As filed with the Securities and Exchange Commission on May 15, 1996
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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 March 31, 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 April 30, 1996, 9,184,141 shares of the registrant's common stock (no
par value) were outstanding.
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This report contains a total of 22 pages.
1
TABLE OF CONTENTS
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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 21
ITEM 2. CHANGES IN SECURITIES 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 5. OTHER INFORMATION 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 22
2
PART I - FINANCIAL INFORMATION
ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1996 1995
(Dollars in thousands) (Unaudited)
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Assets:
Cash and due from banks $ 99,210 $ 85,187
Federal funds sold and securities purchased under
agreement to resell 240,430 257,138
Investment securities, at fair value 334,182 321,309
Loans, net of unearned income 748,351 738,405
Allowance for loan losses (30,200) (29,700)
- -------------------------------------------------------------------------------------
Net loans 718,151 708,705
Premises and equipment 4,453 4,697
Other real estate owned 4,393 4,955
Accrued interest receivable and other assets 23,728 25,596
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Total assets $1,424,547 $1,407,587
=====================================================================================
Liabilities and Shareholders' Equity:
Liabilities:
Noninterest-bearing demand deposits $ 453,961 $ 451,318
Money market and NOW deposits 782,184 773,292
Time deposits 65,736 65,450
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Total deposits 1,301,881 1,290,060
Other liabilities 10,442 12,553
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Total liabilities 1,312,323 1,302,613
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Shareholders' Equity:
Preferred stock, no par value:
20,000,000 shares authorized;
none outstanding
Common stock, no par value:
30,000,000 shares authorized;
9,142,526 and 8,963,662 shares outstanding at
March 31, 1996 and December 31, 1995, respectively 62,094 59,357
Retained earnings 50,532 45,855
Net unrealized loss on available-for-sale investments (295) (198)
Unearned compensation (107) (40)
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Total shareholders' equity 112,224 104,974
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Total liabilities and shareholders' equity $1,424,547 $1,407,587
=====================================================================================
See notes to interim consolidated financial statements.
3
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
For the three months ended
--------------------------
March 31, March 31,
1996 1995
(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------
Interest income:
Loans $21,105 $20,179
Investment securities 4,279 2,354
Federal funds sold and securities purchased under
agreement to resell 2,821 1,475
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Total interest income 28,205 24,008
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Interest expense:
Deposits 7,932 5,843
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Total interest expense 7,932 5,843
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Net interest income 20,273 18,165
Provision for loan losses 1,523 1,355
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Net interest income after provision for loan losses 18,750 16,810
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Noninterest income:
Letter of credit and foreign exchange income 879 705
Deposit service charges 396 351
Disposition of client warrants 291 225
Investment gains (losses) 1 (422)
Other 266 118
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Total noninterest income 1,833 977
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Noninterest expense:
Compensation and benefits 7,788 7,090
Occupancy 850 932
Professional services 804 963
Equipment 653 530
Cost of other real estate owned 450 (5)
Corporate legal and litigation 154 154
Data processing services 126 329
FDIC deposit insurance 81 598
Client services 30 213
Other 1,852 1,264
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Total noninterest expense 12,788 12,068
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Income before income tax expense 7,795 5,719
Income tax expense 3,118 2,439
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Net income $ 4,677 $ 3,280
=====================================================================================
Net income per common and
common equivalent share $ 0.49 $ 0.37
=====================================================================================
See notes to interim consolidated financial statements.
4
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended
--------------------------
March 31, March 31,
1996 1995
(Dollars in thousands) (Unaudited) (Unaudited)
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Cash flows from operating activities:
Net income $ 4,677 $ 3,280
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,523 1,355
Net (gain) loss on sales of investment securities (1) 422
Depreciation and amortization 306 520
Net gain on sales of other real estate owned (173) (53)
Provision for other real estate owned 551 -
Increase in accrued interest receivable (1,119) (53)
Decrease in accounts receivable 253 474
Increase (decrease) in accrued interest payable 29 (55)
Decrease in unearned income (452) (421)
Other, net (1,238) 1,153
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Net cash provided by operating activities 4,356 6,622
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Cash flows from investing activities:
Proceeds from maturities and paydowns of
investment securities 272,319 17,181
Proceeds from sales of investment securities 732 14,119
Purchases of investment securities (284,188) (27,132)
Net (increase) decrease in loans (11,133) 6,805
Proceeds from recoveries of charged off loans 616 968
Net proceeds from sales of other real estate owned 184 1,189
Purchases of premises and equipment (61) (736)
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Net cash provided by (applied to) investing activities (21,531) 12,394
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Cash flows from financing activities:
Net increase (decrease) in deposits 11,821 (51,727)
Proceeds from issuance of common stock,
net of issuance costs 2,669 1,451
Net cash provided by (applied to) financing activities 14,490 (50,276)
- -------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2,685) (31,260)
Cash and cash equivalents at January 1, 342,325 289,849
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Cash and cash equivalents at March 31, $ 339,640 $258,589
=====================================================================================
Supplemental disclosures:
Interest paid $ 7,903 $ 5,898
Income taxes paid $ 810 $ 90
====================================================================================
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 Maryland,
Massachusetts and Oregon. The Bank has received regulatory approval during 1996
to open additional loan offices in: Bellevue, Washington; Boulder, Colorado;
Austin, Texas; and St. Helena, California. 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
March 31, 1996, and the results of its operations and cash flows for the three
month periods ended March 31, 1996 and March 31, 1995. The December 31, 1995
consolidated financial statements were derived from audited financial
statements, and certain information and footnote disclosures normally presented
in 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 month period ended March 31, 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
9,545,307 for the quarter ended March 31, 1996 and 8,836,953 for the quarter
ended March 31, 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 $430,000 and $138,000 at March 31, 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:
MARCH 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1996 1995
- ------------------------------------------------------
Commercial $639,270 $622,488
Real estate term 45,102 56,845
Real estate construction 21,120 17,194
Consumer and other 42,859 41,878
- ------------------------------------------------------
Total loans (1) $748,351 $738,405
======================================================
(1) Loans are presented net of unearned income of $3,360 and $3,813 at March 31,
1996 and December 31, 1995, respectively.
3. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the three month periods ended
March 31, 1996 and 1995 was as follows:
8
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3. ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Quarter Ended March 31, 1996 1995
- -------------------------------------------------
(Dollars in thousands)
Balance at January 1, $29,700 $20,000
Provision for loan losses 1,523 1,355
Loans charged off (1,639) (823)
Recoveries 616 968
- -------------------------------------------------
Balance at March 31, $30,200 $21,500
=================================================
The aggregate recorded investment in loans for which impairment has been
realized in accordance with SFAS No. 114 totaled $27.9 million at March 31,
1996. Allocations to the allowance for loan losses at March 31, 1996 related to
these loans were $7.3 million. Average impaired loans for the first quarter of
1996 were $29.2 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. 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%.
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.
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 $4.7 million, or $0.49 per share, for the
first quarter of 1996, compared with net income of $3.3 million, or $0.37 per
share, for the first quarter of 1995. The annualized return on average equity
for the first quarter of 1996 was 17.1%, compared with 16.3% for the first
quarter of 1995. The annualized return on average assets for the quarter ended
March 31, 1996 improved to 1.4%, up from 1.2% for the quarter ended March 31,
1995.
The increase in net income during the first quarter of 1996 as compared with the
first quarter of 1995 resulted from growth in net interest income and
noninterest income, offset by increases in both the provision for loan losses
and noninterest expense. The major components of net income and changes in
these components are summarized in the following table for the quarters ended
March 31, 1996 and 1995, and are discussed in more detail below.
1996 to 1995
Quarter Ended March 31, 1996 1995 Increase
- -----------------------------------------------------------------------
(Dollars in thousands)
Net interest income $20,273 $18,165 $2,108
Provision for loan losses 1,523 1,355 168
Noninterest income 1,833 977 856
Cost of other real estate owned 450 (5) 455
Other noninterest expense 12,338 12,073 265
- -----------------------------------------------------------------------
Income before income taxes 7,795 5,719 2,076
Income tax expense 3,118 2,439 679
- -----------------------------------------------------------------------
Net income $ 4,677 $ 3,280 $1,397
=======================================================================
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 table sets 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 month periods
ended March 31, 1996 and 1995, respectively.
10
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AVERAGE BALANCES, RATES AND YIELDS
- ------------------------------------------------------------------------------------------------------------------------------------
For the three months ended March 31,
-------------------------------------------------------------------------------------------
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) $ 209,302 $ 2,821 5.4% $ 104,228 $ 1,475 5.7%
Investment securities:
Taxable 299,072 4,178 5.6 153,865 2,232 5.9
Non-taxable (2) 6,128 155 10.2 7,384 187 10.3
Loans:
Commercial 607,698 17,930 11.9 614,353 17,958 11.9
Real estate construction
and term 72,136 2,174 12.1 70,362 1,753 10.1
Consumer and other 43,124 1,001 9.3 18,192 468 10.4
- ----------------------------- -------------------------------------------- -----------------------------------
Total loans 722,958 21,105 11.7 702,907 20,179 11.6
- ----------------------------- -------------------------------------------- -----------------------------------
Total interest-earning assets 1,237,460 28,259 9.2 968,384 24,073 10.1
- ----------------------------- -------------------------------------------- -----------------------------------
Cash and due from banks 130,996 120,434
Allowance for loan losses (30,026) (21,564)
Other real estate owned 4,919 6,521
Other assets 28,995 19,363
- ----------------------------- ---------- ----------
Total assets $1,372,344 $1,093,138
============================= ========== ==========
Funding sources:
Interest-bearing liabilities:
Money market, NOW and
savings deposits $ 765,321 7,311 3.8 $ 581,749 5,275 3.7
Time deposits 64,270 621 3.9 68,201 568 3.4
- ----------------------------- -------------------------------------------- -----------------------------------
Total interest-bearing
liabilities 829,591 7,932 3.8 649,950 5,843 3.6
Portion of
noninterest-bearing
funding sources 407,869 318,434
- ----------------------------- -------------------------------------------- ------------------------------------
Total funding sources 1,237,460 7,932 2.6 968,384 5,843 2.4
- ----------------------------- -------------------------------------------- -----------------------------------
Noninterest-bearing funding
sources:
Demand deposits 420,469 350,544
Portion used to fund
interest-earning
assets (407,869) (318,434)
Other liabilities 12,096 11,194
Shareholders' equity 110,188 81,450
- ----------------------------- ---------- ----------
Total liabilities and
shareholders'
equity $1,372,344 $1,093,138
============================= ========== ==========
Net interest income and $20,327 6.6% $18,230 7.6%
margin ======= ==== ======= ====
=============================
Memorandum: Total deposits $1,250,060 $1,000,494
============================= ========== ==========
(1) Includes average interest-bearing deposits in other financial institutions
of $201 and $1,184 for the three months ended March 31, 1996 and 1995,
respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis. The tax equivalent adjustments were $54 and
$65 for the three months ended March 31, 1996 and 1995, respectively.
11
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 investments
are presented on a fully taxable-equivalent basis using the federal statutory
rate of 35% in 1996 and 1995.
1996 Compared to 1995
-------------------------
Increase (Decrease)
Due to Change in
-------------------------
(Dollars in thousands) Volume Rate Total
- -------------------------------------------------------------------------
Interest income:
Federal funds sold and
securities purchased under
agreement to resell $1,429 $ (83) $1,346
Investment securities 2,063 (149) 1,914
Loans 755 171 926
- -------------------------------------------------------------------------
Increase (decrease) in interest income 4,247 (61) 4,186
- -------------------------------------------------------------------------
Interest expense:
Money market, NOW and
savings deposits 1,798 238 2,036
Time deposits (33) 86 53
- -------------------------------------------------------------------------
Increase in interest expense 1,765 324 2,089
- -------------------------------------------------------------------------
Increase (decrease) in net interest income $2,482 $(385) $2,097
=========================================================================
Net interest income, on a fully taxable-equivalent basis, totaled $20.3 million
for the first quarter of 1996, an increase of $2.1 million, or 11.5%, from the
$18.2 million total for the first quarter of 1995. The increase in net interest
income was the result of a $4.2 million, or 17.4%, increase in interest income,
offset by a $2.1 million, or 35.8%, increase in interest expense over the
comparable prior year period.
The $4.2 million increase in interest income for the first quarter of 1996, as
compared to the first quarter of 1995, was the result of a $4.2 million
favorable volume variance offset by a $0.1 million unfavorable rate variance.
The favorable volume variance resulted from a $269.1 million, or 27.8%, 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 primarily comprised of lower-yielding liquid
investments in federal funds sold and securities purchased under agreement to
resell, and taxable investment securities, which increased $105.1 million and
$144.0 million, respectively. Average loans for the first quarter of 1996
increased $20.1 million, or 2.9%, compared to the prior year first quarter. The
growth in average loans resulted from an increase in personal lines of credit
offered to executives of clients.
Interest income for the first quarter of 1996 decreased $0.1 million from the
comparable prior year period due to an unfavorable rate variance related to
federal funds sold and securities purchased under agreement to resell, and
taxable investment securities. The lower yields on these liquid investments
were primarily the result of a decline in market interest rates during the last
half of 1995 and the first quarter of 1996. The overall decrease in the yield
on interest-earning assets of 90 basis points for the first quarter of 1996, as
compared to the first quarter of 1995, was due
12
to a combination of the decline in market interest rates and a shift in the
composition of interest-earning assets towards lower-yielding liquid
investments. This shift in the composition of interest-earning assets resulted
from the aforementioned growth in the Company's deposits combined with minimal
growth in the average loan portfolio.
Total interest expense in the 1996 first quarter increased $2.1 million from the
1995 first quarter. This increase was due to an unfavorable volume variance of
$1.8 million combined with an unfavorable rate variance of $0.3 million. The
unfavorable volume variance resulted from a $179.6 million, or 27.6%, increase
in average interest-bearing liabilities in the first quarter of 1996 as compared
with the first quarter of 1995. This increase was concentrated in higher-rate
money market deposits, and was attributable to the successful marketing efforts
of the Company. Changes in the rates paid on interest-bearing liabilities had a
$0.3 million unfavorable impact on interest expense in the first quarter of
1996, as the average rate paid on interest-bearing liabilities increased 20
basis points from the first quarter of 1995. This increase resulted from a shift
in the Company's deposit mix towards the aforementioned 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 was $1.5 million for the first quarter of 1996, a
$0.2 million, or 12.4%, increase as compared to the $1.4 million provision for
the first quarter of 1995. 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
quarters ended March 31, 1996 and 1995:
Quarter Ended March 31, 1996 1995
- ----------------------------------------------------------------
(Dollars in thousands)
Letter of credit and foreign exchange income $ 879 $ 705
Deposit service charges 396 351
Disposition of client warrants 291 225
Investment gains (losses) 1 (422)
Other 266 118
- ----------------------------------------------------------------
Total noninterest income $1,833 $ 977
================================================================
Noninterest income increased $0.9 million, or 87.6%, to $1.8 million in the
first quarter of 1996 as compared to $1.0 million in the first quarter of 1995,
primarily due to a decrease in losses incurred through sales of investment
securities, and an increase in letter of credit and foreign exchange income.
Letter of credit fees, foreign exchange fees and other trade finance income
increased to $0.9 million during the 1996 first quarter, up $0.2 million, or
24.7%, from $0.7 million during the 1995
13
first quarter. The growth in this category of noninterest income reflects a
concerted effort by Management to expand the penetration of trade finance-
related services among the Company's client base.
Deposit service charges totaled $0.4 million in the first quarter of both 1996
and 1995. 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.
Income from the disposition of client warrants was $0.3 million in the first
quarter of 1996, an increase of $0.1 million, or 29.3%, compared to $0.2 million
in the first quarter of 1995. 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.
The company realized a nominal gain on the sale of investment securities during
the 1996 first quarter, compared to $0.4 million in losses incurred through such
sales during the first quarter of 1995. The securities sold during the first
quarter 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.
Other noninterest income is comprised primarily of service-based fee income, and
increased $0.1 million, or 125.4%, to $0.3 million for the first quarter of 1996
from $0.1 million for the first quarter of the previous year.
Noninterest Expense
- -------------------
Noninterest expense during the first quarter of 1996 totaled $12.8 million, a
$0.7 million, or 6.0%, increase from the $12.1 million incurred in 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 56.6% for the 1996 first quarter, down from 62.4%
for the first quarter of 1995. The following table presents the detail of
noninterest expense and the incremental contribution of each line item to the
Company's efficiency ratio:
14
Three Months Ended March 31,
----------------------------------------------
1996 1995
----------- -----------
Percent of Percent of
Adjusted Adjusted
(Dollars in thousands) Amount Revenues Amount Revenues
- -----------------------------------------------------------------------------------
Compensation and benefits $ 7,788 35.7% $ 7,090 36.7%
Occupancy 850 3.9 932 4.8
Professional services 804 3.7 963 5.0
Equipment 653 3.0 530 2.7
Corporate legal and litigation 154 0.7 154 0.8
Data processing services 126 0.6 329 1.7
FDIC deposit insurance 81 0.4 598 3.1
Client services 30 0.1 213 1.1
Other 1,852 8.5 1,264 6.5
- -----------------------------------------------------------------------------------
Total excluding cost of other
real estate owned 12,338 56.6% 12,073 62.4%
Cost of other real estate owned 450 (5)
- -----------------------------------------------------------------------------------
Total noninterest expense $12,788 $12,068
===================================================================================
Compensation and benefits expenses were $7.8 million in the first quarter of
1996, a $0.7 million, or 9.8%, increase over the $7.1 million incurred in the
first quarter of 1995. This increase was largely the result of an increase in
the number of average full-time equivalent (FTE) staff employed by the Company
to 350 for the first quarter of 1996 compared with 323 for the first quarter of
1995. The increase in FTE was primarily due to the expansion of the Company's
lending staff in an effort to develop new lending markets, as well as in
response to the growing client base.
Occupancy expenses totaled $0.8 million in the first quarter of 1996, a decrease
of $0.1 million, or 8.8%, from the $0.9 million incurred in the comparable 1995
period. This decrease primarily resulted from certain non-recurring costs that
were incurred in the first quarter of 1995 in connection with the Company's move
into a new headquarters facility. The move into the new facility was completed
during the fourth quarter of 1995.
Professional services expenses were $0.8 million in the first quarter of 1996, a
$0.2 million, or 16.5%, decrease from the $1.0 million incurred in the first
quarter of 1995. The decrease in professional services expenses primarily
relates to a decline in legal fees associated with client loan workouts.
Equipment expenses totaled $0.7 million in the first quarter of 1996, an
increase of $0.1 million, or 23.2%, from the $0.5 million incurred in the 1995
first quarter. This increase was related to investments in computer equipment
as well as other costs associated with the Company's growth in personnel.
Data processing services expenses were $0.1 million in the first quarter of
1996, a decrease of $0.2 million, or 61.7%, from the first quarter of 1995. The
decrease in data processing services expenses was due to the Company's
completion of a conversion to an in-house data processing center during late
1995.
15
FDIC deposit insurance expense was $0.1 million in the first quarter of 1996, a
$0.5 million, or 86.5%, decrease from the first quarter of 1995, as the Bank's
assessment rate was reduced in both the third quarter of 1995 and the first
quarter of 1996 due to the completion of the recapitalization of the Bank
Insurance Fund.
Client services expenses include courier expenses and related costs of loan and
deposit operations. The decline in these expenses of $0.2 million, or 85.9%,
from the first quarter of 1995 to the first quarter of 1996, was due to an
increase in reimbursements from clients.
Other noninterest expenses in the first quarter of 1996 totaled $1.9 million, a
$0.6 million, or 46.5%, increase from the $1.3 million incurred in the first
quarter of 1995. This increase resulted from increased advertising costs and
other miscellaneous expenses resulting from the Company's growth in staff and
increased business development efforts.
Net costs associated with other real estate owned (OREO) in the first quarter of
1996 increased $0.5 million from the comparable prior year period, largely due
to the write-down of one property owned by the Bank. 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.
Income Taxes
- ------------
The Company's effective tax rate was 40.0% in the 1996 first quarter, compared
to 42.6% in the first quarter of the prior year. The reduction in the Company's
1996 effective tax rate, as compared to 1995, was attributable to adjustments in
the Company's estimate of its tax liabilities.
FINANCIAL CONDITION
- -------------------
The Company's total assets were $1.4 billion at March 31, 1996 and December 31,
1995.
Federal Funds Sold and Securities Purchased Under Agreement to Resell
- ---------------------------------------------------------------------
Federal funds sold and securities purchased under agreement to resell totaled
$240.4 million at March 31, 1996, a decrease of $16.7 million, or 6.5%, compared
to the $257.1 million outstanding at December 31, 1995. This decrease reflects
Management's decision to invest an additional portion of excess funds in
investment securities for diversification purposes.
Investment Securities
- ---------------------
Investment securities totaled $334.2 million at March 31, 1996. This
represented a $12.9 million, or 4.0%, increase over the December 31, 1995
balance of $321.3 million. The increase in investment securities was related to
the Company's aforementioned liquidity and investment management activities, as
a portion of the funds previously invested in federal funds sold and
16
securities purchased under agreement to resell was invested in notes issued by
U.S. agencies as well as in commercial paper. These investments were the result
of Management's decision to diversify the Company's short-term investments as
well as lengthen the average remaining life of the investment portfolio in an
effort to obtain the higher yields available due to the recent steepening of the
yield curve.
Loans
- -----
Total loans, net of unearned income, at March 31, 1995 were $748.4 million, a
$9.9 million, or 1.3%, increase compared to the $738.4 million outstanding at
December 31, 1995. The slight increase in loans from the 1995 year-end total
was concentrated in the commercial loan portfolio, and can be attributed to the
Company's increased marketing 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.
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 $30.2 million at March 31, 1996, an increase
of $0.5 million, or 1.7%, compared to the $29.7 million balance at December 31,
1995. This increase was due to $1.5 million in additional provisions to the
allowance for loan losses, offset by net charge-offs of $1.0 million in the
first quarter of 1996. Gross charge-offs in the first quarter of 1996 were $1.6
million, and primarily related to one commercial credit.
In general, Management believes that the allowance for loan losses is adequate
as of March 31, 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:
17
March 31, December 31,
1996 1995
(Dollars in thousands) (Unaudited)
- ---------------------------------------------------------------------------------
Nonperforming assets:
Loans past due 90 days or more $ 935 $ 906
Nonaccrual loans 27,872 27,867
- ---------------------------------------------------------------------------------
Total nonperforming loans 28,807 28,773
OREO 4,393 4,955
- ---------------------------------------------------------------------------------
Total nonperforming assets $33,200 $33,728
=================================================================================
Nonperforming loans as a percent of total loans 3.8% 3.9%
OREO as a percent of total assets 0.3% 0.4%
Nonperforming assets as a percent of total assets 2.3% 2.4%
Allowance for loan losses: $30,200 $29,700
As a percent of total loans 4.0% 4.0%
As a percent of nonaccrual loans 108.4% 106.6%
As a percent of nonperforming loans 104.8% 103.2%
Nonperforming loans were $28.8 million, or 3.8% of total loans, at March 31,
1996. This was a slight change from the total of $28.8 million, or 3.9% of
total loans, at the prior year end. More than half of the total balance of
nonperforming loans at March 31, 1996 was concentrated in two credits totaling
$14.9 million, each of which Management believes is adequately covered with
collateral and specific reserves and one of which continues to remain current in
its payments.
In addition to the loans disclosed in the foregoing analysis, Management has
identified two loans with principal amounts aggregating approximately $7.3
million, that, on the basis of information known by Management as of March 31,
1996, were judged to have a higher than normal risk of becoming nonperforming.
The Company is not aware of any other loans at March 31, 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 $4.4 million at March 31, 1996, a decrease of $0.6 million, or
11.3%, from the $5.0 million balance at December 31, 1995. This decrease
primarily resulted from the previously mentioned write-down of one property
owned by the Bank.
Deposits
- --------
Total deposits were $1,301.9 million at March 31, 1996, an increase of $11.8
million, or 0.9%, from the prior year-end amount of $1,290.1 million. The
majority of this increase was in interest-bearing deposits, which increased $9.2
million, or 1.1%, to $847.9 million at March 31, 1996 from the $838.7 million
balance at December 31, 1995. This increase was primarily concentrated in NOW
accounts. Noninterest-bearing demand deposits were $454.0 million at March 31,
1996, representing a modest increase of $2.6 million, or 0.6%, from the $451.3
million balance at December 31, 1995.
18
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 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 March 31, 1996, the Company's liquid assets as a
percentage of deposits were 35.6% compared to 41.0% at December 31, 1995. This
decrease resulted primarily from the aforementioned lengthening of the average
remaining life of the investment securities portfolio during the first quarter
of 1996.
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.
Shareholders' equity was $112.2 million at March 31, 1996, an increase of $7.3
million from the $105.0 million balance at December 31, 1995. This increase
resulted from net income of $4.7 million and capital generated through the
Company's employee benefit plans of $2.7 million in the first quarter of 1996.
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 state member banks. The ratio is determined using Tier 1 capital
divided by quarterly average total assets. The guidelines require a minimum of
5.0% for a "well capitalized" depository institution.
In addition to the foregoing requirements, the Bank has also been subject to a
capital requirement established by the California State Banking Department.
Under the regulatory consent order with the California State Banking Department,
which was terminated effective April 9, 1996, the Bank has been required to
maintain a minimum tangible equity-to-assets ratio of 6.5%. The Bank's tangible
equity-to-assets ratios were 7.4% and 7.1% at March 31, 1996 and December 31,
1995, respectively.
19
The Company's risk-based capital ratios were in excess of regulatory guidelines
for a "well-capitalized" depository institution as of March 31, 1996 and
December 31, 1995. Capital ratios for the Company are set forth below:
- ---------------------------------------------------------------
March 31, December 31,
1996 1995
- ---------------------------------------------------------------
Total risk-based capital ratio 12.3% 11.9%
Tier 1 risk-based capital ratio 11.0% 10.6%
Tier 1 leverage ratio 8.2% 8.0%
===============================================================
The improvement in all of the Company's capital ratios from December 31, 1995 to
March 31, 1996 is attributable to an increase in Tier 1 capital. The increase
in Tier 1 capital resulted from the net income and capital generated through the
Company's employee benefit plans during the first three months of 1996.
20
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item
pending at March 31, 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
No matters were submitted to a vote by the shareholders of the Company's common
stock during the first quarter of 1996.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
---------
27 Financial Data Schedule
99.1 Letter dated March 27, 1996 from the Federal Reserve Bank of San
Francisco regarding termination of the April 15, 1993 Consent Order
99.2 Letter dated April 9, 1996 from the California State Banking
Department regarding termination of the April 20, 1993 Final Order
(b) Reports on Form 8-K:
--------------------
No reports on Form 8-K were filed by the Company during the quarter ended
March 31, 1996.
21
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: May 15, 1996 (s) Christopher T. Lutes
------------------------
Christopher T. Lutes
Senior Vice President and Controller
(Principal Accounting Officer)
22