-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vict8simTgRDQe1olDpuUZGi27XX9mG+UIln6vqz7zjSv2soFoML9f5VrvJxiA2o I44xn24FzKH2KXWRQP4FNw== 0000912057-97-027505.txt : 19970814 0000912057-97-027505.hdr.sgml : 19970814 ACCESSION NUMBER: 0000912057-97-027505 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SILICON VALLEY BANCSHARES CENTRAL INDEX KEY: 0000719739 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 942856336 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15637 FILM NUMBER: 97658251 BUSINESS ADDRESS: STREET 1: 3003 TASMAN DRIVE, M/S NC820 CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4086547400 MAIL ADDRESS: STREET 1: 3003 TASMAN DRIVE, M/S NC820 CITY: SANTA CLARA STATE: CA ZIP: 95054 10-Q 1 FORM 10-Q As filed with the Securities and Exchange Commission on August 13, 1997 - ------------------------------------------------------------------------------- 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 June 30, 1997 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 July 31, 1997, 9,690,053 shares of the registrant's common stock (no par value) were outstanding. - ------------------------------------------------------------------------------- This report contains a total of 29 pages. TABLE OF CONTENTS
PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS 3 CONSOLIDATED INCOME STATEMENTS 4 CONSOLIDATED STATEMENTS OF CASH FLOWS 5 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 27 ITEM 2. CHANGES IN SECURITIES 27 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 27 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 27 ITEM 5. OTHER INFORMATION 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28 SIGNATURES 29
2 PART I - FINANCIAL INFORMATION ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS SILICON VALLEY BANCSHARES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1997 1996 (Dollars in thousands) (Unaudited) - --------------------------------------------------------------------------------- Assets: Cash and due from banks $ 116,893 $ 122,836 Federal funds sold and securities purchased under agreement to resell 365,307 310,341 Investment securities, at fair value 693,833 625,022 Loans, net of unearned income 1,038,212 863,492 Allowance for loan losses (37,300) (32,700) - --------------------------------------------------------------------------------- Net loans 1,000,912 830,792 Premises and equipment 3,716 4,155 Other real estate owned 1,136 1,948 Accrued interest receivable and other assets 33,987 29,450 - --------------------------------------------------------------------------------- Total assets $2,215,784 $1,924,544 - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- Liabilities and Shareholders' Equity: Liabilities: Noninterest-bearing demand deposits $ 630,002 $ 599,257 NOW deposits 23,706 8,443 Money market deposits 1,298,976 1,081,391 Time deposits 102,332 85,213 - --------------------------------------------------------------------------------- Total deposits 2,055,016 1,774,304 Other liabilities 10,081 14,840 - --------------------------------------------------------------------------------- Total liabilities 2,065,097 1,789,144 - --------------------------------------------------------------------------------- Shareholders' Equity: Preferred stock, no par value: 20,000,000 shares authorized; none outstanding Common stock, no par value: 30,000,000 shares authorized; 9,636,587 and 9,329,993 shares outstanding at June 30, 1997 and December 31, 1996, respectively 70,830 65,968 Retained earnings 80,290 67,321 Net unrealized gain on available-for-sale investments 227 2,456 Unearned compensation (660) (345) - --------------------------------------------------------------------------------- Total shareholders' equity 150,687 135,400 - --------------------------------------------------------------------------------- Total liabilities and shareholders' equity $2,215,784 $1,924,544 - --------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------
See notes to interim consolidated financial statements. 3 SILICON VALLEY BANCSHARES AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS
For the three months ended For the six months ended -------------------------- ------------------------ June 30, June 30, June 30, June 30, 1997 1996 1997 1996 (Dollars in thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited) - ----------------------------------------------------------------------------------------------------- Interest income: Loans, including fees $26,589 $21,195 $49,525 $42,300 Investment securities 9,402 5,137 18,123 9,416 Federal funds sold and securities purchased under agreement to resell 3,729 3,687 6,965 6,508 - ----------------------------------------------------------------------------------------------------- Total interest income 39,720 30,019 74,613 58,224 - ----------------------------------------------------------------------------------------------------- Interest expense: Deposits 12,638 9,153 23,674 17,085 - ----------------------------------------------------------------------------------------------------- Total interest expense 12,638 9,153 23,674 17,085 - ----------------------------------------------------------------------------------------------------- Net interest income 27,082 20,866 50,939 41,139 Provision for loan losses 2,618 2,065 5,966 3,588 - ----------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 24,464 18,801 44,973 37,551 - ----------------------------------------------------------------------------------------------------- Noninterest income: Disposition of client warrants 1,082 1,971 4,245 2,262 Letter of credit and foreign exchange income 1,110 855 2,090 1,734 Deposit service charges 407 445 772 841 Investment gains 44 - 45 1 Other 334 283 655 549 - ----------------------------------------------------------------------------------------------------- Total noninterest income 2,977 3,554 7,807 5,387 - ----------------------------------------------------------------------------------------------------- Noninterest expense: Compensation and benefits 9,420 7,557 18,476 15,345 Professional services 1,695 1,251 3,131 2,209 Business development and travel 1,026 725 1,986 1,278 Net occupancy expense 891 774 1,653 1,624 Furniture and equipment 763 939 1,424 1,592 Advertising and promotion 450 325 728 630 Postage and supplies 342 372 702 749 Telephone 330 291 634 601 Cost of other real estate owned 34 (124) 26 326 Other 803 850 1,660 1,394 - ----------------------------------------------------------------------------------------------------- Total noninterest expense 15,754 12,960 30,420 25,748 - ----------------------------------------------------------------------------------------------------- Income before income tax expense 11,687 9,395 22,360 17,190 Income tax expense 4,908 3,758 9,391 6,876 - ----------------------------------------------------------------------------------------------------- Net income $ 6,779 $ 5,637 $12,969 $10,314 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- Net income per common and common equivalent share $ 0.67 $ 0.58 $ 1.29 $ 1.07 - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements. 4 SILICON VALLEY BANCSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended ----------------------------- June 30, June 30, 1997 1996 (Dollars in thousands) (Unaudited) (Unaudited) - -------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 12,969 $ 10,314 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 5,966 3,588 Provision for other real estate owned - 551 Depreciation and amortization 655 598 Net gain on sales of investment securities (45) (1) Net gain on sales of other real estate owned (45) (367) Increase in accrued interest receivable (2,715) (2,440) (increase) decrease in prepaid expenses (250) 2,549 Increase in unearned income 1,875 391 Decrease in accrued liabilities (3,088) (3,954) Increase (decrease) in taxes payable (1,389) 244 Other, net (2,615) (409) - -------------------------------------------------------------------------------------- Net cash provided by operating activities 11,318 11,064 - -------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from maturities and paydowns of investment securities 670,952 523,770 Proceeds from sales of investment securities 60,555 6,080 Purchases of investment securities (799,572) (651,301) Net increase in loans (179,798) (91,332) Proceeds from recoveries of charged off loans 1,837 1,407 Net proceeds from sales of other real estate owned 857 1,038 Purchases of premises and equipment (222) (212) - -------------------------------------------------------------------------------------- Net cash applied to investing activities (245,391) (210,550) - -------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 280,712 318,487 Proceeds from issuance of common stock, net of issuance costs 2,384 1,407 - -------------------------------------------------------------------------------------- Net cash provided by financing activities 283,096 319,894 - -------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 49,023 120,408 Cash and cash equivalents at January 1, 433,177 342,325 - -------------------------------------------------------------------------------------- Cash and cash equivalents at June 30, $ 482,200 $ 462,733 - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- Supplemental disclosures: Interest paid $ 23,508 $ 17,062 Income taxes paid $ 11,271 $ 6,641 - -------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------
See notes to interim consolidated financial statements. 5 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 1996 consolidated financial statements to conform to the 1997 presentations. Such reclassifications had no effect on the results of operations or shareholders' equity. The following is a summary of the significant accounting and reporting policies used in preparing the interim consolidated financial statements. NATURE OF OPERATIONS The Company is a bank holding company whose principal subsidiary is Silicon Valley Bank (the "Bank"), a California-chartered bank with headquarters in Santa Clara, California. The Bank maintains regional banking offices in Northern and Southern California, and additionally has loan offices in Colorado, Georgia, Maryland, Massachusetts, Oregon, Texas, and Washington. The Bank serves emerging growth and middle-market companies in specific 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 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 June 30, 1997, the results of its operations for the three and six month periods ended June 30, 1997 and June 30, 1996, and the results of its cash flows for the six month periods ended June 30, 1997 and June 30, 1996. The December 31, 1996 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 1996 Annual Report on Form 10-K. The results of operations for the three and six month periods ended June 30, 1997 may not necessarily be indicative of the Company's operating results for the full year. 6 SILICON VALLEY BANCSHARES AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) BASIS OF FINANCIAL STATEMENT PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and judgments that affect the reported amounts of assets and liabilities as of the balance sheet date and the results of operations for the period. Actual results could differ from those estimates. 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 $307,000 and $341,000 at June 30, 1997 and December 31, 1996, 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. 7 SILICON VALLEY BANCSHARES AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share is calculated using weighted-average shares, including the dilutive effect of stock options outstanding during the period. Weighted-average shares outstanding were 10,081,715 and 10,053,481 for the three and six month periods ended June 30, 1997 and 9,665,820 and 9,607,069 for the three and six month periods ended June 30, 1996. Fully diluted earnings per common and common equivalent share were approximately equal to primary earnings per common and common equivalent share for the three and six month periods ended June 30, 1997 and June 30, 1996. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings per Share." SFAS No. 128 establishes standards for computing and reporting earnings per share (EPS) and applies to entities with publicly held common stock or financial instruments that are potentially convertible into publicly held common stock. This statement supersedes Accounting Principles Board (APB) Opinion No. 15, "Earnings per Share." The presentation of primary EPS, as required by APB Opinion No. 15, is replaced with a presentation of basic EPS, which is defined in SFAS No. 128. In addition, dual presentation of basic EPS and diluted EPS, as defined in SFAS No. 128, is required on the face of the income statement for all entities that have complex capital structures. Disclosure of a reconciliation between basic EPS and diluted EPS is also required. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if financial instruments or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to the fully diluted EPS computation required by APB Opinion No. 15. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. However, an entity is permitted to disclose pro forma EPS amounts computed using this statement in the notes to interim financial statements in periods prior to required adoption. 8 SILICON VALLEY BANCSHARES AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The pro forma EPS amounts, computed pursuant to the provisions of SFAS No. 128, for the three and six month periods ended June 30, 1997 and 1996 were as follows:
Three Months Ended June 30, Six Months Ended June 30, (Unaudited) (Unaudited) ------------------------------- ------------------------------- (Dollars and shares in thousands, Net Per Share Net Per Share except per share amounts) Income Shares Amount Income Shares Amount - ----------------------------------------------------------------------------------------------------------- 1997: BASIC EPS: Income available to common shareholders $6,779 9,581 $0.71 $12,969 9,538 $1.36 EFFECT OF DILUTIVE SECURITIES: Stock options outstanding - 500 - - 516 - - ----------------------------------------------------------------------------------------------------------- DILUTED EPS: Income available to common shareholders plus assumed conversions $6,779 10,081 $0.67 $12,969 10,054 $1.29 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- 1996: BASIC EPS: Income available to common shareholders $5,637 9,181 $0.61 $10,314 9,142 $1.13 EFFECT OF DILUTIVE SECURITIES: Stock options outstanding - 485 - - 465 - - ----------------------------------------------------------------------------------------------------------- DILUTED EPS: Income available to common shareholders plus assumed conversions $5,637 9,666 $0.58 $10,314 9,607 $1.07 - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure." SFAS No. 129 establishes standards for disclosing information about an entity's capital structure and applies to all entities. This statement is effective for financial statements issued for periods ending after December 15, 1997. Management does not believe that the adoption of this statement will have a material impact on the Company's consolidated financial position or results of operations. 9 SILICON VALLEY BANCSHARES AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 established standards 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." The only component of other comprehensive income currently applicable to the Company, as defined by SFAS No. 130, is the net unrealized gain or loss on available-for-sale investments. 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 statement of financial position. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997. Management does not believe that the adoption of this statement will have a material impact on the Company's consolidated financial position or results of operations. In June 1997, the 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 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 financial statements issued for periods beginning after December 15, 1997. Management does not believe that the adoption of this statement will have a material impact on the Company's consolidated financial position or results of operations. In January 1997, the Securities and Exchange Commission (SEC) approved amendments (Release No. 33-7386) to Regulations S-X and S-K regarding the disclosure requirements for derivative financial instruments, other financial instruments and derivative commodity instruments (collectively, "market risk sensitive instruments"). The amendments require enhanced disclosure of accounting policies for derivative financial instruments and derivative commodity instruments in the notes to the financial statements. In addition, the amendments expand existing disclosure requirements to include quantitative and qualitative information regarding the market risk inherent in market risk sensitive instruments. The required quantitative and qualitative information should be disclosed outside of the financial statements and related notes thereto. The accounting policies disclosure requirements are effective for all SEC registrants in filings that include financial statements issued for periods ending after June 15, 1997. As the Company's 1996 Annual Report on Form 10-K fully complied with the new disclosure requirements, no additional accounting policy disclosures are required during interim filings in 1997. The quantitative and qualitative information disclosure requirements regarding market risks are effective for all bank and thrift registrant filings which include annual financial statements issued for periods ending after June 15, 1997. Management does not believe that the adoption of the amendments will have a material impact on the Company's consolidated financial position or results of operations. 10 SILICON VALLEY BANCSHARES AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 2. LOANS The detailed composition of loans is presented in the following table: June 30, December 31, 1997 1996 (Dollars in thousands) (Unaudited) - ----------------------------------------------------------------------------- Commercial $ 925,834 $755,699 Real estate term 40,135 44,475 Real estate construction 35,927 27,540 Consumer and other 36,316 35,778 - ----------------------------------------------------------------------------- Total loans (1) $1,038,212 $863,492 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- (1) Net of unearned income of $7,533 and $5,658 at June 30, 1997 and December 31, 1996, respectively. 3. ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses for the three and six month periods ended June 30, 1997 and 1996 was as follows:
Three Months Ended June 30, Six Months Ended June 30, (Unaudited) (Unaudited) --------------------------- -------------------------- (Dollars in thousands) 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------- Beginning balance $36,400 $30,200 $32,700 $29,700 Provision for loan losses 2,618 2,065 5,966 3,588 Loans charged off (2,663) (4,056) (3,203) (5,695) Recoveries 945 791 1,837 1,407 - --------------------------------------------------------------------------------------------- Balance at June 30, $37,300 $29,000 $37,300 $29,000 - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
The aggregate recorded investment in loans for which impairment has been determined in accordance with SFAS No. 114 totaled $15.2 million and $23.5 million at June 30, 1997 and June 30, 1996, respectively. Allocations of the allowance for loan losses related to impaired loans totaled $5.6 million at June 30, 1997 and $7.9 million at June 30, 1996. Average impaired loans for the second quarter of 1997 and 1996 totaled $17.5 million and $25.7 million, respectively. 11 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 trends which may affect the Company's future results. Such 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 the Company's 1996 Annual Report on Form 10-K. Certain reclassifications have been made to the Company's 1996 consolidated financial statements to conform to the 1997 presentations. Such reclassifications had no effect on the results of operations or shareholders' equity. EARNINGS SUMMARY The Company reported net income of $6.8 million, or $0.67 per share, for the second quarter of 1997, compared with net income of $5.6 million, or $0.58 per share, for the second quarter of 1996. Net income totaled $13.0 million, or $1.29 per share, for the six months ended June 30, 1997, versus $10.3 million, or $1.07 per share, for the respective 1996 period. The annualized return on average assets (ROA) was 1.3% in the second quarter of 1997 versus 1.5% in the second quarter of 1996. The annualized return on average equity (ROE) for the second quarter of 1997 was 18.7%, compared to 19.6% in the 1996 second quarter. For the first six months of 1997, ROA was 1.3% and ROE was 18.4% versus 1.4% and 18.4%, respectively, for the comparable prior year period. The increase in net income during the three and six month periods ended June 30, 1997, as compared with the prior year respective periods, resulted primarily from growth in net interest 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 six month periods ended June 30, 1997 and 1996, and are discussed in more detail below.
Three Months Ended June 30, Six Months Ended June 30, (Unaudited) (Unaudited) --------------------------- -------------------------- (Dollars in thousands) 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------- Net interest income $27,082 $20,866 $50,939 $41,139 Provision for loan losses 2,618 2,065 5,966 3,588 Noninterest income 2,977 3,554 7,807 5,387 Noninterest expense 15,754 12,960 30,420 25,748 - --------------------------------------------------------------------------------------------- Income before income taxes 11,687 9,395 22,360 17,190 Income tax expense 4,908 3,758 9,391 6,876 - --------------------------------------------------------------------------------------------- Net income $ 6,779 $ 5,637 $12,969 $10,314 - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
12 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 six month periods ended June 30, 1997 and 1996, respectively. 13
- ---------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES, RATES AND YIELDS - ---------------------------------------------------------------------------------------------------------------------------- For the three months ended June 30, ---------------------------------------------------------------------------- 1997 1996 (Unaudited) (Unaudited) ---------------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Federal funds sold and securities purchased under agreement to resell (1) $ 267,789 $ 3,729 5.6% $ 279,286 $ 3,687 5.3% Investment securities: Taxable 609,413 9,206 6.1 362,881 5,036 5.6 Non-taxable (2) 15,208 302 8.0 6,307 156 9.9 Loans: Commercial 858,789 23,831 11.1 650,070 18,068 11.2 Real estate construction and term 74,192 1,892 10.2 75,503 2,185 11.6 Consumer and other 39,193 866 8.9 43,071 942 8.8 - --------------------------------------------- ------------------------------------ ------------------------------------- Total loans 972,174 26,589 11.0 768,644 21,195 11.1 - --------------------------------------------- ------------------------------------ ------------------------------------- Total interest-earning assets 1,864,584 39,826 8.6 1,417,118 30,074 8.5 - --------------------------------------------- ------------------------------------ ------------------------------------- Cash and due from banks 158,247 123,819 Allowance for loan losses (37,089) (30,773) Other real estate owned 1,249 4,009 Other assets 34,482 27,004 - --------------------------------------------- ------------ ------------- Total assets $2,021,473 $1,541,177 - --------------------------------------------- ------------ ------------- - --------------------------------------------- ------------ ------------- Funding sources: Interest-bearing liabilities: NOW deposits $ 12,953 60 1.9 $ 9,843 55 2.2 Regular money market deposits 357,781 2,411 2.7 312,512 2,112 2.7 Bonus money market deposits 812,674 9,081 4.5 575,053 6,322 4.4 Time deposits 104,651 1,086 4.2 67,932 664 3.9 - --------------------------------------------- ------------------------------------ ------------------------------------- Total interest-bearing liabilities 1,288,059 12,638 3.9 965,340 9,153 3.8 Portion of noninterest-bearing funding sources 576,525 451,778 - --------------------------------------------- ------------------------------------ ------------------------------------- Total funding sources 1,864,584 12,638 2.7 1,417,118 9,153 2.6 - --------------------------------------------- ------------------------------------ ------------------------------------- Noninterest-bearing funding sources: Demand deposits 575,726 449,636 Other liabilities 11,903 10,463 Shareholders' equity 145,785 115,738 Portion used to fund interest-earning assets (576,525) (451,778) - --------------------------------------------- ------------ ------------- Total liabilities and shareholders' equity $2,021,473 $1,541,177 - --------------------------------------------- ------------ ------------- - --------------------------------------------- ------------ ------------- Net interest income and margin $27,188 5.9% $20,921 5.9% - --------------------------------------------- ------------ ------- ----------- ------- - --------------------------------------------- ------------ ------- ----------- ------- Memorandum: Total deposits $1,863,785 $1,414,976 - --------------------------------------------- ------------ ------------- - --------------------------------------------- ------------ -------------
(1) Includes average interest-bearing deposits in other financial institutions of $315 and $418 for the three months ended June 30, 1997 and 1996, respectively. (2) Interest income on non-taxable investments is presented on a fully taxable-equivalent basis using the federal statutory rate of 35% in 1997 and 1996. The tax equivalent adjustments were $106 and $55 for the three months ended June 30, 1997 and 1996, respectively. 14
- ---------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES, RATES AND YIELDS - ---------------------------------------------------------------------------------------------------------------------------- For the six months ended June 30, ---------------------------------------------------------------------------- 1997 1996 (Unaudited) (Unaudited) ---------------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Federal funds sold and securities purchased under agreement to resell (1) $ 257,119 $ 6,965 5.5% $ 244,294 $ 6,508 5.4% Investment securities: Taxable 597,801 17,747 6.0 330,977 9,214 5.6 Non-taxable (2) 14,519 579 8.0 6,218 311 10.1 Loans: Commercial 806,457 44,210 11.1 628,884 35,998 11.5 Real estate construction and term 72,802 3,606 10.0 73,820 4,359 11.9 Consumer and other 38,396 1,709 9.0 43,097 1,943 9.1 - --------------------------------------------- ------------------------------------ ------------------------------------- Total loans 917,655 49,525 10.9 745,801 42,300 11.4 - --------------------------------------------- ------------------------------------ ------------------------------------- Total interest-earning assets 1,787,094 74,816 8.4 1,327,290 58,333 8.8 - --------------------------------------------- ------------------------------------ ------------------------------------- Cash and due from banks 159,735 127,408 Allowance for loan losses (36,110) (30,399) Other real estate owned 1,544 4,464 Other assets 34,693 27,998 - --------------------------------------------- ------------ ------------- Total assets $1,946,956 $1,456,761 - --------------------------------------------- ------------ ------------- - --------------------------------------------- ------------ ------------- Funding sources: Interest-bearing liabilities: NOW deposits $ 13,789 129 1.9 $ 10,961 126 2.3 Regular money market deposits 337,786 4,519 2.7 304,114 4,092 2.7 Bonus money market deposits 766,875 17,042 4.5 516,290 11,582 4.5 Time deposits 98,074 1,984 4.1 66,101 1,285 3.9 - --------------------------------------------- ------------------------------------ ------------------------------------- Total interest-bearing liabilities 1,216,524 23,674 3.9 897,466 17,085 3.8 Portion of noninterest-bearing funding sources 570,570 429,824 - --------------------------------------------- ------------------------------------ ------------------------------------- Total funding sources 1,787,094 23,674 2.7 1,327,290 17,085 2.6 - --------------------------------------------- ------------------------------------ ------------------------------------- Noninterest-bearing funding sources: Demand deposits 574,408 435,052 Other liabilities 13,658 11,280 Shareholders' equity 142,366 112,963 Portion used to fund interest-earning assets (570,570) (429,824) - --------------------------------------------- ------------ ------------- Total liabilities and shareholders' equity $1,946,956 $1,456,761 - --------------------------------------------- ------------ ------------- - --------------------------------------------- ------------ ------------- Net interest income and margin $51,142 5.8% $41,248 6.3% - --------------------------------------------- ------------ ------- ----------- ------- - --------------------------------------------- ------------ ------- ----------- ------- Memorandum: Total deposits $1,790,932 $1,332,518 - --------------------------------------------- ------------ ------------- - --------------------------------------------- ------------ -------------
(1) Includes average interest-bearing deposits in other financial institutions of $323 and $310 for the six months ended June 30, 1997 and 1996, respectively. (2) Interest income on non-taxable investments is presented on a fully taxable-equivalent basis using the federal statutory rate of 35% in 1997 and 1996. The tax equivalent adjustments were $203 and $109 for the six months ended June 30, 1997 and 1996, respectively. 15 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 1997 and 1996.
1997 Compared to 1996 ------------------------------------------------------------------------- Three Months Ended June 30, Six Months Ended June 30, (Unaudited) (Unaudited) --------------------------------- ------------------------------------- Increase (Decrease) Increase (Decrease) Due to Change in Due to Change in --------------------------------- ------------------------------------- (Dollars in thousands) Volume Rate Total Volume Rate Total - ---------------------------------------------------------------------------------------------------------------------------- Interest income: Federal funds sold and securities purchased under agreement to resell $ (150) $ 192 $ 42 $ 329 $ 128 $ 457 Investment securities 3,903 413 4,316 8,208 593 8,801 Loans 5,625 (231) 5,394 9,158 (1,933) 7,225 - ---------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in interest income 9,378 374 9,752 17,695 (1,212) 16,483 - ---------------------------------------------------------------------------------------------------------------------------- Interest expense: NOW deposits 15 (10) 5 25 (22) 3 Regular money market deposits 311 (12) 299 439 (12) 427 Bonus money market deposits 2,673 86 2,759 5,537 (77) 5,460 Time deposits 383 39 422 644 55 699 - ---------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in interest expense 3,382 103 3,485 6,645 (56) 6,589 - ---------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net interest income $5,996 $ 271 $6,267 $11,050 $(1,156) $ 9,894 - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
Net interest income, on a fully taxable-equivalent basis, totaled $27.2 million for the second quarter of 1997, an increase of $6.3 million, or 30.0%, from the $20.9 million total for the second quarter of 1996. The increase in net interest income was the result of a $9.8 million, or 32.4%, increase in interest income, offset by a $3.5 million, or 38.1%, increase in interest expense over the comparable prior year period. The $9.8 million increase in interest income for the second quarter of 1997, as compared to the second quarter of 1996, was the result of a $9.4 million favorable volume variance combined with a $0.4 million favorable rate variance. The favorable volume variance resulted from a $447.5 million, or 31.6%, 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 and consisted of an increase in both loans and investment securities. The growth in average loans for the 1997 second quarter, which were up $203.5 million, or 26.5%, compared to the second quarter of 1996, was widely distributed throughout the loan portfolio. This diversified growth was evidenced by increased average loan balances in many of the Company's market niches, recently developed products and loan offices opened by the Company during the past few years. Average investment securities for the second quarter of 1997 increased $255.4 million, or 69.2%, over the respective prior year period, as excess funds generated as a result of the aforementioned 16 deposit growth having exceeded the growth in loans were invested in U.S. agencies securities, U.S. Treasury securities, mortgage-backed securities, municipal securities, and commercial paper. The nature of this growth in the investment portfolio reflected a continuation of Management's recent actions to both increase the portfolio of longer-term investment securities in an effort to obtain available higher yields, as well as to further diversify the Company's portfolio of short-term investments in response to a significant increase in liquidity. Average federal funds sold and securities purchased under agreement to resell decreased $11.5 million, or 4.1%, in the second quarter of 1997 as compared to the 1996 second quarter. Interest income for the second quarter of 1997 increased $0.4 million from the comparable prior year period due to a favorable rate variance. The overall increase in the yield on average interest-earning assets of approximately 10 basis points for the second quarter of 1997, as compared to the 1996 second quarter, was primarily centered in investment securities, as the yield on average investment securities increased largely due to a shift in the mix of the investment portfolio towards higher-yielding longer-term investment securities. Total interest expense in the 1997 second quarter increased $3.5 million from the second quarter of 1996. This increase was due to an unfavorable volume variance of $3.4 million and an unfavorable rate variance of $0.1 million. The unfavorable volume variance resulted from a $322.7 million, or 33.4%, increase in average interest-bearing liabilities in the second quarter of 1997 as compared with the second quarter of 1996. This increase was largely concentrated in the Company's bonus money market deposit product, which increased $237.6 million, or 41.3%, and was explained by high levels of client liquidity attributable to the continued strong inflow of investment capital into the venture capital community and into the public equity markets during 1996 and 1997. Net interest income, on a fully taxable-equivalent basis, totaled $51.1 million for the first six months of 1997, an increase of $9.9 million, or 24.0%, from the $41.2 million total for the first six months of 1996. The increase in net interest income was attributable to a $16.5 million, or 28.3%, increase in interest income, offset by a $6.6 million, or 38.6%, increase in interest expense over the comparable prior year period. The $16.5 million increase in interest income for the first half of 1997, as compared to the first half of 1996, was explained by a $17.7 million favorable volume variance, slightly offset by a $1.2 million unfavorable rate variance. The favorable volume variance was attributable to growth in average interest-earning assets, which increased $459.8 million, or 34.6%, from the prior year comparable period. The increase in average interest-earning assets resulted from strong growth in the Company's deposits, which were up $458.4 million, or 34.4%, from the comparable prior year period, and primarily consisted of an increase in both loans and investment securities. The growth in average loans was widely distributed among the Company's market niches, recently developed products and loan offices opened by the Company during the past few years. The growth in average investment securities reflected a continuation of Management's recent actions to both increase the portfolio of longer-term investment securities in an effort to obtain available higher yields, as well as to further diversify the Company's portfolio of short-term investments in response to a significant increase in liquidity. The unfavorable rate variance of $1.2 million was the result of an overall decrease in the yield on average interest-earning assets of approximately 40 basis points for the first six months of 1997, as compared to the respective prior year period. The decrease in the yield was centered in loans, 17 as the yield on average loans declined largely due to reduced pricing resulting from increased competition. Total interest expense for the first half of 1997 increased $6.6 million from the first half of 1996. This increase was primarily due to an unfavorable volume variance of $6.6 million which resulted from a $319.1 million, or 35.6%, increase in average interest-bearing liabilities for the first six months of 1997 over the comparable prior year period. The growth in average interest-bearing liabilities was largely concentrated in the Company's bonus money market deposit product, which increased $250.6 million, or 48.5%, and was explained by high levels of client liquidity attributable to the continued strong inflow of investment capital into the venture capital community and into the public equity markets during 1996 and 1997. 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 $2.6 million for the second quarter of 1997, a $0.6 million, or 26.8%, increase compared to the $2.1 million provision for the second quarter of 1996. The provision for loan losses increased $2.4 million, or 66.3%, to a total of $6.0 million for the first six months of 1997, versus $3.6 million for the comparable 1996 period. See "Financial Condition - Credit Quality and the Allowance for Loan Losses" for additional related discussion. NONINTEREST INCOME The following table summarizes the components of noninterest income for the three and six month periods ended June 30, 1997 and 1996:
Three Months Ended June 30, Six Months Ended June 30, (Unaudited) (Unaudited) --------------------------- ------------------------- (Dollars in thousands) 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------------------- Disposition of client warrants $1,082 $1,971 $4,245 $2,262 Letter of credit and foreign exchange income 1,110 855 2,090 1,734 Deposit service charges 407 445 772 841 Investment gains 44 - 45 1 Other 334 283 655 549 - ---------------------------------------------------------------------------------------------------------- Total noninterest income $2,977 $3,554 $7,807 $5,387 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
Noninterest income decreased $0.6 million, or 16.2%, to a total of $3.0 million in the second quarter of 1997 versus $3.6 million in the prior year second quarter. The decrease in noninterest income was largely due to a $0.9 million decrease in income from the disposition of client warrants, partially offset by a $0.3 million increase in letter of credit fees, foreign exchange fees and other trade finance income. Noninterest income totaled $7.8 million for the first six months of 1997, an increase of $2.4 million, or 44.9%, from the $5.4 million total in the comparable prior year period. This increase was largely due to a $2.0 million increase in income from the disposition of client warrants and a $0.4 million increase in letter of credit fees, foreign exchange fees and other trade finance income. 18 Income from the disposition of client warrants totaled $1.1 million in the second quarter of 1997 and $4.2 million for the first six months of 1997 versus $2.0 million and $2.3 million for the respective 1996 periods. 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. Interest rates, loan fees and collateral requirements on loans with warrants are similar to lending arrangements where warrants are not obtained. The timing and amount of income from the disposition of client warrants typically depends upon factors beyond the control of the Company, including the general condition of the public equity markets, and therefore cannot be predicted with any degree of accuracy and is likely to vary materially from period to period. During the first six months of 1997, as well as throughout 1996, 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, as well as evaluate and pursue new business opportunities, and was also offset by the need to increase 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 the execution of its business strategies. Letter of credit fees, foreign exchange fees and other trade finance income increased to a total of $1.1 million during the 1997 second quarter, and totaled $2.1 million for the first six months of 1997, compared to $0.9 million for the 1996 second quarter and $1.7 million for the first six months of 1996. The growth in this category of noninterest income reflects a concerted effort by Management to expand the penetration of trade finance-related products and services among the Company's client base, a large percentage of which provide products and services in international markets. Deposit service charges totaled $0.4 million and $0.8 million for the three and six month periods ended June 30, 1997, respectively, as well as for the three and six month periods ended June 30, 1996, respectively. 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. The Company realized a nominal gain on sales of investment securities for both the three and six month periods ended June 30, 1997. The Company reported no gains or losses on sales of investment securities in the second quarter of 1996 and realized a nominal gain on sales of investment securities during the first six months of 1996. All investment securities sold were classified as available-for-sale, and all sales were conducted as a normal component of the Company's asset/liability and liquidity management activities. Other noninterest income, which largely consists of service-based fee income, totaled $0.3 million and $0.7 million for the three and six month periods ended June 30, 1997, compared to $0.3 million and $0.5 million for the respective prior year periods. The increase during 1997 was primarily due to increased fees associated with cash management services provided to the Company's client base. 19 NONINTEREST EXPENSE Noninterest expense in the second quarter of 1997 totaled $15.8 million, a $2.8 million, or 21.6%, increase from the $13.0 million incurred in the comparable 1996 period. Noninterest expense totaled $30.4 million for the first six months of 1997, an increase of $4.7 million, or 18.1%, over the $25.7 million total for the comparable 1996 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 improved to 54.3% for the 1997 second quarter, down from 58.3% for the second quarter of 1996. The Company's efficiency ratio for the first six months of 1997 was 55.8%, versus 57.4% for the comparable 1996 period. The following tables present the detail of noninterest expense and the incremental contribution of each line item to the Company's efficiency ratio:
Three Months Ended June 30, ------------------------------------------------ 1997 1996 (Unaudited) (Unaudited) ------------------------ ---------------------- Percent of Percent of Adjusted Adjusted (Dollars in thousands) Amount Revenues Amount Revenues - ----------------------------------------------------------------------------------------------- Compensation and benefits $ 9,420 32.6% $ 7,557 33.7% Professional services 1,695 5.9 1,251 5.6 Business development and travel 1,026 3.5 725 3.2 Net occupancy expense 891 3.1 774 3.4 Furniture and equipment 763 2.6 939 4.2 Advertising and promotion 450 1.6 325 1.4 Postage and supplies 342 1.2 372 1.7 Telephone 330 1.1 291 1.3 Other 803 2.8 850 3.8 - ----------------------------------------------------------------------------------------------- Total, excluding cost of other real estate owned 15,720 54.3% 13,084 58.3% Cost of other real estate owned 34 (124) - ----------------------------------------------------------------------------------------------- Total noninterest expense $15,754 $12,960 - ----------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------
20
Six Months Ended June 30, ------------------------------------------------ 1997 1996 (Unaudited) (Unaudited) ------------------------ ---------------------- Percent of Percent of Adjusted Adjusted (Dollars in thousands) Amount Revenues Amount Revenues - ----------------------------------------------------------------------------------------------- Compensation and benefits $18,476 33.9% $15,345 34.7% Professional services 3,131 5.7 2,209 5.0 Business development and travel 1,986 3.6 1,278 2.9 Net occupancy expense 1,653 3.0 1,624 3.7 Furniture and equipment 1,424 2.6 1,592 3.6 Advertising and promotion 728 1.3 630 1.4 Postage and supplies 702 1.3 749 1.7 Telephone 634 1.2 601 1.4 Other 1,660 3.0 1,394 3.1 - ----------------------------------------------------------------------------------------------- Total, excluding cost of other real estate owned 30,394 55.8% 25,422 57.4% Cost of other real estate owned 26 326 - ----------------------------------------------------------------------------------------------- Total noninterest expense $30,420 $25,748 - ----------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------
Compensation and benefits expenses totaled $9.4 million in the second quarter of 1997, a $1.9 million, or 24.7%, increase over the $7.6 million incurred in the second quarter of 1996. For the first six months of 1997, compensation and benefits expenses totaled $18.5 million, an increase of $3.1 million, or 20.4%, over the $15.3 million total for the comparable 1996 period. The 1997 increase in compensation and benefits expenses was largely the result of an increase in the number of average full-time equivalent (FTE) staff employed by the Company. Average FTE were 402 and 397 for the three and six month periods ended June 30, 1997, compared to 355 and 353 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 recently developed as well as previously existing products 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 legal consultation, accounting and auditing, consulting, and directors fees, totaled $1.7 million in the second quarter of 1997, a $0.4 million, or 35.5%, increase from the $1.3 million incurred in the second quarter of 1996. Professional services expenses totaled $3.1 million for the first six months of 1997, an increase of $0.9 million, or 41.7%, versus $2.2 million for the comparable 1996 period. The increase in professional services expenses in 1997 primarily relates to the timing of accounting and auditing expenses, an increase in legal fees related to credit workouts and a $0.4 million gain in the 1996 second quarter related to a legal settlement. Business development and travel expenses totaled $1.0 million and $2.0 million for the three and six month periods ended June 30, 1997, an increase of $0.3 million, or 41.5%, and $0.7 million, or 55.4%, compared to the $0.7 million and $1.3 million totals for the comparable 1996 periods. The increase in business development and travel expenses reflects the Company's expansion during recent quarters into new geographic markets combined with continued business activities. 21 Net occupancy, furniture and equipment expenses totaled $1.7 million for both the second quarter of 1997 and 1996 and $3.1 million and $3.2 million for the first six months of 1997 and 1996, respectively. In July 1997, the Bank finalized an amendment to the original lease related to the Company's headquarters facility located at 3003 Tasman Drive in Santa Clara, California. The amendment provides for the leasing of additional premises, approximating 56,000 square feet, adjacent to the existing headquarters facility. Construction of the interior of the building is projected to begin shortly after the later of December 1, 1997 or the date that the current tenant vacates the premises. Assuming a build-out period of four months, the Bank could begin occupying the additional premises in April 1998, with additional future minimum rental payments of approximately $0.8 million for 1998, $1.1 million per year for 1999 through 2001, $1.2 million per year for 2002 through 2003, $1.3 million in the year 2004, and $0.6 million in the year 2005. The Company expects to incur other occupancy, furniture and equipment expenses in future periods associated with the construction, furnishing and maintenance of the additional premises, in addition to the future minimum rental payments detailed above. Other noninterest expenses totaled $0.8 million and $0.9 million for the second quarter of 1997 and 1996, respectively. For the first half of 1997, other noninterest expenses increased $0.3 million, or 19.1%, to a total of $1.7 million compared to $1.4 million for the first half of 1996. This increase was largely due to both the timing of reimbursements related to client services and an increase in costs associated with certain vendor provided services. Costs incurred during the second quarter of 1997 associated with other real estate owned (OREO) increased $0.2 million from the comparable prior year period, primarily due to a gain realized in the second quarter of 1996 on the sale of one property. For the first six months of 1997, OREO costs incurred decreased $0.3 million from the first half of 1996, primarily due to the write-down in the first quarter of 1996 of one property owned by the Company, partially offset by the aforementioned gain realized in the second quarter of 1996 on the sale of one property. The Company's net costs associated with OREO include: maintenance expenses, property taxes, marketing costs, net operating expense or income associated with income-producing properties, property write-downs, and gains or losses on the sales of such properties. INCOME TAXES The Company's effective tax rate was 42.0% in both the three and six month periods ended June 30, 1997, compared to 40.0% in the comparable prior year periods. The increase 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 $2.2 billion at June 30, 1997 compared to $1.9 billion at December 31, 1996. FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL Federal funds sold and securities purchased under agreement to resell totaled $365.3 million at June 30, 1997, an increase of $55.0 million, or 17.7%, compared to the $310.3 million total at December 31, 1996. The balance of federal funds sold and securities purchased under agreement to resell at June 30, 1997 was significantly higher than the average balance for both the second quarter and the first half of 1997, and was attributable to the Company investing excess funds, 22 resulting from a combination near quarter end of strong growth in deposits coupled with a reduction of noninterest-bearing cash accounts, in these types of short-term, liquid investments. INVESTMENT SECURITIES Investment securities totaled $693.8 million at June 30, 1997. This represented a $68.8 million, or 11.0%, increase over the December 31, 1996 balance of $625.0 million. The increase in investment securities was related to the strong growth in the Company's total deposits during the first half of 1997, and was primarily centered in U.S. Treasury securities and mortgage-backed securities, partially offset by a decrease in U.S. agencies securities. This growth reflected a continuation of Management's recent actions to both increase the portfolio of longer-term investment securities in an effort to obtain available higher yields, as well as to further diversify the Company's portfolio of short-term investments in response to a significant increase in liquidity. LOANS Total loans, net of unearned income, at June 30, 1997 were in excess of $1.0 billion, a $174.7 million, or 20.2%, increase compared to the roughly $0.9 billion total at December 31, 1996. The increase in loans from the 1996 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, recently developed products and loan offices opened by the Company during the past few years. 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, earnings and growth. 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 $37.3 million at June 30, 1997, an increase of $4.6 million, or 14.1%, compared to the $32.7 million balance at December 31, 1996. This increase was due to $6.0 million in additional provisions to the allowance for loan losses, offset by net charge-offs of $1.4 million for the first six months of 1997. Gross charge-offs for the first six months of 1997 were $3.2 million and included charge-offs of $1.6 million related to one commercial credit. In 23 August 1997, the Company realized a $0.7 million recovery and a related reduction in nonperforming loans in excess of $3.0 million as a result of a sale of a portion of the underlying collateral in the above-mentioned commercial credit. In general, Management believes the allowance for loan losses is adequate as of June 30, 1997. However, future changes in circumstances, economic conditions or other factors could cause Management to increase or decrease the allowance for loan losses as deemed necessary. Nonperforming assets consist of loans that are past due 90 days or more but still accruing interest, loans on nonaccrual status and OREO. The table below sets forth certain relationships between nonperforming loans, nonperforming assets and the allowance for loan losses:
June 30, December 31, 1997 1996 (Dollars in thousands) (Unaudited) (Unaudited) - --------------------------------------------------------------------------------------- Nonperforming assets: Loans past due 90 days or more $ 85 $ 8,556 Nonaccrual loans 15,167 14,581 - --------------------------------------------------------------------------------------- Total nonperforming loans 15,252 23,137 OREO 1,136 1,948 - --------------------------------------------------------------------------------------- Total nonperforming assets $16,388 $25,085 - --------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------- Nonperforming loans as a percentage of total loans 1.5% 2.7% OREO as a percentage of total assets 0.1% 0.1% Nonperforming assets as a percentage of total assets 0.7% 1.3% Allowance for loan losses: $37,300 $32,700 As a percentage of total loans 3.6% 3.8% As a percentage of nonaccrual loans 245.9% 224.3% As a percentage of nonperforming loans 244.6% 141.3%
Nonperforming loans totaled $15.3 million, or 1.5% of total loans, at June 30, 1997. This represented a decrease of $7.9 million, or 34.1%, compared to $23.1 million, or 2.7% of total loans, at December 31, 1996. The decrease from the prior year end was primarily due to the first quarter 1997 payoff by the Export-Import Bank of the U.S. of one credit in excess of $8.0 million that was more than 90 days past due as of December 31, 1996. In addition to the loans disclosed in the foregoing analysis, Management has identified four loans with principal amounts aggregating approximately $10.0 million, that, on the basis of information known by Management as of June 30, 1997, were judged to have a higher than normal risk of becoming nonperforming. The Company is not aware of any other loans at June 30, 1997 where known information about possible problems of the borrower casts serious doubts about the ability of the borrower to comply with the loan repayment terms. OREO totaled $1.1 million at June 30, 1997, a decrease of $0.8 million, or 41.7%, from the $1.9 million balance at December 31, 1996. The OREO balance at June 30, 1997 was composed of two properties, each consisting of multiple undeveloped lots, and each acquired prior to June 1993. The decrease in the OREO balance during the first six months of 1997 resulted from sales of lots related to one of the aforementioned properties. 24 DEPOSITS Total deposits were $2.1 billion at June 30, 1997, an increase of $280.7 million, or 15.8%, from the prior year-end total of $1.8 billion. Although each category of the Company's deposit portfolio experienced growth during the first half of 1997, the largest portion of this increase was in the Company's bonus money market deposit product, which increased $211.7 million, or 28.0%, to $1.0 billion at June 30, 1997. The increase in the Company's bonus money market deposit product was explained by high levels of client liquidity attributable to the continued strong inflow of investment capital into the venture capital community and into the public equity markets during 1996 and 1997. 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. Company policy guidelines provide that liquid assets as a percentage of total deposits should not fall below 20.0%. At June 30, 1997, the Company's liquid assets as a percentage of total deposits were 49.8%, compared to 47.3% at December 31, 1996. These ratios are well in excess of the Company's minimum policy guidelines and were largely due to increased balances in short-term, liquid investment securities that primarily resulted from the strong growth in deposits experienced by the Company, which exceeded the growth in loans, during 1996 and 1997. 25 CAPITAL RESOURCES Management seeks to maintain adequate capital to support anticipated asset growth and credit risks, and to ensure that the Company is in compliance with all regulatory capital guidelines. The primary source of new capital for the Company has been the retention of earnings. Aside from current earnings, an additional source of new capital for the Company has been the issuance of common stock under the Company's employee benefit plans, including the Company's stock option plans, employee stock ownership plan and employee stock purchase plan. Shareholders' equity totaled $150.7 million at June 30, 1997, an increase of $15.3 million from the $135.4 million balance at December 31, 1996. This increase resulted from net income of $13.0 million combined with capital generated through the Company's employee benefit plans of $4.5 million, offset by a decrease in the after-tax net unrealized gain on available-for-sale investments of $2.2 million from the prior year end, as the Company sold common stock acquired from the 1996 exercise of a warrant in one client of the Bank and realized approximately $1.8 million in after-tax warrant-related income in the first quarter of 1997. The Company is 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 requirements are 10.0% and 6.0% of risk-weighted assets and certain off-balance sheet items, respectively, 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 risk-based capital ratios were in excess of regulatory guidelines for a well capitalized depository institution as of June 30, 1997 and December 31, 1996. Capital ratios for the Company are set forth below: - -------------------------------------------------------------------------- June 30, December 31, 1997 1996 (Unaudited) - -------------------------------------------------------------------------- Total risk-based capital ratio 11.6% 11.5% Tier 1 risk-based capital ratio 10.3% 10.2% Tier 1 leverage ratio 7.4% 7.7% - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- The improvement in the Company's total risk-based capital ratio and Tier 1 risk-based capital ratio from December 31, 1996 to June 30, 1997 was attributable to an increase in Tier 1 capital, partially offset by an increase in the lower risk-weighted asset categories primarily due to increased balances in short-term, liquid investment securities resulting from deposit growth exceeding loan growth during the first half of 1997. The increase in Tier 1 capital was largely due to the aforementioned net income and capital generated through the Company's employee benefit plans during the first six months of 1997. The decrease in the Company's Tier 1 leverage ratio from December 31, 1996 to June 30, 1997 primarily resulted from an increase in average total assets during the first six months of 1997. 26 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS There were no legal proceedings requiring disclosure pursuant to this item pending at June 30, 1997, 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 The Annual Meeting of Shareholders was held on April 17, 1997. Each of the persons named in the Proxy Statement as a nominee for director was elected; the Silicon Valley Bancshares 1997 Equity Incentive Plan and options previously granted thereunder were ratified and approved; and the appointment of KPMG Peat Marwick LLP as the Company's independent auditors for 1997 was ratified. The following are the voting results on each of these matters: Election of Directors In Favor Withheld - --------------------- -------- -------- Gary K. Barr 8,424,675 28,543 James F. Burns, Jr. 8,424,805 28,413 John C. Dean 8,424,888 28,330 David M. deWilde 8,424,888 28,330 Clarence J. Ferrari, Jr., Esq. 8,424,888 28,330 Daniel J. Kelleher 8,340,583 112,635 James R. Porter 8,424,888 28,330 Michael Roster, Esq. 8,424,688 28,530 Ann R. Wells 8,342,253 110,965 Other Matters In Favor Opposed Abstained Non-Votes - ------------- -------- ------- --------- --------- Ratify and approve the Silicon Valley Bancshares 1997 Equity Incentive Plan and options previously granted thereunder 4,731,655 1,882,726 25,214 2,895,230 Ratification of the appointment of KPMG Peat Marwick LLP as the Company's independent auditors for 1997 8,421,267 16,107 15,844 - 27 ITEM 5 - OTHER INFORMATION None. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: 3.2 Bylaws of the Company, as amended 10.17(a) First amendment to lease outlined in Exhibit 10.17 incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 10.34 Silicon Valley Bancshares 1997 Equity Incentive Plan (b) REPORTS ON FORM 8-K: No reports on Form 8-K were filed by the Company during the quarter ended June 30, 1997. 28 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: August 13, 1997 /s/ Christopher T. Lutes ------------------------------------- Christopher T. Lutes Senior Vice President and Controller (Principal Accounting Officer) 29 EX-3.2 2 EXH 3.2 BYLAWS BYLAWS OF SILICON VALLEY BANCSHARES AMENDMENT AND RESTATEMENT EFFECTIVE AS OF THE DATE OF OBTAINING SHAREHOLDER APPROVAL ON APRIL 18, 1996 ARTICLE I Offices Section 1.1. PRINCIPAL EXECUTIVE OFFICE. The principal executive office of this corporation (the "Corporation") is hereby fixed and located at 3000 Lakeside Drive, Santa Clara, California. The Board of Directors (the "Board") is hereby granted full power and authority to change the principal executive office from one location to another. Any such change shall be noted in the Bylaws by the Secretary, opposite this Section, or this Section may be amended to state the new location. Section 1.2. OTHER OFFICES. Other branch offices or places of business may at any time be established by the Board at any place or places deemed appropriate. ARTICLE II Meetings of Shareholders Section 2.1. PLACE OF MEETINGS. All annual or other meetings of shareholders shall be held at the principal executive office of the Corporation, or at any other place which may be designated either by the Board or by the written consent of all persons entitled to vote thereat given either before or after the meeting and filed with the Secretary of the Corporation. Section 2.2. ANNUAL MEETINGS. (a) TIME. The Annual Meeting of shareholders shall be held each year on a date and at a time designated by the Board. The date so designated shall be within fifteen months after the last Annual Meeting. (b) BUSINESS TO BE TRANSACTED. At each Annual Meeting, directors shall be elected, reports of the affairs of the Corporation shall be considered and any other business may be transacted which is within the powers of the shareholders. (c) NOTICE. Written notice of each Annual Meeting shall be given to each shareholder entitled to vote, either personally or by first class mail or other means of written communication, charges prepaid, addressed to such shareholder at such shareholder's address appearing on the books of the Corporation, or given by the shareholder to the Corporation for the purpose of notice, or if no such address appears or is given, at the place where the principal executive office of the Corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. If any notice or report addressed to the shareholder at the address of such shareholder appearing on the books of the Corporation is returned to the Corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the Corporation for a period of one year from the date of the giving of the notice or report to all other shareholders. If a shareholder gives no address, notice shall be deemed to have been given to the shareholder if sent by mail or other means of written communication addressed to the place where the principal executive office of the Corporation is located, or if published at least once in some newspaper of general circulation in the county in which the principal executive office is located. All notices shall be given to each shareholder entitled thereto not less than ten (10) days nor more than sixty (60) days before each Annual Meeting. Any such notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any such notice in accordance with the foregoing provisions, executed by the Secretary, Assistant Secretary or any transfer agent of the Corporation shall be prima facie evidence of the giving of the notice. Such notices shall specify: (i) the place, the date and the hour of each meeting; (ii) those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders; (iii) if directors are to be elected, the names of nominees intended at the time of the notice to be presented by the Board for election; (iv) the general nature of a proposal, if any, to take action with respect to approval of: (a) a contract or other transaction with an interested director, (b) amendment of the Articles of Incorporation, (c) a reorganization of the Corporation as defined in Section 181 of the California General Corporation Law, (d) a voluntary dissolution of the Corporation, or (e) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any; and (v) such other matters, if any, as may be required by law. Section 2.3. SPECIAL MEETINGS. Special meetings of the shareholders, for the purpose of taking any action permitted by the shareholders under the California General Corporation Law and the Articles of Incorporation of the Corporation, may be called at any time by the Chairman of the Board or the President, or by the Board, or by one or more shareholders holding not less than ten percent (10%) of the votes entitled to be cast at the meeting. Upon request in writing that a special meeting of shareholders be called for any purpose, directed to the Chairman of the Board, President, Vice President or Secretary by any person (other than the Board) entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after receipt of the request. Except in special cases where other express provision is made by statute, notice of special meetings shall be given in the same manner as for annual meetings of shareholders. In addition to the matters required by items (i), and if applicable, (ii) and (iii) of the preceding Section, notice of any special meeting shall specify the general nature of the business to be transacted, and no other business may be transacted at such meeting. Section 2.4. QUORUM. The presence in person or by proxy of the persons entitled to vote a majority of the voting shares at any meeting shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 2.5. ADJOURNED MEETINGS AND NOTICE THEREOF. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but in the absence of a quorum no other business may be transacted at such meeting, except as provided in Section 2.4 above. When any shareholders' meeting, either annual or special, is adjourned for forty-five (45) days or more, or if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. Except as provided above, it shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement of the time and place thereof at the meeting at which such adjournment is taken. Section 2.6. VOTING. Unless a record date for voting purposes be fixed as provided in Section 5.1 of these Bylaws, then, subject to the provisions of Sections 702 through 704 of the California Corporations Code (relating to voting of shares held by a fiduciary, in the name of a corporation or in joint ownership), only persons in whose names shares entitled to vote stand on the stock records of the Corporation at the close of business on the business day next preceding the day on which notice of the meeting is given or if such notice is waived, at the close of business on the business day next preceding the day on which the meeting of shareholders is held, shall be entitled to vote at such meeting, and such day shall be the record date for such meeting. Such vote may be oral or by ballot; provided, however, that all elections for directors must be by ballot upon demand made by a shareholder at any election and before the voting begins. If a quorum is present, except with respect to election of directors, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the California General Corporation Law or the Articles of Incorporation. Subject to the requirements of the next sentence, every shareholder entitled to vote at any election for directors shall have the right to cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected, multiplied by the number of votes to which such shareholder's shares are entitled, or to distribute his or her votes on the same principal among as many candidates as the shareholder shall think fit. No shareholder shall be entitled to cumulate votes unless the name of the candidate or candidates for whom the votes would be cast has been placed in nomination prior to the voting and at least one shareholder has given notice at the meeting, prior to the voting, of the shareholder's intention to cumulate his or her votes. The candidates receiving the highest number of affirmative votes of shares entitled to be voted for them, up to the number of directors to be elected, shall be elected. Votes against the directors and votes withheld shall have no legal effect. Section 2.7. VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy signs a waiver of notice or a consent to the holding of the meeting, or an approval of the minutes thereof. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in Section 2.2(c)(iv) of these Bylaws, the waiver of notice or consent shall state the general nature of the proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of the meeting if that objection is expressly made at the meeting. Section 2.8. ACTION WITHOUT MEETING. (a) ELECTION OF DIRECTORS. Directors may be elected without a meeting by a consent in writing, setting forth the action so taken, signed by all of the persons who would be entitled to vote for the election of directors, provided that, without notice, except as hereinafter set forth, a director may be elected at any time to fill a vacancy (other than one created by removal) not filled by the directors, by the written consent of persons holding a majority of the outstanding shares entitled to vote for the election of directors. (b) OTHER ACTION. Any other action which, under any provision of the California General Corporation Law, may be taken at a meeting of the shareholders, may be taken without a meeting, and without prior notice except as hereinafter set forth, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Unless the consents of all shareholders entitled to vote have been solicited in writing: (i) Notice of any proposed shareholder approval of (a) a contract or other transaction with an interested director, (b) indemnification of an agent of the Corporation as authorized by Section 3.17 of these Bylaws, (c) a reorganization of the Corporation as defined in Section 181 of the California General Corporation Law, or (d) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any, without a meeting by less than unanimous written consent, shall be given at least ten (10) days before the consummation of the action authorized by such approval; and (ii) Prompt notice shall be given at the taking of any other corporate action approved by shareholders without a meeting by less than unanimous written consent, to those shareholders entitled to vote who have not consented in writing. Such notices shall be given as provided in Section 2.2(c) of these Bylaws. Unless, as provided in Section 5.1 of these Bylaws, the Board has fixed a record date for the determination of shareholders entitled to notice of and to give such written consent, the record date for such determination shall be the day on which the first written consent is given. All such written consents shall be filed with the Secretary of the Corporation. Any shareholder giving a written consent, or the shareholder's proxyholders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxyholders, may revoke the consent by a writing received by the Corporation prior to the time that written consents by the number of shares required to authorize the proposed action have been filed with the Secretary of the Corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the Corporation. Section 2.9. PROXIES. Every person entitled to vote or execute consents shall have the right to do so either in person or by one or more agents authorized by a written proxy. A proxy may be in the form of a written authorization signed or an electronic transmission authorized by a shareholder or the shareholder's agent. A proxy may be transmitted by an oral telephonic transmission if it is submitted with information from which it may be determined that the proxy was authorized by the shareholder or the shareholder's agent. Any proxy duly executed is not revoked and continues in full force and effect until (i) an instrument revoking it or a duly executed proxy bearing a later date is filed with the Secretary of the Corporation prior to the vote pursuant thereto, (ii) the person executing the proxy attends the meeting and votes in person, or (iii) written notice of the death or incapacity of the maker of such proxy is received by the Corporation before the vote pursuant thereto is counted; provided, that no such proxy shall be valid after the expiration of eleven (11) months from the date of its execution, unless the person executing it specifies therein the length of time for which said proxy is to continue in force. Section 2.10. INSPECTORS OF ELECTION. In advance of any meeting of shareholders the Board may appoint inspectors of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the Chairman of any meeting of shareholders may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election (or persons to replace those who so fail or refuse) at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. The duties of the inspectors shall be as prescribed in Section 707 of the California General Corporation Law and shall include: (i) determining the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; (ii) receiving votes, ballots or consents; (iii) hearing and determining all challenges and questions in any way arising in connection with the right to vote; (iv) counting and tabulating all votes or consents; (v) determining when the polls shall close; (vi) determining the result; and (vii) such other acts as may be proper to conduct the election or vote with fairness to all shareholders. In the determination of the validity and effect of proxies, the dates contained on the forms of proxy shall presumptively determine the order of execution on the proxies, regardless of postmark dates on the envelopes in which they are mailed. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. Section 2.11. NOMINATION OF DIRECTORS. Nominations for election of members of the Board may be made by the Board or by any shareholder of any outstanding class of capital stock of the Corporation entitled to vote for the election of directors. Notice of intention to make any nominations (other than for persons named in the notice of the meeting at which such nomination is to be made) shall be made in writing and shall be delivered or mailed to the Secretary of the Corporation by the later of: the close of business twenty-one (21) days prior to any meeting of shareholders called for election of directors, or ten (10) days after the date of mailing notice of the meeting to shareholders. Such notification shall contain the following information to the extent known to the notifying shareholder: (i) the name and address of each proposed nominee; (ii) the principal occupation of each proposed nominee; (iii) the number of shares of capital stock of the Corporation owned by each proposed nominee; (iv) the name and residence address of the notifying shareholder; (v) the number of shares of capital stock of the Corporation owned by the notifying shareholder; and (vi) with the written consent of the proposed nominee, a copy of which shall be furnished with the notification, whether the proposed nominee has ever been convicted of or pleaded nolo contendere to any criminal offense involving dishonesty or breach of trust, filed a petition in bankruptcy or been adjudged bankrupt. The notice shall be signed by the nominating shareholder and by the nominee. Nominations not made in accordance herewith shall be disregarded by the Chairman of the meeting, and upon the Chairman's instructions, the inspectors of election shall disregard all votes cast for each such nominee. The restrictions set forth in this paragraph shall not apply to nomination of a person to replace a proposed nominee who has died or otherwise become incapacitated to serve as a director between the last day for giving notice hereunder and the date of election of directors if the procedure called for in this paragraph was followed with respect to the nomination of the proposed nominee. A copy of the preceding paragraph shall be set forth in the notice to shareholders of any meeting at which directors are to be elected. ARTICLE III Directors Section 3.1. POWERS. Subject to limitation of the Articles of Incorporation and of the California General Corporation Law as to action to be authorized or approved by the shareholders, and subject to the duties of directors as prescribed by the Bylaws, and subject to the rules and regulations as may be promulgated from time to time by applicable regulatory authorities, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be controlled by, the Board. Section 3.2 - NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of directors of the Corporation shall not be less than eight (8) nor more than fifteen (15) until changed by amendment of the Articles of Incorporation or by a bylaw amending this Section 3.2 duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote, provided that a proposal to reduce the authorized minimum number of directors below five cannot be adopted. The exact number of directors shall be fixed from time to time, within the limits specified in this Section 3.2: (i) by a resolution duly adopted by the Board; (ii) by a Bylaw or amendment thereof duly adopted by the vote of a majority of the outstanding shares entitled to vote; or (iii) by approval of the shareholders (as defined in Section 153 of the California General Corporation Law). No amendment may change the stated maximum number of authorized directors to a number greater than two times the stated minimum number of directors minus one. Subject to the foregoing provision for changing the number of directors, the number of directors of this Corporation has been fixed at nine (9). Section 3.3. ELECTION AND TERM OF OFFICE. The directors shall be elected at each annual meeting of shareholders, but if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose or by written consent in accordance with Section 2.8 of these Bylaws. All directors shall hold office until their respective successors are elected, subject to the California General Corporation Law and the provisions of these Bylaws with respect to vacancies on the Board. Section 3.4 [RESERVED]. Section 3.5. REMOVAL OF DIRECTORS. The entire Board or any individual director may be removed from office by a vote of shareholders holding a majority of the outstanding shares entitled to vote at an election of directors. A material breach of the Corporation's Code of Ethics or a director's failure to attend at least seventy-five percent (75%) of the Board meetings held during the director's term of office may constitute grounds for removal. However, unless the entire Board is removed, no individual director may be removed when the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of the director's most recent election were then being elected. An individual shall not stand for election or re-election to the Board if such individual will have attained the age of 75 years on or before the date of the shareholders' meeting where the individual would have been standing for election (or re-election). Section 3.6. VACANCIES. A vacancy in the Board shall be deemed to exist (i) in case of the death, resignation or removal of any director, (ii) if a director has been declared of unsound mind by order of court or convicted of a felony, (iii) if the authorized number of directors be increased, or (iv) if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting. Vacancies in the Board, except for a vacancy created by the removal of a director, may be filled by a majority of the remaining directors, though less than a quorum or by a sole remaining director, and each director so elected shall hold office until his or her successor is elected at an annual or a special meting of the shareholders. A vacancy in the Board created by the removal of a director may only be filled by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of the holders of all of the outstanding shares. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election by written consent (except to fill a vacancy created by removal) shall require the consent of holders of a majority of the outstanding shares entitled to vote. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of the Corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the Board accepts the resignation of a director tendered to take effect at a future time, the Board or the shareholders shall have the power to elect a successor to take office when the resignation is to become effective. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his or her term of office. Section 3.7. FREQUENCY AND PLACE OF MEETING. The Board shall hold a meeting at least once each calendar quarter. Regular meetings of the Board shall be held at any place and time which has been designated from time to time by resolution of the Board or by written consent of all members of the Board. In the absence of such designation, regular meetings shall be held at the principal executive office of the Corporation. Special meetings of the Board may be held either at a place so designated or at the principal executive office. Section 3.8. ORGANIZATIONAL MEETING. Immediately following each annual meeting of shareholders, the Board shall hold a regular meeting at the place of the annual meeting or at such other place as shall be fixed by the Board, for the purpose of organization, election of officers and the transaction of other business. Call and notice of such meetings are hereby dispensed with. Section 3.9. OTHER REGULAR MEETINGS. Other regular meetings of the Board shall be held at any place and time which has been designated from time to time by resolution of the Board or by written consent of all members of the Board. Notice of all such regular meetings of the Board is hereby dispensed with. Section 3.10. SPECIAL MEETINGS. Special meetings of the Board for any purpose or purposes may be called at any time by the Chairman of the Board, the President or by any two directors. Special meetings shall be held upon four days' notice by mail or other form of written communication, or 24 hours notice received personally, by telephone or by facsimile or comparable means of communication. Written notice of the time and place of special meetings shall be addressed to the director at the director's address as it is shown upon the records of the Corporation or, if it is not so shown on such records or is not readily ascertainable, at the place at which the meetings of the directors are regularly held. Any notice shall state the date, place and hour of the meeting and may state the general nature of the business to be transacted and that other business may be transacted at the meeting. Section 3.11. ACTION WITHOUT MEETING. Any action by the Board may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to the action. The written consent or consents shall be filed with the minutes of the proceedings of the Board and shall have the same force and effect as a unanimous vote of the directors. Section 3.12. ACTION AT A MEETING, QUORUM AND REQUIRED VOTE. Presence of a majority of the authorized number of directors at a meeting of the Board constitutes a quorum for the transaction of business, except as hereinafter provided. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. (Participation in a meeting as permitted in the preceding sentence constitutes presence in person at the meeting.) Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board, unless a greater number, or the same number after disqualifying one or more directors from voting, is required by law, by the Articles of Incorporation or by these Bylaws. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of a director or directors, provided that any action taken is approved by at least a majority of the required quorum for the meeting. Section 3.13. VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. The transactions of any meeting of the Board, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum is present and if, either before or after the meeting, each of the directors not present or who, though present, has prior to the meeting or at its commencement, protested the lack of proper notice: (i) signs a written waiver of notice or a consent to holding such meeting or an approval of the minutes thereof; or (ii) waives notice and withdraws his or her objection. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 3.14. ADJOURNMENT. A majority of the directors present at any directors' meeting, either regular or special, may adjourn to another time and place. Section 3.15. NOTICE OF ADJOURNMENT. If the meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of adjournment. Otherwise notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned. Section 3.16. FEES AND COMPENSATION. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the Board. Section 3.17. INDEMNIFICATION OF AGENTS OF THE CORPORATION; PURCHASE OF LIABILITY INSURANCE. (a) For the purposes of this Section: "agent" means any person who is or was a director, officer, employee or other agent of this Corporation, or is or was serving at the request of this Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise or was a director, officer, employee or agent of a foreign or domestic Corporation which was a predecessor corporation of this Corporation or of another enterprise at the request of such predecessor Corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "expenses" includes, without limitation, attorneys' fees and any expenses of establishing a right to indemnification under subdivision (d) or subdivision (e)(4) of this Section. (b) This Corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any proceeding (other than an action by or in the right of this Corporation) by reason of the fact that such person is or was an agent of this Corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with the proceeding if the person acted in good faith and in a manner the person reasonably believed to be in the best interests of this Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of the person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of this Corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. (c) This Corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action by or in the right of this Corporation to procure a judgment in its favor by reason of the fact that the person is or was an agent of this Corporation, against expenses actually and reasonably incurred by the person in connection with the defense or settlement of the action if the person acted in good faith, in a manner the person believed to be in the best interests of this Corporation and its shareholders. No indemnification shall be made under this subdivision (c): (1) In respect to any claim, issue or matter as to which the person shall have been adjudged to be liable to this Corporation and its shareholders, in the performance of the person's duty to this Corporation, unless and only to the extent that the court in which the proceeding is or was pending shall determine upon application that, in view of all the circumstances of this case, the person is fairly and reasonably entitled to indemnity for the expenses which the court shall determine. (2) Of amounts paid in settling or otherwise disposing of a pending action, without court approval. (3) Of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. (d) To the extent that an agent of this Corporation has been successful on the merits in defense of any proceedings referred to in subdivision (b) or (c) or in defense of any claim, issue or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith. (e) Except as provided in subdivision (d), any indemnification under this Section shall be made by this Corporation only if authorized in the specific case, upon a determination that indemnification of that agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in subdivision (b) or (c), by any of the following: (1) A majority vote of a quorum consisting of directors who are not parties to such proceeding. (2) If such a quorum of directors is not obtainable, by independent legal counsel in a written opinion. (3) Approval of the shareholders, with the shares owned by the person to be indemnified not being entitled to vote thereon. (4) The court in which the proceeding is or was pending upon application made by the Corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not the application by the agent, attorney or other person is opposed by the Corporation. (f) Expenses incurred in defending any proceeding may be advanced by this Corporation prior to the final disposition of the proceeding upon receipt of a written undertaking by or on behalf of the agent to repay such amount if it shall be determined ultimately that the agent is not entitled to be indemnified as authorized in this Section. (g) The indemnification provided by this Section shall not be deemed exclusive of any additional rights to indemnification that are authorized in the Articles of Incorporation. Nothing in this Section shall affect any right to indemnification to which persons other than the directors and officers may be entitled by contract or otherwise. (h) No indemnification or advance shall be made under this Section, except as provided in subdivision (d) or subdivision (e)(4) of this Section, in any circumstance where it appears: (1) That it would be inconsistent with a provision of the Articles of Incorporation, the Bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification. (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. (i) Upon a determination by the Board, this Corporation may purchase and maintain insurance on behalf of any agent of the Corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not this Corporation would have the power to indemnify the agent against such liability under the provisions of this Section. (j) This Section does not apply to any proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in that person's capacity as such, even though the person may also be an agent, as defined in subdivision (a) of this Section, of the Corporation. The Corporation shall have power to indemnify such a trustee, investment manager or other fiduciary to the extent permitted by subdivision (f) of Section 207 of the California General Corporation Law. Section 3.18. COMMITTEES. The Board may, by resolution or committee charter adopted by a majority of the authorized number of directors, designate one or more committees, each committee consisting of two or more directors, to serve at the pleasure of the Board. These committees may include, without limitation, an Executive Committee, an Audit Committee, a Stock Committee and any such other committees as the Board may deem appropriate. Any such committee, to the extent provided in the resolution of the Board or committee charter, may exercise those powers and responsibilities so designated, except that no committee shall be authorized to take action with respect to: (i) The approval of any action for which shareholder approval or approval of the outstanding shares is required. (ii) The filling of vacancies on the Board or in any committee. (iii) The amendment or repeal of Bylaws or the adoption of new Bylaws. (iv) The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable. (v) The appointment of other committees of the Board or the members thereof. (vi) A distribution, except at a rate, in a periodic amount or within a price range set forth in the Articles of Incorporation or as determined by the Board. ARTICLE IV Officers Section 4.1. OFFICERS. The Officers of the Corporation shall be a Chief Executive Officer, President, Secretary, Chief Financial Officer and, at the discretion of the Board, such other officers as may be deemed necessary ("Officers"). Any two or more Officer positions, except those of the President and Secretary, may be held by the same person. In appropriate circumstances, an Officer of the Corporation may be excluded by resolution of the Board or by a provision of the Bylaws from participation, other than in the capacity of a director if applicable, in major policymaking functions of the Corporation. Section 4.2. ELECTION. Except as otherwise provided in these Bylaws, the Officers of the Corporation shall be chosen by the Board, and each Officer shall be employed at will, unless employed for a determinate period of time pursuant to a written employment agreement approved by the Board, and shall have such authority and perform such duties as are provided in the Bylaws or as the Board may, from time to time, determine. Section 4.3. SUBORDINATE OFFICERS. The Corporation may have such subordinate officers as the business of the Corporation may require ("Subordinate Officers"), including one or more Vice Presidents, a Cashier, one or more Assistant Cashiers, Operations Officers and Managers. Subordinate Officers may be chosen by the Board, the Chief Executive Officer or the President, and such Officers and Subordinate Officers upon whom authority is conferred by the Board, the Chief Executive Officer or the President ("Authorized Officers"). Subordinate Officers shall be employed at will, unless employed for a determinate period of time pursuant to a written employment agreement approved by the Board, and shall have such authority and perform such duties as are provided in the Bylaws or as the Board, Chief Executive Officers, President or Authorized Officers may, from time to time, determine. Section 4.4. REMOVAL AND RESIGNATION. Any Officer may be removed, either with or without cause, by the Board, subject, in each case, to the rights, if any, of an Officer under any contract or employment. Any Subordinate Officer may be removed, with or without cause, by the Board, Chief Executive Officer, President or Authorized Officer, subject to such rights, if any, of a Subordinate Officer under a written employment agreement. Any Officer or Subordinate Officer may resign at any time by giving written notice to the Board or to the President, or to the Secretary of the Corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4.5. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in the Bylaws for regular appointments to such office. Section 4.6. CHAIRMAN OF THE BOARD; VICE-CHAIRMAN. The Executive Committee of the Board shall nominate the Chairman of the Board, subject to approval by the Board. The Chairman of the Board shall also serve as Chairman of the Executive Committee and shall serve in such capacities for a maximum of three consecutive one-year terms. The Chairman shall be an officer of the Board and shall, if present, preside at all meetings of the Board. The Chairman may exercise and perform such other powers and duties as may be from time to time be assigned by the Board or prescribed by the Bylaws. The Chairman shall not, however, be deemed an Officer of the Corporation. The Executive Committee of the Board shall nominate a Vice-Chairman of the Board, subject to approval by the Board. Any Vice-Chairman so approved may serve a maximum of three consecutive one-year terms. The Vice-Chairman shall have such powers and perform such duties as may be from time to time be assigned by the Board or the Chairman of the Board and shall preside at any meeting of the Board at which the Chairman is absent or otherwise unable to serve. The Vice-Chairman shall not be deemed an Officer of the Corporation. Section 4.7. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall, subject to the control of the Board, have general supervision, direction and control of the business and officers of the Corporation. The Chief Executive Officer shall exercise and perform such other powers and duties as may be from time to time assigned by the Board or prescribed by the Bylaws. Section 4.8. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board to the Chairman of the Board, the President shall preside at all meetings of the shareholders and at all meetings of the Board when the Chairman of the Board and the Vice-Chairman of the Board are absent or otherwise unable to serve. The President shall have the general powers and duties of management usually vested in the office of the President of a bank and shall have such other powers and duties as may be prescribed by law, the Board or the Bylaws. Section 4.9. VICE PRESIDENT. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board or, if not ranked, the Vice President designated by the Board, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board or the Bylaws. No Vice President shall preside over meetings of the shareholders or at meetings of the Board in the absence or disability of the President and Chairman of the Board unless the Vice President so serving is also a Director. Section 4.10. SECRETARY. The Secretary shall record or cause to be recorded, and shall keep or cause to be kept, at the principal executive office and such other place or places as the Board may order, a book of minutes of actions taken at all meetings of directors and shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors' meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. In the event of any meeting in Executive Session or otherwise if the Secretary is not present, an Acting Secretary shall be designated by the Chairman of the meeting for the purpose of recording the minutes of actions taken at the meeting or Executive Session thereof. The Secretary shall keep, or cause to be kept, a copy of the Bylaws of the Corporation at the principal executive office or business office in accordance with Section 213 of the California General Corporation Law. The Secretary shall keep, or cause to be kept, at the principal executive office, or at the office of the Corporation's transfer agent, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, or the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all the meetings of the shareholders and of the Board required by the Bylaws or by law to be given and shall have such other powers and perform such other duties as may be prescribed by the Board or by the Bylaws. Section 4.11. CHIEF FINANCIAL OFFICER. The Chief Financial Officer of the Corporation shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the Corporation, and shall send or cause to be sent to the shareholders of the Corporation such financial statements and reports as are required to be sent to them by law or these Bylaws. The Chief Financial Officer shall deposit all moneys and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board. The Chief Financial Officer shall disburse, or cause to be disbursed, the funds of the Corporation as may be ordered by the Board, shall render to the President and directors, whenever they request it, an account of all transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board or the Bylaws. ARTICLE V Miscellaneous Section 5.1. RECORD DATE. The Board may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meetings of shareholders or entitled to give consent to corporate action in writing without a meeting, to receive any report, to receive any dividend or distribution, or any allotment of rights or to exercise rights in respect to any change, conversion or exchange of shares. The record date so fixed shall be not more than sixty (60) days or less than ten (10) days prior to the date of any meeting or other event for the purpose of which it is fixed. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at any such meeting, to give consent without a meeting, to receive any report, to receive a dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date. Section 5.2. INSPECTION OF CORPORATE RECORDS. Except as restricted or limited by applicable law, including Sections 1600 through 1605 of the California General Corporation Law, the accounting books and records, the record of shareholders and minutes of proceedings of the shareholders and the Board and committees of the Board of this Corporation and any subsidiary of this Corporation shall be open to inspection upon the written demand on the Corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interest as shareholder or as the holder of such voting trust certificate. Such inspection by a shareholder or holder of a voting trust certificate may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. Section 5.3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for payment of money, notes or other evidence of indebtedness, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board. Section 5.4. ANNUAL AND OTHER REPORTS. The Board of the Corporation shall cause an annual report to be sent to the shareholders not later than 120 days after the close of the fiscal or calendar year. Notwithstanding the foregoing sentence, however, the requirement for such annual report is dispensed with so long as this Corporation has less than 100 shareholders of record. If required to be sent to shareholders, the annual report shall contain a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the Corporation that such statements were prepared without audit from the books and records of the Corporation. Section 5.5. CONTRACTS, ETC., HOW EXECUTED. The Board, except as in the Bylaws otherwise provided, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. Section 5.6. CERTIFICATE OF SHARES. Every holder of shares in the Corporation shall be entitled to have a certificate signed in the name of the Corporation by the Chairman or Vice Chairman of the Board or the President or a Vice President and by the Chief Financial Officer or an assistant treasurer or the Secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. No new certificate for shares shall be issued in lieu of an old certificate unless the latter is surrendered and cancelled at the same time. The Board may, however, in case any certificate for shares is lost, stolen, mutilated or destroyed, authorize the issuance of a new certificate in lieu thereof, upon such terms and conditions, including reasonable indemnification of the Corporation, as the Board shall determine. Section 5.7. INSPECTION OF BYLAWS. The Corporation shall keep in its principal executive office the original or a copy of the Bylaws as amended or otherwise altered to date, certified by the Secretary, which shall be open to inspection by the shareholders at all reasonable times during office hours. Section 5.8. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the California General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular, number includes the plural and the plural number includes the singular, and the term "person" includes a Corporation as well as a natural person. ARTICLE VI Amendments Section 6.1. POWER OF SHAREHOLDERS. New Bylaws may be adopted or these Bylaws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote, or by written assent of shareholders entitled to vote such shares, except as otherwise provided by law or by the Articles of Incorporation. Section 6.2. POWER OF DIRECTORS. Subject to the right of shareholders as provided in Section 6.1 to adopt, amend or repeal Bylaws, Bylaws may be adopted, amended or repealed by the Board provided, however, that the Board may adopt a bylaw or amendment thereof changing the authorized number of directors only for the purpose of fixing the exact number of directors within the limits specified in Section 3.2 of these Bylaws. TABLE OF CONTENTS Page ARTICLE I Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1. Principal Executive Office. . . . . . . . . . . . . . . . . 1 Section 1.1. Other Offices . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II Meetings of Shareholders . . . . . . . . . . . . . . . . . . . 1 Section 2.1 Place of Meetings. . . . . . . . . . . . . . . . . . . . . . 1 Section 2.2 Annual Meetings. . . . . . . . . . . . . . . . . . . . . . . 1 Section 2.3 Special Meetings . . . . . . . . . . . . . . . . . . . . . . 2 Section 2.4 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 2.5 Adjourned Meetings and Notice Thereof. . . . . . . . . . . . 3 Section 2.6 Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 2.7 Validation of Defectively Called or Noticed Meetings . . . . 4 Section 2.8 Action Without Meeting . . . . . . . . . . . . . . . . . . . 4 Section 2.9 Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 2.10 Inspectors of Election. . . . . . . . . . . . . . . . . . . 6 Section 2.11 Nomination of Directors . . . . . . . . . . . . . . . . . . 6 ARTICLE III Directors . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.1. Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.2. Number and Qualification of Directors . . . . . . . . . . . 7 Section 3.3. Election and Term of Office . . . . . . . . . . . . . . . . 8 Section 3.4 [Reserved] . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.5. Removal of Directors. . . . . . . . . . . . . . . . . . . . 8 Section 3.6. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.7. Frequency and Place of Meeting. . . . . . . . . . . . . . . 9 Section 3.8. Organizational Meeting. . . . . . . . . . . . . . . . . . . 9 Section 3.9. Other Regular Meetings. . . . . . . . . . . . . . . . . . . 9 Section 3.10. Special Meetings . . . . . . . . . . . . . . . . . . . . . 9 Section 3.11. Action Without Meeting . . . . . . . . . . . . . . . . . . 10 Section 3.12. Action at a Meeting, Quorum and Required Vote. . . . . . . 10 Section 3.13. Validation of Defectively Called or Noticed Meetings . . . 10 Section 3.14. Adjournment. . . . . . . . . . . . . . . . . . . . . . . . 10 Section 3.15. Notice of Adjournment. . . . . . . . . . . . . . . . . . . 10 Section 3.16. Fees and Compensation. . . . . . . . . . . . . . . . . . . 11 Section 3.17. Indemnification of Agents of the Corporation; Purchase of Liability Insurance . . . . . . . . . . . . . 11 Section 3.18. Committees . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE IV Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 4.1. Officers. . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 4.2. Election. . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 4.3. Subordinate Officers. . . . . . . . . . . . . . . . . . . . 14 Section 4.4. Removal and Resignation . . . . . . . . . . . . . . . . . . 14 Section 4.5. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 4.6. Chairman of the Board; Vice-Chairman. . . . . . . . . . . . 15 Section 4.7. Chief Executive Officer . . . . . . . . . . . . . . . . . . 15 Section 4.8. President . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 4.9 Vice President. . . . . . . . . . . . . . . . . . . . . . . 15 Section 4.10. Secretary. . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 4.11. Chief Financial Officer. . . . . . . . . . . . . . . . . . 16 ARTICLE V Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 5.1. Record Date . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 5.2. Inspection of Corporate Records . . . . . . . . . . . . . . 17 Section 5.3. Checks, Drafts, Etc. . . . . . . . . . . . . . . . . . . . 17 Section 5.4. Annual and Other Reports. . . . . . . . . . . . . . . . . . 17 Section 5.5. Contracts, Etc., How Executed . . . . . . . . . . . . . . . 18 Section 5.6. Certificate of Shares . . . . . . . . . . . . . . . . . . . 18 Section 5.7 Inspection of Bylaws . . . . . . . . . . . . . . . . . . . 18 Section 5.8. Construction and Definitions. . . . . . . . . . . . . . . . 18 ARTICLE VI Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 6.1. Power of Shareholders . . . . . . . . . . . . . . . . . . . 19 Section 6.2. Power of Directors. . . . . . . . . . . . . . . . . . . . . 19 EX-10.17(A) 3 EXH 10.17(A) FIRST AMEND TO LEASE Lake Marriott Business Park Santa Clara, California ("the Project") FIRST AMENDMENT Date: June 10, 1997 LANDLORD: Beacon Properties, L.P., successor-in-interest to WRC Properties, Inc. TENANT: Silicon Valley Bank, a California banking corporation LEASE EXECUTION DATE: March 8, 1995 EXISTING PREMISES: The entirety of the building now known as and numbered 3003 Tasman Drive, Santa Clara, California. The Existing Premises consist of two floors and contain approximately 100,729 rentable square feet. The Existing Premises are shown on Exhibit A to the Lease. TERMINATION DATE: May 31, 2005 PREVIOUS LEASE AMENDMENTS: None ADDITIONAL PREMISES: The entirety of the two-story Building in the Project, known as 3001 Tasman Drive. The Additional Premises contain approximately 56,448 rentable square feet and are substantially as shown on Exhibit A, First Amendment, Sheets 1 and 2. WHEREAS, Tenant desires to lease additional premises in the Project, to wit, the Additional Premises; WHEREAS, Landlord is willing to lease the Additional Premises to Tenant on the terms and conditions hereinafter set forth; NOW THEREFORE, the above-referenced lease ("Lease") is hereby amended as follows: -1- 1. DEMISE OF ADDITIONAL PREMISES Landlord hereby demises and leases to Tenant, and Tenant hereby hires and takes from the Landlord, the Additional Premises for a term commencing as of the Commencement Date in respect of the Additional Premises, as hereinafter defined. Said demise of the Additional Premises shall be upon the terms and conditions set forth in this First Amendment and upon all of the terms and conditions of the Lease applicable to the Existing Premises (including, without limitation, Tenant's extension options pursuant to Paragraph 40 of the Lease, which shall apply to the Existing Premises together with the Additional Premises) to the extent not inconsistent with the provisions of this First Amendment. 2. COMMENCEMENT DATE IN RESPECT OF THE ADDITIONAL PREMISES; TENANT'S TERMINATION RIGHT A. The Commencement Date in respect of the Additional Premises shall be the later of: (x) December 1, 1997, or (y) the date that the present tenant ("Present Tenant") of the Additional Premises vacates the Additional Premises. B. Notwithstanding anything to the contrary herein contained, if, for any reason the Commencement Date has not occurred on or before May 1, 1998, then Tenant shall have the right to cancel this First Amendment as follows. Tenant may exercise its cancellation right under this Subparagraph B by giving Landlord written notice ("Cancellation Notice") at any time after May 1, 1998, but on or before the occurrence of the Commencement Date. If the Commencement Date does not occur on or before the date thirty (30) days after Landlord receives the Cancellation Notice, then this First Amendment shall be void and without further force or effect and neither party shall have any further obligation to the other party with respect to this First Amendment. If the Commencement Date does occur on or before the date thirty (30) days after Landlord receives the Cancellation Notice, then Tenant shall have no right to cancel this First Amendment. C. Landlord hereby agrees that if the Present Tenant holds over in the Additional Premises after November 30, 1997: (i) Landlord shall take all reasonable measures (including, without limitation, promptly commencing and diligently prosecuting summary proceedings) to recover possession of the Additional Premises as promptly as possible; and (ii) Landlord shall pay to Tenant the amount of Premium Hold-Over Rent, as hereinafter defined, which Landlord actually receives from the Present Tenant on account of the occupancy of the Additional Premises by the Present Tenant after November 30, 1997, after first deducting any costs incurred by Landlord (including, attorneys fees) which are not otherwise paid or reimbursed by Present Tenant in collecting such Premium Hold-Over Rent. Tenant shall have no right to receive any -2- Premium Hold-Over Rent unless and until Landlord has been fully paid for all other amounts due from the Present Tenant on account of its occupancy of the Additional Premises (including, without limitation, all rental due in respect of the period prior to November 30, 1997 and the Base Hold-Over Rent, as hereinafter defined). D. Landlord represents to Tenant that, pursuant to Landlord's lease with the Prior Tenant, if the Prior Tenant holds over in the Additional Premises after November 30, 1997, the Prior Tenant is required to pay to Landlord a hold over charge in the amount of one hundred twenty-five (125%) percent of the amount of base rent which was payable by the Prior Tenant immediately preceding November 30, 1997. Landlord represents to Tenant that said hold over charge is equal to the monthly base rent payable by the Prior Tenant immediately preceding November 30, 1997 in the amount of approximately $80,600.00 (which amount is referred to herein as "Base Hold-Over Rent") plus a monthly premium charge in the amount of approximately $20,150.00 (which charge is referred to herein as "Premium Hold-Over Rent"). 3. RENT COMMENCEMENT DATE IN RESPECT OF THE ADDITIONAL PREMISES A. Tenant's obligation to pay net Monthly Rent and other charges due under the Lease in respect of the Additional Premises shall not commence to accrue until the date ("Rent Commencement Date") which is the earliest to occur of the following dates: (i) the date that Tenant substantially completes Tenant's Additional Premises Work, as hereinafter defined, (ii) the date that Tenant first commences to use the Additional Premises, or any portion thereof, for business purposes, or (ii) the Outside Date, as hereinafter defined. B. The "Outside Date" shall be defined as one hundred twenty (120) days after the Commencement Date, provided however, that in the event of any Landlord Delay, as hereinafter defined, the Outside Date shall be extended the length of time that Tenant is in fact delayed in the performance of Tenant's Additional Premises Work by reason of such Landlord Delay. C. For the purposes hereof, a "Landlord Delay" shall be defined as: (i) any act by Landlord taken without justification pursuant to the Lease, or (ii) the failure of performance by Landlord of any obligation under the Lease within the time period in which Landlord is required, under the Lease, to act, to the extent that such failure is not justified under the Lease. Except (if applicable) with respect to the removal of the Prior Tenant Fixtures in the circumstances set forth in Paragraph 5.B(ii) of this First Amendment, no event shall be considered to be a Landlord Delay unless: (iv) Landlord has received written notice ("Delay Notice") from Tenant advising Landlord of such Event and of the fact that such Event may cause a Landlord Delay, and (v) Landlord fails to eliminate such cause for delay on or before the date five (5) business days after Landlord receives the Delay Notice. Tenant agrees to use reasonable efforts to mitigate the impact of any Landlord Delay, provided however, that this sentence shall not be -3- construed to impose on Tenant the obligation to engage extra work crews, or pay overtime, or otherwise incur any extraordinary cost in order to expedite Tenant's build-out, unless Landlord agrees in writing to pay for the cost of such measures. D. When the actual Commencement Date in respect of the Additional Premises and Rent Commencement Date are determined, the parties shall execute a Commencement Date Memorandum setting forth such dates, substantially in the form attached to the Lease as Exhibit E. 4. NET MONTHLY RENT PAYABLE IN RESPECT OF THE ADDITIONAL PREMISES A. The Net Monthly Rent payable in respect of the Additional Premises shall be as follows: LEASE YEAR NET MONTHLY RENT 1 $85,800.96 2 $89,233.00 3 $92,802.32 4 $96,514.41 5 $100,374.99 6 $104,389.99 7 $108,565.58 8 $112,908.21 B. For the purposes of this First Amendment, "Lease Year" shall be defined as any twelve month period during the term of the Lease in respect of the Additional Premises commencing as of the Rent Commencement Date, or as of any anniversary of the Rent Commencement Date. C. The net Monthly Rent in respect of the Additional Premises shall be subject to adjustment as provided in Paragraph 7 of this First Amendment. Additionally, Tenant shall pay, together with the net Monthly Rent in respect of the Additional Premises, the estimated monthly Building Maintenance Expenses in respect of the Additional Premises, and Tenant's Percentage in respect of the Additional Premises of the estimated monthly Common Area Expenses, as adjusted from time to time hereunder, and a management fee not to exceed two (2.0%) percent of the net Monthly Rent payable in respect of the Additional Premises. D. Tenant shall, on the Rent Commencement Date, pay to Landlord the following amounts to be applied toward the Rent due in respect of the Additional Premises for the first month of the first Lease Year: Monthly Rent (net) $85,800.96 -4- Building Maintenance Expenses and Tenant's Percentage of Common Area Expenses $14,489.00 -------------------------------------------------- Total $100,289.96 5. CONDITION OF ADDITIONAL PREMISES; REMOVAL OF PRIOR TENANT FIXTURES A. Except as provided in Paragraphs 5.B and 5.C of this First Amendment and except for the Landlord agreements as set forth in Paragraphs 11 and 12 of this First Amendment, Tenant shall take the Additional Premises "as-is", in the condition in which the Additional Premises are in as of the Commencement Date in respect of the Additional Premises, without any obligation on the part of the Landlord to prepare or construct the Additional Premises for Tenant's occupancy, and without any representation or warranty by Landlord as to the condition of the Additional Premises. Without limiting the foregoing, the following provisions of the Lease shall have no applicability to the Additional Premises: - The first two sentences of Paragraph 10 - Paragraph 11.B(ii) - Paragraph 7 of Exhibit D - Exhibit F B. Reference is made to the facts that: (i) the prior tenant of the Additional Premises ("ACS") has installed certain fixtures in the Additional Premises, referred to herein as the "Prior Tenant Fixtures" and described in this Paragraph 5.B, and (ii) ACS is required, pursuant to its lease with Landlord, to remove the Prior Tenant Fixtures from the Additional Premises on or before the expiration of the term of its lease with Landlord. The following provisions of this Paragraph 5.B are intended to deal with the possibility that ACS may not remove the Prior Tenant Fixtures from the Additional Premises on a timely basis. (i) The "Prior Tenant Fixtures" are defined as the following items presently located in the Additional Premises: - Raised computer room flooring on the first floor; - Computer room Leibert units and condensers; - UPS and batteries; - Computer room fire protection equipment, including halon system and permanent water leak detection panel; - Back-up generator (located exterior to the Additional Premises). -5- (ii) If, on or before November 30, 1997, the Prior Tenant fails to remove the Prior Tenant Fixtures from the Additional Premises and to repair any damage to the concrete slab floor, the exterior doors (including, without limitation, any roll-up doors), and/or exterior door frames caused by the removal of the Prior Tenant Fixtures from the Additional Premises (such removal and repair obligations being collectively referred to herein as the "Removal Obligations"), then: (x) Landlord shall, at no cost to Tenant, perform the Removal Obligations, and (y) if the Removal Obligations are not completed on or before December 7, 1997, such failure shall, without the requirement of any notice from Tenant, be considered to be a Landlord Delay (provided however, that no period of time prior to December 7, 1997 when the Removal Obligations are not completed shall be considered to be a Landlord Delay). C. Landlord and Tenant shall work together to determine a mutually agreeable solution as to where to place or retain the existing trash enclosures located between the Additional Premises and the Existing Premises. If requested by Tenant, Landlord will remove, at its sole cost and expense, the existing auxiliary structure which currently houses the back-up generator and replace it with landscaping to match the balance of the Project. 6. TENANT IMPROVEMENT ALLOWANCE A. Landlord shall provide the following allowances to Tenant (referred to collectively herein as the "Tenant Improvement Allowance with respect to the Additional Premises"): (i) An allowance ("Initial Allowance") for the planning and construction of the Additional Premises of up to One Million Two Hundred Forty-One Thousand Eight Hundred Fifty-Six ($1,241,856.00) Dollars (the "Maximum Initial Allowance"); and (ii) If Tenant uses all of the Initial Additional Premises Allowance, Landlord shall, at Tenant's election, provide an additional allowance ("Additional Allowance") for the planning and construction of the Additional Premises of up to Five Hundred Sixty-Four Thousand Four Hundred Eighty ($564,480.00) Dollars ("Maximum Additional Allowance"). B. The provisions of Paragraph 4 of Exhibit D shall apply to the Tenant Improvement Allowance with respect to the Additional Premises. Without limiting the foregoing, a construction management fee in the amount of one (1%) percent of the amount of the Tenant Improvement Allowance with the respect to the Additional Premises actually disbursed by Landlord shall be payable to Landlord's managing agent and may be deducted by Landlord from the Tenant Improvement Allowance with respect to the Additional Premises to permit Landlord to make direct payment of such fee to Landlord's managing agent. For example, if Tenant uses all of the Initial Allowance, but -6- no portion of the Additional Allowance, then the construction management fee shall be $12,418.56. C. Tenant shall have no right to use any unused portion of the Tenant Improvement Allowance with respect to the Additional Premises. D. Provided that and so long as the Lease is in full force and effect at the time that Tenant submits any requisition on account of Tenant Improvement Allowance with respect to the Additional Premises, Landlord shall pay the cost of the work shown on each requisition (as hereinafter defined) submitted by Tenant to Landlord within thirty (30) days of submission thereof by Tenant to Landlord. E. For the purposes hereof, a "requisition" shall mean written documentation (including, without limitation, invoices from Tenant's contractor, written conditional lien waivers [provided however, that Tenant shall not be required to provide lien waivers from any subcontractor who is being paid less than $25,000 on account of the work which is being requisitioned] and such other documentation as Landlord's mortgagee may reasonably request) showing in reasonable detail the costs of the improvements installed to date in the Additional Premises, accompanied by certifications from Tenant, Tenant's architect, or Tenant's contractor that the work performed to date has been performed, in all material respects, in accordance with applicable laws and in accordance with Tenant's approved plans, and that the amount of the requisition in question does not exceed the amount of the work covered by such requisition. Each requisition shall be accompanied by evidence reasonably satisfactory to Landlord that all work covered by previous requisitions has been fully paid by Tenant. Landlord shall have the right, upon reasonable advance notice to Tenant, to inspect Tenant's books and records relating to each requisition in order to verify the amount thereof. Tenant shall submit requisition(s) no more often than monthly. F. Notwithstanding anything to the contrary herein contained: (i) Landlord shall have no obligation to advance funds on account of Tenant Improvement Allowance with respect to the Additional Premises unless and until Landlord has received the requisition in question, together with the certifications required by Subparagraph E hereof, certifying that the work shown on the requisition has been performed, in all material respects, in accordance with applicable law and in accordance with Tenant's plans. (ii) Except with respect to work and/or materials previously paid for by Tenant, as evidenced by paid invoices and written lien waivers provided to Landlord, Landlord shall have the right to have Tenant Improvement Allowance with respect to the Additional Premises paid to both Tenant and Tenant's contractor(s) and vendor(s) jointly. (iii) Tenant shall not be entitled to any portion of the Tenant Improvement Allowance with respect to the Additional Premises, and Landlord shall -7- have no obligation to pay Tenant Improvement Allowance with respect to the Additional Premises in respect of any requisition submitted after December 31, 1999, provided however, that said December 31, 1999 date shall be extended by the number of days, if any, that the Outside Date, as defined in Paragraph 3.B of this First Amendment, is extended as the result of Landlord Delays. 7. CONSTRUCTION RENT A. Commencing as of the Rent Commencement Date (if the Rent Commencement Date is the first day of a calendar month, or otherwise on the first day of the calendar month next following the Rent Commencement Date), and continuing on the first day of each month thereafter throughout the term of the Lease, Tenant shall pay to Landlord, as additional rent, Construction Rent, as hereinafter defined, based upon the amount of the Additional Allowance, as defined in Paragraph 6.A of this First Amendment, actually disbursed by Landlord. Tenant's monthly payments of Construction Rent shall be equal to the amount of equal monthly payments of principal and interest which would be necessary to repay a loan in the amount of the Additional Allowance, together with interest at the rate of eleven (11%) percent per annum, on a level direct reduction basis over a term equal to the term of the Lease in respect of the Additional Premises. Monthly payments of Construction Rent shall be payable at the same time and in the same manner as net Monthly Rent is payable under the Lease. B. Construction Rent shall not be abated or reduced for any reason whatsoever (including, without limitation, untenantability of the premises or termination of the Lease). Without limiting the foregoing, the rent abatement provisions of Paragraphs 16, 17.A, and 23.F of the Lease shall not apply to Construction Rent (provided that the provisions of this Subparagraph B shall not affect the operation of said Paragraphs 16, 17.A and 23.F of the Lease in any context other than the payment of Construction Rent). C. Since the payment of Construction Rent represents a reimbursement to Landlord of the Additional Allowance, Tenant, if there is any default (beyond the expiration of any applicable grace periods) of any of Tenant's obligations under the Lease (including, without limitation, its obligation to pay Construction Rent), or if the term of this Lease is terminated for any reason whatsoever prior to the termination of the term of the Lease, Tenant shall pay to Landlord, immediately upon demand, the unamortized balance of the Additional Allowance, and Tenant shall have no obligation to pay Construction Rent which would have been payable after such demand. Tenant's obligation to pay the unamortized balance of the Additional Allowance shall be in addition to all other rights and remedies which Landlord has based upon any default of Tenant under the Lease. -8- 8. TENANT'S ADDITIONAL PREMISES WORK All of Alterations, as defined in Paragraph 3.A of the Lease, affecting the Additional Premises and all improvements to be made by Tenant to the Additional Premises (collectively referred to herein as "Tenant's Additional Premises Work") shall be performed in accordance with and subject to the provisions of the Lease, including, without limitation, Paragraph 13 and Exhibit D, except: A. The fourth sentence of Paragraph 1 of Exhibit D shall have no applicability to the Additional Premises. Landlord hereby approves Robinson, Mills & Williams to act as Tenant's architect in connection with Tenant's Additional Premises Work. B. Any contractor engaged by Tenant to perform Tenant's Additional Premises Work shall be subject to Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed. Landlord hereby approves Toensikoetter & Breeding, Inc. to perform the Additional Premises Work. C. Paragraphs 5, 6 and 7 of Exhibit D of the Lease shall have no applicability to the Additional Premises. D. For the purposes Paragraph 9 of Exhibit D of the Lease, Tenant's Additional Premises Work shall be substituted in place of Tenant Improvements and the Exterior Improvements. E. Tenant shall have the right, to install a bridge or covered walkway ("Bridge Work") between the Existing Premises and the Additional Premises, subject to the following conditions: (i) Tenant obtains Landlord's prior written approval of Tenant's plans and specifications with respect to the Bridge Work. Landlord agrees that it will not unreasonably withhold its approval to the Bridge Work, so long as the Bridge Work is, in Landlord's sole, but bona fide business judgment, aesthetically compatible with Landlord's master plan for the Project; (ii) Tenant obtains all necessary governmental permits and approvals in connection with the Bridge Work; (iii) Tenant pays for one hundred (100%) percent of any increase in real estate or other taxes imposed on the Project arising from the Bridge Work; (iv) The Bridge Work is performed at the sole cost and expense of Tenant, except that Tenant shall have the right to use the Additional Allowance -9- (but not the Initial Allowance) for costs incurred by Tenant in connection with the Bridge Work. (v) At Landlord's election, Landlord shall, at the termination of the term of the Lease, remove the Bridge Work and restore both the Existing Premises and the Additional Premises to the condition in which they were in immediately preceding the performance of the Bridge Work. The cost of such removal and restoration work shall be shared equally between Landlord and Tenant. Tenant shall, within thirty (30) days of billing therefor, reimburse Landlord for one-half of the cost of such removal and restoration work. (vi) Tenant complies with all other provisions of the Lease relating to the performance of alterations and improvements to the premises in performing such work. (vii) Tenant shall not be required to pay Net Monthly Rent in respect of the Bridge Work. (viii) Tenant's Percentage shall not be adjusted by reason of the Bridge Work. (ix) Tenant shall be responsible for maintaining the Bridge Work in good condition throughout the term of the Lease, reasonable wear and tear, fire and other casualty excepted. 9. DEFINITION OF BUILDING Wherever the term "Building" is used in the Lease, such term shall, with respect to the Additional Premises, be deemed to refer to 3001 Tasman Drive. 10. TENANT'S PERCENTAGE Tenant's Percentage, as defined in Paragraph 3.S of the Lease, with respect to the Additional Premises, shall be 14.01% (i.e. 56,448 rentable square feet divided by 402,867 rentable square feet). 11. WARRANTY COMPONENTS OF THE ADDITIONAL PREMISES A. Notwithstanding anything to the contrary herein or in the Lease contained, Landlord hereby agrees that if, with respect to any of the Warranty Components of the Additional Premises, Landlord shall receives written notice from Tenant of the need for repair or replacement of such Warranty Component within the applicable Warranty Period, Landlord shall, at no cost to Tenant, make such repair or replacement as is necessary to maintain such Component in good operating condition, unless the need for -10- such repair or replacement arises from the fault, abuse, negligence, or misconduct of Tenant, or Tenant's agents, employees, contractors, or invitees. B. For the purposes of this Paragraph 11, the following portions of the Building shall be considered the respective "Warranty Components" and "Warranty Periods": WARRANTY COMPONENT LAST DAY OF WARRANTY PERIOD Base Building electrical system First anniversary of Rent Commencement Date Base Building plumbing system First anniversary of Rent Commencement Date Roof system First anniversary of Rent Commencement Date Base Building HVAC system Six months after Rent Commencement Date C. Landlord further agrees that for the period between the date six months after the Rent Commencement Date and the third anniversary of the Rent Commencement Date, if the compressors serving the base Building HVAC fail, and if Landlord receives written notice from Tenant of such failure within such period, Landlord shall, at no cost to Tenant, replace such compressors, unless the need for such repair or replacement arises from the fault, abuse, negligence, or misconduct of Tenant, or Tenant's agents, employees, contractors, or invitees. D. Except as set forth in this Paragraph 11, Tenant shall continue to be obligated to pay for all Building Maintenance Expenses and Tenant's Percentage of all Common Area Expenses, each as defined in Paragraph 17 of the Lease. 12. ADA COMPLIANCE Tenant, at its sole cost and expense (except to the extent that Tenant uses the Tenant Improvement Allowance in respect of the Additional Premises for such purposes pursuant to Paragraph 6 of this First Amendment) shall comply with the ADA (including, the obligation to make any alterations or improvements) so far it affects the Building in which the Additional Premises are located in any way, or Tenant's use of said Building. Landlord, at no cost to Tenant, shall comply with the ADA (including, the obligation to make alterations or improvements), to the extent that: (i) the ADA is in force and effect as of the Execution Date of this First Amendment, and (ii) the ADA requires alterations or improvements to the exterior of the Additional Premises; provided however, that any alterations or improvements required to be made to the doors (including any roll-up doors) to the Additional Premises shall be Tenant's responsibility rather than Landlord's responsibility. 13. SIGNAGE The first three sentences of Paragraph 20 of the Lease shall have no applicability to the Additional Premises and the following shall be substituted in their place: -11- "Subject to Tenant's receipt of all necessary governmental approvals, and provided that such signage conforms to Landlord's master plan for the Project and the provisions of Paragraph 20 of the Lease, Tenant may, at is sole cost and expense, install Tenant identification signage on: (i) the Tasman Drive exterior of the Building, (ii) the Old Ironsides Drive exterior of the Building, and (iii) the monument in front of the Building." 14. CASUALTY AND TAKING A. For the purposes of determining whether either party may exercise its termination rights pursuant to Paragraph 23 of the Lease in the event of a casualty, the Existing Premises and the Additional Premises shall be considered to be separate premises, and, subject to the provisions of Subparagraph C of this Paragraph 14, the termination rights in respect of each portion of the Premises shall be exercised independently and separately from the termination rights with respect to the other portion of the Premises. For example, if there is a casualty which affects the Existing Premises which would give the Landlord the right to terminate the Lease in respect of the Existing Premises but that casualty does not affect the Additional Premises, then, based upon such casualty, Landlord shall have the right to terminate the Lease with respect to the Existing Premises, but Landlord shall not have the right to terminate the Lease with respect the Additional Premises. B. For the purposes of determining whether the Lease shall terminate pursuant to Paragraph 24 of the Lease in the event of a taking, the Existing Premises and the Additional Premises shall be considered to be separate premises, and, subject to the provisions of Subparagraph C of this Paragraph 14, a taking affecting only one of the portion of the Premises shall not cause the termination of the Lease with respect to the other portion of the Premises. C. Notwithstanding the provisions of Subparagraphs A and B of this Paragraph 14, in the event of a casualty or taking which affects the Existing Premises which would give Tenant the right to terminate the Lease in respect of the Existing Premises, but that casualty does not affect the Additional Premises, Tenant shall nevertheless have the right to terminate the Lease in respect of the Additional Premises, at the same time that Tenant exercises its right to terminate the Lease in respect of the Existing Premises. Such termination of the term of the Lease of the Additional Premises shall be effective as of the same date that the term of the Lease of the Existing Premises terminates. 15. SUBLETTING A. It is the intention of the parties that, subject to obtaining Landlord's prior written consent in accordance with Paragraph 25 of the Lease and the other provisions of Paragraph 25 of the Lease, Tenant may, not later than the third anniversary of the Rent -12- Commencement Date, enter into a sublease or subleases aggregating up of to 28,224 rentable square feet of the Additional Premises without Landlord having the right to recapture the premises proposed to be so subleased. Therefore, in addition to Tenant's rights under Paragraph 25, Tenant shall have the following supplemental rights with respect to the Additional Premises: (i) For the purposes of this Paragraph 15, "Non-Recapture Subleases" shall be defined as a sublease or subleases subleasing portions of the Additional Premises which contain, in the aggregate, no more than 28,224 rentable square feet, and which is entered into by Tenant and approved by Landlord on or before the third anniversary of the Rent Commencement Date. (ii) Landlord shall not have the right to elect the options set forth in clauses (i) and (ii) of Paragraph 25.D of the Lease with respect to Non-Recapture Subleases; and the last sentence of Paragraph 25.D of the Lease shall not apply to Non-Recapture Subleases. B. In lieu of the third and fourth sentences of Paragraph 25.D of the Lease, the following shall apply to the Additional Premises: "If Landlord consents to the Sublet with respect to the Additional Premises, Tenant may thereafter enter into a valid Sublet of the Premises or portion thereof, upon substantially the same terms and conditions and with the proposed Subtenant set forth in the information furnished by Tenant to Landlord pursuant to Paragraph 25.C, subject, however, at Landlord's election, to the condition, that forty (40%) percent of any excess of the Subrent over the Rent required to be paid by Tenant under this Lease ("Excess Rental") shall be paid to Landlord. In determining the Excess Rental Tenant shall first be allowed to recover, out of any such Excess, the following costs in connection with any such Sublet before any Excess Rental is paid to Landlord: cost of leasehold improvements made for the benefit of the proposed Subtenant, architectural and engineering fees in connection with any such Sublet, and brokerage commissions and legal fees in connection with such Sublet. In addition, to the extent that the portion of the Additional Premises is improved by leasehold improvements funded by Tenant prior to such Sublet, and such leasehold improvements are used by the Subtenant, the unamortized (i.e. on a straight-line basis over the initial term of this Lease) cost of such leasehold improvements may also be deducted out of any Excess before any Excess Rental is paid to Landlord (i.e. this sentence shall have no effect if leasehold improvements paid for by Tenant in the portion of the Additional Premises to be subleased are demolished so that new leasehold improvements can be made). 16. ADDITIONAL LETTER OF CREDIT Whereas Landlord is unwilling to lease the Additional Premises to Tenant unless Tenant provides additional security for Tenant's obligations under the Lease, Tenant shall, on or before the Rent Commencement Date, deposit with Landlord an irrevocable -13- letter of credit ("Additional Letter of Credit") in the amount of Fifty Thousand ($50,000.00) Dollars issued by a bank (other than Silicon Valley Bank) acceptable to Landlord in Landlord's sole discretion as security for the full and faithful performance of Tenant's obligations under the Lease. Landlord hereby approves both Wells Fargo and Bank of America as issuing banks for such Additional Letter of Credit. The provisions of Paragraph 7.B shall apply to the Additional Letter of Credit. Landlord shall have no obligation to proceed against any security which it holds for Tenant's obligations under the Lease in any particular order. 17. BROKERAGE The first sentence of Paragraph 35 of the Lease shall have no applicability to this First Amendment, and in lieu thereof, the following shall apply: "Tenant warrants and represents that it has had no dealings with any real estate broker or agent in connection with the negotiation of this First Amendment, except for Investment Development Services, Inc. and Ernst & Young LLP, and that it knows of no other real estate broker or agent who is or might be entitled to a commission in connection with this Lease." 18. PARKING The second and third sentences of Paragraph 38 of the Lease shall have no applicability to the Additional Premises, and in lieu thereof, the following shall apply: "Tenant shall have the right, as appurtenant to its demise of the Additional Premises, to use up to two hundred twenty-eight (228) parking spaces within the Project, twenty-five (25) of which shall be reserved spaces and the remaining two hundred three (203) spaces shall be non-exclusive, unreserved spaces. Tenant shall be permitted to locate such unreserved parking spaces anywhere within the area shown on Exhibit G, First Amendment." 19. TENANT'S RIGHT OF FIRST OFFER Since the Additional Premises constitute the Additional Space, as defined in Paragraph 39, Tenant desires to be provided with further expansion rights. Therefore, the first sentence of Paragraph 39 of the Lease is hereby deleted in its entirety and the following is substituted in its place: "Provided that Tenant is not in default hereunder at the time of exercise, during the initial Term of the Lease, and so long as, at the time of exercise, Silicon Valley Bank itself occupies the entirety of the premises then demised to Tenant, Tenant shall have the right of first offer to lease Building 1 and/or Building 5, as shown on Exhibit G attached hereto on the following terms and conditions. Each Building contains approximately -14- 56,400 square feet of rentable area and shall, for the purposes of Paragraph 39 of the Lease, be considered to be an Additional Space." 20. As hereby amended, the Lease is ratified, confirmed, and approved in all respects. EXECUTED as of the date first above written. LANDLORD: BEACON PROPERTIES, L.P. By BEACON PROPERTIES CORPORATION, General Partner By /s/ Douglas S. Mitchell Date Signed: 7/22/97 ----------------------------- ------------ Douglas S. Mitchell Senior Vice President TENANT: SILICON VALLEY BANK By /s/ John C. Dean Date Signed: 7/16/97 ----------------------------- ------------ John C. Dean Chief Executive Officer By /s/ Adele G. Francisco Date Signed: 7/16/97 ----------------------------- ------------ Adele G. Francisco Executive Vice President -15- EX-10.34 4 EXH 10.34 1997 EQUITY INCENTIVE PLAN SILICON VALLEY BANCSHARES 1997 EQUITY INCENTIVE PLAN ADOPTED DECEMBER 19, 1996 APPROVED BY SHAREHOLDERS APRIL 17, 1997 1. PURPOSES. (a) The purpose of the Plan is to provide a means by which selected Employees and Directors of and Consultants to the Company, and its Affiliates, may be given an opportunity to benefit from increases in value of the stock of the Company through the granting of (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses, (iv) rights to purchase restricted stock, and (v) stock appreciation rights, all as defined below. (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors of or Consultants to the Company or its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (c) The Company intends that the Stock Awards issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either (i) Options granted pursuant to Section 6 hereof, including Incentive Stock Options and Nonstatutory Stock Options, (ii) stock bonuses or rights to purchase restricted stock granted pursuant to Section 7 hereof, or (iii) stock appreciation rights granted pursuant to Section 8 hereof. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan. (e) "COMPANY" means Silicon Valley Bancshares, a California corporation. 1 (f) "CONCURRENT STOCK APPRECIATION RIGHT" or "CONCURRENT RIGHT" means a right granted pursuant to subsection 8(b)(2) of the Plan. (g) "CONSULTANT" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. (h) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means that the service of an individual to the Company, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Board or the chief executive officer of the Company may determine, in that party's sole discretion, whether Continuous Status as an Employee, Director or Consultant shall be considered interrupted in the case of: (i) any leave of absence approved by the Board or the chief executive officer of the Company, including sick leave, military leave, or any other personal leave; or (ii) transfers between the Company, Affiliates or their successors. (i) "COVERED EMPLOYEE" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to shareholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (j) "DIRECTOR" means a member of the Board. (k) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (m) "FAIR MARKET VALUE" means, as of any date, the value of the common stock of the Company determined as follows: (1) If the common stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Company's common stock) on the day of determination, as reported in THE WALL STREET JOURNAL or such other source as the Board deems reliable. (2) In the absence of such markets for the common stock, the Fair Market Value shall be determined in good faith by the Board. (n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. 2 (o) "INDEPENDENT STOCK APPRECIATION RIGHT" or "INDEPENDENT RIGHT" means a right granted pursuant to subsection 8(b)(3) of the Plan. (p) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (q) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (r) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "OPTION" means a stock option granted pursuant to the Plan. (t) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (u) "OPTIONEE" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (v) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of the Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (w) "PLAN" means this 1997 Equity Incentive Plan. (x) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect with respect to the Company at the time discretion is being exercised regarding the Plan. (y) "SECURITIES ACT" means the Securities Act of 1933, as amended. 3 (z) "STOCK APPRECIATION RIGHT" means any of the various types of rights which may be granted under Section 8 of the Plan. (aa) "STOCK AWARD" means any right granted under the Plan, including any Option, any stock bonus, any right to purchase restricted stock, and any Stock Appreciation Right. (bb) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. (cc) "TANDEM STOCK APPRECIATION RIGHT" or "TANDEM RIGHT" means a right granted pursuant to subsection 8(b)(1) of the Plan. 3. ADMINISTRATION. (a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (1) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock, a Stock Appreciation Right, or a combination of the foregoing; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive stock pursuant to a Stock Award; whether a person shall be permitted to receive stock upon exercise of an Independent Stock Appreciation Right; and the number of shares with respect to which a Stock Award shall be granted to each such person. (2) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (3) To amend the Plan or a Stock Award as provided in Section 14. (4) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan. (c) The Board may delegate administration of the Plan to a committee or committees of the Board composed of one (1) or more members (the "Committee"). In the discretion of the Board, the Committee may be composed of two (2) or more Non-Employee Directors and/or 4 Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, (and references in this Plan to the Board shall thereafter be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 13 relating to adjustments upon changes in stock, the stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate nine hundred thousand (900,000) shares of the Company's common stock. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. Shares subject to Stock Appreciation Rights exercised in accordance with Section 8 of the Plan shall not be available for subsequent issuance under the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. (a) Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees. Stock Awards other than Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees, Directors or Consultants. (b) No person shall be eligible for the grant of an Incentive Stock Option if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. (c) Subject to the provisions of Section 13 relating to adjustments upon changes in stock, no person shall be eligible to be granted Options and Stock Appreciation Rights covering more than two hundred fifty thousand (250,000) shares of the Company's common stock in any calendar year. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: 5 (a) TERM. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) PRICE. The exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted; the exercise price of each Nonstatutory Stock Option shall be not less than eighty-five percent (85%) the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) CONSIDERATION. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised, or (ii) at the discretion of the Board or the Committee, at the time of the grant of the Option, (A) by delivery to the Company of other common stock of the Company, (B) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (C) in any other form of legal consideration acceptable to the Board. In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (d) TRANSFERABILITY. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Incentive Stock Option is granted only by such person. A Nonstatutory Stock Option shall only be transferable by the Optionee upon such terms and conditions as are set forth in the Option Agreement for such Nonstatutory Stock Option, as the Board or the Committee shall determine in its sole discretion. The person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option. (e) VESTING. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem 6 appropriate. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. (f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or disability or for Cause), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates for Cause, then the Option shall immediately terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. "Cause" shall be defined as an act of embezzlement, fraud, dishonesty, or breach of fiduciary duty to the Company, a deliberate disregard of the rules of the Company which results in loss, damage or injury to the Company, any unauthorized disclosure of any of the secrets or confidential information of the Company, inducing any client or customer of the Company to break any contract with the Company or inducing any principal for whom the Company acts as agent to terminate such agency relations, or engaging in any conduct which constitutes unfair competition with the Company, or any act which results in Optionee being removed from any office of the Company by any bank regulatory agency. An Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director, or Consultant (other than upon the Optionee's death or disability) would result in liability under Section 16(b) of the Exchange Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the Option Agreement, or (ii) the tenth (10th) day after the last date on which such exercise would result in such liability under Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (other than upon the Optionee's death or disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option, or (ii) the expiration of a period of three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant during which the exercise of the Option would not be in violation of such registration requirements. 7 (g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (h) DEATH OF OPTIONEE. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of Optionee's death, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option as of the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date twelve (12) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (i) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate. 7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK. Each stock bonus or restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate. The terms and conditions of stock bonus or restricted stock purchase agreements may change from time to time, and the terms and conditions of separate agreements need not be identical, but each stock bonus or restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions as appropriate: (a) PURCHASE PRICE. The purchase price under each restricted stock purchase agreement shall be such amount as the Board or Committee shall determine and designate in such Stock Award Agreement, but in no event shall the purchase price be less than eighty-five percent 8 (85%) of the stock's Fair Market Value on the date such award is made. Notwithstanding the foregoing, the Board or the Committee may determine that eligible participants in the Plan may be awarded stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (b) TRANSFERABILITY. Rights under a stock bonus or restricted stock purchase agreement shall be transferable by the grantee only upon such terms and conditions as are set forth in the applicable Stock Award Agreement, as the Board or the Committee shall determine in its discretion, so long as stock awarded under such Stock Award Agreement remains subject to the terms of the agreement. (c) CONSIDERATION. The purchase price of stock acquired pursuant to a stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board or the Committee, according to a deferred payment or other arrangement with the person to whom the stock is sold; or (iii) in any other form of legal consideration that may be acceptable to the Board or the Committee in its discretion. Notwithstanding the foregoing, the Board or the Committee to which administration of the Plan has been delegated may award stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (d) VESTING. Shares of stock sold or awarded under the Plan may, but need not, be subject to a repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board or the Committee. (e) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event a Participant's Continuous Status as an Employee, Director or Consultant terminates, the Company may repurchase or otherwise reacquire any or all of the shares of stock held by that person which have not vested as of the date of termination under the terms of the stock bonus or restricted stock purchase agreement between the Company and such person. 8. STOCK APPRECIATION RIGHTS. (a) The Board or Committee shall have full power and authority, exercisable in its sole discretion, to grant Stock Appreciation Rights under the Plan to Employees or Directors of or Consultants to, the Company or its Affiliates. To exercise any outstanding Stock Appreciation Right, the holder must provide written notice of exercise to the Company in compliance with the provisions of the Stock Award Agreement evidencing such right. Except as provided in subsection 5(c), no limitation shall exist on the aggregate amount of cash payments the Company may make under the Plan in connection with the exercise of a Stock Appreciation Right. (b) Three types of Stock Appreciation Rights shall be authorized for issuance under the Plan: (1) TANDEM STOCK APPRECIATION RIGHTS. Tandem Stock Appreciation Rights will be granted appurtenant to an Option, and shall, except as specifically set forth in this Section 9 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. Tandem Stock Appreciation Rights will require the holder to elect between the exercise of the underlying Option for shares of stock and the surrender, in whole or in part, of such Option for an appreciation distribution. The appreciation distribution payable on the exercised Tandem Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the Option surrender) in an amount up to the excess of (A) the Fair Market Value (on the date of the Option surrender) of the number of shares of stock covered by that portion of the surrendered Option in which the Optionee is vested over (B) the aggregate exercise price payable for such vested shares. (2) CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent Rights will be granted appurtenant to an Option and may apply to all or any portion of the shares of stock subject to the underlying Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. A Concurrent Right shall be exercised automatically at the same time the underlying Option is exercised with respect to the particular shares of stock to which the Concurrent Right pertains. The appreciation distribution payable on an exercised Concurrent Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Concurrent Right) in an amount equal to such portion as shall be determined by the Board or the Committee at the time of the grant of the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Concurrent Right) of the vested shares of stock purchased under the underlying Option which have Concurrent Rights appurtenant to them over (B) the aggregate exercise price paid for such shares. (3) INDEPENDENT STOCK APPRECIATION RIGHTS. Independent Rights will be granted independently of any Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to Nonstatutory Stock Options as set forth in Section 6. They shall be denominated in share equivalents. The appreciation distribution payable on the exercised Independent Right shall be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Independent Right) of a number of shares of Company stock equal to the number of share equivalents in which the holder is vested under such Independent Right, and with respect to which the holder is exercising the Independent Right on such date, over (B) the aggregate Fair Market Value (on the date of the grant of the Independent Right) of such number of shares of Company stock. The appreciation distribution payable on the exercised Independent Right shall be in cash or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Independent Right. 9. CANCELLATION AND RE-GRANT OF OPTIONS. (a) The Board or the Committee shall have the authority to effect, at any time and from time to time, (i) the repricing of any outstanding Options and/or any Stock Appreciation Rights under the Plan and/or (ii) with the consent of the affected holders of Options and/or Stock Appreciation Rights, the cancellation of any outstanding Options and/or any Stock Appreciation Rights under the Plan and the grant in substitution therefor of new Options and/or Stock Appreciation Rights under the Plan covering the same or different numbers of shares of stock, 10 but having an exercise price per share not less than eighty-five percent (85%) of the Fair Market Value (one hundred percent (100%) of the Fair Market Value in the case of an Incentive Stock Option) or, in the case of a 10% shareholder (as described in subsection 5(b)) receiving a new grant of an Incentive Stock Option, not less than one hundred ten percent (110%) of the Fair Market Value) per share of stock on the new grant date. Notwithstanding the foregoing, the Board or the Committee may grant an Option and/or Stock Appreciation Right with an exercise price lower than that set forth above if such Option and/or Stock Appreciation Right is granted as part of a transaction to which section 424(a) of the Code applies. (b) Shares subject to an Option or Stock Appreciation Right canceled under this Section 9 shall continue to be counted against the maximum award of Options and Stock Appreciation Rights permitted to be granted pursuant to subsection 5(c) of the Plan. The repricing of an Option and/or Stock Appreciation Right under this Section 9, resulting in a reduction of the exercise price, shall be deemed to be a cancellation of the original Option and/or Stock Appreciation Right and the grant of a substitute Option and/or Stock Appreciation Right; in the event of such repricing, both the original and the substituted Options and Stock Appreciation Rights shall be counted against the maximum awards of Options and Stock Appreciation Rights permitted to be granted pursuant to subsection 5(c) of the Plan. The provisions of this subsection 9(b) shall be applicable only to the extent required by Section 162(m) of the Code. 10. COVENANTS OF THE COMPANY. (a) During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of stock required to satisfy such Stock Awards. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Stock Award; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Stock Awards unless and until such authority is obtained. 11. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Stock Awards shall constitute general funds of the Company. 11 12. MISCELLANEOUS. (a) The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest pursuant to subsection 6(e), 7(d) or 8(b), notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. (b) Neither an Employee, Director or Consultant nor any person to whom a Stock Award is transferred under subsection 6(d), 7(b), or 8(b) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Stock Award unless and until such person has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (c) Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Employee, Director, Consultant or other holder of Stock Awards any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Director or Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee with or without cause the right of the Company's Board of Directors and/or the Company's shareholders to remove any Director as provided in the Company's Bylaws and the provisions of the California Corporations Code, or the right to terminate the relationship of any Consultant subject to the terms of such Consultant's agreement with the Company or Affiliate. (d) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (e) The Company may require any person to whom a Stock Award is granted, or any person to whom a Stock Award is transferred pursuant to subsection 6(d), 7(b) or 8(b), as a condition of exercising or acquiring stock under any Stock Award, (1) to give written assurances satisfactory to the Company as to such person's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Stock Award for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise or acquisition of stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the 12 then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (f) To the extent provided by the terms of a Stock Award Agreement, the person to whom a Stock Award is granted may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under a Stock Award by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the common stock otherwise issuable to the participant as a result of the exercise or acquisition of stock under the Stock Award; or (3) delivering to the Company owned and unencumbered shares of the common stock of the Company. 13. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any Stock Award (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the type(s) and maximum number of securities subject to the Plan pursuant to subsection 4(a) and the maximum number of securities subject to award to any person during any calendar year pursuant to subsection 5(c), and the outstanding Stock Awards will be appropriately adjusted in the type(s) and number of securities and price per share of stock subject to such outstanding Stock Awards. Such adjustments shall be made by the Board or the Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company.)" (b) In the event of "Change in Control," all outstanding Stock Awards shall immediately become one hundred percent (100%) vested, and the Board shall notify all participants that their outstanding Stock Awards shall be fully exercisable for a period of three (3) months (or such other period of time not exceeding six (6) months as is determined by the Board at the time of grant) from the date of such notice, and any unexercised Stock Awards shall terminate upon the expiration of such period. "Change in Control" means the occurrence of any of the following events: (1) the shareholders of the Company approve a merger or consolidation of the Company 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 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 13 Voting Securities of the Company, or of such surviving entity, outstanding immediately after such merger or consolidation; (2) the shareholders of the Company 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 of all or substantially all of the Company's assets; (3) any person (as such term is used in Sections 13(d) and 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 (B) a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their beneficial ownership of stock in 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 representing fifty percent (50%) or more of the Voting Securities; or (4) (A) (1) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in beneficial owners of Voting Securities of the Company 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 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 (b) a corporation owned directly or indirectly by the shareholders of Company in substantially the same proportions as their ownership of stock in the Company, is or becomes the beneficial owner (within the meaning or Rule 13d-3 under the Exchange Act), directly or indirectly, of the securities of the Company representing twenty-five percent (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 Company's Board 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 the Company as of the date hereof; (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors of the Company who are Incumbent Directors described in (A) above at the time of such election or nomination; or (C) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors of the Company who are Incumbent Directors described in (A) or (B) above at the time of such election or nomination. 14 Notwithstanding the foregoing, "Incumbent Directors" shall not include an individual whose election or nomination to the Board 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 the Company. 14. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) The Board at any time, and from time to time, may amend the Plan and/or some or all outstanding Stock Awards granted under the Plan. However, except as provided in paragraph 13 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the shareholders of the Company to the extent shareholder approval is necessary for the Plan to satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or securities exchange listing requirements. (b) The Board may in its sole discretion submit any other amendment to the Plan for shareholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations promulgated thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) Rights and obligations under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. (e) The Board at any time, and from time to time, may amend the terms of any one or more Stock Award; provided, however, that the rights and obligations under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. 15. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on December 18, 2006 which shall be within ten (10) years from the date the Plan is adopted by the Board or approved by the shareholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. 15 (b) Rights and obligations under any Stock Award granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the written consent of the person to whom the Stock Award was granted. 16. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Stock Awards granted under the Plan shall be exercised unless and until the Plan has been approved by the shareholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board, and, if required, an appropriate permit has been issued by the Commissioner of Corporations of the State of California. 16 EX-27 5 EXHIBIT 27
9 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 SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 116,893 307 365,000 0 693,833 0 0 1,038,212 37,300 2,215,784 2,055,016 0 10,081 0 0 0 70,170 80,517 2,215,784 49,525 18,123 6,965 74,613 23,674 23,674 50,939 5,966 45 30,420 22,360 12,969 0 0 12,969 1.29 1.29 5.8 15,167 85 0 9,975 32,700 3,203 1,837 37,300 37,300 0 10,687
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