<PAGE>
As filed with the Securities and Exchange Commission on November 13, 1998
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, 1998
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, 1998, 20,641,341 shares of the registrant's common stock
(no par value) were outstanding.
This report contains a total of 31 pages.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED INCOME STATEMENTS 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 30
ITEM 2. CHANGES IN SECURITIES 30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 30
ITEM 5. OTHER INFORMATION 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 30
SIGNATURES 31
</TABLE>
<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,
1998 1997
(Dollars in thousands) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 107,953 $ 105,059
Federal funds sold and securities purchased under
agreement to resell 711,220 321,773
Investment securities, at fair value 940,893 1,013,904
Loans, net of unearned income 1,438,231 1,174,645
Allowance for loan losses (35,900) (37,700)
- -------------------------------------------------------------------------------------------------------------------
Net loans 1,402,331 1,136,945
Premises and equipment 9,348 4,460
Other real estate owned 664 689
Accrued interest receivable and other assets 43,773 42,293
- -------------------------------------------------------------------------------------------------------------------
Total assets $3,216,182 $2,625,123
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Liabilities:
Noninterest-bearing demand deposits $ 839,713 $ 788,442
NOW deposits 15,561 21,348
Money market deposits 1,958,341 1,497,996
Time deposits 130,255 124,621
- -------------------------------------------------------------------------------------------------------------------
Total deposits 2,943,870 2,432,407
Other liabilities 23,602 18,235
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 2,967,472 2,450,642
- -------------------------------------------------------------------------------------------------------------------
Company obligated mandatorily redeemable trust preferred securities of
subsidiary trust holding solely junior subordinated debentures
(trust preferred securities) 38,472 -
Shareholders' Equity:
Preferred stock, no par value:
20,000,000 shares authorized; none outstanding
Common stock, no par value:
60,000,000 shares authorized; 20,635,643 and
19,940,474 shares outstanding at September 30, 1998
and December 31, 1997, respectively 91,728 83,009
Retained earnings 119,331 94,999
Unearned compensation (4,792) (5,946)
Accumulated other comprehensive income:
Net unrealized gain on available-for-sale investments 3,971 2,419
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 210,238 174,481
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $3,216,182 $2,625,123
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to interim consolidated financial statements.
<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,
1998 1997 1998 1997
(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $36,494 $28,349 $101,356 $ 77,874
Investment securities 17,757 10,897 47,959 29,020
Federal funds sold and securities
purchased under agreement to resell 5,941 4,925 15,149 11,891
- -------------------------------------------------------------------------------------------------------------------
Total interest income 60,192 44,171 164,464 118,785
- -------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 21,736 15,117 58,669 38,791
Other borrowings - - 3 -
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 21,736 15,117 58,672 38,791
- -------------------------------------------------------------------------------------------------------------------
Net interest income 38,456 29,054 105,792 79,994
Provision for loan losses 10,557 1,716 20,061 7,682
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 27,899 27,338 85,731 72,312
- -------------------------------------------------------------------------------------------------------------------
Noninterest income:
Letter of credit and foreign
exchange income 1,795 1,159 5,137 3,249
Disposition of client warrants 705 708 4,979 4,953
Investment gains 4,149 33 4,626 78
Deposit service charges 432 588 1,277 1,360
Other 635 318 1,523 973
- -------------------------------------------------------------------------------------------------------------------
Total noninterest income 7,716 2,806 17,542 10,613
- -------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and benefits 10,773 10,625 34,877 29,100
Professional services 2,361 1,958 6,390 5,088
Furniture and equipment 1,320 1,178 5,051 2,602
Business development and travel 1,460 1,077 4,422 3,063
Net occupancy expense 1,394 840 3,451 2,493
Telephone 481 370 1,600 1,004
Advertising and promotion 643 354 1,553 1,082
Postage and supplies 635 420 1,545 1,122
Trust preferred securities distributions 825 - 1,187 -
Cost of other real estate owned 19 30 (1,229) 56
Other 1,152 766 2,893 2,429
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense 21,063 17,618 61,740 48,039
- -------------------------------------------------------------------------------------------------------------------
Income before income tax expense 14,552 12,526 41,533 34,886
Income tax expense 6,002 5,261 17,202 14,652
- -------------------------------------------------------------------------------------------------------------------
Net income $ 8,550 $ 7,265 $ 24,331 $ 20,234
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.42 $ 0.37 $ 1.20 $ 1.05
Diluted earnings per share $ 0.41 $ 0.35 $ 1.16 $ 1.00
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to interim consolidated financial statements.
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
-------------------------- -------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
(Dollars in thousands) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 8,550 $7,265 $24,331 $20,234
Other comprehensive income, net of tax:
Unrealized gain/(loss) on available-for-
sale investments:
Unrealized holding gain arising
during period 4,873 2,172 7,123 2,431
Less: Reclassification adjustment for
gain included in net income (2,815) (430) (5,571) (2,918)
- ------------------------------------------------------------------------------------------------------------------
Other comprehensive income 2,058 1,742 1,552 (487)
- ------------------------------------------------------------------------------------------------------------------
Comprehensive income $10,608 $9,007 $25,883 $19,747
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to interim consolidated financial statements.
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the nine months ended
---------------------------------------
September 30, September 30,
1998 1997
(Dollars in thousands) (Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 24,331 $ 20,234
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 20,061 7,682
Depreciation and amortization 1,187 974
Net gain on sales of investment securities (4,626) (78)
Net gain on sales of other real estate owned (1,298) (45)
(Increase) decrease in accrued interest receivable 1,108 (5,260)
Increase in prepaid expenses (924) (180)
Increase in unearned income 662 1,757
Increase (decrease) in accrued liabilities (489) 896
Increase (decrease) in taxes payable 3,926 (327)
Other, net (1,539) (2,316)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 42,399 23,337
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and paydowns of
investment securities 1,122,228 923,336
Proceeds from sales of investment securities 453,821 105,476
Purchases of investment securities (1,489,814) (1,236,675)
Net increase in loans (288,165) (181,605)
Proceeds from recoveries of charged off loans 2,055 3,121
Net proceeds from sales of other real estate owned 1,323 1,193
Purchases of premises and equipment (6,251) (426)
- ------------------------------------------------------------------------------------------------------------------
Net cash applied to investing activities (204,803) (385,580)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 511,463 453,906
Proceeds from issuance of trust preferred securities,
net of issuance costs 38,472 -
Proceeds from issuance of common stock,
net of issuance costs 4,810 3,481
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 554,745 457,387
- ------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 392,341 95,144
Cash and cash equivalents at January 1, 426,832 433,177
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at September 30, $ 819,173 $ 528,321
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Interest paid $ 58,528 $ 38,514
Income taxes paid $ 16,306 $ 14,585
Non-cash investing activities:
Transfer of loans to other foreclosed assets $ - $ 1,169
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to interim consolidated financial statements.
<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 1997 consolidated financial
statements to conform to the 1998 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 Arizona, Colorado,
Georgia, Illinois, Maryland, Massachusetts, Oregon, Texas, and Washington. The
Bank serves emerging growth and middle-market companies in targeted niches,
focusing on the technology and life sciences industries, while also identifying
and capitalizing on opportunities to serve companies in other industries whose
financial services needs are underserved. 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, SVB Capital I 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, 1998, the results of its operations for the three and nine month
periods ended September 30, 1998, and September 30, 1997, and the results of its
cash flows for the nine month periods ended September 30, 1998, and September
30, 1997. The December 31, 1997, 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 notes thereto included in the
Company's 1997 Annual Report on Form 10-K. The results of operations for the
three and nine month periods ended September 30, 1998, may not necessarily be
indicative of the Company's operating results for the
<PAGE>
full year.
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. A material estimate that is particularly susceptible to
possible change in the near term relates to the determination of the allowance
for loan losses. An estimate of possible changes or range of possible changes
cannot be made.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents as reported in the consolidated statements of cash
flows includes cash on hand, cash balances due from banks, federal funds sold,
and securities purchased under agreement to resell. The cash equivalents are
readily convertible to known amounts of cash and are so near their maturity that
they present insignificant risk of changes in value.
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 $220,000 and $273,000 at September 30, 1998,
and December 31, 1997, respectively.
NONACCRUAL LOANS
Loans are placed on nonaccrual status when they become 90 days past due as to
principal or interest payments (unless the principal and interest are well
secured and in the process of collection), when the Company has determined,
based upon currently known information, that the timely collection of principal
or interest is doubtful, or when the loans otherwise become impaired under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan."
When a loan is placed on nonaccrual status, the accrued interest is reversed
against interest income and the loan is accounted for on the cash or cost
recovery method thereafter until qualifying for return to accrual status.
Generally, a loan will be returned to accrual status when all delinquent
principal and interest become current in accordance with the terms of the loan
agreement and full collection of the principal appears probable.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for all entities for reporting comprehensive
income and its components in financial statements. This statement requires that
all items which are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income is equal to net income plus the change in "other comprehensive income,"
as defined by SFAS No. 130. The only component of other comprehensive income
currently applicable to the Company is the net unrealized gain or loss on
available-for-sale investments.
<PAGE>
SFAS No. 130 requires that an entity: (a) classify items of other
comprehensive income by their nature in a financial statement, and (b) report
the accumulated balance of other comprehensive income separately from common
stock and retained earnings in the equity section of the balance sheet. This
statement is effective for financial statements issued for fiscal years
beginning after December 15, 1997.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for publicly held entities to follow in
reporting information about operating segments in annual financial statements
and requires that those entities also report selected information about
operating segments in interim financial statements. This statement also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement is effective for annual
financial statements issued for periods beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The statement is effective for
fiscal quarters of fiscal years beginning after June 15, 1999. The Company
expects to adopt this statement on January 1, 2000. The Company will begin
evaluating the impact of its adoption on the Company's consolidated financial
statements.
In July 1998, the Securities and Exchange Commission (SEC) issued an
interpretive release (Release No. 33-7558) that provides specific guidance
regarding Year 2000 disclosure requirements in a public company's Form 10-K and
10-Qs. Emphasis of the Release is on expanded disclosure under Management's
Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
The Release supersedes the revised Staff Legal Bulletin No. 5 and is effective
for quarters ending after August 4, 1998. See the Item 2 section entitled "Year
2000 Compliance" for the Company's expanded disclosure.
2. EARNINGS PER SHARE
The following is a reconciliation of basic earnings per share (EPS) to diluted
EPS for the three and nine month periods ended September 30, 1998 and 1997. The
number of shares and earnings per share have been restated to reflect a
two-for-one stock split for common shares of record as of April 17, 1998.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
(Unaudited) (Unaudited)
----------- -----------
(Dollars and shares in thousands, Net Per Share Net Per Share
except per share amounts) Income Shares Amount Income Shares Amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998:
Basic EPS:
Income available to common
shareholders $8,550 20,350 $0.42 $24,331 20,227 $1.20
Effect of Dilutive Securities:
Stock options and restricted stock - 630 - - 721 -
- -------------------------------------------------------------------------------------------------------------------
Diluted EPS:
Income available to common
shareholders plus assumed
conversions $8,550 20,980 $0.41 $24,331 20,948 $1.16
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
1997:
Basic EPS:
Income available to common
shareholders $7,265 19,480 $0.37 $20,234 19,212 $1.05
Effect of Dilutive Securities:
Stock options and restricted stock - 1,097 - - 1,076 -
- -------------------------------------------------------------------------------------------------------------------
Diluted EPS:
Income available to common
shareholders plus assumed
conversions $7,265 20,577 $0.35 $20,234 20,288 $1.00
- -------------------------------------------------------------------------------------------------------------------
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</TABLE>
3. LOANS
The detailed composition of loans, net of unearned income of $8.7 million and
$8.0 million at September 30, 1998, and December 31, 1997, respectively, is
presented in the following table:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Dollars in thousands) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial $1,266,547 $1,051,218
Real estate term 59,485 33,395
Real estate construction 58,819 53,583
Consumer and other 53,380 36,449
- ------------------------------------------------------------------------------------------------------------------
Total loans $1,438,231 $1,174,645
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
4. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the three and nine month
periods ended September 30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
(Unaudited) (Unaudited)
----------- -----------
(Dollars in thousands) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance $42,300 $37,300 $37,700 $32,700
Provision for loan losses 10,557 1,716 20,061 7,682
Loans charged off (17,406) (1,700) (23,916) (4,903)
Recoveries 449 1,284 2,055 3,121
- ---------------------------------------------------------------------------------------------------------------
Balance at September 30, $35,900 $38,600 $35,900 $38,600
- ---------------------------------------------------------------------------------------------------------------
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</TABLE>
The aggregate recorded investment in loans for which impairment has been
determined in accordance with SFAS No. 114 totaled $23.2 million and $23.3
million at September 30, 1998, and September 30, 1997, respectively. Allocations
of the allowance for loan losses related to impaired loans totaled $5.9 million
at September 30, 1998, and $11.5 million at September 30, 1997. Average impaired
loans for the third quarter of 1998 and 1997 totaled $30.2 million and $19.5
million, respectively. See "Financial Condition - Credit Quality and the
Allowance for Loan Losses" for additional related discussion.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's interim consolidated
financial statements as presented in Item 1 of this report. In addition to
historical information, this discussion and analysis includes certain
forward-looking statements regarding events and circumstances that may affect
the Company's future results. Such forward-looking statements are subject to
risks and uncertainties that could cause the Company's actual results to differ
materially. These risks and uncertainties include, but are not limited to, those
described in this discussion and analysis, as well as those described in the
Company's 1997 Annual Report on Form 10-K.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements included herein, which speak only as of the date
made. The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect unanticipated events and
circumstances occurring after the date of such statements.
Certain reclassifications have been made to the Company's 1997 consolidated
financial statements to conform to the 1998 presentations. Such
reclassifications had no effect on the results of operations or shareholders'
equity.
EARNINGS SUMMARY
The Company reported net income of $8.6 million, or $0.41 per diluted share, for
the third quarter of 1998, compared with net income of $7.3 million, or $0.35
per diluted share, for the third quarter of 1997. Net income totaled $24.3
million, or $1.16 per diluted share, for the nine months ended September 30,
1998, versus $20.2 million, or $1.00 per diluted share, for the respective 1997
period. The annualized return on average assets (ROA) was 1.1% in the third
quarter of 1998 versus 1.3% in the third quarter of 1997. The annualized return
on average equity (ROE) for the third quarter of 1998 was 16.6%, compared to
18.4% in the 1997 third quarter. For the first nine months of 1998, ROA was 1.1%
and ROE was 16.9% versus 1.3% and 18.4%, respectively, for the comparable prior
year period.
The increase in net income during the three and nine month periods ended
September 30, 1998, as compared with the prior year respective periods, was
attributable to increases in net interest income and noninterest income,
partially offset by an increase in both the provision for loan losses and
noninterest expense. The major components of net income and changes in these
components are summarized in the following table for the three and nine month
periods ended September 30, 1998 and 1997, and are discussed in more detail
below.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
(Unaudited) (Unaudited)
----------- -----------
(Dollars in thousands) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $38,456 $29,054 $105,792 $79,994
Provision for loan losses 10,557 1,716 20,061 7,682
Noninterest income 7,716 2,806 17,542 10,613
Noninterest expense 21,063 17,618 61,740 48,039
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 14,552 12,526 41,533 34,886
Income tax expense 6,002 5,261 17,202 14,652
- -------------------------------------------------------------------------------------------------------------------
Net income $ 8,550 $ 7,265 $ 24,331 $20,234
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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 months
ended September 30, 1998 and 1997, respectively.
<PAGE>
- -------------------------------------------------------------------------------
AVERAGE BALANCES, RATES AND YIELDS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the three months ended September 30,
----------------------------------------
1998 1997
(Unaudited) (Unaudited)
----------- -----------
Average Average
Average Yield Average Yield
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and
securities purchased under
agreement to resell (1) $ 423,316 $ 5,941 5.6% $ 350,786 $ 4,925 5.6%
Investment securities:
Taxable 1,135,695 16,835 5.9 680,886 10,399 6.1
Non-taxable (2) 79,872 1,418 7.0 45,767 766 6.6
Loans:
Commercial 1,194,522 31,992 10.6 885,577 25,265 11.3
Real estate construction and term 124,789 3,394 10.8 80,269 2,169 10.7
Consumer and other 48,380 1,108 9.1 35,905 915 10.1
- -------------------------------------------------------------------------------------------------------------------
Total loans 1,367,691 36,494 10.6 1,001,751 28,349 11.2
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 3,006,574 60,688 8.0 2,079,190 44,439 8.5
- -------------------------------------------------------------------------------------------------------------------
Cash and due from banks 143,921 147,834
Allowance for loan losses (43,295) (38,455)
Other real estate owned 681 921
Other assets 57,447 37,507
- -------------------------------------------------------------------------------------------------------------------
Total assets $3,165,328 $2,226,997
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Funding sources:
Interest-bearing liabilities:
NOW deposits $ 21,742 101 1.8 $ 17,900 94 2.1
Regular money market deposits 353,241 2,434 2.7 356,449 2,441 2.7
Bonus money market deposits 1,622,710 17,763 4.3 967,974 11,338 4.6
Time deposits 126,075 1,438 4.5 113,082 1,244 4.4
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,123,768 21,736 4.1 1,455,405 15,117 4.1
Portion of noninterest-bearing
funding sources 882,806 623,785
- -------------------------------------------------------------------------------------------------------------------
Total funding sources 3,006,574 21,736 2.9 2,079,190 15,117 2.9
- -------------------------------------------------------------------------------------------------------------------
Noninterest-bearing funding sources:
Demand deposits 773,506 602,078
Other liabilities 25,644 13,033
Trust preferred securities 38,460 -
Shareholders' equity 203,950 156,481
Portion used to fund
interest-earning assets (882,806) (623,785)
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $3,165,328 $2,226,997
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Net interest income and margin $38,952 5.1% $29,322 5.6%
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Memorandum: Total deposits $2,897,274 $2,057,483
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes average interest-bearing deposits in other financial institutions
of $232 and $298 for the three months ended September 30, 1998 and 1997,
respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in 1998
and 1997. The tax equivalent adjustments were $496 and $268 for the three
months ended September 30, 1998 and 1997, respectively.
<PAGE>
- -------------------------------------------------------------------------------
AVERAGE BALANCES, RATES AND YIELDS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the nine months ended September 30,
----------------------------------------
1998 1997
(Unaudited) (Unaudited)
----------- -----------
Average Average
Average Yield Average Yield
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and
securities purchased under
agreement to resell (1) $ 364,544 $ 15,149 5.6% $ 288,685 $ 11,891 5.5%
Investment securities:
Taxable 1,027,295 45,699 5.9 625,800 28,146 6.0
Non-taxable (2) 68,419 3,477 6.8 25,049 1,344 7.2
Loans:
Commercial 1,113,177 89,257 10.7 833,120 69,475 11.1
Real estate construction and term 112,299 9,097 10.8 75,319 5,775 10.3
Consumer and other 43,943 3,002 9.1 37,556 2,624 9.3
- -----------------------------------------------------------------------------------------------------------------
Total loans 1,269,419 101,356 10.7 945,995 77,874 11.0
- -----------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,729,677 165,681 8.1 1,885,529 119,255 8.5
- -----------------------------------------------------------------------------------------------------------------
Cash and due from banks 134,861 155,725
Allowance for loan losses (41,364) (36,901)
Other real estate owned 686 1,334
Other assets 52,901 35,642
- -----------------------------------------------------------------------------------------------------------------
Total assets $2,876,761 $2,041,329
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Funding sources:
Interest-bearing liabilities:
NOW deposits $ 19,463 283 1.9 $ 15,175 222 2.0
Regular money market deposits 339,056 6,900 2.7 344,075 6,960 2.7
Bonus money market deposits 1,416,124 47,171 4.5 834,645 28,381 4.5
Time deposits 127,913 4,315 4.5 103,132 3,228 4.2
Other borrowings 73 3 5.5 - - -
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,902,629 58,672 4.1 1,297,027 38,791 4.0
Portion of noninterest-bearing
funding sources 827,048 588,502
- -----------------------------------------------------------------------------------------------------------------
Total funding sources 2,729,677 58,672 2.9 1,885,529 38,791 2.8
- -----------------------------------------------------------------------------------------------------------------
Noninterest-bearing funding sources:
Demand deposits 741,798 583,732
Other liabilities 20,666 13,448
Trust preferred securities 18,615 -
Shareholders' equity 193,051 147,122
Portion used to fund
interest-earning assets (827,048) (588,502)
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $2,876,761 $2,041,329
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Net interest income and margin $107,009 5.2% $ 80,464 5.7%
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Memorandum: Total deposits $2,644,355 $1,880,759
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes average interest-bearing deposits in other financial institutions
of $248 and $315 for the nine months ended September 30, 1998 and 1997,
respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in 1998
and 1997. The tax equivalent adjustments were $1,217 and $470 for the nine
months ended September 30, 1998 and 1997, respectively.
<PAGE>
Net interest income is affected by changes in the amount and mix of
interest-earning assets and interest-bearing liabilities, referred to as "volume
change." Net interest income is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing liabilities, referred
to as "rate change." The following table sets forth changes in interest income
and interest expense for each major category of interest-earning assets and
interest-bearing liabilities. The table also reflects the amount of change
attributable to both volume and rate changes for the periods indicated. Changes
relating to investments in non-taxable municipal securities are presented on a
fully taxable-equivalent basis using the federal statutory rate of 35% in 1998
and 1997.
<TABLE>
<CAPTION>
1998 Compared to 1997
---------------------
Three Months Ended September 30, Nine Months Ended September 30,
(Unaudited) (Unaudited)
----------- -----------
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 $ 1,018 $ (2) $ 1,016 $ 3,152 $ 106 $ 3,258
Investment securities 7,342 (254) 7,088 19,967 (281) 19,686
Loans 9,764 (1,619) 8,145 25,823 (2,341) 23,482
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest income 18,124 (1,875) 16,249 48,942 (2,516) 46,426
- ------------------------------------------------------------------------------------------------------------------
Interest expense:
NOW deposits 17 (10) 7 63 (2) 61
Regular money market deposits (22) 15 (7) (102) 42 (60)
Bonus money market deposits 7,168 (743) 6,425 19,369 (579) 18,790
Time deposits 148 46 194 836 251 1,087
Other borrowings - - - 3 - 3
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense 7,311 (692) 6,619 20,169 (288) 19,881
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income $10,813 $(1,183) $ 9,630 $28,773 $(2,228) $26,545
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Net interest income, on a fully taxable-equivalent basis, totaled $39.0 million
for the third quarter of 1998, an increase of $9.6 million, or 32.8%, from the
$29.3 million total for the third quarter of 1997. The increase in net interest
income was the result of a $16.2 million, or 36.6%, increase in interest income,
offset by a $6.6 million, or 43.8%, increase in interest expense over the
comparable prior year period.
The $16.2 million increase in interest income for the third quarter of 1998, as
compared to the third quarter of 1997, was the result of an $18.1 million
favorable volume variance partially offset by a $1.9 million unfavorable rate
variance. The favorable volume variance resulted from a $927.4 million, or
44.6%, increase in average interest-earning assets over the comparable prior
year period. The increase in average interest-earning assets resulted from
strong growth in the Company's deposits, which increased $839.8 million, or
40.8%, compared to the third quarter of 1997. The increase in average
interest-earning assets consisted of loans, which were up $365.9 million, plus a
combination of highly liquid, lower-yielding federal funds sold, securities
purchased under agreement to resell and investment securities, which
collectively increased $561.4 million, accounting for 60.6% of the total
increase in average interest-earning assets.
Average loans increased $365.9 million, or 36.5%, in the third quarter of 1998
as compared to the 1997 third quarter, resulting in a $9.8 million favorable
volume variance. This growth was widely distributed throughout the loan
portfolio, as reflected by increased loan balances in most of the Company's
technology, life sciences and special industry niche practices, in specialized
<PAGE>
lending products, and throughout the Company's loan offices located across the
nation.
Average investment securities for the third quarter of 1998 increased $488.9
million, or 67.3%, as compared to the 1997 third quarter, resulting in a $7.3
million favorable volume variance. The aforementioned strong growth in average
deposits exceeded the growth in average loans over the past year, and generated
excess funds that were largely invested in U.S. agency securities, U.S. Treasury
securities, mortgage-backed securities, and municipal securities.
Average federal funds sold and securities purchased under agreement to resell in
the third quarter of 1998 increased a combined $72.5 million, or 20.7%, over the
prior year third quarter, resulting in a $1.0 million favorable volume variance.
This increase was also a result of the aforementioned strong growth in average
deposits during the past year.
The $18.1 million favorable volume variance associated with interest-earning
assets was partially offset by a $1.9 million unfavorable rate variance in the
third quarter of 1998 as compared to the respective prior year period. This
unfavorable rate variance was largely attributable to a $1.6 million decrease in
loan interest income that resulted from a 60 basis points decline in the average
yield on loans primarily due to increased competition.
The yield on average interest-earning assets decreased 50 basis points in the
third quarter of 1998 from the comparable prior year period. This decrease
resulted from a decline in the average yield on loans, largely due to increased
competition, and a shift in the composition of average interest-earning assets
towards a higher percentage of highly liquid, lower-yielding federal funds sold,
securities purchased under agreement to resell and investment securities. This
shift in the composition of average interest-earning assets resulted from the
aforementioned deposit growth having exceeded the growth in loans.
Total interest expense in the 1998 third quarter increased $6.6 million from the
third quarter of 1997 due to an unfavorable volume variance of $7.3 million
partially offset by a $0.7 million favorable rate variance. The unfavorable
volume variance resulted from a $668.4 million, or 45.9%, increase in average
interest-bearing liabilities in the third quarter of 1998 as compared with the
third quarter of 1997. This increase was largely concentrated in the Company's
bonus money market deposit product, which increased $654.7 million, or 67.6%,
and was explained by high levels of client liquidity attributable to a strong
inflow of investment capital into the venture capital community during the past
year, and by growth in the number of clients served by the Company. The $0.7
million favorable rate variance was primarily attributable to a decrease in the
average rate paid on the Company's bonus money market deposit product during the
past year in response to changes in short-term market interest rates.
The average cost of funds paid on interest-bearing liabilities during the third
quarter of 1998 was comparable to the third quarter of 1997. Although there was
a shift in the composition of average interest-bearing liabilities towards a
higher percentage of the Company's bonus money market deposit product, this
resulting increase was offset by decreases in the average rate paid on that
product during the past year.
Net interest income, on a fully taxable-equivalent basis, totaled $107.0 million
for the first nine months of 1998, an increase of $26.5 million, or 33.0%, from
the $80.5 million total for the first nine months of 1997. This increase in net
interest income was the result of a $46.4 million, or 38.9%, increase in
interest income, offset by a $19.9 million, or 51.3%, increase in interest
<PAGE>
expense over the comparable prior year period.
The $46.4 million increase in interest income for the first nine months of 1998,
as compared to the first nine months of 1997, was the result of a $48.9 million
favorable volume variance partially offset by a $2.5 million unfavorable rate
variance. The favorable volume variance was attributable to growth in average
interest-earning assets, which increased $844.1 million, or 44.8%, from the
prior year comparable period. The increase in average interest-earning assets
resulted from strong growth in the Company's deposits, which increased $763.6
million, or 40.6%, compared to the first nine months of 1997, and primarily
consisted of an increase in both average loans and investment securities. The
growth in average loans was widely distributed throughout the loan portfolio, as
reflected by increased loan balances in most of the Company's technology, life
sciences and special industry niche practices, in specialized lending products,
and throughout the Company's loan offices located across the nation. The growth
in average investment securities resulted from the aforementioned strong growth
in average deposits, which exceeded the growth in average loans over the past
year, and generated excess funds that were largely invested in U.S. agency
securities, U.S. Treasury securities, mortgage-backed securities, and municipal
securities.
The $48.9 million favorable volume variance associated with interest-earning
assets was partially offset by a $2.5 million unfavorable rate variance in the
first nine months of 1998 as compared to the respective prior year period. This
unfavorable rate variance was largely attributable to a $2.3 million decrease in
loan interest income that resulted from a 30 basis points decline in the average
yield on loans primarily due to increased competition.
Total interest expense in the first nine months of 1998 increased $19.9 million
from the first nine months of 1997 due to a $20.2 million unfavorable volume
variance partially offset by a $0.3 million favorable rate variance. The
unfavorable volume variance resulted from a $605.6 million, or 46.7%, increase
in average interest-bearing liabilities in the first nine months of 1998 as
compared with the first nine months of 1997. This increase was largely
concentrated in the Company's bonus money market deposit product, which
increased $581.5 million, or 69.7%, and was explained by high levels of client
liquidity attributable to a strong inflow of investment capital into the venture
capital community during the past year, and by growth in the number of clients
served by the Company. The $0.3 million favorable rate variance was largely
attributable to a slight decrease in the average rate paid on the Company's
bonus money market deposit product during the past year in response to changes
in short-term market interest rates.
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 periodic assessment of the inherent and identified risk
dynamics of the loan portfolio resulting from reviews of selected individual
loans and loan commitments.
The Company's provision for loan losses totaled $10.6 million for the third
quarter of 1998, an $8.8 million, or 515.2%, increase compared to the $1.7
million provision for the third quarter of 1997. The provision for loan losses
increased $12.4 million, or 161.1%, to a total of $20.1 million for the first
nine months of 1998, versus $7.7 million for the comparable 1997 period. See
"Financial Condition - Credit Quality and the Allowance for Loan Losses" for
additional related discussion.
<PAGE>
NONINTEREST INCOME
The following table summarizes the components of noninterest income for the
three and nine month periods ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
------------- -------------
(Dollars in thousands) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Letter of credit and foreign exchange income $1,795 $1,159 $ 5,137 $ 3,249
Disposition of client warrants 705 708 4,979 4,953
Investment gains 4,149 33 4,626 78
Deposit service charges 432 588 1,277 1,360
Other 635 318 1,523 973
- ----------------------------------------------------------------------------------------------------------------
Total noninterest income $7,716 $2,806 $17,542 $10,613
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest income increased $4.9 million, or 175.0%, to a total of $7.7 million
in the third quarter of 1998 versus $2.8 million in the prior year third
quarter. During the first nine months of 1998, noninterest income totaled $17.5
million, an increase of $6.9 million, or 65.3%, from the $10.6 million in the
comparable 1997 period. The increase in noninterest income for the three and
nine month periods ended September 30, 1998, versus the comparable prior year
periods, was primarily due to both an increase in gains on sales of investment
securities and an increase in letter of credit fees, foreign exchange fees and
other trade finance income.
Letter of credit fees, foreign exchange fees and other trade finance income
totaled $1.8 million in the third quarter of 1998, an increase of $0.6 million,
or 54.9%, from the $1.2 million reported in the third quarter of 1997. For the
first nine months of 1998, letter of credit fees, foreign exchange fees and
other trade finance income totaled $5.1 million, an increase of $1.9 million, or
58.1%, compared to the $3.2 million in the first nine months of 1997. The growth
in this category of noninterest income reflects a concerted effort by Management
to expand the penetration of trade finance products and services among the
Company's growing client base, a large percentage of which provide products and
services in international markets.
The Company has historically obtained rights to acquire stock (in the form of
warrants) in certain 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, 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 depend upon
factors beyond the control of the Company, including the general condition of
the public equity markets as well as the merger and acquisition environment, and
therefore cannot be predicted with any degree of accuracy and are likely to vary
materially from period to period. During the first nine months of 1998, as well
as throughout 1997, a significant portion of the income realized by the Company
from the disposition of client warrants was offset by expenses related to the
Company's efforts to build an infrastructure sufficient to support present and
prospective business activities, and was also offset by increases to the
provision for loan losses during those periods. As opportunities present
themselves in future periods, the Company may continue to reinvest some or all
of the income realized from the disposition of client warrants in furthering its
business strategies.
<PAGE>
During the third quarter of 1998, the Company realized investment gains of $4.1
million related to sales of approximately $280.9 million in U.S. Treasury and
agency securities, as well as mortgage-backed securities. Investment gains for
the first nine months of 1998 totaled $4.6 million. The Company realized nominal
gains on investment securities during the three and nine month periods ended
September 30, 1997. All investment securities sold were classified as
available-for-sale, and all sales were conducted as a component of the Company's
asset/liability management activities.
Deposit service charges totaled $0.4 million for the three month period ended
September 30, 1998, a decrease of $0.2 million, or 26.5%, from the $0.6 million
reported in the third quarter of 1997. For the first nine months of 1998,
deposit service charges totaled $1.3 million, a nominal decrease from the $1.4
million total for the first nine months of the prior year. Clients compensate
the Company for depository services either through earnings credits computed on
their demand deposit balances, or via explicit payments recognized by the
Company as deposit service charges income.
Other noninterest income largely consists of service-based fee income, and
increased $0.3 million, or 100.0%, to $0.6 million in the third quarter of 1998
from $0.3 million in the third quarter of 1997. For the nine month period ended
September 30, 1998, other noninterest income increased $0.5 million, or 56.5%,
to $1.5 million from $1.0 million in the comparable 1997 period. The increase
during 1998 was primarily due to a higher volume of cash management and loan
documentation services related to the Company's growing client base.
NONINTEREST EXPENSE
Noninterest expense in the third quarter of 1998 totaled $21.1 million, a $3.4
million, or 19.6%, increase from the $17.6 million incurred in the comparable
1997 period. Noninterest expense totaled $61.7 million for the first nine months
of 1998, an increase of $13.7 million, or 28.5%, over the $48.0 million total
for the comparable 1997 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 related to sales of investment securities. This ratio reflects the level
of operating expense required to generate $1 of operating revenue. The Company's
efficiency ratio for the 1998 third quarter was 50.9% versus 56.5% for the third
quarter of 1997. The Company's efficiency ratio for the first nine months of
1998 was 55.4% versus 56.1% for the comparable 1997 period. The following tables
present the detail of noninterest expense and the incremental contribution of
each line item to the Company's efficiency ratio:
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1998 1997
---- ----
Percent of Percent of
Adjusted Adjusted
(Dollars in thousands) Amount Revenues Amount Revenues
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Compensation and benefits $10,773 26.1% $10,625 34.1%
Professional services 2,361 5.7 1,958 6.3
Furniture and equipment 1,320 3.2 1,178 3.8
Business development and travel 1,460 3.5 1,077 3.5
Net occupancy expense 1,394 3.4 840 2.7
Telephone 481 1.2 370 1.2
Advertising and promotion 643 1.6 354 1.1
Postage and supplies 635 1.5 420 1.3
Trust preferred securities distributions 825 2.0 - -
Other 1,152 2.8 766 2.5
- -----------------------------------------------------------------------------------------------------------------
Total excluding cost of other
real estate owned 21,044 50.9% 17,588 56.5%
Cost of other real estate owned 19 30
- -----------------------------------------------------------------------------------------------------------------
Total noninterest expense $21,063 $17,618
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
Percent of Percent of
Adjusted Adjusted
(Dollars in thousands) Amount Revenues Amount Revenues
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Compensation and benefits $34,877 30.7% $29,100 34.0%
Professional services 6,390 5.6 5,088 5.9
Furniture and equipment 5,051 4.4 2,602 3.0
Business development and travel 4,422 3.9 3,063 3.6
Net occupancy expense 3,451 3.0 2,493 2.9
Telephone 1,600 1.4 1,004 1.2
Advertising and promotion 1,553 1.4 1,082 1.2
Postage and supplies 1,545 1.4 1,122 1.3
Trust preferred securities distributions 1,187 1.0 - -
Other 2,893 2.5 2,429 2.8
- -----------------------------------------------------------------------------------------------------------------
Total excluding cost of other
real estate owned 62,969 55.4% 47,983 56.1%
Cost of other real estate owned (1,229) 56
- -----------------------------------------------------------------------------------------------------------------
Total noninterest expense $61,740 $48,039
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Compensation and benefits expenses totaled $10.8 million in the third quarter of
1998, a slight increase over the $10.6 million incurred in the third quarter of
1997. For the first nine months of 1998, compensation and benefits expenses
totaled $34.9 million, an increase of $5.8 million, or 19.9%, compared to $29.1
million for the comparable 1997 period. The increase in compensation and
benefits expenses was largely the result of an increase in the number of average
full-time equivalent (FTE) personnel employed by the Company, partially offset
by decreased expenses associated with certain variable-based compensation
programs. Average FTE were 537 and 504 for the three and nine month periods
ended September 30, 1998, versus 428 and 407 for the respective prior year
periods. The increase in FTE was primarily due to a combination of the Company's
efforts to develop and support new markets through geographic expansion, to
develop and expand products, services and niches, and to build an infrastructure
sufficient to support present and prospective business activities. Further
growth in the Company's FTE is likely to occur during future years as a result
of the continued expansion of the Company's business activities.
Professional services expenses, which consist of costs associated with corporate
legal services, litigation settlements, accounting and auditing services,
consulting, and the Company's Board of Directors, totaled $2.4 million and $6.4
million for the three and nine month periods ended September 30, 1998, an
increase of $0.4 million, or 20.6%, and $1.3 million, or 25.6%, compared to $2.0
million and $5.1 million in the comparable 1997 periods. The level of
professional services expenses during 1998 and 1997 reflects the extensive
efforts undertaken by the Company to continue to build and support its
infrastructure, as well as evaluate and pursue new business opportunities. It
also reflects the Company's efforts in outsourcing several corporate functions,
such as internal audit, facilities management and credit review, where the
Company believes it can achieve a combination of cost savings and increased
quality of service.
Occupancy, furniture and equipment expenses totaled $2.7 million and $8.5
million for the three and nine month periods ended September 30, 1998, an
increase of $0.7 million, or 34.5%, and $3.4 million, or 66.9%, from the $2.0
million and $5.1 million for the three and nine month periods ended September
30, 1997, respectively. The increase in occupancy, furniture and equipment
expenses is largely attributable to the Company incurring certain non-recurring
costs in connection with the expansion of its existing headquarters facility
during the second quarter of 1998 and an increase in recurring expenses
associated with that additional office space. Occupancy, furniture and equipment
expenses were also impacted by costs related to furniture, computer equipment
and other related costs associated with the Company opening new loan offices in
West Los Angeles, California, and Rosemont, Illinois, in early 1998. The Company
intends to continue its geographic expansion into other emerging technology
market places across the U.S. during future periods.
Business development and travel expenses totaled $1.5 million and $4.4 million
for the three and nine month periods ended September 30, 1998, an increase of
$0.4 million, or 35.6%, and $1.4 million, or 44.4%, compared to the $1.1 million
and $3.1 million totals for the comparable 1997 periods. The increase in
business development and travel expenses was largely attributable to overall
growth in the Company's business, including both an increase in the number of
FTE and expansion into new geographic markets.
Total telephone expenses were $0.5 million and $1.6 million for the three and
nine month periods ended September 30, 1998, and increase of $0.1 million, or
30.0%, and $0.6 million, or 59.4%, compared to the $0.4 million and $1.0 million
totals for the comparable 1997 periods.
<PAGE>
The increase in telephone expenses in 1998, as compared to the prior year
respective periods, was largely the result of the aforementioned overall
growth in the Company's business, including both an increase in the number of
FTE and expansion into new geographic markets.
The Company incurred $0.8 million and $1.2 million for the three and nine
month periods ended September 30, 1998, in trust preferred securities
distributions in connection with the sale of $40.0 million in cumulative
trust preferred securities during the second quarter of 1998. The trust
preferred securities pay a fixed rate quarterly distribution of 8.25% and
have a maximum maturity of 30 years. For further discussion related to the
trust preferred securities, see the Item 2 section entitled "Liquidity."
Other noninterest expenses totaled $1.2 million in the third quarter of 1998, a
$0.4 million, or 50.4%, increase over the $0.8 million incurred in the third
quarter of 1997. For the first nine months of 1998, other noninterest expenses
increased $0.5 million, or 19.1%, to a total of $2.9 million compared to $2.4
million for the first nine months of 1997. These increases were primarily due to
an increase in data processing services related to the continued expansion of
the Company's business activities.
During the second quarter of 1998, the Company realized a net gain of $1.3
million in connection with a sale of an OREO property that consisted of multiple
undeveloped lots.
Certain lawsuits and claims arising in the ordinary course of business have been
filed or are pending against the Company and/or the Bank. Based upon information
available to the Company, its review of such claims to date and consultation
with its legal counsel, Management believes the liability relating to these
actions, if any, will not have a material adverse effect on the Company's
liquidity, consolidated financial position or results of operations.
INCOME TAXES
The Company's effective tax rate was 41.3% and 41.4% for the third quarter and
first nine months of 1998, respectively, compared to 42.0% in both the three and
nine month prior year periods. The slight decrease in the Company's effective
income tax rate was attributable to adjustments in the Company's estimate of its
tax liabilities.
FINANCIAL CONDITION
The Company's total assets were $3.2 billion at September 30, 1998, an increase
of $591.1 million, or 22.5%, compared to $2.6 billion at December 31, 1997.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell totaled a
combined $711.2 million at September 30, 1998, an increase of $389.4 million, or
121.0%, compared to the $321.8 million outstanding at the prior year end. This
increase was attributable to the Company investing funds, resulting from both
the strong growth in deposits during the first nine months of 1998 and from
sales of investment securities during the third quarter of 1998, into these
types of short-term, liquid investments.
<PAGE>
INVESTMENT SECURITIES
Investment securities totaled $940.9 million at September 30, 1998, a decrease
of $73.0 million, or 7.2%, from the December 31, 1997, balance of $1.0 billion.
This decrease primarily resulted from the sales of approximately $280.9 million
in U.S. Treasury and agency securities, as well as mortgage-backed securities,
during the third quarter of 1998. The Company realized investment gains of $4.1
million related to those sales. All investment securities sold were classified
as available-for-sale, and all sales were conducted as a component of the
Company's asset/liability management activities.
LOANS
Total loans, net of unearned income, at September 30, 1998, were $1.4 billion, a
$263.6 million, or 22.4%, increase compared to the $1.2 billion total at
December 31, 1997. The increase in loans from the 1997 year-end total was widely
distributed throughout the loan portfolio. This diversified growth was evidenced
by increased quarter-end loan balances in many of the Company's market niches,
specialized lending products and loan offices.
CREDIT QUALITY AND THE ALLOWANCE FOR LOAN LOSSES
Credit risk is defined as the possibility of sustaining a loss because other
parties to the financial instrument fail to perform in accordance with the terms
of the contract. While the Bank follows underwriting and credit monitoring
procedures which it believes are appropriate in growing and managing the loan
portfolio, in the event of nonperformance by these other parties, the Bank's
potential exposure to credit losses could significantly affect the Company's
consolidated financial position and earnings.
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.
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 totaled $35.9 million at September 30, 1998, a
decrease of $1.8 million, or 4.8%, compared to the $37.7 million balance at
December 31, 1997. This slight decrease was due to net charge-offs of $21.9
million, largely offset by $20.1 million in additional provisions to the
allowance for loan losses for the nine months ended September 30, 1998. Gross
charge-offs for the first nine months of 1998 totaled $23.9 million, of which
$17.4 million were incurred in the third quarter of 1998.
Gross charge-offs for the third quarter of 1998, the largest of which was $7.0
million, were primarily related to five commercial credits and were not
concentrated in any particular niche or industry. Of the total 1998 third
quarter gross charge-offs, $8.1 million were classified as
<PAGE>
nonperforming loans at the end of 1997, while $8.7 million were disclosed in
the Company's second quarter 10-Q as having a higher than normal risk of
becoming nonperforming loans during the third quarter of 1998.
In general, Management believes the allowance for loan losses is adequate as of
September 30, 1998. 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 and other
foreclosed assets. The table below sets forth certain relationships between
nonperforming loans, nonperforming assets and the allowance for loan losses:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Dollars in thousands) (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming assets:
Loans past due 90 days or more $ 244 $ 1,016
Nonaccrual loans 23,229 24,476
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 23,473 25,492
OREO and other foreclosed assets 1,832 1,858
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $25,305 $27,350
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of total loans 1.6% 2.2%
OREO and other foreclosed assets as a percentage of total assets 0.1% 0.1%
Nonperforming assets as a percentage of total assets 0.8% 1.0%
Allowance for loan losses: $35,900 $37,700
As a percentage of total loans 2.5% 3.2%
As a percentage of nonaccrual loans 154.6% 154.0%
As a percentage of nonperforming loans 152.9% 147.9%
</TABLE>
Nonperforming loans totaled $23.5 million, or 1.6% of total loans, at September
30, 1998, compared to $25.5 million, or 2.2% of total loans, at December 31,
1997. The slight decrease in nonperforming loans from the prior year end was
primarily due to gross charge-offs of $8.6 million incurred on loans that were
nonperforming at the prior year end, partially offset by new loans placed on
nonperforming status during the first nine months of 1998.
In addition to the loans disclosed in the foregoing analysis, Management has
identified three loans with principal amounts aggregating approximately $6.6
million, that, on the basis of information known by Management, were judged to
have a higher than normal risk of becoming nonperforming. The Company is not
aware of any other loans 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 and other foreclosed assets totaled a combined $1.8 million at September
30, 1998, a slight decrease from the $1.9 million balance at December 31, 1997.
The OREO and other foreclosed assets balance at September 30, 1998, consisted of
one OREO property and one other
<PAGE>
asset that was acquired through foreclosure. The OREO property consists of
multiple undeveloped lots and was acquired by the Company prior to June 1993.
The one other asset acquired through foreclosure, which totaled $1.2 million
at September 30, 1998, consists of a favorable leasehold right under a master
lease which the Company acquired upon foreclosure of a loan during the third
quarter of 1997.
DEPOSITS
Total deposits were $2.9 billion at September 30, 1998, an increase of $511.5
million, or 21.0%, from the prior year-end total of $2.4 billion. A significant
portion of the increase in deposits during the first nine months of 1998 was
concentrated in the Company's highest-rate paying deposit product, the bonus
money market deposit product, which increased $492.0 million, or 42.9%, to a
total of $1.6 billion at the end of the September 30, 1998. This increase was
explained by high levels of client liquidity attributable to a strong inflow of
investment capital into the venture capital community, and by growth during the
first nine months of 1998 in the number of clients served by the Company.
YEAR 2000 COMPLIANCE
In May 1997, the Federal Financial Institutions Examination Council (FFIEC)
issued an interagency statement to the chief executive officers of all federally
supervised financial institutions regarding Year 2000 project awareness. The
statement provides guidance to financial institutions, providers of data
services and all examining personnel of the federal banking agencies regarding
the Year 2000 issue. The federal banking agencies intend to conduct Year 2000
compliance examinations, and the failure to implement a Year 2000 compliance
program by December 31, 1998, may be viewed by the federal banking agencies as
an unsafe and unsound banking practice. In addition, the federal banking
agencies will be taking into account Year 2000 compliance programs when
analyzing applications to acquire a bank or other bank holding company and may
deny an application based on Year 2000 related issues.
In July 1998, the SEC issued an interpretive release No. 33-7558, that provides
specific guidance regarding Year 2000 expanded disclosure requirements under
MD&A in a public company's Form 10-K and 10-Qs. The Release supersedes the
revised Staff Legal Bulletin No. 5 and is effective for quarters ending after
August 4, 1998.
The Company and the Bank are currently in the process of addressing the Year
2000 issue. The Bank has engaged a third party vendor, a recognized expert, to
assist in the Year 2000 remediation effort for information technology systems.
The FFIEC has defined Supervisory Milestones that cover each of the phases of a
Year 2000 remediation program. As of September 30, 1998, the Bank has met all of
the Supervisory Milestones required as of that date.
The remaining milestones, as defined by the FFIEC, are:
<TABLE>
<S> <C>
December 31, 1998: Substantially complete testing of internal
systems which are critical to the Bank's operations.
March 31, 1999: Testing with business partners should be substantially
complete for critical systems.
June 30, 1999: Testing and implementation of critical systems should
be complete.
</TABLE>
<PAGE>
Currently, the Bank expects to meet each of these deadlines.
Most of the Bank's information technology systems are off-the-shelf software, as
a result, remediation efforts have focused on obtaining Year 2000 compliant
application upgrades. The Bank's core banking system, which runs loans, deposits
and the general ledger has been upgraded to the Year 2000 compliant version and
is currently being tested. Year 2000 releases have been completed and received
for all of the Bank's other critical systems. Testing and implementation of
these releases is expected to be completed by June 30, 1999. The Bank has
inventoried its non-information technology systems and is working with the
vendors to determine Year 2000 compliance and to define procedures to be used to
complete a compliance test in those applications where a calendar function is
found. The Bank has obtained verification from third party business partners and
suppliers regarding their Year 2000 compliance status. Business partners and
suppliers who are critical to the Bank's operations have reported being on
schedule with FFIEC guidelines. The Bank has plans to conduct testing of
critical applications with these third party vendors during the first quarter of
1999.
The Company is currently analyzing its most reasonably likely worst case Year
2000 scenario and is developing a contingency plan to handle that scenario. This
analysis and contingency plan is expected to be completed during the fourth
quarter of 1998. The Bank is also in the process of assessing loan portfolio
credit risk relating to its customers' understanding and preparedness to address
Year 2000 issues. An initial assessment was completed during the third quarter
of 1998 and an update of the initial survey will be done in the fourth quarter
of 1998. The Bank will continue to use customer surveys to monitor this risk
through January 2000.
The Company has incurred $1.0 million in costs during the first nine months of
1998 for remediation of the Year 2000 issue and expects to incur an additional
$0.5 million in the fourth quarter of 1998 and $0.6 million in 1999. The
remediation costs for the Year 2000 issue are included in noninterest expense as
incurred.
MARKET RISK MANAGEMENT
Interest rate risk is the most significant market risk impacting the Company.
The Company's monitoring activities related to managing interest rate risk
include both interest rate sensitivity "gap" analysis and the use of a
simulation model to measure the impact of market interest rate changes on the
net present value of estimated cash flows from the Company's assets, liabilities
and off-balance sheet items, defined as the Company's market value of portfolio
equity (MVPE). See the Company's 1997 Annual Report on Form 10-K for disclosure
of the quantitative and qualitative information regarding the interest rate risk
inherent in interest rate risk sensitive instruments as of December 31, 1997.
There have been no changes in the assumptions used by the Company in monitoring
interest rate risk, and the Company is in compliance with all interest rate risk
policy guidelines as of September 30, 1998. Other types of market risk affecting
the Company in the normal course of its business activities include foreign
currency exchange risk and equity price risk. The impact on the Company,
resulting from these other two types of market risks, is deemed immaterial. The
Company does not maintain a portfolio of trading securities and does not intend
to engage in such activities in the immediate future.
<PAGE>
LIQUIDITY
The objective of liquidity management is to ensure that funds are available in a
timely manner to meet loan demand and depositors' needs, and to service other
liabilities as they come due, without causing an undue amount of cost or risk,
and without causing a disruption to normal operating conditions.
The Company regularly assesses the amount and likelihood of projected funding
requirements through a review of factors such as historical deposit volatility
and funding patterns, present and forecasted market and economic conditions,
individual client funding needs, and existing and planned Company business
activities. The asset/liability committee of the Bank provides oversight to the
liquidity management process and recommends policy guidelines, subject to Board
of Directors approval, and courses of action to address the Company's actual and
projected liquidity needs.
The ability to attract a stable, low-cost base of deposits is the Company's
primary source of liquidity. Other sources of liquidity available to the Company
include short-term borrowings, which consist of federal funds purchased,
security repurchase agreements and other short-term borrowing arrangements. The
Company's liquidity requirements can also be met through the use of its
portfolio of liquid assets. Liquid assets, as defined, include cash and cash
equivalents in excess of the minimum levels necessary to carry out normal
business operations, federal funds sold, securities purchased under resale
agreements, investment securities maturing within six months, investment
securities eligible and available for pledging purposes with a maturity in
excess of six months, and anticipated near term cash flows from investments.
Additionally, during the second quarter of 1998 the Company issued $40.0 million
in cumulative trust preferred securities through a newly formed special-purpose
trust (SVB Capital I). The securities had an offering price (liquidation amount)
of $25 per security and distributions at a fixed rate of 8.25% will be paid by
the Company quarterly. The securities have a maximum maturity of 30 years. The
Company received proceeds of $38.5 million related to the sale of these
securities, net of underwriting commissions and other offering expenses. The
proceeds will be used by the Company for general corporate purposes, which may
include, without limitation, investments in liquid government and corporate debt
securities, and investments in venture capital funds.
Bank policy guidelines provide that liquid assets as a percentage of total
deposits should not fall below 20.0%. At September 30, 1998, the Bank's ratio of
liquid assets to total deposits was 53.2%. This ratio is well in excess of the
Bank's minimum policy guidelines and is slightly higher than the comparable
ratio of 52.1% as of December 31, 1997. In addition to monitoring the level of
liquid assets relative to total deposits, the Bank also utilizes other policy
measures in its liquidity management activities. As of September 30, 1998, the
Bank was in compliance with all of these policy measures.
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
<PAGE>
guidelines. The primary source of new capital for the Company has been the
retention of earnings. Aside from current earnings, other sources of new
capital for the Company have been the issuance of common stock under the
Company's employee benefit plans, including the Company's stock option plans,
defined contribution plans and employee stock purchase plan.
Additionally, during the second quarter of 1998 the Company issued $40.0 million
in cumulative trust preferred securities through SVB Capital I. The trust
preferred securities are presented as a separate line item in the consolidated
balance sheet of the Company under the caption "Company obligated mandatorily
redeemable trust preferred securities of subsidiary trust holding solely junior
subordinated debentures." The securities have a maximum maturity of 30 years and
qualify as Tier 1 capital under the capital guidelines of the Federal Reserve
Board.
Shareholders' equity totaled $210.2 million at September 30, 1998, an increase
of $35.8 million, or 20.5%, from the $174.5 million balance at December 31,
1997. This increase resulted from net income of $24.3 million combined with
capital generated primarily through the Company's employee benefit plans of $9.9
million and an increase in the after-tax net unrealized gain on
available-for-sale investments of $1.6 million from the prior year end.
The Company and the Bank are subject to capital adequacy guidelines issued by
the Federal Reserve Board. Under these capital guidelines, the minimum total
risk-based capital and Tier 1 risk-based capital ratio requirements are 10.0%
and 6.0%, respectively, of risk-weighted assets and certain off-balance sheet
items for a "well capitalized" depository institution.
The Federal Reserve Board has also established minimum capital leverage ratio
guidelines for state member banks. The ratio is determined using Tier 1 capital
divided by quarterly average total assets. The guidelines require a minimum of
5.0% for a well capitalized depository institution.
The Company's and the Bank's risk-based capital ratios were in excess of
regulatory guidelines for a well capitalized depository institution as of
September 30, 1998, and December 31, 1997. Capital ratios for the Company are
set forth below:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
- -----------------------------------------------------------------------------
<S> <C> <C>
Total risk-based capital ratio 12.5% 11.5%
Tier 1 risk-based capital ratio 11.2% 10.2%
Tier 1 leverage ratio 7.7% 7.1%
- -----------------------------------------------------------------------------
</TABLE>
The improvement in the Company's total risk-based capital ratio and Tier 1
risk-based capital ratio from December 31, 1997, to September 30, 1998, was
attributable to an increase in Tier 1 capital, partially offset by an increase
in total assets. The increase in Tier 1 capital primarily resulted from the
aforementioned net income and the issuance of $40.0 million in trust preferred
securities during the first nine months of 1998.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item
pending at September 30, 1998, 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:
10.40 Severance Agreement between Silicon Valley Bancshares and John C. Dean
related to garage.com-TM-, as of August 12, 1998
10.41 Severance Agreement between Silicon Valley Bancshares and Harry W.
Kellogg related to garage.com-TM-, as of August 12, 1998
10.42 Form of Executive Change In Control Severance Benefits, as of
August 12, 1998
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 1998.
<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, 1998 /s/ Lydia A. Burke
------------------
Lydia A. Burke
Senior Vice President and Controller
(Principal Accounting Officer)
<PAGE>
Severance Agreement
Page
EXHIBIT 10.40
SEVERANCE AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of the 12th day
of August, 1998, by and between Silicon Valley Bancshares ("Bancshares") and
John C. Dean ("Mr. Dean").
RECITALS
WHEREAS, Mr. Dean is the President and Chief Executive Officer of Bancshares
and Silicon Valley Bank (the "Bank");
WHEREAS, Bancshares has made an equity investment in non-voting preferred
stock (the "Preferred Stock") of garage.com-TM- (the "Company") and, in that
regard, has been offered membership on the Company's board of directors;
WHEREAS, Bancshares has asked, and Mr. Dean has agreed, to serve as a
director of the Company;
WHEREAS, the Company offered to Bancshares the opportunity to purchase
75,000 shares of the Company's common stock (the "Common Stock"), in regard to
services provided by Mr. Dean on the Company's board of directors;
WHEREAS, Mr. Dean's service on the board of directors of the Company will
provide value to Bancshares;
WHEREAS, Bancshares purchased the Common Stock for a total purchase price of
$750;
WHEREAS, the Company intends to form a California limited liability company
each year during its existence (the "LLCs") to hold and distribute securities,
or the proceeds from the sale or disposition of such securities, that the
Company receives in each particular year from entities that seek to raise
capital using the Company's Internet matchmaking service; and
WHEREAS, the Company intends to allocate an interest in each of the annual
LLCs to its holders of common and preferred stock, including Bancshares. For
purposes of this Agreement, "Interests" means the interests allocated by the
Company in each of the annual LLCs to Bancshares related solely to Bancshares'
ownership of the Common Stock granted in regard to Mr. Dean's services on the
Company's board of directors.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants set forth below, the parties agree as follows:
<PAGE>
Severance Agreement
Page
AGREEMENT
1. RIGHTS IN THE STOCK AND THE INTERESTS. Except as otherwise provided in
this Agreement, Bancshares shall have all right, title and interest in the
Common Stock and the Interests.
2. MR. DEAN'S SEPARATION. Upon the earlier of (i) a Covered Termination;
or (ii) a Qualified Separation of Mr. Dean from Bancshares and the Bank
(collectively, "Mr. Dean's Separation"), the determination of the value of the
Common Stock and the Interests will be made in accordance with Section 3 of this
Agreement. For purposes of this Agreement, a "Covered Termination" shall have
the meaning as defined in the then existing Change in Control Agreement among
Mr. Dean, Bancshares and the Bank; and a "Qualified Separation" shall mean where
Mr. Dean voluntarily resigns as an officer of Bancshares and the Bank and, in
the sole discretion of Bancshares, determines that Mr. Dean continues to add
value to Bancshares and the Bank. Factors to be considered in this determination
include, but are not limited to: (1) Mr. Dean's promotion and support of the
interests of the Bank in the marketplace and community; (2) Mr. Dean's promotion
and support of the interests of the Bank with clients, venture capitalists and
prospective Bank clients; (3) Mr. Dean's promotion and support of the interests
of the Bank through civic activities; (4) Mr. Dean's continued service to the
Bank (i.e., as a consultant); (5) Mr. Dean's continued addition of value to a
Bank-related project; or (6) Mr. Dean providing referrals to the Bank.
Bancshares' shall make this determination one time only, within three (3) months
following Mr. Dean's separation.
3. DETERMINED VALUE. The term "Determined Value" shall mean fifty percent
(50%) of the present value of the fair market value of the then-vested Common
Stock and the Interests, valued as of the date of Mr. Dean's Separation, and
determined as follows: (i) within twenty (20) days of Mr. Dean's Separation,
Bancshares and Mr. Dean shall each select a business valuation appraiser, each
of whom is an accredited senior appraiser by the American Society of Appraisers;
(ii) within twenty (20) days of their selection, the appraisers selected by
Bancshares and Mr. Dean shall promptly meet and confer and select an independent
business valuation appraiser who is an accredited senior appraiser by the
American Society of Appraisers (the "Independent Appraiser"); (iii) the
Independent Appraiser shall promptly conduct an appraisal of the Common Stock
and the Interests and determine the fair market value of the Common Stock and
the Interests discounted to present value; and (iv) the Independent Appraiser
shall then promptly prepare and deliver to Bancshares and Mr. Dean a written
report reflecting the fair market value of the Common Stock and the Interests
discounted to present value (the "Appraisal Report"). The fair market value
determined under this Section 3 will include an amount representing the value of
the goodwill of the Company. The Determined Value established by the Independent
Appraiser is conclusive and binding upon the parties. Bancshares will pay the
fees and expenses charged by the Independent Appraiser.
4. CLOSING. Within twenty (20) days of the delivery of the Appraisal
Report, but no earlier than ninety-five (95) days from the date of Mr. Dean's
Separation, Bancshares will pay to
<PAGE>
Severance Agreement
Page
Mr. Dean the amount of the Determined Value. Notwithstanding the foregoing,
if Harry W. Kellogg, Jr. ("Mr. Kellogg") is then participating in the payment
from Bancshares to Mr. Dean pursuant to the Severance Agreement between
Bancshares and Mr. Kellogg dated August 12, 1998, Bancshares will pay to Mr.
Dean only one-half of the amount of the Determined Value (with the other half
then being paid to Mr. Kellogg).
5. ATTORNEYS' FEES. In any action at law or in equity, including any
arbitration proceeding, to enforce any of the provisions or rights under this
Agreement, the unsuccessful party to the action, as determined by the court or
the arbitrator in its final judgment or decree, shall pay the successful party
all costs, expenses and reasonable attorneys' fees incurred by the successful
party (including, without limitation, costs, expenses and fees on any appeal),
and, if the successful party shall recover judgment in any such action or
proceeding, such costs, expenses and attorneys' fees shall be included as part
of the judgment.
6. AMENDMENTS. No change in, modification of or addition to the terms of
this Agreement shall be valid unless set forth in a writing signed by Bancshares
and Mr. Dean and specifically stating that it constitutes an amendment to this
Agreement.
7. CHOICE OF LAW. It is the intention of the parties that the laws of the
State of California shall govern the validity of this Agreement, the
construction of its terms and the interpretation of the rights and duties of the
parties.
8. BINDING ON HEIRS, SUCCESSORS AND ASSIGNS. This Agreement and all of its
terms, conditions and covenants are intended to be fully effective and binding,
to the extent permitted by law, on the heirs, executors, administrators,
successors and assigns of the parties to this Agreement.
9. ASSIGNMENT. Except as otherwise provided in this Agreement, neither
this Agreement nor any right or interest is assignable by any of the parties
without the prior written consent of all of the parties.
10. ARBITRATION. Any dispute between the parties arising out of or in
connection with this Agreement shall be referred to arbitration in Santa Clara
County, California in accordance with the Commercial Rules of the American
Arbitration Association. The award shall be final and binding upon the parties
and judgment of such award may be entered in any court having jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date and year first above written.
SILICON VALLEY BANCSHARES JOHN C. DEAN
By:
-----------------------
<PAGE>
EXHIBIT 10.41
SEVERANCE AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of the 12th day
of August, 1998, by and between Silicon Valley Bancshares ("Bancshares") and
Harry W. Kellogg, Jr. ("Mr. Kellogg").
RECITALS
WHEREAS, Mr. Kellogg is Executive Vice President of Bancshares and Executive
Vice President, Strategic Products and Services Group, of Silicon Valley Bank
(the "Bank");
WHEREAS, John C. Dean ("Mr. Dean") is the President and Chief Executive
Officer of Bancshares and the Bank;
WHEREAS, Bancshares has made an equity investment in non-voting preferred
stock (the "Preferred Stock") of garage.com-TM- (the "Company") and, in that
regard, has been offered membership on the Company's board of directors;
WHEREAS, Bancshares has asked, and Mr. Dean has agreed, to serve as a
director of the Company;
WHEREAS, Mr. Kellogg has provided, and will from time to time in the future
provide, support to Mr. Dean in connection with Mr. Dean's activities concerning
the Company;
WHEREAS, the Company offered to Bancshares the opportunity to purchase
75,000 shares of the Company's common stock (the "Common Stock"), in regard to
services provided by Mr. Dean on the Company's board of directors;
WHEREAS, Mr. Kellogg's support of Mr. Dean in connection with Mr. Dean's
service on the board of directors of the Company will provide value to
Bancshares;
WHEREAS, Bancshares purchased the Common Stock for a total purchase price of
$750;
WHEREAS, the Company intends to form a California limited liability company
each year during its existence (the "LLCs") to hold and distribute securities,
or the proceeds from the sale or disposition of such securities, that the
Company receives in each particular year from entities that seek to raise
capital using the Company's Internet matchmaking service;
WHEREAS, the Company intends to allocate an interest in each of the annual
LLCs to its holders of common and preferred stock, including Bancshares. For
purposes of this Agreement, "Interests" means the interests allocated by the
Company in each of the annual LLCs to Bancshares related solely to Bancshares'
ownership of the Common Stock granted in regards to Mr. Dean's services on the
Company's board of directors; and
<PAGE>
Severance Agreement
Page 2
WHEREAS, Bancshares and Mr. Dean entered into that certain Severance
Agreement dated August 12, 1998 (the "Bancshares/Dean Agreement"). A copy of the
Bancshares/Dean Agreement is attached as Exhibit A and incorporated by
reference.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants set forth below, the parties agree as follows:
AGREEMENT
1. RIGHTS IN THE STOCK AND THE INTERESTS. Except as otherwise provided in
this Agreement and in the Bancshares/Dean Agreement, Bancshares has all right,
title and interest in the Common Stock and the Interests.
2. MR. KELLOGG'S PARTICIPATION IN THE BANCSHARES/DEAN AGREEMENT. If
Bancshares is obligated to pay Mr. Dean the Determined Value (as defined in
Section 3 of the Bancshares/Dean Agreement) pursuant to Section 4 of the
Bancshares/Dean Agreement, Bancshares shall pay one-half of the amount of the
Determined Value to Mr. Kellogg and one-half of the Determined Value to Mr.
Dean; provided however, that the conditions set forth in Section 3, below, are
satisfied.
3. CONDITIONS TO MR. KELLOGG'S PARTICIPATION IN THE DETERMINED VALUE. Mr.
Kellogg may participate in the Determined Value only if: (i) this Agreement has
not earlier been terminated by Bancshares in accordance with Section 4 below;
and (ii) Mr. Kellogg is employed by Bancshares and the Bank on the date of Mr.
Dean's Separation (as defined in Section 2 of the Bancshares/Dean Agreement.)
4. TERMINATION OF THIS AGREEMENT. Bancshares may terminate this Agreement
effective on an annual anniversary of the date of this Agreement by providing
Mr. Kellogg with written notice of Bancshares' decision to terminate this
Agreement provided such notice of termination is made at least sixty (60) days
before an annual anniversary date of this Agreement.
5. ATTORNEYS' FEES. In any action at law or in equity, including any
arbitration proceeding, to enforce any of the provisions or rights under this
Agreement, the unsuccessful party to the action, as determined by the court or
the arbitrator in its final judgment or decree, shall pay the successful party
all costs, expenses and reasonable attorneys' fees incurred by the successful
party (including, without limitation, costs, expenses and fees on any appeal),
and, if the successful party shall recover judgment in any such action or
proceeding, such costs, expenses and attorneys' fees shall be included as part
of the judgment.
6. AMENDMENTS. No change in, modification of or addition to the terms of
this Agreement shall be valid unless set forth in a writing signed by Bancshares
and Mr. Kellogg and specifically stating that it constitutes an amendment to
this Agreement.
7. CHOICE OF LAW. It is the intention of the parties that the laws of the
State of California shall govern the validity of this Agreement, the
construction of its terms and the interpretation of the rights and duties of the
parties.
<PAGE>
Severance Agreement
Page 3
8. BINDING ON HEIRS, SUCCESSORS AND ASSIGNS. This Agreement and all of its
terms, conditions and covenants are intended to be fully effective and binding,
to the extent permitted by law, on the heirs, executors, administrators,
successors and assigns of the parties to this Agreement.
9. ASSIGNMENT. Except as otherwise provided in this Agreement, neither
this Agreement nor any right or interest is assignable by any of the parties
without the prior written consent of all of the parties.
10. ARBITRATION. Any dispute between the parties arising out of or in
connection with this Agreement shall be referred to arbitration in Santa Clara
County, California in accordance with the Commercial Rules of the American
Arbitration Association. The award shall be final and binding upon the parties
and judgment of such award may be entered in any court having jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as of
the date and year first above written.
SILICON VALLEY BANCSHARES HARRY W. KELLOGG, JR.
By:
---------------------- --------------------------------
<PAGE>
EXHIBIT 10.42
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, 1998 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 a(n) ___[TITLE]___ of the Company.
1.2 This Agreement shall remain in full force and effect for the two (2)
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) until August 11, 2000 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: (i) 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 event of a
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termination of Executive's employment which is not proximately related to the
occurrence of a Change in Control; and (ii) the Company's 1998 Venture
Capital Retention Program (and any subsequent Venture Capital Retention
programs) and any severance amounts payable to Executive under such
program(s).
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 (following a
Change in Control), 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 (i) but not due to an Involuntary Termination or a
Constructive Termination within twenty-four (24) months following a Change in
Control, (ii) for any reason prior to a Change in Control or (iii) 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 Base
Salary 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 Selling Price of the
Company or Bancshares (as the case may be) 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 or Bancshares (as the case may be) 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:
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF MONTHS
FOLLOWING CHANGE IN CONTROL PERCENTAGE OF CIC BENEFIT
<S> <C>
15 75%
18 50%
21 25%
24 0%
</TABLE>
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, 1998 and the Executive incurs a Covered
Termination on November 15, 1999, 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). All Bancshares stock held by the
Executive that is unvested at the time of a Change in Control may become fully
vested upon a Change in Control, subject to the terms of the agreements
providing for the grant of such Bancshares stock.
2.4 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.
2.5 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 insurance coverage is required under the Consolidated
Omnibus Budget Reconciliation Act of 1985 ("COBRA").
This Section 2.5 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.
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2.6 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.
2.7 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.
2.8 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 FDIC, the
Federal Reserve Bank of San Francisco (the "FRB") and the California State
Banking Department (the "SBD").
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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 (c) 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) (the "Reduction Amount") only upon written notice by Executive
indicating the Reduction Amount, if any. If the Internal Revenue Service (the
"IRS") determines that a Payment is subject to the Excise Tax, then subsection
(c) hereof shall apply, and the enforcement of subsection (c) 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) Intentionally omitted.
< TO BE INSERTED IN THOSE AGREEMENTS WHICH INCLUDE A CHARITABLE RECIPIENT
DESIGNATION:
" (b) IN THE EVENT A PAYMENT IS REDUCED IN ACCORDANCE WITH SUBSECTION (a)
HEREOF, THE COMPANY SHALL REMIT TO [________________] (THE "CHARITABLE
RECIPIENT"), WITHIN [TEN (10)] DAYS AFTER A PAYMENT IS MADE TO EXECUTIVE, AN
AMOUNT EQUAL TO THE REDUCTION AMOUNT. THE COMPANY AND THE EXECUTIVE AGREE
THAT THE EXECUTIVE MAY AMEND, AT ANY TIME BY WRITTEN SUBMISSION TO THE
COMPANY, THIS SUBSECTION (b) FOR THE SOLE PURPOSE OF DESIGNATING A DIFFERENT
ENTITY AS THE CHARITABLE RECIPIENT; PROVIDED, HOWEVER, THAT ANY SUCH
AMENDMENT RECEIVED BY THE COMPANY WITHIN SIX (6) MONTHS PRIOR TO THE DATE IN
WHICH EXECUTIVE FIRST BECOMES ENTITLED TO A PAYMENT PURSUANT TO THIS
AGREEMENT MAY BE DISREGARDED BY THE COMPANY IN ITS SOLE DISCRETION.
NOTWITHSTANDING ANYTHING TO THE FOREGOING, IN NO EVENT MAY EXECUTIVE
DESIGNATE A CHARITABLE RECIPIENT IN WHICH EXECUTIVE HAS A DIRECT OR INDIRECT
BENEFICIAL OWNERSHIP INTEREST." >
(c) 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
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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 (c), Executive shall pay the Excise Tax.
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
Agreements.
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 "BASE SALARY" means the base salary rate in effect for the subject
Executive at the time of a Covered Termination, 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)
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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;
(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
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(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.
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 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;
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(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
(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. Section 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 Base Salary, any
annual incentive compensation (including any "VC Participant Amount" under, and
as defined in, the Company's Venture Capital Retention Program), 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 commence as of the date of execution of this Agreement
set forth on page 1 of this Agreement, and shall terminate on August 11, 2000.
ARTICLE 8
GENERAL PROVISIONS
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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, 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
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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 (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.
11
<PAGE>
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.
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 [Name]
President and Chief Executive Officer
Exhibit A: CIC Benefit Table
Exhibit B: Employee Agreement and Release
Exhibit C: Arbitration Procedure
12
<PAGE>
EXHIBIT A
For purposes of this table, the following definitions shall apply:
1. "BOOK VALUE" shall mean the amount of 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 or Bancshares (as
the case may be) as determined by the Company or Bancshares, respectively, 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.
13
<PAGE>
EXHIBIT A
CIC BENEFIT(1)
<TABLE>
<CAPTION>
Multiple of Base Salary
Selling Price ---------------------------------------------------------------------
Multiple of Executive ** MC Members & Grades 11-12 Grades 8-10
Book Value Committee Grades 13-14
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.00 0.0000 0.0000 0.5000 0.2500
- ------------------------------------------------------------------------------------------------------------------
1.10 0.0000 0.0000 0.5000 0.2500
- ------------------------------------------------------------------------------------------------------------------
1.20 0.0000 0.0000 0.5000 0.2500
- ------------------------------------------------------------------------------------------------------------------
1.30 0.0000 0.0000 0.5000 0.2500
- ------------------------------------------------------------------------------------------------------------------
1.40 0.0000 0.0000 0.5000 0.2500
- ------------------------------------------------------------------------------------------------------------------
1.50 0.0000 0.0000 0.5000 0.2500
- ------------------------------------------------------------------------------------------------------------------
1.60 0.0000 0.0000 0.5000 0.2500
- ------------------------------------------------------------------------------------------------------------------
1.70 0.0000 0.0000 0.5000 0.2500
- ------------------------------------------------------------------------------------------------------------------
1.80 0.0000 0.0000 0.5000 0.2500
- ------------------------------------------------------------------------------------------------------------------
1.90 0.0000 0.0000 0.5000 0.2500
- ------------------------------------------------------------------------------------------------------------------
2.00 0.0000 0.0000 0.5000 0.2500
- ------------------------------------------------------------------------------------------------------------------
2.10 1.6500 1.2375 0.5500 0.2750
- ------------------------------------------------------------------------------------------------------------------
2.20 1.8000 1.3500 0.6000 0.3000
- ------------------------------------------------------------------------------------------------------------------
2.30 1.9500 1.4625 0.6500 0.3250
- ------------------------------------------------------------------------------------------------------------------
2.40 2.1000 1.5750 0.7000 0.3500
- ------------------------------------------------------------------------------------------------------------------
2.50 2.2500 1.6875 0.7500 0.3750
- ------------------------------------------------------------------------------------------------------------------
2.60 2.4000 1.8000 0.8000 0.4000
- ------------------------------------------------------------------------------------------------------------------
2.70 2.5500 1.9125 0.8500 0.4250
- ------------------------------------------------------------------------------------------------------------------
2.80 2.7000 2.0250 0.9000 0.4500
- ------------------------------------------------------------------------------------------------------------------
2.90 2.8500 2.1375 0.9500 0.4750
- ------------------------------------------------------------------------------------------------------------------
3.00 3.0000 2.2500 1.0000 0.5000
- ------------------------------------------------------------------------------------------------------------------
3.10 3.1500 2.3625 1.0500 0.5250
- ------------------------------------------------------------------------------------------------------------------
3.20 3.3000 2.4750 1.1000 0.5500
- ------------------------------------------------------------------------------------------------------------------
3.30 3.4500 2.5875 1.1500 0.5750
- ------------------------------------------------------------------------------------------------------------------
3.40 3.6000 2.7000 1.2000 0.6000
- ------------------------------------------------------------------------------------------------------------------
3.50 3.7500 2.8125 1.2500 0.6250
- ------------------------------------------------------------------------------------------------------------------
3.60 3.9000 2.9250 1.3000 0.6500
- ------------------------------------------------------------------------------------------------------------------
3.70 4.0500 3.0375 1.3500 0.6750
- ------------------------------------------------------------------------------------------------------------------
3.80 4.2000 3.1500 1.4000 0.7000
- ------------------------------------------------------------------------------------------------------------------
3.90 4.3500 3.2625 1.4500 0.7250
- ------------------------------------------------------------------------------------------------------------------
4.00 4.5000 3.3750 1.5000 0.7500
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------
(1) This table reflects CIC benefits for sales up to 4.00 times SVB's then book
value (the "4.0x Sales"). For sales above this, the multiples (of total cash
compensation) will be fixed at the multiples for 4.0x Sales.
** 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.
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:
-------------------------------------------------
[Employee Name]
Date:
-----------------------------------------------
[FOR PARTICIPANTS WHO ARE AGE 40 AND OVER]
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
<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 NINE MONTHS ENDED SEPTEMBER 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 107,953
<INT-BEARING-DEPOSITS> 220
<FED-FUNDS-SOLD> 711,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 940,893
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,438,231
<ALLOWANCE> 35,900
<TOTAL-ASSETS> 3,216,182
<DEPOSITS> 2,943,870
<SHORT-TERM> 0
<LIABILITIES-OTHER> 23,602
<LONG-TERM> 0
0
0
<COMMON> 86,936
<OTHER-SE> 123,302
<TOTAL-LIABILITIES-AND-EQUITY> 3,216,182
<INTEREST-LOAN> 101,356
<INTEREST-INVEST> 47,959
<INTEREST-OTHER> 15,149
<INTEREST-TOTAL> 164,464
<INTEREST-DEPOSIT> 58,669
<INTEREST-EXPENSE> 58,672
<INTEREST-INCOME-NET> 105,792
<LOAN-LOSSES> 20,061
<SECURITIES-GAINS> 4,626
<EXPENSE-OTHER> 61,740
<INCOME-PRETAX> 41,533
<INCOME-PRE-EXTRAORDINARY> 24,331
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,331
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.16
<YIELD-ACTUAL> 5.2
<LOANS-NON> 23,229
<LOANS-PAST> 244
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,575
<ALLOWANCE-OPEN> 37,700
<CHARGE-OFFS> 23,916
<RECOVERIES> 2,055
<ALLOWANCE-CLOSE> 35,900
<ALLOWANCE-DOMESTIC> 26,610
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,290
</TABLE>
