
Change in Control, exclusive of any bonus or other incentive cash compensation,
income from any stock options or other stock awards, supplemental deferred
compensation contributions made by the Company, pension or profit sharing
contributions or distributions (except as provided below), insurance payments or
proceeds, fringe benefits, or other form of additional compensation, but
specifically including any amounts withheld from base salary to provide benefits
pursuant to section 125, 401(k), or 402(g) of the Internal Revenue Code or
pursuant to any other plan or program of deferred compensation.
.2 "CHANGE IN CONTROL" means the consummation of any of the
following transactions:
(a) the shareholders of the Company or Bancshares approve a merger or
consolidation of the Company or Bancshares with any other corporation, other
than a merger or consolidation which would result in beneficial owners of the
total voting power in the election of directors represented by the voting
securities ("Voting Securities") of the Company or Bancshares (as the case may
be) outstanding immediately prior thereto continuing to beneficially own
securities representing (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least fifty percent (50%) of
the total Voting Securities of the Company or Bancshares, or of such surviving
entity, outstanding immediately after such merger or consolidation;
(b) the shareholders of the Company or Bancshares approve a plan of
liquidation or dissolution of the Company or approve an agreement for the sale,
lease, exchange or other
5
<PAGE>
transfer or disposition by the Company or Bancshares of all or substantially all
of the Company's assets;
(c) any person (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other
than (A) a trustee or other fiduciary holding securities under an employee
benefit plan of the Company or Bancshares, (B) a corporation owned directly or
indirectly by the shareholders of Bancshares in substantially the same
proportions as their beneficial ownership of stock in Bancshares, or (C)
Bancshares (with respect to Bancshares' ownership of the stock of the Company),
is or becomes the beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act), directly or indirectly, of the securities of the Company or
Bancshares representing 50% or more of the Voting Securities; or
(d) (A) (1) the shareholders of the Company or
Bancshares approve a merger or consolidation of the Company or Bancshares with
any other corporation, other than a merger or consolidation which would result
in beneficial owners of Voting Securities of the Company or Bancshares (as the
case may be) outstanding immediately prior thereto continuing to beneficially
own securities representing (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than twenty-five
percent (25%) of the total Voting Securities of the Company or Bancshares, or of
such surviving entity, outstanding immediately after such merger or
consolidation, or (2) any person (as such term is used in Sections 13(d) or
14(d) of the Exchange Act), other than (a) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or Bancshares, (b) a
corporation owned directly or indirectly by the shareholders of Bancshares in
substantially the same proportions as their ownership of stock in Bancshares, or
(c) Bancshares (with respect to Bancshares' ownership of the stock of the
Company) is or becomes the beneficial owner (within the meaning or Rule 13d-3
under the Exchange Act), directly or indirectly, of the securities of the
Company or Bancshares representing 25% or more of the Voting Securities of such
corporation, and
(A) within twelve (12) months of the occurrence of such event, a
change in the composition of the Board of Directors of Bancshares occurs as a
result of which sixty percent (60%) or fewer of the directors are Incumbent
Directors.
"INCUMBENT DIRECTORS" shall mean directors who either:
(A) are directors of Bancshares as of the date hereof;
(B) are elected, or nominated for election, to the Board of
Directors of Bancshares with the affirmative votes of at least a majority of the
directors of Bancshares who are Incumbent Directors described in (A) above at
the time of such election or nomination; or
(C) are elected, or nominated for election, to the Board of
Directors of Bancshares with the affirmative votes of at least a majority of the
directors of Bancshares who are Incumbent Directors described in (A) or (B)
above at the time of such election or nomination.
6
<PAGE>
Notwithstanding the foregoing, "Incumbent Directors" shall not include
an individual whose election or nomination to the Board of Directors of
Bancshares occurs in order to provide representation for a person or group of
related persons who have initiated or encouraged an actual or threatened proxy
contest relating to the election of directors of Bancshares.
.3 "COMPANY" means Silicon Valley Bank, a California
corporation, and any successor thereto.
.4 "CONSTRUCTIVE TERMINATION" means that an Eligible Employee
voluntarily terminates his or her employment after any of the following are
undertaken without the Eligible Employee's express written consent:
(a) the material, involuntary reduction in the Eligible Employee's
responsibilities, authorities or functions as an employee of the Company as in
effect immediately prior to a Change in Control, except in connection with the
termination of the Eligible Employee's employment for death, disability,
retirement, fraud, misappropriation, embezzlement or any listed exclusion from
the definition of Involuntary Termination;
(b) a reduction in the Eligible Employee's Annual Base Salary;
(c) a reduction in the Eligible Employee's Total Compensation to less
than 85% of the amount provided to the Eligible Employee for the last full
calendar year immediately preceding the occurrence of a Change in Control; or
(d) a relocation of the Eligible Employee to a location more than
fifty (50) miles from the location at which the Eligible Employee performed the
Eligible Employee's duties prior to a Change in Control, except for required
travel by the Eligible Employee on the Company's business to an extent
substantially consistent with the Eligible Employee's business travel
obligations at the time of a Change in Control.
.5 "COVERED TERMINATION" means an Involuntary Termination or a
Constructive Termination within twenty-four (24) months following a Change in
Control. No other event shall be a Covered Termination for purposes of this
Policy.
.6 "ELIGIBLE EMPLOYEE" means each employee of the Company who
meets the requirements of Section 1.1.
.7 "INVOLUNTARY TERMINATION" means an Eligible Employee's
dismissal or discharge by the Company (or, if applicable, by the successor
entity) for reasons other than for one of the following reasons:
7
<PAGE>
(a) the commission by the Eligible Employee of an act of deliberately
criminal or fraudulent misconduct in the line of duty to the Company or
Bancshares (including, but not limited to, the willful violation of any material
law, rule, regulation, or cease and desist order applicable to the Eligible
Employee, the Company or Bancshares), a deliberate act that constitutes a
conflict of interest with the Company, Bancshares, or Bancshares' shareholders,
or a deliberate breach of a fiduciary duty owed by the Eligible Employee to the
Company, Bancshares, or Bancshares' shareholders;
(b) the Eligible Employee's habitual absence from work, intentional
failure to perform stated duties, gross negligence, or gross incompetence in the
performance of stated duties;
(c) the Eligible Employee's chronic alcohol or drug abuse that results
in a material impairment of the Eligible Employee's ability to perform his or
her duties as an employee of the Company after reasonable accommodation;
(d) the rendering of a verdict of guilty against the Eligible Employee
for any criminal offense (other than a law relating to a traffic violation or
similar offense), whether or not in the line of duty; or
(e) the Eligible Employee's removal from his or her office with the
Company or Bancshares pursuant to an effective order under Section 8(e) of the
Federal Deposit Insurance Act 12 U.S.C.(S) 1818(e).
The termination of an Eligible Employee's employment will not be
deemed to be an "Involuntary Termination" if such termination occurs as a result
of the death or disability of the Eligible Employee.
.8 "POLICY" means this Change in Control Severance Benefits
Policy for Non-Executives.
.9 "TOTAL COMPENSATION" means the amount of compensation paid
by the Company to an Eligible Employee with respect to the calendar year
immediately preceding the occurrence of a Change in Control. Such amount shall
include the following amounts paid with respect to such calendar year: the
Eligible Employee's Annual Base Salary, any annual incentive compensation, if
applicable, most recently declared (whether or not actually paid, and
specifically including any amounts which may be transferred into Executive's
incentive reserve), and any amounts withheld from the Eligible Employee's base
salary or bonus to provide benefits pursuant to section 125, 401(k), or 402(g)
of the Internal Revenue Code or pursuant to any other plan or program of
deferred compensation. Such amount shall exclude any bonus declared or paid
from the warrant incentive plan of the Company, overtime pay, any income from
any stock options or other stock awards, supplemental deferred compensation
contributions made by the Company, pension or profit sharing contributions or
distributions (except included above), insurance payments or proceeds, fringe
benefits, and other forms of additional compensation. Notwithstanding the
foregoing, any
8
<PAGE>
annual incentive compensation declared for the calendar year immediately
preceding the occurrence of a Change in Control shall relate to the Eligible
Employee's performance in the preceding calendar year.
.10 "WELFARE BENEFITS" means benefits providing for coverage or
payment in the event of an Eligible Employee's death, disability, illness or
injury that were provided to the Eligible Employee immediately before a Change
in Control, whether taxable or non-taxable and whether funded through insurance
or otherwise.
VI
GENERAL PROVISIONS
.1 EMPLOYMENT STATUS. This Policy does not constitute a
contract of employment or impose on an Eligible Employee any obligation to
remain as an employee, or impose on the Company any obligation (i) to retain an
Eligible Employee as an employee, (ii) to change the status of an Eligible
Employee as an at-will employee, or (iii) to change the Company's policies
regarding termination of employment.
.2 PAYMENTS. Any payments made by the Company to an Eligible
Employee under the terms of this Policy shall be delivered to the Eligible
Employee either in person or at his or her address as listed in the Company's
payroll records.
.3 SEVERABILITY. Whenever possible, each provision of this
Policy will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Policy is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Policy will be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provisions had never been contained herein.
.4 WAIVER. If either the Company or an Eligible Employee
should waive any breach of any provisions of this Policy, such party shall not
thereby be deemed to have waived any preceding or succeeding beach of the same
or any other provision of this Policy.
.5 COMPLETE AGREEMENT. This Policy, including Exhibits A and B
and any other written agreements specifically referred to in this Policy,
constitutes the entire agreement between an Eligible Employee and the Company,
and it is the complete, final, and exclusive embodiment of their agreement with
regard to this subject matter. No promise or representation other than those
expressly contained herein shall alter the terms of this Policy.
.6 BASIS OF PAYMENTS. All benefits under the Policy shall be
paid by the Company. The Policy shall be unfunded, and benefits hereunder shall
be paid only from the general assets of the Company.
9
<PAGE>
.7 AMENDMENT OR TERMINATION OF POLICY. This Policy may be
changed or terminated only by the Company. A change or termination of this
Policy must be signed by an executive officer of the Company after such change
or termination has been approved by an authorized committee of the Company's
Board of Directors. Notwithstanding the foregoing, no amendment or termination
-----------------------------
shall affect the right to any unpaid benefit of any Eligible Employee whose
employment with the Company terminated prior to the amendment or termination of
the Policy; and further provided, that for the period of twenty-four (24) months
----------------
following a Change in Control, the Policy shall not be amended and no Eligible
Employee shall be reclassified in any manner that would adversely affect the
interests of the Eligible Employee without the written consent of the Eligible
Employee so affected.
.8 HEADINGS. The headings of the Articles and Sections hereof
are inserted for convenience only and shall not be deemed to constitute a part
hereof nor to affect the meaning thereof.
.9 SUCCESSORS AND ASSIGNS. This Policy is intended to bind and
inure to the benefit of and be enforceable by an Eligible Employee and the
Company, and their respective successors, assigns, heirs, executors and
administrators, except that an Eligible Employee may not assign any of his or
her duties hereunder and he may not assign any of his or her rights hereunder
without the written consent of the Company, which consent shall not be withheld
unreasonably.
.10 ARBITRATION. Any and all disputes or controversies, arising
from or regarding the interpretation, performance, enforcement or termination of
this Policy shall be resolved by final and binding arbitration under the
procedures set forth in the Arbitration Procedure attached hereto as Exhibit B
and the then existing Judicial Arbitration and Mediation Services, Inc. ("JAMS")
Rules of Practice and Procedure or the rules of practice and procedure of any
successor entity to JAMS (except insofar as they are inconsistent with the
procedures set forth in the enclosed Arbitration Procedure). Nothing in this
section is intended to prevent either the Company or an Eligible Employee from
obtaining either injunctive relief in court to prevent irreparable harm pending
the conclusion of any such arbitration or in lieu of arbitration or from
utilizing any judicial court system to seek enforcement of an arbitration award.
.11 ATTORNEY FEES. In the event of any arbitration or any other
action or proceeding relating to the interpretation, performance, enforcement or
termination of this Policy, the prevailing party shall be entitled to an award
requiring payment by the other party of such prevailing party's reasonable fees
and costs, including reasonable attorneys' fees incurred as a result of such
action or proceeding.
.12 TRANSFER OF SERVICES TO AFFILIATE. This Policy shall not
prohibit the Company from transferring an Eligible Employee's services to an
affiliate of the Company, provided that the rights and obligations of the
parties hereto shall not terminate in the event of such transfer, and provided
further that the new entity for which the Eligible Employee is performing
services also
10
<PAGE>
shall be bound hereby without the need for further written agreement and without
release of the Company.
.13 NO VIOLATION OF GOVERNING BANKING LAW. Nothing in this
Policy is intended to require or shall be construed as requiring the Company to
do or fail to do any act in violation of applicable law, rule, regulation or
order. The Company's inability, pursuant to court or regulatory order, to
perform its obligations under this Policy or the modification of this Policy by
the FRB, the SBD or other bank regulatory agency through administrative action
shall not constitute a breach of this Policy. Except to the extent provided in
Section 3.3, the provisions of this Policy shall be severable. If this Policy
or any portion hereof shall be invalidated on any ground by any court of
competent jurisdiction, then the Company shall nevertheless perform its
obligations hereunder to the full extent permitted by any applicable portion of
this Policy that shall not have been invalidated, and the balance of this Policy
not so invalidated shall be enforceable in accordance with its terms.
.14 CONSTRUCTION OF POLICY. In the event of a conflict between
the text of the Policy and any Summary Plan Description, summary, description or
other information regarding the Policy, the text of the Policy shall control.
This Policy is intended to governed by and shall be construed in accordance with
the Employee Retirement Income Security Act of 1974 ("ERISA") and, to the extent
not preempted by ERISA, the laws of the State of California.
IN WITNESS WHEREOF, to record the adoption of this Policy as set forth
herein, effective as of the day and year written above, Silicon Valley Bank has
caused its duly authorized officer to execute the same this ______ day of
___________, 1996.
SILICON VALLEY BANK,
a California corporation
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Exhibit A: CIC Benefit Table
Exhibit B: Arbitration Procedure
11
<PAGE>
EXHIBIT A
SCHEDULE OF BENEFITS
ELIGIBLE EMPLOYEE GRADE 8 OR ABOVE
LUMP SUM SEVERANCE PAYMENT. Within sixty (60) days following a Covered
Termination, an Eligible Employee classified by the Company at Grade 8 or above
as of the date of the Covered Termination shall receive a lump sum payment
determined by the Eligible Employee's Total Compensation multiplied by the
appropriate factor applied from the attached table (which factor shall be based
upon (1) the Eligible Employee's grade within the Company and (2) the
relationship between the valuation of the Company at the time of the transaction
(or series of related transactions) causing the occurrence of a Change in
Control and the Book Value of the Company at that time). This lump sum payment
shall be called the Eligible Employee's "CIC Benefit."
If the Eligible Employee's Covered Termination occurs on or before the
expiration of twelve (12) months from the occurrence of a Change in Control, the
Eligible Employee shall be entitled to receive 100% of his or her CIC Benefit.
If the Eligible Employee's Covered Termination occurs after the expiration of
twelve (12) months from the occurrence of a Change in Control, the Eligible
Employee shall be entitled to receive a CIC Benefit based upon the following
table:
NUMBER OF MONTHS PERCENTAGE OF CIC BENEFIT
FOLLOWING CHANGE IN CONTROL
15 75%
18 50%
21 25%
24 0%
In the event that an Eligible Employee's Covered Termination occurs on
a date between two of these quarterly benchmarks, then the percentage of the CIC
Benefit to which the Eligible Employee shall be entitled shall be equal to the
sum of two percentages (rounded to the nearest whole percentage): (1) the
Percentage of CIC Benefit for the quarterly benchmark next following the
occurrence of the Covered Termination, and (2) twenty five percent (25%)
multiplied by a fraction, the numerator of which is the number of days after
the date of Covered Termination and on or before the date on which the
subsequent quarterly benchmark falls, and the denominator of which is ninety one
(91). For example, if the date on which a Change of Control occurs is September
1, 1996 and the Eligible Employee incurs a Covered Termination on November 15,
1997, then the Percentage of CIC Benefit to which the Eligible Employee is
entitled shall be 79% (75% + (16/91 x 25%)) or (75% + 4.4%) or 79.4%, as rounded
to the nearest whole percentage. An Eligible Employee's CIC Benefit may be
further reduced as a result of the limits on payment of aggregate CIC Benefits
described in this Exhibit A.
12
<PAGE>
EVA PLAN PAYMENT. In addition to the CIC Benefit, within ninety (90)
days of the occurrence of a Covered Termination, an Eligible Employee classified
in Grade 8 to 13 shall receive a lump sum payment of the entire amount of
Eligible Employee's incentive reserve under the EVA Plan, as determined under
the terms of the Company's Incentive Plan at Silicon Valley Bank (known as the
"EVA Plan") or under other, similar incentive or bonus plans that preceded the
EVA Plan or that may replace the EVA Plan.
STOCK OPTION VESTING. All stock options held by the Eligible Employee
with respect to Bancshares stock that are unvested at the time of a Change in
Control shall become fully vested and exercisable upon a Change in Control
(regardless of whether a Covered Termination occurs) and all Bancshares stock
held by the Eligible Employee that is unvested at the time of a Change in
Control shall become fully vested upon a Change in Control (regardless of
whether a Covered Termination occurs). The Company shall take all actions
necessary to amend all stock option agreements evidencing outstanding stock
options granted to an Eligible Employee to provide for full vesting of stock
options upon a Change in Control or to otherwise conform such stock agreements,
as necessary, to the terms of this Policy.
*** For purposes of the attached table, the following definitions shall apply:
VII "Book Value" shall mean the amount of the Company's
stockholders' equity, as determined in accordance with generally accepted
accounting principles, as of the date immediately preceding a Change in Control,
excluding the Company's allowance for loan losses.
VIII "Selling Price" shall mean the valuation of the Company as
determined by the Company in good faith at the time of the occurrence of the
transaction (or series of related transactions) as a result of which a Change in
Control occurs.
Furthermore, notwithstanding any provision in this Exhibit A and any
personnel policy of the Company to the contrary, the cumulative CIC Benefit paid
to all employees of the Company shall not exceed 5.8% of the difference between
the Selling Price and the Book Value assuming one-third (1/3rd) of the Company's
employees at the time of a Change in Control incur a Covered Termination, shall
not exceed 11.7% of the difference between the Selling Price and the Book Value
assuming two-thirds (2/3rds) of the Company's employees at the time of a Change
in Control incur a Covered Termination, and in no event shall exceed 17.5% of
the difference between the Selling Price and the Book Value. For purposes of
the potential reduction in CIC Benefits provided for in this paragraph, the
determination shall be made at the time of the Change in Control and the
determination of whether the cumulative CIC Benefit to be paid exceeds the
relevant limits specified herein also shall be determined at the time of the
Change in Control. If, at the time of the Change in Control, it is determined
that the limits specified in this paragraph are exceeded, then the potential CIC
Benefits of all employees of the Company incurring a Covered Termination shall
be proportionately decreased such that the resulting potential aggregate payouts
will not exceed the relevant limit.
13
<PAGE>
CIC BENEFIT/1/
<TABLE>
<CAPTION>
Selling Price Multiple of Total Cash Compensation
Multiple of ------------------------------------------------
Book Value Grade 13 Grades 11-12 Grades 10-8
- --------------------------------------------------------------------
<S> <C> <C> <C>
1.00 0.000 0.000 0.000
1.05 0.075 0.050 0.025
1.10 0.150 0.100 0.050
1.15 0.225 0.150 0.075
1.20 0.300 0.200 0.100
1.25 0.375 0.250 0.125
1.30 0.450 0.300 0.150
1.35 0.525 0.350 0.175
1.40 0.600 0.400 0.200
1.45 0.675 0.450 0.225
1.50 0.750 0.500 0.250
1.55 0.825 0.550 0.275
1.60 0.900 0.600 0.300
1.65 0.975 0.650 0.325
1.70 1.050 0.700 0.350
1.75 1.125 0.750 0.375
1.80 1.200 0.800 0.400
1.85 1.275 0.850 0.425
1.90 1.350 0.900 0.450
1.95 1.425 0.950 0.475
2.00 1.500 1.000 0.500
2.05 1.575 1.050 0.525
2.10 1.650 1.100 0.550
2.15 1.725 1.150 0.575
2.20 1.800 1.200 0.600
2.25 1.875 1.250 0.625
2.30 1.950 1.300 0.650
2.35 2.025 1.350 0.675
2.40 2.100 1.400 0.700
2.45 2.175 1.450 0.725
2.50 2.250 1.500 0.750
2.55 2.325 1.550 0.775
2.60 2.400 1.600 0.800
2.65 2.475 1.650 0.825
2.70 2.550 1.700 0.850
2.75 2.625 1.750 0.875
2.80 2.700 1.800 0.900
2.85 2.775 1.850 0.925
2.90 2.850 1.900 0.950
2.95 2.925 1.950 0.975
3.00 3.000 2.000 1.000
</TABLE>
/1/ This table reflects CIC benefits for sales up to 3.00 times SVB's
then book value. For sales above this, the multiples (of total cash
compensation) must appropriatesly be extrapolated from the multiples (of
total cash compensation) shown.
14
<PAGE>
EXHIBIT A
SCHEDULE OF BENEFITS
ELIGIBLE EMPLOYEE GRADE 7 AND BELOW
Subject to the limitations specified below, within sixty (60) days
following a Covered Termination, an Eligible Employee classified at Grade 7 or
below as of the date of the Covered Termination shall receive a lump sum payment
in an amount equal to one week of Total Compensation for each full year of
service with the Company, but not to exceed a maximum of fifteen (15) weeks of
Total Compensation. This lump sum payment shall be called the Eligible
Employee's CIC Benefit. Notwithstanding the foregoing, (i) Eligible Employees
-----------------------------
who are classified as Grade 7 or below who are not officers of the Company will
receive a minimum of two (2) weeks of Total Compensation as the Eligible
Employee's CIC Benefit, and (ii) Eligible Employees who are classified at Grade
7 or below who are officers of the Company will receive a minimum of four (4)
weeks of Total Compensation as the Eligible Employee's CIC Benefit.
For purposes of determining CIC Benefits for an Eligible Employee
classified at Grade 7 or below, such Eligible Employee's Total Compensation
shall be divided by 52 in order to determine the amount of one week of Total
Compensation.
However, notwithstanding any provision in this Exhibit A and any personnel
policy of the Company to the contrary, the cumulative CIC Benefit paid to all
employees of the Company shall not exceed 5.8% of the difference between the
Selling Price and the Book Value assuming one-third (1/3rd) of the Company's
employees at the time of a Change in Control incur a Covered Termination, shall
not exceed 11.7% of the difference between the Selling Price and the Book Value
assuming two-thirds (2/3rds) of the Company's employees at the time of a Change
in Control incur a Covered Termination, and in no event shall exceed 17.5% of
the difference between the Selling Price and the Book Value. For purposes of
the potential reduction in CIC Benefits provided for in this paragraph, the
determination shall be made at the time of the Change in Control and the
determination of whether the cumulative CIC Benefit to be paid exceeds the
relevant limits specified herein also shall be determined at the time of the
Change in Control. If, at the time of the Change in Control, it is determined
that the limits specified in this paragraph are exceeded, then the potential CIC
Benefits of all employees of the Company incurring a Covered Termination shall
be proportionately decreased such that the resulting potential aggregate payouts
will not exceed the relevant limit.
*** For purposes of this Exhibit A, the following definitions shall apply:
IX "Book Value" shall mean the amount of the Company's stockholders'
equity, as determined in accordance with generally accepted accounting
principles, as of the date immediately preceding a Change in Control, excluding
the Company's allowance for loan losses.
15
<PAGE>
X "Selling Price" shall mean the valuation of the Company as determined by
the Company in good faith at the time of the occurrence of the transaction (or
series of related transactions) as a result of which a Change in Control occurs.
16
<PAGE>
EXHIBIT B
ARBITRATION PROCEDURE
XI The parties agree that any dispute that arises in connection
with the payment of benefits under this Policy or the termination of this Policy
shall be resolved by binding arbitration in the manner described below.
XII A party intending to seek resolution of any dispute under the
Policy by arbitration shall provide a written demand for arbitration to the
other party, which demand shall contain a brief statement of the issues to be
resolved.
XIII The arbitration shall be conducted in Santa Clara County,
California, by a mutually acceptable retired judge from the panel of Judicial
Arbitration and Mediation Services, Inc. or any entity performing the same type
of services that succeeds to its business ("JAMS"). At the request of either
party, arbitration proceedings will be conducted in the utmost secrecy and, in
such case, all documents, testimony and records shall be received, heard and
maintained by the arbitrator in secrecy under seal, available for inspection
only by the parties to the arbitration, their respective attorneys, and their
respective expert consultants or witnesses who shall agree, in advance and in
writing, to receive all such information confidentially and to maintain such
information in secrecy, and make no use of such information except for the
purposes of the arbitration, unless compelled by legal process.
XIV The arbitrator is required to disclose any circumstances that
might preclude the arbitrator from rendering an objective and impartial
determination. In the event the parties cannot mutually agree upon the
selection of a JAMS arbitrator, the President of JAMS shall designate the
arbitrator.
XV The party demanding arbitration shall promptly request that
JAMS conduct a scheduling conference within fifteen (15) days of the date of
that party's written demand for arbitration or on the first available date
thereafter on the arbitrator's calendar. The arbitration hearing shall be held
within thirty (30) days after the scheduling conference or on the first
available date thereafter on the arbitrator's calendar. Nothing in this
paragraph shall prevent a party from at any time seeking temporary equitable
relief, from JAMS or any court of competent jurisdiction, to prevent irreparable
harm pending the resolution of the arbitration.
XVI Discovery shall be conducted as follows: (a) prior to the
arbitration any party may make a written demand for lists of the witnesses to be
called and the documents to be introduced at the hearing; (b) the lists must be
served within fifteen days of the date of receipt of the demand, or one day
prior to the arbitration, whichever is earlier; and (c) each party may take no
more than two depositions (pursuant to the procedures set forth in the
California Code of Civil Procedure) with a
17
<PAGE>
maximum of five hours of examination time per deposition, and no other form of
pre-arbitration discovery shall be permitted.
XVII It is the intent of the parties that the Federal Arbitration
Act ("FAA") shall apply to the enforcement of this provision unless it is held
inapplicable by a court with jurisdiction over the dispute, in which event the
California Arbitration Act ("CAA") shall apply.
XVIII The arbitrator shall apply California law, including the
California Evidence Code, and shall be able to decree any and all relief of an
equitable nature, including but not limited to such relief as a temporary
restraining order, a preliminary injunction, a permanent injunction, or replevin
of Company property. The arbitrator shall also be able to award actual, general
or consequential damages, but shall not award any other form of damage (e.g.,
punitive damages).
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS, RELATED NOTES, AND
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTAINED IN THE REPORT ON FORM 10-Q FILED
BY SILICON VALLEY BANCSHARES FOR THE QUARTER ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 85,478
<INT-BEARING-DEPOSITS> 394
<FED-FUNDS-SOLD> 280,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 493,132
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 840,778
<ALLOWANCE> 30,000
<TOTAL-ASSETS> 1,703,770
<DEPOSITS> 1,568,832
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9,813
<LONG-TERM> 0
0
0
<COMMON> 64,232
<OTHER-SE> 60,893
<TOTAL-LIABILITIES-AND-EQUITY> 1,703,770
<INTEREST-LOAN> 65,536
<INTEREST-INVEST> 16,455
<INTEREST-OTHER> 9,527
<INTEREST-TOTAL> 91,518
<INTEREST-DEPOSIT> 27,438
<INTEREST-EXPENSE> 27,438
<INTEREST-INCOME-NET> 64,080
<LOAN-LOSSES> 6,550
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 6,314
<INCOME-PRETAX> 25,975
<INCOME-PRE-EXTRAORDINARY> 15,585
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,585
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.61
<YIELD-ACTUAL> 8.7
<LOANS-NON> 19,936
<LOANS-PAST> 359
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,518
<ALLOWANCE-OPEN> 29,700
<CHARGE-OFFS> 8,196
<RECOVERIES> 1,946
<ALLOWANCE-CLOSE> 30,000
<ALLOWANCE-DOMESTIC> 20,365
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,635
</TABLE>
