-----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, E4VuMqTJqUTUxeKGQTufcF44m3rJ8AhnzYcitNRmHdtB9uYW4uCCtTCIS3Ogk0KA E2+uWZ6FPz/FWca0yGjiAA== 0001012870-96-000641.txt : 19961115 0001012870-96-000641.hdr.sgml : 19961115 ACCESSION NUMBER: 0001012870-96-000641 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 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: 96660989 BUSINESS ADDRESS: STREET 1: 3003 TASMAN DRIVE, M/S NC820 CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4083835282 MAIL ADDRESS: STREET 1: 3003 TASMAN DRIVE, M/S NC820 CITY: SANTA CLARA STATE: CA ZIP: 95054 10-Q 1 FORM 10-Q OF SILICON VALLEY BANK As filed with the Securities and Exchange Commission on November 13, 1996 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________ FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________ to ________. Commission File Number: 33-41102 SILICON VALLEY BANCSHARES (Exact name of registrant as specified in its charter) California 94-2856336 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3003 Tasman Drive Santa Clara, California 95054-1191 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (408) 654-7282 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- At October 31, 1996, 9,304,966 shares of the registrant's common stock (no par value) were outstanding. ================================================================================ This report contains a total of 26 pages. 1 TABLE OF CONTENTS ----------------- PAGE ---- PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS 3 CONSOLIDATED INCOME STATEMENTS 4 CONSOLIDATED STATEMENTS OF CASH FLOWS 5 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 PART II - OTHER INFORMATION ---------------------------- ITEM 1. LEGAL PROCEEDINGS 25 ITEM 2. CHANGES IN SECURITIES 25 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25 ITEM 5. OTHER INFORMATION 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25 SIGNATURES 26 2 PART I - FINANCIAL INFORMATION ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS SILICON VALLEY BANCSHARES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1996 1995 (Dollars in thousands) (Unaudited) - ----------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 85,478 $ 85,187 Federal funds sold and securities purchased under agreement to resell 280,394 257,138 Investment securities, at fair value 493,132 321,309 Loans, net of unearned income 840,778 738,405 Allowance for loan losses (30,000) (29,700) - ----------------------------------------------------------------------------------------- Net loans 810,778 708,705 Premises and equipment 4,127 4,697 Other real estate owned 2,720 4,955 Accrued interest receivable and other assets 27,141 25,596 - ----------------------------------------------------------------------------------------- Total assets $1,703,770 $1,407,587 ========================================================================================= Liabilities and Shareholders' Equity: Liabilities: Noninterest-bearing demand deposits $ 489,369 $ 451,318 Money market and NOW deposits 1,005,904 773,292 Time deposits 73,559 65,450 - ----------------------------------------------------------------------------------------- Total deposits 1,568,832 1,290,060 Other liabilities 9,813 12,553 - ----------------------------------------------------------------------------------------- Total liabilities 1,578,645 1,302,613 - ----------------------------------------------------------------------------------------- Shareholders' Equity: Preferred stock, no par value: 20,000,000 shares authorized; none outstanding Common stock, no par value: 30,000,000 shares authorized; 9,296,293 and 8,963,662 shares outstanding at September 30, 1996 and December 31, 1995, respectively 64,598 59,357 Retained earnings 61,440 45,855 Net unrealized loss on available-for-sale investments (547) (198) Unearned compensation (366) (40) - ----------------------------------------------------------------------------------------- Total shareholders' equity 125,125 104,974 - ----------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,703,770 $1,407,587 =========================================================================================
See notes to interim consolidated financial statements. 3 SILICON VALLEY BANCSHARES AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS
For the three months ended For the nine months ended ---------------------------- ----------------------------- September 30, September 30, September 30, September 30, 1996 1995 1996 1995 (Dollars in thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited) - ------------------------------------------------------------------------------------------------------------------- Interest income: Loans $23,236 $19,193 $65,536 $59,371 Investment securities 7,040 2,111 16,455 6,831 Federal funds sold and securities purchased under agreement to resell 3,019 3,894 9,527 7,307 - ------------------------------------------------------------------------------------------------------------------- Total interest income 33,295 25,198 91,518 73,509 - ------------------------------------------------------------------------------------------------------------------- Interest expense: Deposits 10,353 7,282 27,438 19,062 - ------------------------------------------------------------------------------------------------------------------- Total interest expense 10,353 7,282 27,438 19,062 - ------------------------------------------------------------------------------------------------------------------- Net interest income 22,942 17,916 64,080 54,447 Provision for loan losses 2,962 3,337 6,550 6,098 - ------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 19,980 14,579 57,530 48,349 - ------------------------------------------------------------------------------------------------------------------- Noninterest income: Disposition of client warrants 618 3,823 2,880 5,626 Letter of credit and foreign exchange income 759 807 2,493 2,267 Deposit service charges 359 315 1,200 1,000 Investment gains (losses) - - 1 (770) Other 277 153 825 434 - ------------------------------------------------------------------------------------------------------------------- Total noninterest income 2,013 5,098 7,399 8,557 - ------------------------------------------------------------------------------------------------------------------- Noninterest expense: Compensation and benefits 7,914 6,517 23,259 20,374 Professional services 1,122 1,032 3,398 3,620 Equipment 859 1,473 2,452 2,678 Occupancy 706 1,007 2,329 2,655 Corporate legal and litigation 207 179 140 571 Data processing services 119 214 319 767 Client services 23 82 225 339 Cost of other real estate owned 19 23 345 37 FDIC deposit insurance 1 14 173 1,210 Other 2,237 1,370 6,314 4,143 - ------------------------------------------------------------------------------------------------------------------- Total noninterest expense 13,207 11,911 38,954 36,394 - ------------------------------------------------------------------------------------------------------------------- Income before income tax expense 8,786 7,766 25,975 20,512 Income tax expense 3,514 2,303 10,390 7,788 - ------------------------------------------------------------------------------------------------------------------- Net income $ 5,272 $ 5,463 $15,585 $12,724 =================================================================================================================== Net income per common and common equivalent share $0.54 $0.59 $1.61 $1.40 ===================================================================================================================
See notes to interim consolidated financial statements. 4 SILICON VALLEY BANCSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended ------------------------------ September 30, September 30, 1996 1995 (Dollars in thousands) (Unaudited) (Unaudited) - ------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 15,585 $ 12,724 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 6,550 6,098 Net (gain) loss on sales of investment securities (1) 770 Depreciation and amortization 880 1,633 Net gain on sales of other real estate owned (407) (124) Provision for other real estate owned 551 - Increase (decrease) in unearned income 1,182 (277) Increase in accrued interest receivable (3,671) (429) (Increase) decrease in accounts receivable 629 (362) Increase (decrease) in accrued liabilities (2,804) 643 Other, net (3,369) 730 - ------------------------------------------------------------------------------------------------- Net cash provided by operating activities 15,125 21,406 - ------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from maturities and paydowns of investment securities 716,999 37,366 Proceeds from sales of investment securities 9,699 31,316 Purchases of investment securities (893,856) (83,569) Net increase in loans (111,751) (1,406) Proceeds from recoveries of charged off loans 1,946 5,224 Net proceeds from sales of other real estate owned 2,092 2,093 Purchases of premises and equipment (310) (5,151) - ------------------------------------------------------------------------------------------------- Net cash applied to investing activities (275,181) (14,127) - ------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 278,772 72,977 Proceeds from issuance of common stock, net of issuance costs 4,831 4,333 - ------------------------------------------------------------------------------------------------- Net cash provided by financing activities 283,603 77,310 - ------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 23,547 84,589 Cash and cash equivalents at January 1, 342,325 289,849 - ------------------------------------------------------------------------------------------------- Cash and cash equivalents at September 30, $ 365,872 $374,438 ================================================================================================= Supplemental disclosures: Interest paid $ 27,405 $ 18,964 Income taxes paid $ 11,932 $ 9,124 =================================================================================================
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 1995 consolidated financial statements to conform to the 1996 presentations. Such reclassifications had no effect on the results of operations or shareholders' equity. The following is a summary of the significant accounting and reporting policies used in preparing the interim consolidated financial statements. Nature of Operations - -------------------- The Company is a bank holding company whose principal subsidiary is Silicon Valley Bank (the "Bank"), a California-chartered bank with headquarters in Santa Clara, California. The Bank maintains regional banking offices in Northern and Southern California, and additionally has loan offices in Colorado, Maryland, Massachusetts, Oregon, Texas, and Washington. The Bank serves emerging and middle-market growth companies in specific targeted niches and focuses on the technology and life sciences industries, while identifying and capitalizing on opportunities to serve other groups of clients with unique financial needs. Substantially all of the assets, liabilities and earnings of the Company relate to its investment in the Bank. Consolidation - ------------- The interim consolidated financial statements include the accounts of the Company and those of its wholly owned subsidiaries, the Bank and SVB Leasing Company (inactive). The revenues, expenses, assets, and liabilities of the subsidiaries are included in the respective line items in the interim consolidated financial statements after elimination of intercompany accounts and transactions. Interim Consolidated Financial Statements - ----------------------------------------- In the opinion of Management, the interim consolidated financial statements contain all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the Company's consolidated financial position at September 30, 1996, and the results of its operations and cash flows for the three and nine month periods ended September 30, 1996 and September 30, 1995. The December 31, 1995 consolidated financial statements were derived from audited financial statements, and certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's 1995 Annual Report on Form 10-K. The results of operations for the three and nine month periods ended September 30, 1996 may not necessarily be indicative of the Company's operating results for the full year. 6 SILICON VALLEY BANCSHARES AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basis of Financial Statement Presentation - ----------------------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and judgments that affect the reported amounts of assets and liabilities as of the balance sheet date and the results of operations for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to possible change in the near term relate to the determination of the allowance for loan losses and the valuation of other real estate owned (OREO). An estimate of possible changes or range of possible changes cannot be made. Net Income Per Share Computation - -------------------------------- Net income per common and common equivalent share is calculated using weighted average shares outstanding, including the dilutive effect of stock options outstanding during the period. Weighted average shares outstanding were 9,735,778 and 9,660,785 for the three and nine month periods ended September 30, 1996 and 9,305,261 and 9,073,862 for the three and nine month periods ended September 30, 1995. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents as reported in the consolidated statements of cash flows includes cash on hand, cash balances due from banks, federal funds sold, and securities purchased under agreement to resell. Federal Funds Sold and Securities Purchased Under Agreement to Resell - --------------------------------------------------------------------- Federal funds sold and securities purchased under agreement to resell as reported in the consolidated balance sheets includes interest-bearing deposits in other financial institutions of $394,000 and $138,000 at September 30, 1996 and December 31, 1995, respectively. Nonaccrual Loans - ---------------- Loans are placed on nonaccrual status when they become 90 days past due as to principal or interest payments (unless the principal and interest are well secured and in the process of collection), when the Company has determined that the timely collection of principal or interest is doubtful, or when the loans otherwise become impaired under the provisions of Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan." When a loan is placed on nonaccrual status, the accrued interest is reversed against interest income and the loan is accounted for on the cash or cost recovery method thereafter until qualifying for return to accrual status. Generally, a loan will be returned to accrual status when all delinquent interest and principal becomes current in accordance with the terms of the loan agreement and full collection of the principal appears probable. 7 SILICON VALLEY BANCSHARES AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New Accounting Pronouncements - ----------------------------- In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes financial accounting and reporting standards for stock-based compensation plans, including employee stock purchase plans, stock options and restricted stock. SFAS No. 123 encourages all entities to adopt a fair value method of accounting for stock- based compensation plans, whereby compensation cost is measured at the grant date based on the fair value of the award and is realized as an expense over the service or vesting period. However, SFAS No. 123 also allows an entity to continue to measure compensation cost for these plans using the intrinsic value method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," which is the method currently being used by the Company. Under the intrinsic value method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount which must be paid to acquire the stock. The Company adopted SFAS No. 123 effective January 1, 1996, but will continue to account for employee and director stock-based compensation plans under the intrinsic value accounting methodology prescribed by APB Opinion No. 25. SFAS No. 123 requires that stock-based compensation to other parties be accounted for under the fair value method. The effect of adoption of this statement on the interim consolidated financial position and results of operations of the Company was not material. 2. LOANS The detailed composition of loans is presented in the following table:
September 30, December 31, (Dollars in thousands) 1996 1995 - ---------------------------------------------------------- Commercial $711,355 $622,488 Real estate term 60,872 56,845 Real estate construction 35,865 17,194 Consumer and other 32,686 41,878 - ---------------------------------------------------------- Total loans (1) $840,778 $738,405 ==========================================================
(1) Loans are presented net of unearned income of $4,995 and $3,813 at September 30, 1996 and December 31, 1995, respectively. 3. ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses for the three and nine month periods ended September 30, 1996 and 1995 was as follows: 8 SILICON VALLEY BANCSHARES AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 3. ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- (Dollars in thousands) 1996 1995 1996 1995 - ------------------------------------------------------------------------------ Beginning balance $29,000 $22,500 $29,700 $20,000 Provision for loan losses 2,962 3,337 6,550 6,098 Loans charged off (2,502) (1,948) (8,196) (4,322) Recoveries 540 3,111 1,946 5,224 - ------------------------------------------------------------------------------ Balance at September 30, $30,000 $27,000 $30,000 $27,000 ==============================================================================
The aggregate recorded investment in loans for which impairment has been realized in accordance with SFAS No. 114 totaled $19.9 million at September 30, 1996. Allocations to the allowance for loan losses at September 30, 1996 related to these loans were $6.5 million. Average impaired loans for the third quarter of 1996 were $18.7 million. 4. REGULATORY MATTERS During 1993, the Company and the Bank consented to a formal supervisory order by the Federal Reserve Bank of San Francisco and the Bank consented to a formal supervisory order by the California State Banking Department. The Federal Reserve Bank removed its supervisory order effective March 27, 1996, and the California State Banking Department terminated its supervisory order effective April 9, 1996. These orders required, among other actions, the following: suspension of cash dividends; restrictions on transactions between the Company and the Bank without prior regulatory approval; development of a capital plan to ensure the Bank maintains adequate capital levels subject to regulatory approval; development of plans to improve the quality of the Bank's loan portfolio through collection or improvement of the credits within specified time frames; changes to the Bank's loan policies which require the Directors' Loan Committee to approve all loans to any one borrower exceeding $3.0 million and requiring the Board of Directors to become more actively involved in loan portfolio management and monitoring activities; review of, and changes in, the Bank's loan policies to implement (i) policies for controlling and monitoring credit concentrations, (ii) underwriting standards for all loan products, and (iii) standards for credit analysis and credit file documentation; development of an independent loan review function and related loan review policies and procedures; development of Board of Directors oversight programs to establish and maintain effective control and supervision of Management and major Bank operations and activities; development of a plan, including a written methodology, to maintain an adequate allowance for loan losses, defined as a minimum of 2.0% of total loans; development of business plans to establish guidelines for growth and ensure maintenance of adequate capital levels; a review and evaluation of existing compensation practices and development of officer compensation policies and procedures by the Boards of Directors of the Company and the Bank; policies requiring that changes in fees paid to directors as well as bonuses paid to executive officers first receive regulatory approval; and development of a detailed internal audit plan for approval by the Board of Directors of the Bank. The California State Banking Department order further required the Bank to maintain a minimum tangible equity-to-assets ratio of 6.5%. 9 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- Earnings Summary - ---------------- The Company reported net income of $5.3 million, or $0.54 per share, for the third quarter of 1996, compared with net income of $5.5 million, or $0.59 per share, for the third quarter of 1995. Net income was $15.6 million, or $1.61 per share, for the nine months ended September 30, 1996, versus $12.7 million, or $1.40 per share, for the respective 1995 period. The annualized return on average assets (ROA) was 1.3% in the third quarter of 1996 compared to 1.8% in the 1995 third quarter. The annualized return on average equity (ROE) in the third quarter of 1996 was 17.2%, compared to 22.4% in the third quarter of 1995. For the first nine months of 1996, ROA was 1.4% and ROE was 17.9% versus 1.5% and 19.3%, respectively, for the comparable prior year period. The decrease in net income during the quarter ended September 30, 1996, as compared with the prior year respective period, resulted from a decrease in noninterest income, an increase in noninterest expense, and a higher effective tax rate, offset by an increase in net interest income and a lower provision for loan losses. The increase in net income for the nine month period ended September 30, 1996, as compared with the prior year respective period, was due to an increase in net interest income, offset by a higher provision for loan losses, an increase in noninterest expense, and lower noninterest income. The major components of net income as well as changes in these components are summarized in the following table for the three and nine month periods ended September 30, 1996 and 1995, and are discussed in more detail below.
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ----------------- (Dollars in thousands) 1996 1995 1996 1995 - ------------------------------------------------------------------------------- Net interest income $22,942 $17,916 $64,080 $54,447 Provision for loan losses 2,962 3,337 6,550 6,098 Noninterest income 2,013 5,098 7,399 8,557 Noninterest expense 13,207 11,911 38,954 36,394 - ------------------------------------------------------------------------------- Income before income taxes 8,786 7,766 25,975 20,512 Income tax expense 3,514 2,303 10,390 7,788 - ------------------------------------------------------------------------------- Net income $ 5,272 $ 5,463 $15,585 $12,724 ===============================================================================
10 Net Interest Income and Margin - ------------------------------ Net interest income represents the difference between interest earned, primarily on loans and investments, and interest paid on funding sources, primarily deposits, and is the principal source of revenue for the Company. Net interest margin is the amount of net interest income, on a fully taxable-equivalent basis, expressed as a percentage of average interest-earning assets. The average yield earned on interest-earning assets is the amount of taxable-equivalent interest income expressed as a percentage of average interest-earning assets. The average rate paid on funding sources expresses interest expense as a percentage of average interest-earning assets. The following tables set forth average assets, liabilities and shareholders' equity, interest income and interest expense, average yields and rates, and the composition of the Company's net interest margin for the three and nine month periods ended September 30, 1996 and 1995, respectively. 11 - -------------------------------------------------------------------------------- AVERAGE BALANCES, RATES AND YIELDS - --------------------------------------------------------------------------------
For the three months ended September 30, ------------------------------------------------------------------------ 1996 1995 (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) $ 226,543 $ 3,019 5.3% $ 264,361 $ 3,894 5.9% Investment securities: Taxable 470,391 6,912 5.8 134,047 2,001 6.0 Non-taxable (2) 8,683 196 9.0 6,686 169 10.1 Loans: Commercial 684,832 20,203 11.7 570,022 16,831 11.8 Real estate construction and term 90,841 2,062 9.0 72,497 1,843 10.2 Consumer and other 40,574 971 9.5 21,420 519 9.7 - ---------------------------------------- ----------------------------------- --------------------------------- Total loans 816,247 23,236 11.3 663,939 19,193 11.6 - ---------------------------------------- ----------------------------------- --------------------------------- Total interest-earning assets 1,521,864 33,363 8.7 1,069,033 25,257 9.5 - ---------------------------------------- ----------------------------------- --------------------------------- Cash and due from banks 127,463 111,873 Allowance for loan losses (30,004) (24,549) Other real estate owned 2,925 5,446 Other assets 28,515 26,519 - ---------------------------------------- ---------- ---------- Total assets $1,650,763 $1,188,322 ======================================== ========== ========== Funding sources: Interest-bearing liabilities: Money market and NOW deposits $ 991,521 9,601 3.9 $ 651,752 6,679 4.1 Time deposits 73,129 752 4.1 63,998 603 3.8 - ---------------------------------------- ----------------------------------- --------------------------------- Total interest-bearing liabilities 1,064,650 10,353 3.9 715,750 7,282 4.1 Portion of noninterest-bearing funding sources 457,214 353,283 - ---------------------------------------- ----------------------------------- --------------------------------- Total funding sources 1,521,864 10,353 2.7 1,069,033 7,282 2.7 - ---------------------------------------- ----------------------------------- --------------------------------- Noninterest-bearing funding sources: Demand deposits 452,322 360,919 Other liabilities 11,957 15,015 Portion used to fund interest-earning assets (457,214) (353,283) Shareholders' equity 121,834 96,638 - ---------------------------------------- ---------- ---------- Total liabilities and shareholders' equity $1,650,763 $1,188,322 ======================================== ========== ========== Net interest income and margin $ 23,010 6.0% $17,975 6.7% ======================================== ========== ======= ======= ===== Memorandum: Total deposits $1,516,972 $1,076,669 ======================================== ========== ==========
(1) Includes average interest-bearing deposits in other financial institutions of $402 and $128 for the three months ended September 30, 1996 and 1995, respectively. (2) Interest income on non-taxable investments is presented on a fully taxable- equivalent basis. The tax-equivalent adjustments were $68 and $59 for the three months ended September 30, 1996 and 1995, respectively. 12 - -------------------------------------------------------------------------------- AVERAGE BALANCES, RATES AND YIELDS - --------------------------------------------------------------------------------
For the nine months ended September 30, ----------------------------------------------- 1996 1995 (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) $ 238,334 $ 9,527 5.3% $166,227 $ 7,307 5.9% Investment securities: Taxable 377,788 16,125 5.7 146,261 6,483 5.9 Non-taxable (2) 7,045 507 9.6 7,064 536 10.1 Loans: Commercial 647,670 56,201 11.6 588,841 52,547 11.9 Real estate construction and term 79,534 6,421 10.8 69,269 5,287 10.2 Consumer and other 42,250 2,914 9.2 18,777 1,537 10.9 - --------------------------------------------- -------------------------------------- --------------------------- Total loans 769,454 65,536 11.4 676,887 59,371 11.7 - --------------------------------------------- -------------------------------------- --------------------------- Total interest-earning assets 1,392,621 91,695 8.8 996,439 73,697 9.9 - --------------------------------------------- -------------------------------------- --------------------------- Cash and due from banks 127,426 115,424 Allowance for loan losses (30,266) (22,886) Other real estate owned 3,948 5,939 Other assets 28,171 22,085 - --------------------------------------------- ---------- ---------- Total assets $1,521,900 $1,117,001 ============================================= ========== ========== Funding sources: Interest-bearing liabilities: Money market and NOW deposits $ 885,139 25,401 3.8 $595,922 17,372 3.9 Time deposits 68,461 2,037 4.0 64,034 1,690 3.5 - --------------------------------------------- -------------------------------------- --------------------------- Total interest-bearing liabilities 953,600 27,438 3.8 659,956 19,062 3.9 Portion of noninterest-bearing funding sources 439,021 336,483 - ---------------------------------------------- -------------------------------------- --------------------------- Total funding sources 1,392,621 27,438 2.6 996,439 19,062 2.6 - --------------------------------------------- -------------------------------------- --------------------------- Noninterest-bearing funding sources: Demand deposits 440,851 355,606 Other liabilities 11,508 13,157 Portion used to fund interest-earning assets (439,021) (336,483) Shareholders' equity 115,941 88,282 - --------------------------------------------- ---------- ---------- Total liabilities and shareholders' equity $1,521,900 $1,117,001 ============================================= ========== ========== Net interest income and margin $ 64,257 6.2% $ 54,635 7.3% ============================================= ========== ========== ========== ===== Memorandum: Total deposits $1,394,451 $1,015,562 ============================================= ========== ==========
(1) Includes average interest-bearing deposits in other financial institutions of $341 and $459 for the nine months ended September 30, 1996 and 1995, respectively. (2) Interest income on non-taxable investments is presented on a fully taxable- equivalent basis. The tax-equivalent adjustments were $177 and $188 for the nine months ended September 30, 1996 and 1995, respectively. 13 Net interest income is affected by changes in the amount and mix of interest- earnings assets and interest-bearing liabilities, referred to as "volume change." Net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities, referred to as "rate change." The following table sets forth changes in interest income and interest expense for each major category of interest-earning assets and interest-bearing liabilities. Changes which are the combined result of volume and rate changes have been allocated to volume. Changes relating to investment securities are presented on a fully taxable-equivalent basis using the federal statutory rate of 35% in 1996 and 1995.
1996 Versus 1995 --------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, --------------------------------------------------------------- Increase (Decrease) Increase (Decrease) Due to Change in Due to Change in --------------------------------------------------------------- (Dollars in thousands) Volume Rate Total Volume Rate Total - ------------------------------------------------------------------------------------------------------------------------- Interest income: Federal funds sold and securities purchased under agreement to resell $ (515) $(360) $ (875) $ 2,889 $ (669) $ 2,220 Investment securities 5,014 (76) 4,938 10,012 (399) 9,613 Loans 4,283 (240) 4,043 7,939 (1,774) 6,165 - ------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in interest income 8,782 (676) 8,106 20,840 (2,842) 17,998 - ------------------------------------------------------------------------------------------------------------------------- Interest expense: Money market and NOW deposits 3,272 (350) 2,922 8,316 (287) 8,029 Time deposits 92 57 149 133 214 347 - ------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in interest expense 3,364 (293) 3,071 8,449 (73) 8,376 - ------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net interest income $5,418 $(383) $5,035 $12,391 $(2,769) $ 9,622 =========================================================================================================================
Net interest income, on a fully taxable-equivalent basis, totaled $23.0 million for the third quarter of 1996, an increase of $5.0 million, or 28.0%, from the $18.0 million total for the third quarter of 1995. The increase in net interest income was the result of a $8.1 million, or 32.1%, increase in interest income, offset by a $3.1 million, or 42.2%, increase in interest expense over the comparable prior year period. The $8.1 million increase in interest income for the third quarter of 1996, as compared to the third quarter of 1995, was the result of a $8.8 million favorable volume variance offset by a $0.7 million unfavorable rate variance. The favorable volume variance resulted from a $452.8 million, or 42.4%, increase in average interest-earning assets over the comparable prior year period. The increase in average interest-earning assets resulted from growth in the Company's deposits and was composed of increases in loans and investment securities, offset by a decline in federal funds sold and securities purchased under agreement to resell. The growth in average loans, which were up $152.3 million, or 22.9%, compared to the third quarter of 1995, primarily resulted from an increase in commercial loans and personal lines of credit offered to executives of clients. Average investment securities for the third quarter of 1996 increased $338.3 million, or 240.4%, over the respective prior year period. This growth largely consisted of investments in notes issued by U.S. agencies as well as in commercial paper. Average federal funds sold and securities purchased under agreement to resell decreased $37.8 million, or 14.3%, over the comparable 1995 period, as a portion of funds previously invested in federal funds sold were shifted to short-term investment securities. The change in the mix of average investment securities and average federal funds sold and securities purchased under agreement to resell was 14 the result of Management's decision to further diversify the Company's portfolio of short-term investments in connection with its liquidity management activities. Further, the increase in average investment securities reflected Management's decision to lengthen the average life of the Company's investment portfolio in an effort to obtain the higher yields available due to the steepening of the yield curve during 1996. Interest income for the third quarter of 1996 decreased $0.7 million from the comparable prior year period due to an unfavorable rate variance. The unfavorable rate variance was the result of a decline in market interest rates during the last half of 1995 and the first quarter of 1996. Lower yields on loans in the 1996 third quarter accounted for $0.2 million of the total unfavorable rate variance, as a substantial portion of the Company's loans are prime rate-based. This unfavorable rate variance would have been higher had the Company not realized $1.2 million in loan interest income that resulted from the payoff of two nonperforming loans during the 1996 third quarter. The remaining $0.5 million portion of the total unfavorable rate variance was attributable to lower yields on federal funds sold and securities purchased under agreement to resell, and investment securities. The overall decrease in the yield on average interest-earning assets of 80 basis points for the third quarter of 1996, as compared to the third quarter of 1995, was due to a combination of the decline in market interest rates and a shift in the composition of average interest-earning assets towards a higher percentage of short-term investment securities. This shift in the composition of average interest-earning assets resulted from growth in the Company's deposits combined with the Company's liquidity and investment management activities. Total interest expense in the 1996 third quarter increased $3.1 million from the total for the 1995 third quarter. This increase was due to an unfavorable volume variance of $3.4 million slightly offset by a $0.3 million favorable rate variance. The unfavorable volume variance resulted from a $348.9 million, or 48.7%, increase in average interest-bearing liabilities in the third quarter of 1996 as compared with the third quarter of 1995. This increase was concentrated in higher-rate money market deposits, and was attributable to market conditions combined with the successful business development efforts of the Company. Changes in the rates paid on interest-bearing liabilities had a $0.3 million favorable impact on interest expense in the third quarter of 1996 versus the 1995 third quarter, as the average rate paid on interest-bearing liabilities decreased 20 basis points from the third quarter of 1995. This slight decrease resulted from a reduction in the rates paid on the Company's higher-rate money market deposits on account of the declining interest rate environment during the last half of 1995 and the first quarter of 1996, offset by the aforementioned growth of higher-rate money market deposits. Net interest income, on a fully taxable-equivalent basis, totaled $64.3 million for the first nine months of 1996, an increase of $9.6 million, or 17.6%, from the $54.6 million total for the first nine months of 1995. The increase in net interest income was the result of an $18.0 million, or 24.4%, increase in interest income, offset by a $8.4 million, or 43.9%, increase in interest expense over the comparable prior year period. The $18.0 million increase in interest income for the first nine months of 1996, as compared to the first nine months of 1995, was the result of a $20.8 million favorable volume variance offset by a $2.8 million unfavorable rate variance. The favorable volume variance resulted from a $396.2 million, or 39.8%, increase in average interest-earning assets over the comparable prior year period. The increase in average interest-earning assets for the first nine months of 1996, 15 compared with the first nine months of 1995, was composed of increases in loans, investment securities, and liquid investments in federal funds sold and securities purchased under agreement to resell, and resulted from the aforementioned growth in deposits. The unfavorable rate variance was attributable to the previously mentioned decline in market interest rates during the last half of 1995 and the first quarter of 1996, offset by the aforementioned loan interest income realized in connection with the payoff of two nonperforming loans during the 1996 third quarter. The overall decrease in the yield on average interest-earning assets of 110 basis points for the first nine months of 1996, over the comparable period in 1995, was due to a combination of the decline in market interest rates and a shift in the composition of average interest-earning assets towards a higher percentage of short-term investment securities. This shift in the composition of average interest-earning assets resulted from growth in the Company's deposits combined with the Company's liquidity and investment management activities. Total interest expense for the first nine months of 1996 increased $8.4 million from the total for the first nine months of 1995. This increase was due to an unfavorable volume variance of $8.5 million offset by a favorable rate variance of $0.1 million. The unfavorable volume variance resulted from a $293.6 million, or 44.5%, increase in average interest-bearing liabilities for the first nine months of 1996 over the comparable prior year period. This increase was concentrated in higher-rate money market deposits, and was attributable to market conditions combined with the successful business development efforts of the Company. Changes in the rates paid on interest-bearing liabilities had a $0.1 million favorable impact on interest expense for the first nine months of 1996, as compared to the respective 1995 period. This slight decrease in interest expense resulted from a reduction in the rates paid on the Company's higher-rate money market deposits on account of the declining interest rate environment during the last half of 1995 and the first quarter of 1996, offset by the aforementioned growth of higher-rate money market deposits. Provision For Loan Losses - ------------------------- The provision for loan losses is based on Management's evaluation of the adequacy of the existing allowance for loan losses in relation to total loans, and on Management's continuous assessment of the inherent and identified risk dynamics of the loan portfolio resulting from reviews of selected individual loans and loan commitments. The provision for loan losses totaled $3.0 million for the third quarter of 1996, a $0.4 million, or 11.2%, decrease compared to the $3.3 million provision for the third quarter of 1995. The provision for loan losses increased $0.5 million, or 7.4%, to $6.6 million for the first nine months of 1996, versus $6.1 million for the comparable 1995 period. See "Financial Condition - Credit Quality and the Allowance for Loan Losses" for additional related discussion. Noninterest Income - ------------------ The following table summarizes the components of noninterest income for the three and nine month periods ended September 30, 1996 and 1995: 16
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- (Dollars in thousands) 1996 1995 1996 1995 - --------------------------------------------------------------------------------------------- Disposition of client warrants $ 618 $3,823 $2,880 $5,626 Letter of credit and foreign exchange income 759 807 2,493 2,267 Deposit service charges 359 315 1,200 1,000 Investment gains (losses) - - 1 (770) Other 277 153 825 434 - --------------------------------------------------------------------------------------------- Total noninterest income $2,013 $5,098 $7,399 $8,557 =============================================================================================
Total noninterest income for the three and nine month periods ended September 30, 1996 amounted to $2.0 million and $7.4 million, a decrease of $3.1 million and $1.2 million, respectively, from the $5.1 million and $8.6 million totals for the comparable 1995 periods. The decrease in noninterest income during 1996 was primarily explained by a decrease in income from the disposition of client warrants. Income from the disposition of client warrants was $0.6 million in the third quarter of 1996 and $2.9 million for the first nine months of 1996 versus $3.8 million and $5.6 million for the respective 1995 periods. The Company has historically obtained rights to acquire stock (in the form of warrants) in certain nonpublic clients as part of negotiated credit facilities. The receipt of warrants does not change the loan covenants or other collateral control techniques employed by the Company to mitigate the risk of a loan becoming nonperforming. Interest rates, loan fees and collateral requirements on loans with warrants are similar to lending arrangements where warrants are not obtained. The timing and amount of income from the disposition of client warrants typically depends upon factors beyond the control of the Company, including the general condition of the capital markets, and therefore cannot be predicted with any degree of accuracy and is likely to vary materially from period to period. Letter of credit fees, foreign exchange fees and other trade finance income was $0.8 million during both the 1996 and 1995 third quarters, and $2.5 million for the first nine months of 1996, compared to $2.3 million for the first nine months of 1995. The slight growth in this category of noninterest income in 1996 was due to increased foreign exchange fees, offset by lower letter of credit fees on account of a decline in transaction volume resulting from increased competition. Deposit service charges totaled $0.4 million and $1.2 million for the three and nine month periods ended September 30, 1996, respectively, versus $0.3 million and $1.0 million for the comparable 1995 periods. Clients compensate the Company for depository services either through earnings credits computed on their demand deposit balances or via explicit payments recognized as deposit service charges. The increase during 1996 was primarily related to growth in the Company's client base. The Company incurred no gains or losses on sales of investment securities in both the 1996 and 1995 third quarters. The Company realized a nominal gain on sales of investment securities during the first nine months of 1996, and incurred $0.8 million in losses through such sales during the first nine months of 1995. The securities sold during the first nine months of 1995 were primarily mortgage-backed securities. All sales of investment securities were conducted as a normal component of the Company's interest rate risk and liquidity management activities. 17 Other noninterest income is composed primarily of service-based fee income, and increased to $0.3 million and $0.8 million for the 1996 third quarter and the first nine months of 1996, respectively, from $0.2 million and $0.4 million for the comparable prior year periods. The increase during 1996 was primarily due to increased examination fees on client accounts receivable. Noninterest Expense - ------------------- Noninterest expense during the third quarter of 1996 totaled $13.2 million, a $1.3 million, or 10.9%, increase from the $11.9 million incurred in the comparable 1995 period. Noninterest expense was $39.0 million for the first nine months of 1996, an increase of $2.6 million, or 7.0%, over the $36.4 million total for the comparable 1995 period. Management closely monitors the level of noninterest expense using a variety of financial ratios, including the efficiency ratio. The efficiency ratio is calculated by dividing the amount of noninterest expense, excluding costs associated with other real estate owned, by adjusted revenues, defined as the total of net interest income and noninterest income, excluding income from the disposition of client warrants and gains or losses incurred through sales of investment securities. This ratio reflects the level of operating expense required to generate $1 of operating revenue. The Company's efficiency ratio improved to 54.2% for the 1996 third quarter, down from 61.9% for the third quarter of 1995. The Company's efficiency ratio for the first nine months of 1996 was 56.3%, versus 62.5% for the comparable 1995 period. The following tables present the detail of noninterest expense and the incremental contribution of each line item to the Company's efficiency ratio:
Three Months Ended September 30, ------------------------------------------- 1996 1995 ------------------- -------------------- Percent of Percent of Adjusted Adjusted (Dollars in thousands) Amount Revenues Amount Revenues - --------------------------------------------------------------------------------- Compensation and benefits $ 7,914 32.5% $ 6,517 34.0% Professional services 1,122 4.6 1,032 5.4 Equipment 859 3.5 1,473 7.7 Occupancy 706 2.9 1,007 5.2 Corporate legal and litigation 207 0.9 179 0.9 Data processing services 119 0.5 214 1.1 Client services 23 0.1 82 0.4 FDIC deposit insurance 1 0.0 14 0.1 Other 2,237 9.2 1,370 7.1 - -------------------------------------------------------------------------------- Total excluding cost of other real estate owned 13,188 54.2% 11,888 61.9% Cost of other real estate owned 19 23 - -------------------------------------------------------------------------------- Total noninterest expense $13,207 $11,911 ================================================================================
18
Nine Months Ended September 30, ------------------------------------------- 1996 1995 ------------------- -------------------- Percent of Percent of Adjusted Adjusted (Dollars in thousands) Amount Revenues Amount Revenues - --------------------------------- ------- ----------- ------- ----------- Compensation and benefits $23,259 33.9% $20,374 35.0% Professional services 3,398 4.9 3,620 6.2 Equipment 2,452 3.6 2,678 4.6 Occupancy 2,329 3.4 2,655 4.6 Data processing services 319 0.5 767 1.3 Client services 225 0.3 339 0.6 FDIC deposit insurance 173 0.3 1,210 2.1 Corporate legal and litigation 140 0.2 571 1.0 Other 6,314 9.2 4,143 7.1 - -------------------------------------------------------------------------------- Total excluding cost of other real estate owned 38,609 56.3% 36,357 62.5% Cost of other real estate owned 345 37 - -------------------------------------------------------------------------------- Total noninterest expense $38,954 $36,394 ================================================================================
Compensation and benefits expenses totaled $7.9 million in the third quarter of 1996, a $1.4 million, or 21.4%, increase over the $6.5 million incurred in the third quarter of 1995. For the first nine months of 1996, compensation and benefits expenses totaled $23.3 million, an increase of $2.9 million, or 14.2%, over the $20.4 million total for the comparable 1995 period. The increase during 1996 in compensation and benefits expenses was largely the result of an increase in the number of average full-time equivalent (FTE) staff employed by the Company. Average FTE were 369 and 358 for the three and nine month periods ended September 30, 1996, respectively, compared to 339 and 331 for the respective prior year periods. The increase in FTE was primarily attributable to the expansion of the Company's lending staff in an effort to develop new markets, as well as in response to the Company's growing client base. 19 Professional services expenses totaled $1.1 million in the third quarter of 1996, a $0.1 million, or 8.7%, increase from the $1.0 million incurred in the third quarter of 1995. This increase was the result of higher accounting and auditing fees, offset by lower legal expenses on account of client reimbursements received by the Company in connection with the previously mentioned payoff of two nonperforming loans during the 1996 third quarter. Professional services expenses decreased $0.2 million, or 6.1%, to a total of $3.4 million for the first nine months of 1996 versus $3.6 million for the comparable 1995 period. This decrease was primarily related to lower legal expenses resulting from the client reimbursements discussed above. Equipment expenses in the third quarter of 1996 totaled $0.9 million, a decrease of $0.6 million, or 41.7%, from the 1995 third quarter total of $1.5 million. Equipment expenses for the first nine months of 1996 totaled $2.5 million, a decrease of $0.2 million, or 8.4%, from the $2.7 million incurred in the comparable prior year period. The lower equipment expenses in 1996, compared to 1995, were primarily the result of the Company recognizing certain non-recurring costs in connection with a move into a new headquarters facility in the third quarter of 1995, offset by higher equipment costs in 1996 due to investments in computer equipment as well as other costs associated with the Company's growth in personnel. Occupancy expenses totaled $0.7 million and $2.3 million for the three and nine month periods ended September 30, 1996. This was a decrease of $0.3 million, or 29.9%, and $0.3 million, or 12.3%, from the $1.0 million and $2.7 million totals incurred in the respective 1995 periods. This decrease in occupancy expenses was the result of the aforementioned non-recurring costs incurred in connection with the Company's move into a new headquarters facility in the third quarter of 1995, offset by additional rent expense associated with several new loan offices opened by the Company during the first half of 1996. Corporate legal and litigation expenses totaled $0.2 million for both the third quarter of 1996 and 1995. Total corporate legal and litigation expenses were $0.1 million for the first nine months of 1996, versus $0.6 million for the first nine months of 1995. This decrease in expenses during 1996 was the result of the Company realizing a $0.4 million gain in the 1996 second quarter related to the net proceeds received from a legal settlement. Data processing services expenses were $0.1 million and $0.3 million for the three and nine month periods ended September 30, 1996, a decrease of $0.1 million, or 44.4%, and $0.4 million, or 58.4%, compared to the $0.2 million and $0.8 million totals for the comparable 1995 periods. The decrease during 1996 in data processing services expenses was due to the Company's conversion to an in- house data processing center during late 1995. Client services expenses include courier expenses and related costs of loan and deposit operations. Total client services expenses were nominal during the third quarter of 1996, compared to $0.1 million incurred in the third quarter of 1995. Client services expenses totaled $0.2 million for the first nine months of 1996, versus $0.3 million for the comparable prior year period. The year-to-year decrease in these expenses from 1995 to 1996 was due to the timing of reimbursements from clients. The Company realized minimal FDIC deposit insurance expense in both the third quarter of 1996 and 1995. Total FDIC deposit insurance expense for the first nine months of 1996 amounted to $0.2 million, a $1.0 million, or 85.7%, decrease from the $1.2 million incurred in the first nine months of 1995. This decrease was attributable to reductions in the Bank's assessment rate during both the third quarter of 1995 and the first quarter of 1996 due to completion of the recapitalization of the Bank Insurance Fund. The Bank's assessment rate was further reduced to the statutory minimum annual assessment of $2,000, effective July 1, 1996. Other noninterest expenses in the third quarter of 1996 totaled $2.2 million, a $0.9 million, or 63.3%, increase from the $1.4 million incurred in the third quarter of 1995. For the first nine months of 1996, other noninterest expenses increased $2.2 million, or 52.4%, to a total of $6.3 million compared to $4.1 million for the first nine months of 1995. The increase during 1996 largely resulted from increased marketing and business development efforts combined with an increase in other miscellaneous expenses resulting from the Company's growth in personnel. Net costs associated with other real estate owned were minimal in both the third quarter of 1996 and 1995. For the first nine months of 1996, net costs associated with OREO increased $0.3 million from the comparable 1995 period, primarily due to the 1996 first quarter write-down of one property owned by the Company. The costs associated with OREO include: maintenance expenses; property taxes; marketing costs; net operating expense or income associated with income- producing properties; property write-downs; and gains or losses on the sales of such properties. 20 Income Taxes - ------------ The Company's effective tax rate was 40.0% in the 1996 third quarter, compared to 29.7% in the third quarter of the prior year. For the nine months ended September 30, 1996, the Company's effective tax rate was 40.0%, versus 38.0% in the comparable 1995 period. The lower effective tax rates in 1995, as compared to 1996, were attributable to a 1995 third quarter adjustment in the Company's estimate of its tax liabilities. FINANCIAL CONDITION - ------------------- The Company's total assets were $1.7 billion at September 30, 1996 compared to $1.4 billion at December 31, 1995. Federal Funds Sold and Securities Purchased Under Agreement to Resell - --------------------------------------------------------------------- Federal funds sold and securities purchased under agreement to resell totaled $280.4 million at September 30, 1996, an increase of $23.3 million, or 9.0%, compared to the $257.1 million balance at December 31, 1995. This increase was the result of growth in the Company's deposits during 1996, offset by loan growth and by Management's decision to invest a significant portion of the deposit growth in investment securities in connection with the Company's liquidity and investment management activities. Investment Securities - --------------------- Investment securities totaled $493.1 million at September 30, 1996. This represented a $171.8 million, or 53.5%, increase over the December 31, 1995 balance of $321.3 million. The increase in investment securities was related to growth in the Company's total deposits coupled with the Company's liquidity and investment management activities, and was primarily centered in notes issued by U.S. agencies as well as in commercial paper. The Company's liquidity and investment management activities involved Management's decisions to further diversify the Company's portfolio of short-term investments as well as lengthen the average life of the investment portfolio in an effort to obtain the higher yields available due to the steepening of the yield curve during 1996. Loans - ----- Total loans, net of unearned income, at September 30, 1996 were $840.8 million, a $102.4 million, or 13.9%, increase compared to the $738.4 million balance outstanding at December 31, 1995. The increase in loans from the 1995 year-end total was largely concentrated in the commercial loan portfolio, and can be attributed to the Company's increased business development efforts. Credit Quality and the Allowance for Loan Losses - ------------------------------------------------ Lending money involves an inherent risk of nonpayment. Through the administration of loan policies and monitoring of the portfolio, Management seeks to reduce such risks. The allowance for loan losses is an estimate to provide a financial buffer for losses, both identified and unidentified, in the loan portfolio. 21 Management regularly reviews and monitors the loan portfolio to determine the risk profile of each credit and to identify credits whose risk profiles have changed. This review includes, but is not limited to, such factors as payment status, the financial condition of the borrower, borrower compliance with loan covenants, underlying collateral values, potential loan concentrations, and general economic conditions. Potential problem credits are identified and, based upon known information, action plans are developed. The allowance for loan losses was $30.0 million at September 30, 1996, an increase of $0.3 million, or 1.0%, compared to the $29.7 million balance at December 31, 1995. This increase was due to additional provisions to the allowance for loan losses of $6.6 million, offset by net charge-offs of $6.3 million for the first nine months of 1996. Gross charge-offs for the first nine months of 1996 were $8.2 million, and primarily related to four commercial credits. In general, Management believes, based on currently known information, that the allowance for loan losses is adequate as of September 30, 1996. However, future changes in circumstances, economic conditions or other factors could cause Management to increase or decrease the allowance for loan losses as deemed necessary. Nonperforming assets consist of loans that are past due 90 days or more but still accruing interest, loans on nonaccrual status and OREO. The table below sets forth certain relationships between nonperforming loans, nonperforming assets and the allowance for loan losses:
September 30, December 31, 1996 1995 (Dollars in thousands) (Unaudited) - ------------------------------------------------------------------------------------ Nonperforming assets: Loans past due 90 days or more $ 359 $ 906 Nonaccrual loans 19,936 27,867 - ------------------------------------------------------------------------------------ Total nonperforming loans 20,295 28,773 OREO 2,720 4,955 - ------------------------------------------------------------------------------------ Total nonperforming assets $23,015 $33,728 ==================================================================================== Nonperforming loans as a percent of total loans 2.4% 3.9% OREO as a percent of total assets 0.2% 0.4% Nonperforming assets as a percent of total assets 1.4% 2.4% Allowance for loan losses: $30,000 $29,700 As a percent of total loans 3.5% 4.0% As a percent of nonaccrual loans 150.5% 106.6% As a percent of nonperforming loans 147.8% 103.2%
Nonperforming loans were $20.3 million, or 2.4% of total loans, at September 30, 1996. This was down from the total of $28.8 million or 3.9% of total loans, at the prior year-end. Nonperforming loans at September 30, 1996 included two credits, one of which is collateralized with real estate, totaling $11.1 million. Management believes each of these two credits, based on currently known information, is adequately covered with collateral and specific reserves. 22 Management has identified one loan in excess of $1.5 million, that, on the basis of information known by Management as of September 30, 1996, was judged to have a higher than normal risk of becoming nonperforming. The Company is not aware of any other loans at September 30, 1996 where known information about possible problems of the borrower casts serious doubts about the ability of the borrower to comply with the loan repayment terms. OREO totaled $2.7 million at September 30, 1996, a decrease of $2.2 million, or 45.1%, from the $5.0 million balance at December 31, 1995. This decrease primarily resulted from the previously mentioned write-down of one property combined with sales of several properties during the first nine months of 1996. Deposits - -------- Total deposits were $1.6 billion at September 30, 1996, an increase of $278.8 million, or 21.6%, from the prior year-end total of $1.3 billion. The majority of this increase was in interest-bearing deposits, which increased $240.7 million, or 28.7%, to $1.1 billion at September 30, 1996 from $838.7 million as of December 31, 1995. This increase was largely concentrated in higher-rate money market deposits and resulted from market conditions combined with increased business development efforts by the Company. Noninterest-bearing demand deposits were $489.4 million at September 30, 1996, representing a $38.1 million, or 8.4%, increase from the $451.3 million balance at December 31, 1995. LIQUIDITY - --------- Management regularly reviews general economic and financial conditions, both external and internal, and determines whether the positions taken with respect to liquidity and interest rate sensitivity are appropriate. The objectives of liquidity management are to provide funds, at an acceptable cost, to meet loan demand and depositors' needs, and to service other liabilities as they come due. The Company assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs. One measure Management uses to assess the Company's liquidity is the level of liquid assets (as defined by the Company) relative to total deposits. Liquid assets include cash and due from banks, federal funds sold, securities purchased under agreement to resell, and investment securities maturing within one year. At September 30, 1996, the Company's liquid assets as a percentage of deposits were 34.9% compared to 41.0% at December 31, 1995. This decrease resulted primarily from growth in the Company's deposits combined with Management's decision to lengthen the average life of the investment portfolio. CAPITAL RESOURCES - ----------------- Management seeks to maintain adequate capital to support anticipated asset growth and credit risks and to ensure that the Company and the Bank are in compliance with all regulatory capital guidelines. The primary source of new capital for the Company has been the retention of earnings. Aside from current earnings, an additional source of new capital for the Company has been proceeds from the issuance of common stock under the Company's employee benefit plans, including the Company's 1983 and 1989 stock option plans, the employee stock ownership plan and the employee stock purchase plan. 23 Shareholders' equity was $125.1 million at September 30, 1996, an increase of $20.2 million, or 19.2%, from the $105.0 million balance at December 31, 1995. This increase resulted from net income of $15.6 million and capital generated through the Company's employee benefit plans of $4.9 million in the first nine months of 1996, slightly offset by a $0.3 million increase in the unrealized loss on available-for-sale investments. The Company and the Bank are subject to capital adequacy guidelines issued by the Federal Reserve Board. Under these guidelines, the minimum total risk-based capital requirement is 10.0% of risk-weighted assets and certain off-balance sheet items for a "well capitalized" depository institution. At least 6.0% of the 10.0% total risk-based capital ratio must consist of Tier 1 capital, defined as tangible common equity, and the remainder may consist of subordinated debt, cumulative preferred stock, and a limited amount of the allowance for loan losses. The Federal Reserve Board has established minimum capital leverage ratio guidelines for banking organizations. This ratio is determined using Tier 1 capital divided by quarterly average total assets. The guidelines require a minimum of 5.0% for a "well capitalized" depository institution. The Company's risk-based capital ratios were in excess of regulatory guidelines for a "well-capitalized" depository institution as of September 30, 1996 and December 31, 1995. Capital ratios for the Company are set forth below:
- -------------------------------------------------------------------------------- September 30, December 31, 1996 1995 - -------------------------------------------------------------------------------- Total risk-based capital ratio 12.1% 11.9% Tier 1 risk-based capital ratio 10.8% 10.6% Tier 1 leverage ratio 7.6% 8.0% ================================================================================
The increase in the Company's total and Tier 1 risk-based capital ratios from December 31, 1995 to September 30, 1996 was attributable to growth in the Company's capital, combined with the Company investing a substantial portion of the deposit growth during 1996 in lower risk-weighted assets. The decrease in the Company's Tier 1 leverage ratio from December 31, 1995 to September 30, 1996 was attributable to an increase in quarterly average assets that resulted from the aforementioned 1996 deposit growth. 24 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS There were no legal proceedings requiring disclosure pursuant to this item pending at September 30, 1996, or at the date of this report. ITEM 2 - CHANGES IN SECURITIES None. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5 - OTHER INFORMATION None. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: -------- 10.32 Executive Change in Control Severance Benefits Agreement 10.33 Change in Control Severance Policy For Non-executives 27 Financial Data Schedule (b) Reports on Form 8-K: ------------------- No reports on Form 8-K were filed by the Company during the quarter ended September 30, 1996. 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SILICON VALLEY BANCSHARES Date: November 13, 1996 /s/ Christopher T. Lutes ------------------------ Christopher T. Lutes Senior Vice President and Controller (Principal Accounting Officer) 26 EX-10.32 2 EXEC CHANGE IN CTRL SEVERENCE BENEFIT AGRMNT EXHIBIT 10.32 EXECUTIVE CHANGE IN CONTROL SEVERANCE BENEFITS AGREEMENT THIS EXECUTIVE CHANGE IN CONTROL SEVERANCE BENEFITS AGREEMENT (the "AGREEMENT") is entered into this 12th day of August, 1996 between ______________ ("EXECUTIVE") and SILICON VALLEY BANK, a California corporation (the "COMPANY"), a wholly owned subsidiary of Silicon Valley Bancshares, a California corporation ("BANCSHARES"). This Agreement is intended to provide Executive with the compensation and benefits described herein upon the occurrence of specific events. Certain capitalized terms used in this Agreement are defined in Article VI. The Company and Executive hereby agree as follows: ARTICLE 1 EMPLOYMENT BY THE COMPANY 1.1 Executive is currently employed as an executive vice president of the Company. 1.2 This Agreement shall remain in full force and effect for the two year period specified in Article VII; provided, however, that the rights and obligations of the parties hereto contained in Articles II through VII shall survive any termination for the longer of (i) two (2) years from the date of the Agreement or (ii) twenty-four (24) months following a Change in Control (as hereinafter defined) or such later period as may be required so that all benefits to which Executive is entitled under this Agreement are paid or otherwise provided to Executive. 1.3 The Company and Executive wish to set forth the compensation and benefits which Executive shall be entitled to receive in the event that there is a Change in Control or Executive's employment with the Company terminates following a Change in Control under the circumstances described in Article II of this Agreement. 1.4 The duties and obligations of the Company to Executive under this Agreement shall be in consideration for Executive's past services to the Company, Executive's continued employment with the Company, and Executive's execution of the general waiver and release described in Section 3.2. 1.5 This Agreement shall supersede any other agreements relating to any compensation, benefits, severance or other amounts to be paid to Executive in the event of Executive's termination of employment following the occurrence of a Change in Control, including but not limited to any Termination Agreement entered into between Executive and the Company, but shall not supersede any agreement between Executive and the Company or any personnel policies of the Company relating to other aspects of Executive's employment relationship with the Company, including but not limited to the Company's personnel policies addressing severance payments to Executive in the 1 event of a termination of Executive's employment which is not proximately related to the occurrence of a Change in Control. By executing this Agreement, both Executive and the Company agree that any Termination Agreement previously entered into between the parties which addressed as part of its provisions compensation to be paid to the Executive upon the termination of Executive's employment with the Company, shall terminate immediately and shall be of no further force and effect. ARTICLE 2 SEVERANCE BENEFITS 2.1 ENTITLEMENT TO SEVERANCE BENEFITS. If Executive's employment terminates due to an Involuntary Termination or a Constructive Termination within twenty- four (24) months following a Change in Control, the termination of employment will be a Covered Termination and the Company shall pay Executive the compensation and benefits described in this Article II. If Executive's employment terminates, but not due to an Involuntary Termination or a Constructive Termination within twenty-four (24) months following a Change in Control, or for any reason prior to a Change in Control or after twenty-four (24) months or more following a Change in Control, then the termination of employment will not be a Covered Termination and Executive will not be entitled to receive any payments or benefits under this Article II. Payment of any benefits described in this Article II shall be subject to the restrictions and limitations set forth in Article III. 2.2 LUMP SUM SEVERANCE PAYMENT. Within thirty (30) days following a Covered Termination, or such longer period as is administratively reasonable following the close of the maximum period provided by law for consideration and revocation of the employee agreement and release described in Section 3.2, Executive shall receive a lump sum payment determined by the Executive's Total Compensation multiplied by the appropriate factor applied from the table attached as Exhibit A (which factor shall be based upon (1) the Executive's title or grade within the Company and (2) the relationship between the valuation of the Company at the time of the transaction (or series of related transactions) causing the occurrence of a Change in Control and the Book Value of the Company at that time). This lump sum payment shall be called the Executive's "CIC Benefit." If the Executive's Covered Termination occurs on or before the expiration of twelve (12) months from the occurrence of a Change in Control, the Executive shall be entitled to receive 100% of his or her CIC Benefit. If the Executive's Covered Termination occurs after the expiration of twelve (12) months from the occurrence of a Change in Control, the Executive shall be entitled to receive a CIC Benefit based upon the following table: 2 NUMBER OF MONTHS FOLLOWING CHANGE IN CONTROL PERCENTAGE OF CIC BENEFIT 15 75% 18 50% 21 25% 24 0% In the event that an Executive's Covered Termination occurs on a date between two of these quarterly benchmarks, then the percentage of the CIC Benefit to which Executive shall be entitled shall be equal to the sum of two percentages (rounded to the nearest whole percentage): (1) the Percentage of CIC Benefit for the quarterly benchmark next following the occurrence of the Covered Termination, and (2) twenty five percent (25%) multiplied by a fraction, the numerator of which is the number of days after the date of Covered Termination and on or before the date on which the subsequent quarterly benchmark falls, and the denominator of which is ninety one (91). For example, if the date on which a Change of Control occurs is September 1, 1996 and the Executive incurs a Covered Termination on November 15, 1997, then the Percentage of CIC Benefit to which Executive is entitled shall be 79% (75% + (16/91 x 25%)) or (75% + 4.4%) or 79.4%, as rounded to the nearest whole percentage. Executive's CIC Benefit may be further reduced as a result of the limits on payment of aggregate CIC Benefits described in Exhibit A to this Agreement. 2.3 STOCK OPTIONS AND STOCK. All stock options held by the Executive with respect to Bancshares stock that are unvested at the time of a Change in Control shall become fully vested and exercisable upon a Change in Control (regardless of whether a Covered Termination occurs) and all Bancshares stock held by the Executive that is unvested at the time of a Change in Control shall become fully vested upon a Change in Control (regardless of whether a Covered Termination occurs). 2.4 EVA INCENTIVE RESERVE. Within ninety (90) days of the occurrence of a Covered Termination, Executive shall receive a lump sum payment of the entire amount of Executive's incentive reserve under the EVA Plan, as determined under the terms of the Company's Incentive Plan at Silicon Valley Bank (known as the "EVA Plan") or under other, similar incentive or bonus plans that preceded the EVA Plan or that may replace the EVA Plan. 2.5 TAX-QUALIFIED RETIREMENT PLANS. Upon the occurrence of a Covered Termination, the Executive's benefits under any pension, profit sharing, or stock bonus plan intended to satisfy the requirements of Section 401(a) of the Internal Revenue Code, specifically including, but not limited to, the Silicon Valley Bank 401(k) and Employee Stock Ownership Plan and the Silicon Valley Bank Money Purchase Pension Plan, shall become fully vested. 2.6 WELFARE BENEFITS. Following a Covered Termination, Executive and his or her covered dependents will be eligible to continue their Welfare Benefit coverage under any Welfare Benefit plan or program maintained by the Company only to the extent provided under the terms and conditions of such Welfare Benefit plan or program. Except for the foregoing, no continuation of Welfare Benefits shall be provided under this Agreement, except to the extent continuation of health 3 insurance coverage is required under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). This Section 2.6 is not intended to affect, nor does it affect, the rights of Executive, or Executive's covered dependents, under any applicable law with respect to health insurance continuation coverage. 2.7 OUTPLACEMENT SERVICES. The Company shall provide Executive with outplacement services under the terms and conditions of the Company's personnel policies in effect immediately prior to the occurrence of a Change in Control. 2.8 MITIGATION. Except as otherwise specifically provided herein, Executive shall not be required to mitigate damages or the amount of any payment provided under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer or by retirement benefits received after the date of the Covered Termination, or otherwise. 2.9 BASIS OF PAYMENTS. All benefits under this Agreement shall be paid by the Company. This Agreement shall be unfunded, and benefits hereunder shall be paid only from the general assets of the Company. ARTICLE 3 LIMITATIONS AND CONDITIONS ON BENEFITS 3.1 WITHHOLDING OF TAXES. The Company shall withhold appropriate federal, state or local income and employment taxes from any payments hereunder. 3.2 EMPLOYEE AGREEMENT AND RELEASE PRIOR TO RECEIPT OF BENEFITS. Upon the occurrence of a Covered Termination, and prior to the receipt of any benefits under this Agreement on account of the occurrence of a Covered Termination, Executive shall, as of the date of a Covered Termination, execute an employee agreement and release substantially in the form attached hereto as Exhibit B. Such employee agreement and release shall specifically relate to all of Executive's rights and claims in existence at the time of such execution. In the event Executive does not execute such employee agreement and release within the time period specified in such employee agreement and release or if Executive revokes such employee agreement and release within the revocation period provided in such employee agreement and release no benefits shall be payable under this Agreement to Executive. 3.3 LIMITS IMPOSED BY APPLICABLE BANKING LAW. Notwithstanding any other provision to the contrary, the Company shall not be obligated under this Agreement to pay any CIC Benefit to the extent that such payment would violate any prohibition or limitation on termination payments under any applicable federal or state statute, rule or regulation promulgated, or effective order issued, by any federal or state regulatory agency having jurisdiction over the Company or Bancshares. Without limiting the foregoing, the Company and Executive acknowledge and agree that the Federal Deposit Insurance Corporation (the "FDIC") has issued a regulation that prohibits payment of the CIC Benefit under certain circumstances, unless such payments were approved by the 4 FDIC, the Federal Reserve Bank of San Francisco (the "FRB") and the California State Banking Department (the "SBD"). ARTICLE 4 OTHER RIGHTS AND BENEFITS 4.1 NONEXCLUSIVITY. Nothing in the Agreement shall prevent or limit Executive's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices provided by the Company and for which Executive may otherwise qualify, nor, except as specifically provided herein, shall anything herein limit or otherwise affect such rights as Executive may have under any stock option or other agreements with the Company. Except as otherwise expressly provided herein, amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the date of a Covered Termination shall be payable in accordance with such plan, policy, practice or program. 4.2 PARACHUTE PAYMENTS. (a) In the event that any payment received or to be received by Executive pursuant to this Agreement ("Payment") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code (the "Code") and (ii) but for this subsection (a), be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then, subject to the provisions of subsection (b) hereof, such Payment shall be reduced, if at all, to the largest amount which Executive, in his or her discretion, determines would result in maximizing Executive's net proceeds with respect to such Payments (after taking into account the payment of any appropriate federal, state or local income and employment taxes and the payment of any Excise Tax imposed on such Payment). The determination by Executive of any required reduction pursuant to this subsection (a) shall be conclusive and binding upon the Company. The Company shall reduce a Payment in accordance with this subsection (a) only upon written notice by Executive indicating the amount of such reduction, if any. If the Internal Revenue Service (the "IRS") determines that a Payment is subject to the Excise Tax, then subsection (b) hereof shall apply, and the enforcement of subsection (b) shall be the exclusive remedy to the Company for a failure by Executive to reduce the Payment so that no portion thereof is subject to the Excise Tax. (b) If, notwithstanding any reduction described in subsection (a) hereof (or in the absence of any such reduction), the IRS determines that Executive is liable for the Excise Tax as a result of the receipt of one or more Payments, then Executive shall be obligated to pay back to the Company, within 30 days after final IRS determination, an amount of such Payments equal to the "Repayment Amount." The Repayment Amount with respect to such Payments shall be the smallest such amount, if any, as shall be required to be paid to the Company so that Executive's net proceeds with respect to such Payments (after taking into account the payment of the Excise Tax imposed on such Payments) shall be maximized. Notwithstanding the foregoing, the Repayment Amount with respect to such Payments shall be zero if a Repayment Amount of more than zero would not eliminate the Excise Tax imposed on such Payments. If the Excise Tax is not eliminated pursuant to this subsection (b), Executive shall pay the Excise Tax. 5 4.3 STOCK OPTIONS. The Company shall take all actions necessary to amend all stock agreements evidencing outstanding stock options granted to Executive to provide for full vesting of stock options upon a Change in Control or to otherwise conform such stock agreements, as required, to the terms of this Agreement. ARTICLE 5 NON-ALIENATION OF BENEFITS No benefit hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to so subject a benefit hereunder shall be void. ARTICLE 6 DEFINITIONS For purposes of the Agreement, the following terms shall have the meanings set forth below: 6.1 AGREEMENT" means this Executive Change in Control Severance Benefits Agreement. 6.2 "ANNUAL BASE SALARY" means the amount of compensation provided by the Company to Executive as base salary. Such amount shall be determined by annualizing the highest base rate in effect for Executive at any time immediately prior to, on, or after the date of the Change in Control, exclusive of any bonus or other incentive cash compensation, income from any stock options or other stock awards, supplemental deferred compensation contributions made by the Company, pension or profit sharing contributions or distributions (except as provided below), insurance payments or proceeds, fringe benefits, or other form of additional compensation, but specifically including any amounts withheld from base salary to provide benefits pursuant to section 125, 401(k), or 402(g) of the Internal Revenue Code or pursuant to any other plan or program of deferred compensation. 6.3 "CHANGE IN CONTROL" means the consummation of any of the following transactions during the term of this Agreement: (a) the shareholders of the Company or Bancshares approve a merger or consolidation of the Company or Bancshares with any other corporation, other than a merger or consolidation which would result in beneficial owners of the total voting power in the election of directors represented by the voting securities ("Voting Securities") of the Company or Bancshares (as the case may be) outstanding immediately prior thereto continuing to beneficially own securities representing (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total Voting Securities of the Company or Bancshares, or of such surviving entity, outstanding immediately after such merger or consolidation; (b) the shareholders of the Company or Bancshares approve a plan of liquidation or dissolution of the Company or approve an agreement for the sale, lease, exchange or other transfer or disposition by the Company or Bancshares of all or substantially all of the Company's assets; 6 (c) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than (A) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or Bancshares, (B) a corporation owned directly or indirectly by the shareholders of Bancshares in substantially the same proportions as their beneficial ownership of stock in Bancshares, or (C) Bancshares (with respect to Bancshares' ownership of the stock of the Company), is or becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of the securities of the Company or Bancshares representing 50% or more of the Voting Securities; or (d) (A) (1) the shareholders of the Company or Bancshares approve a merger or consolidation of the Company or Bancshares with any other corporation, other than a merger or consolidation which would result in beneficial owners of Voting Securities of the Company or Bancshares (as the case may be) outstanding immediately prior thereto continuing to beneficially own securities representing (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than twenty-five percent (25%) of the total Voting Securities of the Company or Bancshares, or of such surviving entity, outstanding immediately after such merger or consolidation, or (2) any person (as such term is used in Sections 13(d) or 14(d) of the Exchange Act), other than (a) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or Bancshares, (b) a corporation owned directly or indirectly by the shareholders of Bancshares in substantially the same proportions as their ownership of stock in Bancshares, or (c) Bancshares (with respect to Bancshares' ownership of the stock of the Company) is or becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of the securities of the Company or Bancshares representing 25% or more of the Voting Securities of such corporation, and (B) within twelve (12) months of the occurrence of such event, a change in the composition of the Board of Directors of Bancshares occurs as a result of which sixty percent (60%) or fewer of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of Bancshares as of the date hereof; (B) are elected, or nominated for election, to the Board of Directors of Bancshares with the affirmative votes of at least a majority of the directors of Bancshares who are Incumbent Directors described in (A) above at the time of such election or nomination; or (C) are elected, or nominated for election, to the Board of Directors of Bancshares with the affirmative votes of at least a majority of the directors of Bancshares who are Incumbent Directors described in (A) or (B) above at the time of such election or nomination. Notwithstanding the foregoing, "Incumbent Directors" shall not include an individual whose election or nomination to the Board of Directors of Bancshares occurs in order to provide representation for a person or group of related persons who have initiated or encouraged an actual or threatened proxy contest relating to the election of directors of Bancshares. 6.4 "COMPANY" means Silicon Valley Bank, a California corporation, and any successor thereto. 7 6.5 "CONSTRUCTIVE TERMINATION" means that the Executive voluntarily terminates his or her employment after any of the following are undertaken without Executive's express written consent: (a) the material, involuntary reduction in Executive's responsibilities, authorities or functions as an employee of the Company as in effect immediately prior to a Change in Control, except in connection with the termination of Executive's employment for death, disability, retirement, fraud, misappropriation, embezzlement or any listed exclusion from the definition of Involuntary Termination; (b) a reduction in Executive's Annual Base Salary; (c) reduction in Executive's Total Compensation to less than 85% of the amount provided to Executive for the last full calendar year immediately preceding the occurrence of a Change in Control; or (d) a relocation of Executive to a location more than fifty (50) miles from the location at which Executive performed Executive's duties prior to a Change in Control, except for required travel by Executive on the Company's business to an extent substantially consistent with Executive's business travel obligations at the time of a Change in Control. 6.6 "COVERED TERMINATION" means an Involuntary Termination or a Constructive Termination within twenty-four (24) months following a Change in Control. No other event shall be a Covered Termination for purposes of this Agreement. 6.7 "INVOLUNTARY TERMINATION" means Executive's dismissal or discharge by the Company (or, if applicable, by the successor entity) for reasons other than for one of the following reasons: (a) the commission by Executive of an act of deliberately criminal or fraudulent misconduct in the line of duty to the Company or Bancshares (including, but not limited to, the willful violation of any material law, rule, regulation, or cease and desist order applicable to Executive, the Company or Bancshares), a deliberate act that constitutes a conflict of interest with the Company, Bancshares, or Bancshares' shareholders, or a deliberate breach of a fiduciary duty owed by Executive to the Company, Bancshares, or Bancshares' shareholders; (b) Executive's habitual absence from work, intentional failure to perform stated duties, gross negligence, or gross incompetence in the performance of stated duties; (c) Executive's chronic alcohol or drug abuse that results in a material impairment of Executive's ability to perform his or her duties as an employee of the Company after reasonable accommodation; (d) the rendering of a verdict of guilty against Executive for any criminal offense (other than a law relating to a traffic violation or similar offense), whether or not in the line of duty; or 8 (e) Executive's removal from his or her office with the Company or Bancshares pursuant to an effective order under Section 8(e) of the Federal Deposit Insurance Act 12 U.S.C.(S) 1818(e). The termination of an Executive's employment will not be deemed to be an "Involuntary Termination" if such termination occurs as a result of the death or disability of Executive. 6.8 "TOTAL COMPENSATION" means the amount of compensation paid by the Company to Executive with respect to the calendar year immediately preceding the occurrence of a Change in Control. Such amount shall include the following amounts paid with respect to such calendar year: Executive's Annual Base Salary, any annual incentive compensation most recently declared (whether or not actually paid, and specifically including any amounts which may be transferred into Executive's incentive reserve), and any amounts withheld from Executive's base salary or bonus to provide benefits pursuant to section 125, 401(k), or 402(g) of the Internal Revenue Code or pursuant to any other plan or program of deferred compensation. Such amount shall exclude any bonus declared or paid from the warrant incentive plan of the Company, any income from any stock options or other stock awards, supplemental deferred compensation contributions made by the Company, pension or profit sharing contributions or distributions (except included above), insurance payments or proceeds, fringe benefits, and other forms of additional compensation. Notwithstanding the foregoing, any annual incentive compensation declared for the calendar year immediately preceding the occurrence of a Change in Control shall relate to the Executive's performance in the preceding calendar year. 6.9 "WELFARE BENEFITS" means benefits providing for coverage or payment in the event of Executive's death, disability, illness or injury that were provided to Executive immediately before a Change in Control, whether taxable or non- taxable and whether funded through insurance or otherwise. ARTICLE 7 TERM OF AGREEMENT This Agreement shall have a term of two (2) years, commencing as of the date of execution of this Agreement set forth on page 1 of this Agreement. ARTICLE 8 GENERAL PROVISIONS 8.1 EMPLOYMENT STATUS. This Agreement does not constitute a contract of employment or impose on Executive any obligation to remain as an employee, or impose on the Company any obligation (i) to retain Executive as an employee, (ii) to change the status of Executive as an at-will employee, or (iii) to change the Company's policies regarding termination of employment. 8.2 NOTICES. Any notices provided hereunder must be in writing and such notices or any other written communication shall be deemed effective upon the earlier of personal delivery (including personal delivery by telex or facsimile) or the third day after mailing by first class mail, 9 to the Company at its primary office location and to Executive at his or her address as listed in the Company's payroll records. Any payments made by the Company to Executive under the terms of this Agreement shall be delivered to Executive either in person or at his or her address as listed in the Company's payroll records. 8.3 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 8.4 WAIVER. If either party should waive any breach of any provisions of this Agreement, such party shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 8.5 COMPLETE AGREEMENT. This Agreement, including Exhibits A, B and C and any other written agreements expressly referred to in this Agreement, constitutes the entire agreement between Executive and the Company and it is the complete, final, and exclusive embodiment of their agreement with regard to this subject matter. It is entered into without reliance on any promise or representation other than those expressly contained herein. 8.6 AMENDMENT OR TERMINATION OF AGREEMENT. This Agreement may be changed or terminated only upon the mutual written consent of the Company and Executive. The written consent of the Company to a change or termination of this Agreement must be signed by an executive officer of the Company after such change or termination has been approved by an authorized committee of the Company's Board of Directors. 8.7 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 8.8 HEADINGS. The headings of the Articles and Sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 8.9 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and their respective successors, assigns, heirs, executors and administrators, except that Executive may not assign any of his duties hereunder and he may not assign any of his rights hereunder without the written consent of the Company, which consent shall not be withheld unreasonably. 8.10 ARBITRATION. Any and all disputes or controversies, arising from or regarding the interpretation, performance, enforcement or termination of this Agreement shall be resolved by final and binding arbitration under the procedures set forth in the Arbitration Procedure attached hereto as Exhibit C and the then existing Judicial Arbitration and Mediation Services, Inc. ("JAMS") Rules of Practice and Procedure or the rules of practice and procedure of any successor entity to JAMS 10 (except insofar as they are inconsistent with the procedures set forth in the enclosed Arbitration Procedure). Nothing in this section is intended to prevent either party from obtaining either injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration or in lieu of arbitration or from utilizing any judicial court system to seek enforcement of an arbitration award. 8.11 ATTORNEY FEES. In the event of any arbitration or litigation or any other action or proceeding relating to the interpretation, performance, enforcement or termination of this Agreement, the prevailing party shall be entitled to an award requiring payment by the other party of such prevailing party's reasonable fees and costs, including reasonable attorneys' fees, incurred as a result of such action or proceeding. 8.12 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the laws of the State of California applicable to contracts executed and to be performed solely in the State of California. 8.13 NON-PUBLICATION. The parties mutually agree not to disclose publicly the terms of this Agreement except to the extent that disclosure is mandated by applicable law. 8.14 TRANSFER OF SERVICES TO AFFILIATE. This Agreement shall not prohibit the Company from transferring Executive's services to an affiliate of the Company, provided that the rights and obligations of the parties hereto shall not terminate in the event of such transfer, and provided further that the new entity for which Executive is performing services also shall be bound hereby without the need for further written agreement and without release of the Company. 8.15 NO VIOLATION OF GOVERNING BANKING LAW. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law, rule, regulation or order. The Company's inability, pursuant to court or regulatory order, to perform its obligations under this Agreement or the modification of this Agreement by the FRB, the SBD or other bank regulatory agency through administrative action shall not constitute a breach of this Agreement. Except to the extent provided in Section 3.3, the provisions of this Agreement shall be severable. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless perform its obligations hereunder to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 8.16 OPPORTUNITY FOR INDEPENDENT COUNSEL AND ADVISORS. Executive acknowledges that he or she has had an opportunity to retain independent counsel and tax advisors to review this Agreement. 8.17 CONSTRUCTION OF AGREEMENT. In the event of a conflict between the text of the Agreement and any summary, description or other information regarding the Agreement, the text of the Agreement shall control. 11 IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year written above. SILICON VALLEY BANK, a California corporation Executive By: --------------------------- --------------------------- John C. Dean President and Chief Executive Officer Exhibit A: CIC Benefit Table Exhibit B: Employee Agreement and Release Exhibit C: Arbitration Procedure 12 CIC BENEFIT/1/
Multiple of Total Cash Compensation Selling Price ----------------------------------- Multiple of Executive Non-Exec. Committee Book Value Committee** MC Members - ---------------------------------------------------------- 1.00 0.000 0.000 1.05 0.125 0.100 1.10 0.250 0.200 1.15 0.375 0.300 1.20 0.500 0.400 1.25 0.625 0.500 1.30 0.750 0.600 1.35 0.875 0.700 1.40 1.000 0.800 1.45 1.125 0.900 1.50 1.250 1.000 1.55 1.375 1.100 1.60 1.500 1.200 1.65 1.625 1.300 1.70 1.750 1.400 1.75 1.875 1.500 1.80 2.000 1.600 1.85 2.125 1.700 1.90 2.250 1.800 1.95 2.375 1.900 2.00 2.500 2.000 2.05 2.625 2.100 2.10 2.750 2.200 2.15 2.875 2.300 2.20 3.000 2.400 2.25 3.125 2.500 2.30 3.250 2.600 2.35 3.375 2.700 2.40 3.500 2.800 2.45 3.625 2.900 2.50 3.750 3.000 2.55 3.875 3.100 2.60 4.000 3.200 2.65 4.125 3.300 2.70 4.250 3.400 2.75 4.375 3.500 2.80 4.500 3.600 2.85 4.625 3.700 2.90 4.750 3.800 2.95 4.875 3.900 3.00 5.000 4.000
/1/ This table reflects CIC benefits for sales up to 3.00 times SVB's then book value. For sales above this, the multiples (of total cash compensation) must appropriately be extrapolated from the multiples (of total cash compensation) shown. ** Executive Committee members are the CEO and such other persons determined by the CEO and Board. For purposes of this grid, "Executive Committee" members are not necessarily SVB's Reg. O Officers. 13 EXHIBIT A For purposes of this table, the following definitions shall apply: 1. "BOOK VALUE" shall mean the amount of the Company's stockholders' equity, as determined in accordance with generally accepted accounting principles, as of the date immediately preceding a Change in Control, excluding the Company's allowance for loan losses. 2. "SELLING PRICE" shall mean the valuation of the Company as determined by the Company in good faith at the time of the occurrence of the transaction (or series of related transactions) as a result of which a Change in Control occurs. Furthermore, notwithstanding any provision in this table, the Executive's Agreement, and any personnel policy of the Company to the contrary, the cumulative CIC Benefit paid to all employees of the Company shall not exceed 5.8% of the difference between the Selling Price and the Book Value assuming one-third (1/3rd) of the Company's employees at the time of a Change in Control incur a Covered Termination, shall not exceed 11.7% of the difference between the Selling Price and the Book Value assuming two-thirds (2/3rds) of the Company's employees at the time of a Change in Control incur a Covered Termination, and in no event shall exceed 17.5% of the difference between the Selling Price and the Book Value. For purposes of the potential reduction in CIC Benefits provided for in this paragraph, the determination shall be made at the time of the Change in Control and the determination of whether the cumulative CIC Benefit to be paid exceeds the relevant limits specified herein also shall be determined at the time of the Change in Control. If, at the time of the Change in Control, it is determined that the limits specified in this paragraph are exceeded, then the potential CIC Benefits of all employees of the Company incurring a Covered Termination shall be proportionately decreased such that the resulting potential aggregate payouts will not exceed the relevant limit. 14 EXHIBIT B.1 EMPLOYEE AGREEMENT AND RELEASE I UNDERSTAND AND AGREE COMPLETELY TO THE TERMS SET FORTH IN THE FOREGOING. Except as otherwise set forth in this Agreement, I hereby release, acquit and forever discharge the Company, its parents and subsidiaries, and their officers, directors, agents, servants, employees, shareholders, attorneys, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed (other than any claim for indemnification which I may have as a result of any third party action against me based on my employment with the Company), arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the effective date of this Agreement, including but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with my employment with the Company or the termination of that employment, including but not limited to, claims of intentional and negligent infliction of emotional distress, any and all tort claims for personal injury, claims or demands related to salary, bonuses, commissions, stock, stock options, or any other ownership interests in the Company, vacation pay, fringe benefits, expense reimbursements, severance pay, or any other form of compensation; claims pursuant to any federal, state or local law, statute or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Americans with Disabilities Act of 1990; the California Fair Employment and Housing Act, as amended; tort law; contract law; wrongful discharge; discrimination; harassment; fraud; defamation; emotional distress; and breach of the implied covenant of good faith and fair dealing; provided, however, that nothing in this paragraph shall be construed in any way to release the Company from its obligation to indemnify me pursuant to any Indemnification Agreement between me and the Company which is currently in effect. In giving this release, which includes claims which may be unknown to me at present, I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any claims I may have against the Company. By: ___________________________________ [Employee Name] Date: _________________________, 199___ [FOR PARTICIPANTS UNDER AGE 40] 15 EXHIBIT B.2 EMPLOYEE AGREEMENT AND RELEASE I UNDERSTAND AND AGREE COMPLETELY TO THE TERMS SET FORTH IN THE FOREGOING AGREEMENT. I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any claims I may have against the Company. Except as otherwise set forth in this Agreement, I hereby release, acquit and forever discharge the Company, its parents and subsidiaries, and their officers, directors, agents, servants, employees, shareholders, attorneys, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed (other than any claim for indemnification I may have as a result of any third party action against me based on my employment with the Company), arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the Effective Date of this Agreement, including but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with my employment with the Company or the termination of that employment, including but not limited to, claims of intentional and negligent infliction of emotional distress, any and all tort claims for personal injury, claims or demands related to salary, bonuses, commissions, stock, stock options, or any other ownership interests in the Company, vacation pay, fringe benefits, expense reimbursements, severance pay, or any other form of compensation; claims pursuant to any federal, state or local law or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"); the federal Americans with Disabilities Act of 1990; the California Fair Employment and Housing Act, as amended; tort law; contract law; wrongful discharge; discrimination; fraud; defamation; emotional distress; and breach of the implied covenant of good faith and fair dealing; provided, however, that nothing in this paragraph shall be construed in any way to release the Company from its obligation to indemnify me pursuant to any Indemnification Agreement between me and the Company which is currently in effect. I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under ADEA. I also acknowledge that the consideration given for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (A) my waiver and release do not apply to any rights or claims that may arise after the Effective Date of this Agreement; (B) I have the right to consult with an attorney prior to executing this Agreement; (C) I have twenty-one (21) days to consider this Agreement (although I may choose to voluntarily execute this Agreement earlier); (D) I have seven (7) days following the execution of this Agreement by the parties to revoke the Agreement; and (E) this Agreement shall not be effective until the date upon which the revocation period has expired, which shall be the eighth day after this Agreement is executed by me, provided that the Company has also executed this Agreement by that date ("Effective Date"). By: _______________________________________________ [Executive] Date: _____________________________________________ [FOR EXECUTIVES WHO ARE AGE 40 AND OLDER] 16 EXHIBIT C ARBITRATION PROCEDURE 1. The parties agree that any dispute that arises in connection with the payment of benefits under this Agreement or the termination of this Agreement shall be resolved by binding arbitration in the manner described below. 2. A party intending to seek resolution of any dispute under the Agreement by arbitration shall provide a written demand for arbitration to the other party, which demand shall contain a brief statement of the issues to be resolved. 3. The arbitration shall be conducted in Santa Clara County, California, by a mutually acceptable retired judge from the panel of Judicial Arbitration and Mediation Services, Inc. or any entity performing the same type of services that succeeds to its business ("JAMS"). At the request of either party, arbitration proceedings will be conducted in the utmost secrecy and, in such case, all documents, testimony and records shall be received, heard and maintained by the arbitrator in secrecy under seal, available for inspection only by the parties to the arbitration, their respective attorneys, and their respective expert consultants or witnesses who shall agree, in advance and in writing, to receive all such information confidentially and to maintain such information in secrecy, and make no use of such information except for the purposes of the arbitration, unless compelled by legal process. 4. The arbitrator is required to disclose any circumstances that might preclude the arbitrator from rendering an objective and impartial determination. In the event the parties cannot mutually agree upon the selection of a JAMS arbitrator, the President of JAMS shall designate the arbitrator. 5. The party demanding arbitration shall promptly request that JAMS conduct a scheduling conference within fifteen (15) days of the date of that party's written demand for arbitration or on the first available date thereafter on the arbitrator's calendar. The arbitration hearing shall be held within thirty (30) days after the scheduling conference or on the first available date thereafter on the arbitrator's calendar. Nothing in this paragraph shall prevent a party from at any time seeking temporary equitable relief, from JAMS or any court of competent jurisdiction, to prevent irreparable harm pending the resolution of the arbitration. 6. Discovery shall be conducted as follows: (a) prior to the arbitration any party may make a written demand for lists of the witnesses to be called and the documents to be introduced at the hearing; (b) the lists must be served within fifteen days of the date of receipt of the demand, or one day prior to the arbitration, whichever is earlier; and (c) each party may take no more than two depositions (pursuant to the procedures set forth in the California Code of Civil Procedure) with a maximum of five hours of examination time per deposition, and no other form of pre-arbitration discovery shall be permitted. 7. It is the intent of the parties that the Federal Arbitration Act ("FAA") shall apply to the enforcement of this provision unless it is held inapplicable by a court with jurisdiction over the dispute, in which event the California Arbitration Act ("CAA") shall apply. 17 8. The arbitrator shall apply California law, including the California Evidence Code, and shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a preliminary injunction, a permanent injunction, or replevin of Company property. The arbitrator shall also be able to award actual, general or consequential damages, but shall not award any other form of damage (e.g., punitive damages). 18 EX-10.33 3 CHNG IN CTRL SEVERANCE POLICY FOR NON-EXECUTIVES EXHIBIT 10.33 CHANGE IN CONTROL SEVERANCE BENEFITS POLICY FOR NON-EXECUTIVES THIS CHANGE IN CONTROL SEVERANCE BENEFITS POLICY FOR NON-EXECUTIVES (the "POLICY") is adopted this 18th day of July, 1996 by SILICON VALLEY BANK, a California corporation (the "COMPANY"), a wholly owned subsidiary of Silicon Valley Bancshares, a California corporation ("BANCSHARES"). This Policy is intended to provide Eligible Employees with the compensation and benefits described herein upon the occurrence of specific events. Certain capitalized terms used in this Policy are defined in Article VI. I ELIGIBLE EMPLOYEES .1 Eligible Employees are those employees of the Company who are classified by the Company in Grades 13 and below. Notwithstanding the foregoing, the employees of any other wholly owned subsidiary of Bancshares also shall be Eligible Employees under this Policy if such wholly owned subsidiary is so designated by the Company and agrees in writing to be bound by the terms and conditions of this Policy. .2 The rights and obligations of the Eligible Employees and the Company contained in Articles II through VI shall survive any termination of an Eligible Employee for twenty-four (24) months following a Change in Control (as hereinafter defined), or such later period as may be required so that all benefits to which the Eligible Employee is entitled under this Policy are paid or otherwise provided to the Eligible Employee. .3 The Company intends to set forth the compensation and benefits which an Eligible Employee shall be entitled to receive in the event that there is a Change in Control or the Eligible Employee's employment with the Company terminates following a Change in Control under the circumstances described in Article II of this Policy. .4 As a condition of receiving benefits under this Policy, an Eligible Employee shall be required to execute a general waiver and release in the form provided by the Company and as further described in Section 3.2. .5 This Policy shall supersede any other policies relating to any compensation, benefits, severance or other amounts to be paid to an Eligible Employee in the event of the Eligible Employee's termination of employment following the occurrence of a Change in Control, but shall not supersede any agreement between the Eligible Employee and the Company or any personnel policies of the Company relating to other aspects of the Eligible Employee's employment 1 relationship with the Company, including but not limited to the Company's personnel policies addressing severance payments to the Eligible Employee in the event of a termination of the Eligible Employee's employment which is not proximately related to the occurrence of a Change in Control. II SEVERANCE BENEFITS .1 ENTITLEMENT TO SEVERANCE BENEFITS. If an Eligible Employee's employment terminates due to an Involuntary Termination or a Constructive Termination within twenty-four (24) months following a Change in Control, the termination of employment will be a Covered Termination and the Company shall pay the Eligible Employee the compensation and benefits described in this Article II. If the Eligible Employee's employment terminates, but not due to an Involuntary Termination or a Constructive Termination within twenty- four (24) months following a Change in Control, or for any reason prior to a Change in Control or after twenty-four (24) months or more following a Change in Control, then the termination of employment will not be a Covered Termination --- and Eligible Employee will not be entitled to receive any payments or benefits --- under this Article II. Payment of any benefits described in this Article II shall be subject to the restrictions and limitations set forth in Article III. .2 LUMP SUM SEVERANCE PAYMENT AND BENEFITS. An Eligible Employee entitled to benefits under this Policy shall receive the lump sum severance payment and other benefits described in Exhibit A of this Policy. .3 TAX-QUALIFIED RETIREMENT PLANS. Upon the occurrence of a Covered Termination, the Eligible Employee's benefits accrued under any pension, profit sharing, or stock bonus plan intended to satisfy the requirements of Section 401(a) of the Internal Revenue Code, specifically including, but not limited to, the Silicon Valley Bank 401(k) and Employee Stock Ownership Plan and the Silicon Valley Bank Money Purchase Pension Plan, shall become fully vested. .4 WELFARE BENEFITS. Following a Covered Termination, an Eligible Employee and his or her covered dependents will be eligible to continue their Welfare Benefit coverage under any Welfare Benefit plan or program maintained by the Company only to the extent provided under the terms and conditions of such Welfare Benefit plan or program. Except for the foregoing, no continuation of Welfare Benefits shall be provided under this Policy except to the extent continuation of health insurance coverage is required under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). 2 This Section 2.4 is not intended to affect, nor does it affect, the rights of an Eligible Employee, or an Eligible Employee's covered dependents, under any applicable law with respect to health insurance continuation coverage. .5 OUTPLACEMENT SERVICES. The Company shall provide an Eligible Employee with outplacement services under the terms and conditions of the Company's personnel policies in effect immediately prior to the occurrence of a Change in Control. .6 MITIGATION. Except as otherwise specifically provided herein, an Eligible Employee shall not be required to mitigate damages or the amount of any payment provided under this Policy by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Policy be reduced by any compensation earned by an Eligible Employee as a result of employment by another employer or by retirement benefits received after the date of the Covered Termination, or otherwise. ARTICLE III LIMITATIONS AND CONDITIONS ON BENEFITS .7 WITHHOLDING OF TAXES. The Company shall withhold appropriate federal, state or local income and employment taxes from any payments hereunder. .8 EMPLOYEE AGREEMENT AND RELEASE PRIOR TO RECEIPT OF BENEFITS. Upon the occurrence of a Covered Termination, and prior to the receipt of any benefits under this Policy on account of the occurrence of a Covered Termination, Eligible Employee shall, as of the date of a Covered Termination, execute an employee agreement and release in the form provided by the Company. In the event an Eligible Employee does not execute such employee agreement and release within the time period specified in such employee agreement and release or if the Eligible Employee revokes such employee agreement and release within the revocation period provided in such employee agreement and release no benefits shall be payable under this Policy to such Eligible Employee. The Company reserves the right to include in the employment agreement and release a representation regarding non-publication of the terms of this Policy. .9 LIMITS IMPOSED BY APPLICABLE BANKING LAW. Notwithstanding any other provision to the contrary, the Company shall not be obligated under this Policy to pay any benefit to the extent that such payment would violate any prohibition or limitation on termination payments under any applicable federal or state statute, rule or regulation promulgated, or effective order issued, by any federal or state regulatory agency having jurisdiction over the Company or Bancshares. Without limiting the foregoing, the Company and Eligible Employee acknowledge and agree that the Federal Deposit Insurance Corporation (the "FDIC") has issued a regulation that prohibits payment of the benefit under certain circumstances, unless such payments were approved by the FDIC, the Federal Reserve Bank of San Francisco (the "FRB") and the California State Banking Department (the "SBD"). 3 III OTHER RIGHTS AND BENEFITS .1 NONEXCLUSIVITY. Nothing in the Policy shall prevent or limit an Eligible Employee's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices provided by the Company and for which the Eligible Employee may otherwise qualify, nor, except as specifically provided herein, shall anything herein limit or otherwise affect such rights as the Eligible Employee may have under any stock option or other agreements with the Company. Except as otherwise expressly provided herein, amounts which are vested benefits or which the Eligible Employee is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the date of a Covered Termination shall be payable in accordance with such plan, policy, practice or program. .2 PARACHUTE PAYMENTS. (a) In the event that any payment received or to be received by an Eligible Employee pursuant to this Policy ("Payment") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code (the "Code") and (ii) but for this subsection (a), be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then, subject to the provisions of subsection (b) hereof, such Payment shall be reduced, if at all, to the largest amount which the Eligible Employee, in his or her discretion, determines would result in maximizing the Eligible Employee's net proceeds with respect to such Payments (after taking into account the payment of any appropriate federal, state or local income and employment taxes and the payment of any Excise Tax imposed on such Payment). The determination by the Eligible Employee of any required reduction pursuant to this subsection (a) shall be conclusive and binding upon the Company. The Company shall reduce a Payment in accordance with this subsection (a) only upon written notice by the Eligible Employee indicating the amount of such reduction, if any. If the Internal Revenue Service (the "IRS") determines that a Payment is subject to the Excise Tax, then subsection (b) hereof shall apply, and the enforcement of subsection (b) shall be the exclusive remedy to the Company for a failure by the Eligible Employee to reduce the Payment so that no portion thereof is subject to the Excise Tax. (b) If, notwithstanding any reduction described in subsection (a) hereof (or in the absence of any such reduction), the IRS determines that the Eligible Employee is liable for the Excise Tax as a result of the receipt of one or more Payments, then the Eligible Employee shall be obligated to pay back to the Company, within 30 days after final IRS determination, an amount of such Payments equal to the "Repayment Amount." The Repayment Amount with respect to such Payments shall be the smallest such amount, if any, as shall be required to be paid to the Company so that the Eligible Employee's net proceeds with respect to such Payments (after taking into account the payment of the Excise Tax imposed on such Payments) shall be maximized. Notwithstanding the foregoing, the Repayment Amount with respect to such Payments shall be zero if a Repayment Amount of more than zero would not eliminate the Excise Tax imposed on such 4 Payments. If the Excise Tax is not eliminated pursuant to this subsection (b), the Eligible Employee shall pay the Excise Tax. IV NON-ALIENATION OF BENEFITS No benefit hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to so subject a benefit hereunder shall be void. V DEFINITIONS For purposes of the Policy, the following terms shall have the meanings set forth below: .1 "ANNUAL BASE SALARY" means the amount of compensation provided by the Company to an Eligible Employee as base salary. Such amount shall be determined by annualizing the highest base rate in effect for the Eligible Employee at any time immediately prior to, on, or after the date of the Change in Control, exclusive of any bonus or other incentive cash compensation, income from any stock options or other stock awards, supplemental deferred compensation contributions made by the Company, pension or profit sharing contributions or distributions (except as provided below), insurance payments or proceeds, fringe benefits, or other form of additional compensation, but specifically including any amounts withheld from base salary to provide benefits pursuant to section 125, 401(k), or 402(g) of the Internal Revenue Code or pursuant to any other plan or program of deferred compensation. .2 "CHANGE IN CONTROL" means the consummation of any of the following transactions: (a) the shareholders of the Company or Bancshares approve a merger or consolidation of the Company or Bancshares with any other corporation, other than a merger or consolidation which would result in beneficial owners of the total voting power in the election of directors represented by the voting securities ("Voting Securities") of the Company or Bancshares (as the case may be) outstanding immediately prior thereto continuing to beneficially own securities representing (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total Voting Securities of the Company or Bancshares, or of such surviving entity, outstanding immediately after such merger or consolidation; (b) the shareholders of the Company or Bancshares approve a plan of liquidation or dissolution of the Company or approve an agreement for the sale, lease, exchange or other 5 transfer or disposition by the Company or Bancshares of all or substantially all of the Company's assets; (c) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than (A) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or Bancshares, (B) a corporation owned directly or indirectly by the shareholders of Bancshares in substantially the same proportions as their beneficial ownership of stock in Bancshares, or (C) Bancshares (with respect to Bancshares' ownership of the stock of the Company), is or becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of the securities of the Company or Bancshares representing 50% or more of the Voting Securities; or (d) (A) (1) the shareholders of the Company or Bancshares approve a merger or consolidation of the Company or Bancshares with any other corporation, other than a merger or consolidation which would result in beneficial owners of Voting Securities of the Company or Bancshares (as the case may be) outstanding immediately prior thereto continuing to beneficially own securities representing (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than twenty-five percent (25%) of the total Voting Securities of the Company or Bancshares, or of such surviving entity, outstanding immediately after such merger or consolidation, or (2) any person (as such term is used in Sections 13(d) or 14(d) of the Exchange Act), other than (a) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or Bancshares, (b) a corporation owned directly or indirectly by the shareholders of Bancshares in substantially the same proportions as their ownership of stock in Bancshares, or (c) Bancshares (with respect to Bancshares' ownership of the stock of the Company) is or becomes the beneficial owner (within the meaning or Rule 13d-3 under the Exchange Act), directly or indirectly, of the securities of the Company or Bancshares representing 25% or more of the Voting Securities of such corporation, and (A) within twelve (12) months of the occurrence of such event, a change in the composition of the Board of Directors of Bancshares occurs as a result of which sixty percent (60%) or fewer of the directors are Incumbent Directors. "INCUMBENT DIRECTORS" shall mean directors who either: (A) are directors of Bancshares as of the date hereof; (B) are elected, or nominated for election, to the Board of Directors of Bancshares with the affirmative votes of at least a majority of the directors of Bancshares who are Incumbent Directors described in (A) above at the time of such election or nomination; or (C) are elected, or nominated for election, to the Board of Directors of Bancshares with the affirmative votes of at least a majority of the directors of Bancshares who are Incumbent Directors described in (A) or (B) above at the time of such election or nomination. 6 Notwithstanding the foregoing, "Incumbent Directors" shall not include an individual whose election or nomination to the Board of Directors of Bancshares occurs in order to provide representation for a person or group of related persons who have initiated or encouraged an actual or threatened proxy contest relating to the election of directors of Bancshares. .3 "COMPANY" means Silicon Valley Bank, a California corporation, and any successor thereto. .4 "CONSTRUCTIVE TERMINATION" means that an Eligible Employee voluntarily terminates his or her employment after any of the following are undertaken without the Eligible Employee's express written consent: (a) the material, involuntary reduction in the Eligible Employee's responsibilities, authorities or functions as an employee of the Company as in effect immediately prior to a Change in Control, except in connection with the termination of the Eligible Employee's employment for death, disability, retirement, fraud, misappropriation, embezzlement or any listed exclusion from the definition of Involuntary Termination; (b) a reduction in the Eligible Employee's Annual Base Salary; (c) a reduction in the Eligible Employee's Total Compensation to less than 85% of the amount provided to the Eligible Employee for the last full calendar year immediately preceding the occurrence of a Change in Control; or (d) a relocation of the Eligible Employee to a location more than fifty (50) miles from the location at which the Eligible Employee performed the Eligible Employee's duties prior to a Change in Control, except for required travel by the Eligible Employee on the Company's business to an extent substantially consistent with the Eligible Employee's business travel obligations at the time of a Change in Control. .5 "COVERED TERMINATION" means an Involuntary Termination or a Constructive Termination within twenty-four (24) months following a Change in Control. No other event shall be a Covered Termination for purposes of this Policy. .6 "ELIGIBLE EMPLOYEE" means each employee of the Company who meets the requirements of Section 1.1. .7 "INVOLUNTARY TERMINATION" means an Eligible Employee's dismissal or discharge by the Company (or, if applicable, by the successor entity) for reasons other than for one of the following reasons: 7 (a) the commission by the Eligible Employee of an act of deliberately criminal or fraudulent misconduct in the line of duty to the Company or Bancshares (including, but not limited to, the willful violation of any material law, rule, regulation, or cease and desist order applicable to the Eligible Employee, the Company or Bancshares), a deliberate act that constitutes a conflict of interest with the Company, Bancshares, or Bancshares' shareholders, or a deliberate breach of a fiduciary duty owed by the Eligible Employee to the Company, Bancshares, or Bancshares' shareholders; (b) the Eligible Employee's habitual absence from work, intentional failure to perform stated duties, gross negligence, or gross incompetence in the performance of stated duties; (c) the Eligible Employee's chronic alcohol or drug abuse that results in a material impairment of the Eligible Employee's ability to perform his or her duties as an employee of the Company after reasonable accommodation; (d) the rendering of a verdict of guilty against the Eligible Employee for any criminal offense (other than a law relating to a traffic violation or similar offense), whether or not in the line of duty; or (e) the Eligible Employee's removal from his or her office with the Company or Bancshares pursuant to an effective order under Section 8(e) of the Federal Deposit Insurance Act 12 U.S.C.(S) 1818(e). The termination of an Eligible Employee's employment will not be deemed to be an "Involuntary Termination" if such termination occurs as a result of the death or disability of the Eligible Employee. .8 "POLICY" means this Change in Control Severance Benefits Policy for Non-Executives. .9 "TOTAL COMPENSATION" means the amount of compensation paid by the Company to an Eligible Employee with respect to the calendar year immediately preceding the occurrence of a Change in Control. Such amount shall include the following amounts paid with respect to such calendar year: the Eligible Employee's Annual Base Salary, any annual incentive compensation, if applicable, most recently declared (whether or not actually paid, and specifically including any amounts which may be transferred into Executive's incentive reserve), and any amounts withheld from the Eligible Employee's base salary or bonus to provide benefits pursuant to section 125, 401(k), or 402(g) of the Internal Revenue Code or pursuant to any other plan or program of deferred compensation. Such amount shall exclude any bonus declared or paid from the warrant incentive plan of the Company, overtime pay, any income from any stock options or other stock awards, supplemental deferred compensation contributions made by the Company, pension or profit sharing contributions or distributions (except included above), insurance payments or proceeds, fringe benefits, and other forms of additional compensation. Notwithstanding the foregoing, any 8 annual incentive compensation declared for the calendar year immediately preceding the occurrence of a Change in Control shall relate to the Eligible Employee's performance in the preceding calendar year. .10 "WELFARE BENEFITS" means benefits providing for coverage or payment in the event of an Eligible Employee's death, disability, illness or injury that were provided to the Eligible Employee immediately before a Change in Control, whether taxable or non-taxable and whether funded through insurance or otherwise. VI GENERAL PROVISIONS .1 EMPLOYMENT STATUS. This Policy does not constitute a contract of employment or impose on an Eligible Employee any obligation to remain as an employee, or impose on the Company any obligation (i) to retain an Eligible Employee as an employee, (ii) to change the status of an Eligible Employee as an at-will employee, or (iii) to change the Company's policies regarding termination of employment. .2 PAYMENTS. Any payments made by the Company to an Eligible Employee under the terms of this Policy shall be delivered to the Eligible Employee either in person or at his or her address as listed in the Company's payroll records. .3 SEVERABILITY. Whenever possible, each provision of this Policy will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Policy is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Policy will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. .4 WAIVER. If either the Company or an Eligible Employee should waive any breach of any provisions of this Policy, such party shall not thereby be deemed to have waived any preceding or succeeding beach of the same or any other provision of this Policy. .5 COMPLETE AGREEMENT. This Policy, including Exhibits A and B and any other written agreements specifically referred to in this Policy, constitutes the entire agreement between an Eligible Employee and the Company, and it is the complete, final, and exclusive embodiment of their agreement with regard to this subject matter. No promise or representation other than those expressly contained herein shall alter the terms of this Policy. .6 BASIS OF PAYMENTS. All benefits under the Policy shall be paid by the Company. The Policy shall be unfunded, and benefits hereunder shall be paid only from the general assets of the Company. 9 .7 AMENDMENT OR TERMINATION OF POLICY. This Policy may be changed or terminated only by the Company. A change or termination of this Policy must be signed by an executive officer of the Company after such change or termination has been approved by an authorized committee of the Company's Board of Directors. Notwithstanding the foregoing, no amendment or termination ----------------------------- shall affect the right to any unpaid benefit of any Eligible Employee whose employment with the Company terminated prior to the amendment or termination of the Policy; and further provided, that for the period of twenty-four (24) months ---------------- following a Change in Control, the Policy shall not be amended and no Eligible Employee shall be reclassified in any manner that would adversely affect the interests of the Eligible Employee without the written consent of the Eligible Employee so affected. .8 HEADINGS. The headings of the Articles and Sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. .9 SUCCESSORS AND ASSIGNS. This Policy is intended to bind and inure to the benefit of and be enforceable by an Eligible Employee and the Company, and their respective successors, assigns, heirs, executors and administrators, except that an Eligible Employee may not assign any of his or her duties hereunder and he may not assign any of his or her rights hereunder without the written consent of the Company, which consent shall not be withheld unreasonably. .10 ARBITRATION. Any and all disputes or controversies, arising from or regarding the interpretation, performance, enforcement or termination of this Policy shall be resolved by final and binding arbitration under the procedures set forth in the Arbitration Procedure attached hereto as Exhibit B and the then existing Judicial Arbitration and Mediation Services, Inc. ("JAMS") Rules of Practice and Procedure or the rules of practice and procedure of any successor entity to JAMS (except insofar as they are inconsistent with the procedures set forth in the enclosed Arbitration Procedure). Nothing in this section is intended to prevent either the Company or an Eligible Employee from obtaining either injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration or in lieu of arbitration or from utilizing any judicial court system to seek enforcement of an arbitration award. .11 ATTORNEY FEES. In the event of any arbitration or any other action or proceeding relating to the interpretation, performance, enforcement or termination of this Policy, the prevailing party shall be entitled to an award requiring payment by the other party of such prevailing party's reasonable fees and costs, including reasonable attorneys' fees incurred as a result of such action or proceeding. .12 TRANSFER OF SERVICES TO AFFILIATE. This Policy shall not prohibit the Company from transferring an Eligible Employee's services to an affiliate of the Company, provided that the rights and obligations of the parties hereto shall not terminate in the event of such transfer, and provided further that the new entity for which the Eligible Employee is performing services also 10 shall be bound hereby without the need for further written agreement and without release of the Company. .13 NO VIOLATION OF GOVERNING BANKING LAW. Nothing in this Policy is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law, rule, regulation or order. The Company's inability, pursuant to court or regulatory order, to perform its obligations under this Policy or the modification of this Policy by the FRB, the SBD or other bank regulatory agency through administrative action shall not constitute a breach of this Policy. Except to the extent provided in Section 3.3, the provisions of this Policy shall be severable. If this Policy or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless perform its obligations hereunder to the full extent permitted by any applicable portion of this Policy that shall not have been invalidated, and the balance of this Policy not so invalidated shall be enforceable in accordance with its terms. .14 CONSTRUCTION OF POLICY. In the event of a conflict between the text of the Policy and any Summary Plan Description, summary, description or other information regarding the Policy, the text of the Policy shall control. This Policy is intended to governed by and shall be construed in accordance with the Employee Retirement Income Security Act of 1974 ("ERISA") and, to the extent not preempted by ERISA, the laws of the State of California. IN WITNESS WHEREOF, to record the adoption of this Policy as set forth herein, effective as of the day and year written above, Silicon Valley Bank has caused its duly authorized officer to execute the same this ______ day of ___________, 1996. SILICON VALLEY BANK, a California corporation By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- Exhibit A: CIC Benefit Table Exhibit B: Arbitration Procedure 11 EXHIBIT A SCHEDULE OF BENEFITS ELIGIBLE EMPLOYEE GRADE 8 OR ABOVE LUMP SUM SEVERANCE PAYMENT. Within sixty (60) days following a Covered Termination, an Eligible Employee classified by the Company at Grade 8 or above as of the date of the Covered Termination shall receive a lump sum payment determined by the Eligible Employee's Total Compensation multiplied by the appropriate factor applied from the attached table (which factor shall be based upon (1) the Eligible Employee's grade within the Company and (2) the relationship between the valuation of the Company at the time of the transaction (or series of related transactions) causing the occurrence of a Change in Control and the Book Value of the Company at that time). This lump sum payment shall be called the Eligible Employee's "CIC Benefit." If the Eligible Employee's Covered Termination occurs on or before the expiration of twelve (12) months from the occurrence of a Change in Control, the Eligible Employee shall be entitled to receive 100% of his or her CIC Benefit. If the Eligible Employee's Covered Termination occurs after the expiration of twelve (12) months from the occurrence of a Change in Control, the Eligible Employee shall be entitled to receive a CIC Benefit based upon the following table: NUMBER OF MONTHS PERCENTAGE OF CIC BENEFIT FOLLOWING CHANGE IN CONTROL 15 75% 18 50% 21 25% 24 0% In the event that an Eligible Employee's Covered Termination occurs on a date between two of these quarterly benchmarks, then the percentage of the CIC Benefit to which the Eligible Employee shall be entitled shall be equal to the sum of two percentages (rounded to the nearest whole percentage): (1) the Percentage of CIC Benefit for the quarterly benchmark next following the occurrence of the Covered Termination, and (2) twenty five percent (25%) multiplied by a fraction, the numerator of which is the number of days after the date of Covered Termination and on or before the date on which the subsequent quarterly benchmark falls, and the denominator of which is ninety one (91). For example, if the date on which a Change of Control occurs is September 1, 1996 and the Eligible Employee incurs a Covered Termination on November 15, 1997, then the Percentage of CIC Benefit to which the Eligible Employee is entitled shall be 79% (75% + (16/91 x 25%)) or (75% + 4.4%) or 79.4%, as rounded to the nearest whole percentage. An Eligible Employee's CIC Benefit may be further reduced as a result of the limits on payment of aggregate CIC Benefits described in this Exhibit A. 12 EVA PLAN PAYMENT. In addition to the CIC Benefit, within ninety (90) days of the occurrence of a Covered Termination, an Eligible Employee classified in Grade 8 to 13 shall receive a lump sum payment of the entire amount of Eligible Employee's incentive reserve under the EVA Plan, as determined under the terms of the Company's Incentive Plan at Silicon Valley Bank (known as the "EVA Plan") or under other, similar incentive or bonus plans that preceded the EVA Plan or that may replace the EVA Plan. STOCK OPTION VESTING. All stock options held by the Eligible Employee with respect to Bancshares stock that are unvested at the time of a Change in Control shall become fully vested and exercisable upon a Change in Control (regardless of whether a Covered Termination occurs) and all Bancshares stock held by the Eligible Employee that is unvested at the time of a Change in Control shall become fully vested upon a Change in Control (regardless of whether a Covered Termination occurs). The Company shall take all actions necessary to amend all stock option agreements evidencing outstanding stock options granted to an Eligible Employee to provide for full vesting of stock options upon a Change in Control or to otherwise conform such stock agreements, as necessary, to the terms of this Policy. *** For purposes of the attached table, the following definitions shall apply: VII "Book Value" shall mean the amount of the Company's stockholders' equity, as determined in accordance with generally accepted accounting principles, as of the date immediately preceding a Change in Control, excluding the Company's allowance for loan losses. VIII "Selling Price" shall mean the valuation of the Company as determined by the Company in good faith at the time of the occurrence of the transaction (or series of related transactions) as a result of which a Change in Control occurs. Furthermore, notwithstanding any provision in this Exhibit A and any personnel policy of the Company to the contrary, the cumulative CIC Benefit paid to all employees of the Company shall not exceed 5.8% of the difference between the Selling Price and the Book Value assuming one-third (1/3rd) of the Company's employees at the time of a Change in Control incur a Covered Termination, shall not exceed 11.7% of the difference between the Selling Price and the Book Value assuming two-thirds (2/3rds) of the Company's employees at the time of a Change in Control incur a Covered Termination, and in no event shall exceed 17.5% of the difference between the Selling Price and the Book Value. For purposes of the potential reduction in CIC Benefits provided for in this paragraph, the determination shall be made at the time of the Change in Control and the determination of whether the cumulative CIC Benefit to be paid exceeds the relevant limits specified herein also shall be determined at the time of the Change in Control. If, at the time of the Change in Control, it is determined that the limits specified in this paragraph are exceeded, then the potential CIC Benefits of all employees of the Company incurring a Covered Termination shall be proportionately decreased such that the resulting potential aggregate payouts will not exceed the relevant limit. 13 CIC BENEFIT/1/
Selling Price Multiple of Total Cash Compensation Multiple of ------------------------------------------------ Book Value Grade 13 Grades 11-12 Grades 10-8 - -------------------------------------------------------------------- 1.00 0.000 0.000 0.000 1.05 0.075 0.050 0.025 1.10 0.150 0.100 0.050 1.15 0.225 0.150 0.075 1.20 0.300 0.200 0.100 1.25 0.375 0.250 0.125 1.30 0.450 0.300 0.150 1.35 0.525 0.350 0.175 1.40 0.600 0.400 0.200 1.45 0.675 0.450 0.225 1.50 0.750 0.500 0.250 1.55 0.825 0.550 0.275 1.60 0.900 0.600 0.300 1.65 0.975 0.650 0.325 1.70 1.050 0.700 0.350 1.75 1.125 0.750 0.375 1.80 1.200 0.800 0.400 1.85 1.275 0.850 0.425 1.90 1.350 0.900 0.450 1.95 1.425 0.950 0.475 2.00 1.500 1.000 0.500 2.05 1.575 1.050 0.525 2.10 1.650 1.100 0.550 2.15 1.725 1.150 0.575 2.20 1.800 1.200 0.600 2.25 1.875 1.250 0.625 2.30 1.950 1.300 0.650 2.35 2.025 1.350 0.675 2.40 2.100 1.400 0.700 2.45 2.175 1.450 0.725 2.50 2.250 1.500 0.750 2.55 2.325 1.550 0.775 2.60 2.400 1.600 0.800 2.65 2.475 1.650 0.825 2.70 2.550 1.700 0.850 2.75 2.625 1.750 0.875 2.80 2.700 1.800 0.900 2.85 2.775 1.850 0.925 2.90 2.850 1.900 0.950 2.95 2.925 1.950 0.975 3.00 3.000 2.000 1.000
/1/ This table reflects CIC benefits for sales up to 3.00 times SVB's then book value. For sales above this, the multiples (of total cash compensation) must appropriatesly be extrapolated from the multiples (of total cash compensation) shown. 14 EXHIBIT A SCHEDULE OF BENEFITS ELIGIBLE EMPLOYEE GRADE 7 AND BELOW Subject to the limitations specified below, within sixty (60) days following a Covered Termination, an Eligible Employee classified at Grade 7 or below as of the date of the Covered Termination shall receive a lump sum payment in an amount equal to one week of Total Compensation for each full year of service with the Company, but not to exceed a maximum of fifteen (15) weeks of Total Compensation. This lump sum payment shall be called the Eligible Employee's CIC Benefit. Notwithstanding the foregoing, (i) Eligible Employees ----------------------------- who are classified as Grade 7 or below who are not officers of the Company will receive a minimum of two (2) weeks of Total Compensation as the Eligible Employee's CIC Benefit, and (ii) Eligible Employees who are classified at Grade 7 or below who are officers of the Company will receive a minimum of four (4) weeks of Total Compensation as the Eligible Employee's CIC Benefit. For purposes of determining CIC Benefits for an Eligible Employee classified at Grade 7 or below, such Eligible Employee's Total Compensation shall be divided by 52 in order to determine the amount of one week of Total Compensation. However, notwithstanding any provision in this Exhibit A and any personnel policy of the Company to the contrary, the cumulative CIC Benefit paid to all employees of the Company shall not exceed 5.8% of the difference between the Selling Price and the Book Value assuming one-third (1/3rd) of the Company's employees at the time of a Change in Control incur a Covered Termination, shall not exceed 11.7% of the difference between the Selling Price and the Book Value assuming two-thirds (2/3rds) of the Company's employees at the time of a Change in Control incur a Covered Termination, and in no event shall exceed 17.5% of the difference between the Selling Price and the Book Value. For purposes of the potential reduction in CIC Benefits provided for in this paragraph, the determination shall be made at the time of the Change in Control and the determination of whether the cumulative CIC Benefit to be paid exceeds the relevant limits specified herein also shall be determined at the time of the Change in Control. If, at the time of the Change in Control, it is determined that the limits specified in this paragraph are exceeded, then the potential CIC Benefits of all employees of the Company incurring a Covered Termination shall be proportionately decreased such that the resulting potential aggregate payouts will not exceed the relevant limit. *** For purposes of this Exhibit A, the following definitions shall apply: IX "Book Value" shall mean the amount of the Company's stockholders' equity, as determined in accordance with generally accepted accounting principles, as of the date immediately preceding a Change in Control, excluding the Company's allowance for loan losses. 15 X "Selling Price" shall mean the valuation of the Company as determined by the Company in good faith at the time of the occurrence of the transaction (or series of related transactions) as a result of which a Change in Control occurs. 16 EXHIBIT B ARBITRATION PROCEDURE XI The parties agree that any dispute that arises in connection with the payment of benefits under this Policy or the termination of this Policy shall be resolved by binding arbitration in the manner described below. XII A party intending to seek resolution of any dispute under the Policy by arbitration shall provide a written demand for arbitration to the other party, which demand shall contain a brief statement of the issues to be resolved. XIII The arbitration shall be conducted in Santa Clara County, California, by a mutually acceptable retired judge from the panel of Judicial Arbitration and Mediation Services, Inc. or any entity performing the same type of services that succeeds to its business ("JAMS"). At the request of either party, arbitration proceedings will be conducted in the utmost secrecy and, in such case, all documents, testimony and records shall be received, heard and maintained by the arbitrator in secrecy under seal, available for inspection only by the parties to the arbitration, their respective attorneys, and their respective expert consultants or witnesses who shall agree, in advance and in writing, to receive all such information confidentially and to maintain such information in secrecy, and make no use of such information except for the purposes of the arbitration, unless compelled by legal process. XIV The arbitrator is required to disclose any circumstances that might preclude the arbitrator from rendering an objective and impartial determination. In the event the parties cannot mutually agree upon the selection of a JAMS arbitrator, the President of JAMS shall designate the arbitrator. XV The party demanding arbitration shall promptly request that JAMS conduct a scheduling conference within fifteen (15) days of the date of that party's written demand for arbitration or on the first available date thereafter on the arbitrator's calendar. The arbitration hearing shall be held within thirty (30) days after the scheduling conference or on the first available date thereafter on the arbitrator's calendar. Nothing in this paragraph shall prevent a party from at any time seeking temporary equitable relief, from JAMS or any court of competent jurisdiction, to prevent irreparable harm pending the resolution of the arbitration. XVI Discovery shall be conducted as follows: (a) prior to the arbitration any party may make a written demand for lists of the witnesses to be called and the documents to be introduced at the hearing; (b) the lists must be served within fifteen days of the date of receipt of the demand, or one day prior to the arbitration, whichever is earlier; and (c) each party may take no more than two depositions (pursuant to the procedures set forth in the California Code of Civil Procedure) with a 17 maximum of five hours of examination time per deposition, and no other form of pre-arbitration discovery shall be permitted. XVII It is the intent of the parties that the Federal Arbitration Act ("FAA") shall apply to the enforcement of this provision unless it is held inapplicable by a court with jurisdiction over the dispute, in which event the California Arbitration Act ("CAA") shall apply. XVIII The arbitrator shall apply California law, including the California Evidence Code, and shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a preliminary injunction, a permanent injunction, or replevin of Company property. The arbitrator shall also be able to award actual, general or consequential damages, but shall not award any other form of damage (e.g., punitive damages). 18 EX-27 4 FINANCIAL DATA SCHEDULE
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 QUARTER ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 85,478 394 280,000 0 493,132 0 0 840,778 30,000 1,703,770 1,568,832 0 9,813 0 0 0 64,232 60,893 1,703,770 65,536 16,455 9,527 91,518 27,438 27,438 64,080 6,550 1 6,314 25,975 15,585 0 0 15,585 1.61 1.61 8.7 19,936 359 0 1,518 29,700 8,196 1,946 30,000 20,365 0 9,635
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