As filed with the Securities and Exchange Commission on August 13, 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 June 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 July 31, 1996, 9,217,351 shares of the registrant's common stock (no par
value) were outstanding.
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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 24
ITEM 2. CHANGES IN SECURITIES 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
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
June 30, December 31,
1996 1995
(Dollars in thousands) (Unaudited)
- ------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 90,323 $ 85,187
Federal funds sold and securities purchased under
agreement to resell 372,410 257,138
Investment securities, at fair value 445,263 321,309
Loans, net of unearned income 823,651 738,405
Allowance for loan losses (29,000) (29,700)
---------- ----------
Net loans 794,651 708,705
Premises and equipment 4,311 4,697
Other real estate owned 3,733 4,955
Accrued interest receivable and other assets 25,775 25,596
---------- ----------
Total assets $1,736,466 $1,407,587
========== ==========
Liabilities and Shareholders' Equity:
Liabilities:
Noninterest-bearing demand deposits $ 513,263 $ 451,318
Money market and NOW deposits 1,023,604 773,292
Time deposits 71,680 65,450
---------- ----------
Total deposits 1,608,547 1,290,060
Other liabilities 8,947 12,553
---------- ----------
Total liabilities 1,617,494 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;
9,211,790 and 8,963,662 shares outstanding at
June 30, 1996 and December 31, 1995, respectively 64,048 59,357
Retained earnings 56,169 45,855
Net unrealized loss on available-for-sale investments (856) (198)
Unearned compensation (389) (40)
---------- ----------
Total shareholders' equity 118,972 104,974
---------- ----------
Total liabilities and shareholders' equity $1,736,466 $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 six months ended
--------------------------- -------------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans $21,195 $19,999 $42,300 $40,178
Investment securities 5,137 2,367 9,416 4,721
Federal funds sold and securities
purchased under agreement to resell 3,687 1,936 6,508 3,411
------- ------- -------- --------
Total interest income 30,019 24,302 58,224 48,310
------- ------- -------- --------
Interest expense:
Deposits 9,153 5,936 17,085 11,779
------- ------- -------- --------
Total interest expense 9,153 5,936 17,085 11,779
------- ------- -------- --------
Net interest income 20,866 18,366 41,139 36,531
Provision for loan losses 2,065 1,406 3,588 2,761
------- ------- -------- --------
Net interest income after provision
for loan losses 18,801 16,960 37,551 33,770
------- ------- -------- --------
Noninterest income:
Disposition of client warrants 1,971 1,578 2,262 1,803
Letter of credit and foreign
exchange income 855 756 1,734 1,461
Deposit service charges 445 333 841 685
Investment gains (losses) - (348) 1 (770)
Other 283 162 549 280
------- ------- -------- --------
Total noninterest income 3,554 2,481 5,387 3,459
------- ------- -------- --------
Noninterest expense:
Compensation and benefits 7,557 6,767 15,345 13,857
Professional services 1,472 1,626 2,276 2,589
Equipment 939 675 1,592 1,205
Occupancy 774 715 1,624 1,647
Client services 173 44 203 257
FDIC deposit insurance 91 598 172 1,196
Data processing services 74 223 200 552
Cost of other real estate owned (124) 20 326 15
Corporate legal and litigation (221) 239 (67) 392
Other 2,225 1,508 4,077 2,773
------- ------- -------- --------
Total noninterest expense 12,960 12,415 25,748 24,483
------- ------- -------- --------
Income before income tax expense 9,395 7,026 17,190 12,746
Income tax expense 3,758 3,046 6,876 5,485
Net income $ 5,637 $ 3,980 $10,314 $ 7,261
======= ======= ======= =======
Net income per common and
common equivalent share $0.58 $0.44 $1.07 $0.81
======= ======= ======= =======
See notes to interim consolidated financial statements.
4
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended
------------------------
June 30, June 30,
1996 1995
(Dollars in thousands) (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 10,314 $ 7,261
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3,588 2,761
Net (gain) loss on sales of investment securities (1) 770
Depreciation and amortization 598 1,193
Net gain on sales of other real estate owned (367) (124)
Provision for other real estate owned 551 -
Increase (decrease) in unearned income 391 (485)
(Increase) decrease in accrued interest receivable (2,440) 956
Increase in accounts receivable (10) (10,450)
Increase (decrease) in accrued liabilities (3,686) 1,758
Other, net (809) (470)
--------- --------
Net cash provided by operating activities 8,129 3,170
--------- --------
Cash flows from investing activities:
Proceeds from maturities and paydowns of
investment securities 523,770 24,379
Proceeds from sales of investment securities 6,080 29,609
Purchases of investment securities (651,301) (32,333)
Net (increase) decrease in loans (91,331) 42,622
Proceeds from recoveries of charged off loans 1,406 2,113
Net proceeds from sales of other real estate owned 1,038 2,079
Purchases of premises and equipment (212) (3,323)
--------- --------
Net cash provided by (applied to) investing activities (210,550) 65,146
--------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits 318,487 (4,753)
Proceeds from issuance of common stock,
net of issuance costs 4,342 4,335
--------- --------
Net cash provided by (applied to) financing activities 322,829 (418)
--------- --------
Net increase in cash and cash equivalents 120,408 67,898
Cash and cash equivalents at January 1, 342,325 289,849
--------- --------
Cash and cash equivalents at June 30, $ 462,733 $357,747
========= ========
Supplemental disclosures:
Interest paid $ 17,062 $ 11,816
Income taxes paid $ 6,641 $ 5,318
========= ========
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
June 30, 1996, the results of its operations for the three and six month periods
ended June 30, 1996 and June 30, 1995, and the results of its cash flows for the
six month periods ended June 30, 1996 and June 30, 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 and six month periods ended June 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
9,665,820 and 9,607,069 for the three and six month periods ended June 30, 1996
and 9,033,164 and 8,944,291 for the three and six month periods ended June 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 $410,000 and $138,000 at June 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:
June 30, December 31,
(Dollars in thousands) 1996 1995
- --------------------------- -------- ------------
Commercial $691,258 $622,488
Real estate term 58,715 56,845
Real estate construction 31,037 17,194
Consumer and other 42,641 41,878
- --------------------------- -------- --------
Total loans (1) $823,651 $738,405
=========================== ======== ========
(1) Loans are presented net of unearned income of $4,204 and $3,813 at June 30,
1996 and December 31, 1995, respectively.
3. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the three and six month
periods ended June 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 Six Months Ended
June 30, June 30,
------------------- -----------------
(Dollars in thousands) 1996 1995 1996 1995
Beginning balance $30,200 $21,500 $29,700 $20,000
Provision for loan losses 2,065 1,406 3,588 2,761
Loans charged off (4,056) (1,552) (5,695) (2,374)
Recoveries 791 1,146 1,407 2,113
------- ------- ------- -------
Balance at June 30, $29,000 $22,500 $29,000 $22,500
======= ======= ======= =======
The aggregate recorded investment in loans for which impairment has been
realized in accordance with SFAS No. 114 totaled $23.5 million at June 30, 1996.
Allocations to the allowance for loan losses at June 30, 1996 related to these
loans were $7.9 million. Average impaired loans for the second quarter of 1996
were $25.7 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. 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 $5.6 million, or $0.58 per share, for the
second quarter of 1996, compared with net income of $4.0 million, or $0.44 per
share, for the second quarter of 1995. Net income totaled $10.3 million, or
$1.07 per share, for the six months ended June 30, 1996, versus $7.3 million, or
$0.81 per share, for the respective 1995 period. The annualized return on
average assets (ROA) was 1.5% for both the second quarter of 1996 and 1995. The
annualized return on average equity (ROE) for the second quarter of 1996 was
19.6%, an increase from 18.4% in the 1995 second quarter. For the first six
months of 1996, ROA was 1.4% and ROE was 18.4% versus 1.4% and 17.4%,
respectively, for the comparable prior year period.
The increase in net income during the three and six month periods ended June 30,
1996, as compared with the prior year respective periods, 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 as well as changes in these components are summarized in the following
table for the three and six month periods ended June 30, 1996 and 1995, and are
discussed in more detail below:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
(Dollars in thousands) 1996 1995 1996 1995
Net interest income $20,866 $18,366 $41,139 $36,531
Provision for loan losses 2,065 1,406 3,588 2,761
Noninterest income 3,554 2,481 5,387 3,459
Noninterest expense 12,960 12,415 25,748 24,483
------- ------- ------- -------
Income before income taxes 9,395 7,026 17,190 12,746
Income tax expense 3,758 3,046 6,876 5,485
------- ------- ------- -------
Net income $ 5,637 $ 3,980 $10,314 $ 7,261
======= ======= ======= =======
Net Interest Income and Margin
- ------------------------------
Net interest income represents the difference between interest earned, primarily
on loans and investments, and interest paid on funding sources, primarily
deposits, and is the principal source of revenue for the Company. Net interest
margin is the amount of net interest income, on a fully taxable-equivalent
basis, expressed as a percentage of average interest-earning assets. The average
yield earned on interest-earning assets is the amount of taxable-equivalent
interest income expressed as a percentage of average interest-earning assets.
The average rate paid on funding sources expresses interest expense as a
percentage of average interest-earning assets.
The following tables set forth average assets, liabilities and shareholders'
equity, interest income and interest expense, average yields and rates, and the
composition of the Company's net interest margin for the three and six month
periods ended June 30, 1996 and 1995, respectively:
10
AVERAGE BALANCES, RATES AND YIELDS
For the three months ended June 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) $ 279,286 $ 3,687 5.3% $ 128,331 $ 1,936 6.1%
Investment securities:
Taxable 362,881 5,036 5.6 151,088 2,250 6.0
Non-taxable (2) 6,307 156 9.9 7,131 180 10.1
Loans:
Commercial 650,070 18,068 11.2 582,635 17,758 12.2
Real estate construction and term 75,503 2,185 11.6 64,925 1,691 10.4
Consumer and other 43,071 942 8.8 16,682 550 13.2
- ---------------------------------------- ---------- ---------- ------- -------- ------- ----
Total loans 768,644 21,195 11.1 664,242 19,999 12.1
- ---------------------------------------- ---------- ---------- ------- -------- ------- ----
Total interest-earning assets 1,417,118 30,074 8.5 950,792 24,365 10.3
- ---------------------------------------- ---------- ---------- ------- -------- ------- ----
Cash and due from banks 123,819 114,058
Allowance for loan losses (30,773) (22,511)
Other real estate owned 4,009 5,862
Other assets 27,004 20,296
- ---------------------------------------- ---------- ----------
Total assets $1,541,177 $1,068,497
======================================== ========== ==========
Funding sources:
Interest-bearing liabilities:
Money market, NOW and
savings deposits $ 897,408 8,489 3.8 $553,494 5,418 3.9
Time deposits 67,932 664 3.9 59,949 518 3.5
- ---------------------------------------- ---------- ---------- ------- ---------- ------- ----
Total interest-bearing liabilities 965,340 9,153 3.8 613,443 5,936 3.9
Portion of noninterest-bearing
funding sources 451,778 337,349
- ---------------------------------------- ---------- ----------
Total funding sources 1,417,118 9,153 2.6 950,792 5,936 2.5
- ---------------------------------------- ---------- ---------- ------- ---------- ------- ----
Noninterest-bearing funding sources:
Demand deposits 449,636 355,243
Other liabilities 10,463 13,220
Portion used to fund interest-earning
assets (451,778) (337,349)
Shareholders' equity 115,738 86,591
- ---------------------------------------- ---------- ----------
Total liabilities and shareholders'
equity $1,541,177 $1,068,497
======================================== ========== ==========
Net interest income and margin $ 20,921 5.9% $18,429 7.8%
======================================== ========== ======= ======= ====
Memorandum: Total deposits $1,414,976 $ 968,686
======================================== ========== ==========
(1) Includes average interest-bearing deposits in other financial institutions
of $418 and $78 for the three months ended June 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 $55 and $63 for the
three months ended June 30, 1996 and 1995, respectively.
11
AVERAGE BALANCES, RATES AND YIELDS
For the six months ended June 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) $ 244,294 $ 6,508 5.4% $ 116,346 $ 3,411 5.9%
Investment securities:
Taxable 330,977 9,214 5.6 152,470 4,482 5.9
Non-taxable (2) 6,218 311 10.1 7,257 367 10.2
Loans:
Commercial 628,884 35,998 11.5 598,406 35,716 12.0
Real estate construction and term 73,820 4,359 11.9 67,628 3,444 10.3
Consumer and other 43,097 1,943 9.1 17,433 1,018 11.8
- ---------------------------------------- ---------- ---------- ---- ---------- ------- ----
Total loans 745,801 42,300 11.4 683,467 40,178 11.9
- ---------------------------------------- ---------- ---------- ---- ---------- ------- ----
Total interest-earning assets 1,327,290 58,333 8.8 959,540 48,438 10.2
- ---------------------------------------- ---------- ---------- ---- ---------- ------- ----
Cash and due from banks 127,408 117,228
Allowance for loan losses (30,399) (22,040)
Other real estate owned 4,464 6,190
Other assets 27,998 19,831
- ---------------------------------------- ---------- ----------
Total assets $1,456,761 $1,080,749
======================================== ========== ==========
Funding sources:
Interest-bearing liabilities:
Money market, NOW and
savings deposits $ 831,365 15,800 3.8 $ 567,544 10,693 3.8
Time deposits 66,101 1,285 3.9 64,052 1,086 3.4
- ---------------------------------------- ---------- ---------- ---- ---------- ------- ----
Total interest-bearing liabilities 897,466 17,085 3.8 631,596 11,779 3.8
Portion of noninterest-bearing
funding sources 429,824 327,944
- ---------------------------------------- ---------- ----------
Total funding sources 1,327,290 17,085 2.6 959,540 11,779 2.5
- ---------------------------------------- ---------- ---------- ---- ---------- ------- ----
Noninterest-bearing funding sources:
Demand deposits 435,052 352,906
Other liabilities 11,280 12,213
Portion used to fund interest-earning
assets (429,824) (327,944)
Shareholders' equity 112,963 84,034
- ---------------------------------------- ---------- ----------
Total liabilities and shareholders'
equity $1,456,761 $1,080,749
======================================== ========== ==========
Net interest income and margin $ 41,248 6.3% $36,659 7.7%
======================================== ========== ==== ======= ====
Memorandum: Total deposits $1,332,518 $ 984,502
======================================== ========== ==========
(1) Includes average interest-bearing deposits in other financial institutions
of $310 and $628 for the six months ended June 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 $109 and $128 for the
six months ended June 30, 1996 and 1995, respectively.
12
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 Six Months Ended
June 30, June 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 $1,993 $ (242) $1,751 $ 3,409 $ (312) $3,097
Investment securities 2,967 (205) 2,762 5,013 (337) 4,676
Loans 2,879 (1,683) 1,196 3,535 (1,413) 2,122
- --------------------------------------------- ------ ------- ------ ------- ------- ------
Increase (decrease) in interest income 7,839 (2,130) 5,709 11,957 (2,062) 9,895
- --------------------------------------------- ------ ------- ------ ------- ------- ------
Interest expense:
Money market, NOW and
savings deposits 3,253 (182) 3,071 5,014 93 5,107
Time deposits 78 68 146 40 159 199
- --------------------------------------------- ------ ------- ------ ------- ------- ------
Increase (decrease) in interest expense 3,331 (114) 3,217 5,054 252 5,306
- --------------------------------------------- ------ ------- ------ ------- ------- ------
Increase (decrease) in net interest income $4,508 $(2,016) $2,492 $ 6,903 $(2,314) $4,589
============================================= ====== ======= ====== ======= ======= ======
Net interest income, on a fully taxable-equivalent basis, totaled $20.9 million
for the second quarter of 1996, an increase of $2.5 million, or 13.5%, from the
$18.4 million total for the second quarter of 1995. The increase in net interest
income was the result of a $5.7 million, or 23.4%, increase in interest income,
offset by a $3.2 million, or 54.2%, increase in interest expense over the
comparable prior year period.
The $5.7 million increase in interest income for the second quarter of 1996, as
compared to the second quarter of 1995, was the result of a $7.8 million
favorable volume variance offset by a $2.1 million unfavorable rate variance.
The favorable volume variance resulted from a $466.3 million, or 49.0%, 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 comprised of increases in loans, investment
securities, and liquid investments in federal funds sold and securities
purchased under agreement to resell. The growth in average loans, which were up
$104.4 million, or 15.7%, compared to the second 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 second
quarter of 1996 increased $211.0 million, or 133.3%, over the respective prior
year period, as a portion of the funds generated from the deposit growth were
primarily invested in notes issued by U.S. agencies as well as in commercial
paper. Average federal funds sold and securities purchased under agreement to
resell were up a combined $151.0 million, or 117.6%, over the comparable 1995
period.
13
Interest income for the second quarter of 1996 decreased $2.1 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 second quarter accounted for $1.7 million of the total
unfavorable rate variance, as a substantial portion of the Company's loans are
prime-rate based. The remaining $0.4 million portion of the total unfavorable
rate variance was attributed 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 180
basis points for the second quarter of 1996, as compared to the second 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 lower-
yielding liquid investments in federal funds sold and securities purchased under
agreement to resell, and investment securities. This shift in the composition of
average interest-earning assets resulted from the liquidity generated by the
aforementioned growth in the Company's deposits, which exceeded the growth in
loans.
Total interest expense in the 1996 second quarter increased $3.2 million from
the 1995 second quarter. This increase was due to an unfavorable volume variance
of $3.3 million slightly offset by a $0.1 million favorable rate variance. The
unfavorable volume variance resulted from a $351.9 million, or 57.4%, increase
in average interest-bearing liabilities in the second quarter of 1996 as
compared with the second 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 average interest-bearing liabilities had a $0.1
million favorable impact on interest expense in the second quarter of 1996, as
the average rate paid on interest-bearing liabilities decreased 10 basis points
from the second quarter of 1995. This slight decrease resulted from a reduction
in the rates paid on interest-bearing liabilities due to the declining interest
rate environment during the last half of 1995 and the first quarter of 1996,
offset by a shift in the composition of average interest-bearing liabilities
towards the aforementioned higher-rate money market deposits.
Net interest income, on a fully taxable-equivalent basis, totaled $41.2 million
for the first six months of 1996, an increase of $4.6 million, or 12.5%, from
the $36.7 million total for the first six months of 1995. The increase in net
interest income was the result of a $9.9 million, or 20.4%, increase in interest
income for the first half of 1996, offset by a $5.3 million, or 45.0%, increase
in interest expense over the comparable prior year period.
The $9.9 million increase in interest income for the first half of 1996, as
compared to the first half of 1995, was the result of a $12.0 million favorable
volume variance offset by a $2.1 million unfavorable rate variance. The
favorable volume variance resulted from a $367.8 million, or 38.3%, increase in
average interest-earning assets over the comparable prior year period. As with
the 1996 second quarter, the increase in average interest-earning assets for the
first six months of 1996, compared with the first six months of 1995, was
comprised of increases in loans, investment securities, and liquid investments
in federal funds sold and securities purchased under agreement to resell, and
resulted from growth in the Company's deposits. The unfavorable rate variance
was attributable to the decline in market interest rates during the last half of
1995 and the first quarter of 1996.
14
The overall decrease in the yield on average interest-earning assets of 140
basis points for the first six 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 lower-
yielding liquid investments in federal funds sold and securities purchased under
agreement to resell, and investment securities. This shift in the composition of
average interest-earning assets resulted from the liquidity generated by the
aforementioned growth in the Company's deposits, which exceeded the growth in
loans.
Total interest expense for the first half of 1996 increased $5.3 million from
the first half of 1995. This increase was due to unfavorable volume and rate
variances of $5.1 million and $0.3 million, respectively. The unfavorable volume
variance resulted from a $265.9 million, or 42.1%, increase in average interest-
bearing liabilities for the first six 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
average interest-bearing liabilities had a $0.3 million unfavorable impact on
interest expense for the first half of 1996, as compared to the respective 1995
period. This slight increase in interest expense resulted from a shift in the
composition of interest-bearing liabilities towards the aforementioned higher-
rate money market deposits, and was offset by a reduction in the rates paid on
average interest-bearing liabilities due to the declining interest rate
environment during the last half of 1995 and the first quarter of 1996.
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 $2.1 million for the second quarter of
1996, a $0.7 million, or 46.9%, increase as compared to the $1.4 million
provision for the second quarter of 1995. The provision for loan losses
increased $0.8 million, or 30.0%, to $3.6 million for the first six months of
1996, versus $2.8 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 six month periods ended June 30, 1996 and 1995:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
(Dollars in thousands) 1996 1995 1996 1995
- -------------------------------------------- -------- ------- ------- ------
Disposition of client warrants $1,971 $1,578 $2,262 $1,803
Letter of credit and foreign exchange income 855 756 1,734 1,461
Deposit service charges 445 333 841 685
Investment gains (losses) - (348) 1 (770)
Other 283 162 549 280
- -------------------------------------------- -------- ------- ------- ------
Total noninterest income $3,554 $2,481 $5,387 $3,459
============================================ ======== ======= ======= ======
15
Total noninterest income for the three and six month periods ended June 30, 1996
was $3.6 million and $5.4 million, an increase of $1.1 million and $1.9 million,
respectively, from the $2.5 million and $3.5 million totals for the comparable
1995 periods. The increase in noninterest income during 1996 was primarily due
to an increase in income from the disposition of client warrants and a decrease
in losses incurred through sales of investment securities.
Income from the disposition of client warrants was $2.0 million in the second
quarter of 1996 and $2.3 million for the first six months of 1996 versus $1.6
million and $1.8 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
increased to $0.9 million during the 1996 second quarter, and $1.7 million for
the first six months of 1996, compared to $0.8 million for the 1995 second
quarter and $1.5 million for the first six months of 1995. 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 and $0.8 million for the three and
six month periods ended June 30, 1996, respectively, versus $0.3 million and
$0.7 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 an increase in the
number of clients incurring deposit service charges.
The Company incurred no gains or losses on sales of investment securities in the
second quarter of 1996 and realized a nominal gain on sales of investment
securities during the first six months of 1996. The Company incurred $0.3
million and $0.8 million in losses through such sales during the 1995 second
quarter and the first six months of 1995, respectively. The securities sold
during both the first and second quarters 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 to $0.3 million and $0.5 million for the 1996 second quarter and the
first six months of 1996, respectively, from $0.2 million and $0.3 million for
the comparable prior year periods. The increase during 1996 was primarily due to
increased examination fees on client accounts receivable.
16
Noninterest Expense
- -------------------
Noninterest expense during the second quarter of 1996 totaled $13.0 million, a
$0.5 million, or 4.4%, increase from the $12.4 million incurred in the
comparable 1995 period. Noninterest expense was $25.7 million for the first six
months of 1996, an increase of $1.3 million, or 5.2%, over the $24.5 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 58.3% for the 1996 second quarter, down
from 63.2% for the second quarter of 1995. The Company's efficiency ratio for
the first six months of 1996 was 57.4%, versus 62.8% for the comparable 1995
period. The following table presents the detail of noninterest expense and the
incremental contribution of each line item to the Company's efficiency ratio:
Three Months Ended June 30,
----------------------------------------------
1996 1995
---------------------- ---------------------
Percent of Percent of
Adjusted Adjusted
(Dollars in thousands) Amount Revenues Amount Revenues
- ---------------------------------- -------- ----------- ------- -----------
Compensation and benefits $ 7,557 33.7% $ 6,767 34.5%
Professional services 1,472 6.6 1,626 8.3
Equipment 939 4.2 675 3.4
Occupancy 774 3.4 715 3.6
Client services 173 0.8 44 0.2
FDIC deposit insurance 91 0.4 598 3.0
Data processing services 74 0.3 223 1.1
Corporate legal and litigation (221) (1.0) 239 1.2
Other 2,225 9.9 1,508 7.7
- ---------------------------------- ------- ---- ------- ----
Total excluding cost of other
real estate owned 13,084 58.3% 12,395 63.2%
Cost of other real estate owned (124) 20
- ---------------------------------- ------- -------
Total noninterest expense $12,960 $12,415
================================== ======= =======
17
Six Months Ended June 30,
----------------------------------------------
1996 1995
---------------------- ---------------------
Percent of Percent of
Adjusted Adjusted
(Dollars in thousands) Amount Revenues Amount Revenues
- ---------------------------------- -------- ----------- ------- -----------
Compensation and benefits $15,345 34.7% $13,857 35.6%
Professional services 2,276 5.1 2,589 6.6
Equipment 1,592 3.6 1,205 3.1
Occupancy 1,624 3.7 1,647 4.2
Client services 203 0.5 257 0.7
Data processing services 200 0.5 552 1.4
FDIC deposit insurance 172 0.4 1,196 3.1
Corporate legal and litigation (67) (0.2) 392 0.1
Other 4,077 9.1 2,773 7.1
- ---------------------------------- ------- ---- ------- ----
Total excluding cost of other
real estate owned 25,422 57.4% 24,468 62.8%
Cost of other real estate owned 326 15
- ---------------------------------- ------- -------
Total noninterest expense $25,748 $24,483
================================== ======= =======
Compensation and benefits expenses totaled $7.6 million in the second quarter of
1996, a $0.8 million, or 11.7%, increase over the $6.8 million incurred in the
second quarter of 1995. For the first six months of 1996, compensation and
benefits expenses totaled $15.3 million, an increase of $1.5 million, or 10.7%,
over the $13.9 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 355 and 353 for the three and six month periods
ended June 30, 1996, compared to 331 and 327 for the respective prior year
periods. The increase in FTE was primarily due to the expansion of the Company's
lending staff in an effort to develop new markets, as well as in response to the
growing client base.
Professional services expenses totaled $1.5 million in the second quarter of
1996, a $0.2 million, or 9.5%, decrease from the $1.6 million incurred in the
second quarter of 1995. Professional services expenses decreased $0.3 million,
or 12.1%, to a total of $2.3 million for the first six months of 1996 versus
$2.6 million for the comparable 1995 period. The decrease during 1996 in
professional services expenses primarily relates to the timing of director's
fees.
Equipment expenses in the second quarter of 1996 totaled $0.9 million, an
increase of $0.3 million, or 39.1%, from the 1995 second quarter total of $0.7
million. Equipment expenses for the first half of 1996 totaled $1.6 million, an
increase of $0.4 million, or 32.1%, from the $1.2 million incurred in the
comparable prior year period. The increase during 1996 was related to
investments in computer equipment as well as other costs associated with the
Company's growth in personnel.
Occupancy expenses totaled $0.8 million for the three months ended June 30,
1996, an increase of $0.1 million, or 8.3%, from the $0.7 million incurred in
the second quarter of 1995. Total occupancy expenses were $1.6 million for the
first six months of both 1996 and 1995. The increase in occupancy expenses for
the second quarter of 1996, as compared to the second quarter of 1995, was
related to additional rent expense associated with several new loan offices
opened during the first half of 1996.
18
Client services expenses include courier expenses and related costs of loan and
deposit operations. For the second quarter of 1996, client services expenses
totaled $0.2 million, a $0.1 million increase from the $0.1 million incurred in
the second quarter of 1995. Total client services expenses were $0.2 million for
the first six months of 1996, versus $0.3 million for the comparable prior year
period. The variances in these expenses from 1995 to 1996 were largely due to
the timing of reimbursements from clients.
FDIC deposit insurance expense totaled $0.1 million in the second quarter of
1996, a $0.5 million, or 84.8%, decrease from the 1995 second quarter expense of
$0.6 million. Total FDIC deposit insurance expense for the first half of 1996
amounted to $0.2 million, a $1.0 million, or 85.6%, decrease from the $1.2
million incurred in the first half of 1995. The decrease during 1996 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 the 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.
Data processing services expenses were $0.1 million and $0.2 million for the
three and six month periods ended June 30, 1996, respectively, a decrease of
$0.1 million, or 66.8%, and $0.4 million, or 63.8%, compared to the $0.2 million
and $0.6 million in expenses for the comparable 1995 periods. The decrease
during 1996 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.
Corporate legal and litigation expenses totaled $(0.2) million for the second
quarter of 1996, a $0.5 million decrease from the $0.2 million total for the
1995 second quarter. Total corporate legal and litigation expenses were $(0.1)
for the first six months of 1996, versus $0.4 million for the first six months
of 1995. The decrease in these expenses during 1996 was primarily 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.
Other noninterest expenses in the second quarter of 1996 totaled $2.2 million, a
$0.7 million, or 47.5%, increase from the $1.5 million incurred in the second
quarter of 1995. For the first half of 1996, other noninterest expenses
increased $1.3 million, or 47.0%, to a total of $4.1 million compared to $2.8
million for the first half of 1995. The increase during 1996 largely resulted
from increased advertising costs and business development efforts combined with
other miscellaneous expenses related to the Company's growth in personnel.
Net costs associated with other real estate owned (OREO) in the second quarter
of 1996 decreased $0.1 million from the comparable prior year period, largely
due to a gain realized on the sale of one property. For the first six months of
1996, the net costs associated with OREO increased $0.3 million from the first
half of 1995, primarily due to the 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.
Income Taxes
- ------------
19
The Company's effective tax rate was 40.0% in the 1996 second quarter, compared
to 43.4% in the second quarter of the prior year. For the six months ended June
30, 1996, the Company's effective tax rate was 40.0%, versus 43.0% in the
comparable 1995 period. 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 $1.7 billion at June 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
$372.4 million at June 30, 1996, an increase of $115.3 million, or 44.8%,
compared to the $257.1 million balance at December 31, 1995. This increase was
the result of significant growth in the Company's deposits during the 1996
second quarter.
Investment Securities
- ---------------------
Investment securities totaled $445.3 million at June 30, 1996. This represented
a $124.0 million, or 38.6%, increase over the December 31, 1995 balance of
$321.3 million. The increase in investment securities was related to the
Company's liquidity and investment management activities, as a portion of the
growth in the Company's deposits during the 1996 second quarter was primarily
invested in notes issued by U.S. agencies as well as in commercial paper. These
investments were the result of Management's decision to further 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 June 30, 1996 were $823.7 million, a
$85.2 million, or 11.5%, increase compared to the $738.4 million balance
outstanding at December 31, 1995. The increase in loans from the 1995 year-end
total was primarily concentrated in the commercial loan portfolio, and can be
attributed to the Company's successful 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.
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.
20
The allowance for loan losses was $29.0 million at June 30, 1996, a decrease of
$0.7 million, or 2.4%, compared to the $29.7 million balance at December 31,
1995. This decrease was due to net charge-offs of $4.3 million for the first
six months of 1996, offset by $3.6 million in additional provisions to the
allowance for loan losses. Gross charge-offs for the first six months of 1996
were $5.7 million, and primarily related to two commercial credits.
In general, Management believes, based on currently known information, that the
allowance for loan losses is adequate as of June 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:
June 30, December 31,
1996 1995
(Dollars in thousands) (Unaudited)
- ---------------------------------------------------- ----------- ------------
Nonperforming assets:
Loans past due 90 days or more $ 88 $ 906
Nonaccrual loans 23,532 27,867
- ---------------------------------------------------- ------- -------
Total nonperforming loans 23,620 28,773
OREO 3,733 4,955
- ---------------------------------------------------- ------- -------
Total nonperforming assets $27,353 $33,728
==================================================== ======= =======
Nonperforming loans as a percent of total loans 2.9% 3.9%
OREO as a percent of total assets 0.2% 0.4%
Nonperforming assets as a percent of total assets 1.6% 2.4%
Allowance for loan losses: $29,000 $29,700
As a percent of total loans 3.5% 4.0%
As a percent of nonaccrual loans 123.2% 106.6%
As a percent of nonperforming loans 122.8% 103.2%
Nonperforming loans were $23.6 million, or 2.9% of total loans, at June 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 June 30, 1996 included two credits
totaling $10.5 million, one of which, in excess of $6.0 million, was fully
collected in July 1996. Management believes the remaining credit is adequately
covered with collateral and specific reserves.
Despite the July 1996 payoff of the one nonperforming loan in excess of $6.0
million, Management cannot give assurances that the level of nonperforming loans
at the end of the third quarter of 1996 will be below the level as of June 30,
1996, given the potential for additional nonperforming loans. Management has
identified four loans with principal amounts aggregating approximately $8.7
million, including one loan in excess of $7.0 million, that, on the basis of
information known by Management as of June 30, 1996, were judged to have a
higher than normal risk of becoming nonperforming. The Company is not aware of
any other loans at June
21
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 $3.7 million at June 30, 1996, a decrease of $1.2 million, or
24.7%, 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 Company and sales of two properties during the first six months of
1996.
Deposits
- --------
Total deposits were $1.6 billion at June 30, 1996, an increase of $318.5
million, or 24.7%, from the prior year-end total of $1.3 billion. The majority
of this increase was in interest-bearing deposits, which increased $256.5
million, or 30.6%, to $1.1 billion at June 30, 1996 from an $838.7 million
balance at December 31, 1995. This increase was largely concentrated in higher-
rate money market deposits and resulted from market conditions combined with
successful business development efforts by the Company. Noninterest-bearing
demand deposits were $513.3 million at June 30, 1996, representing a $61.9
million, or 13.7%, 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 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 June 30, 1996, the Company's liquid assets as a
percentage of deposits were 39.1% 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 half of
1996.
22
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 $119.0 million at June 30, 1996, an increase of $14.0
million, or 13.3%, from the $105.0 million balance at December 31, 1995. This
increase resulted from net income of $10.3 million and capital generated through
the Company's employee benefit plans of $4.3 million in the first six months of
1996, slightly offset by a $0.7 million increase in the net 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 state member banks. The ratio is determined using Tier 1 capital
divided by quarterly average total assets. The guidelines require a minimum of
5.0% for a "well capitalized" depository institution.
The Company's risk-based capital ratios were in excess of regulatory guidelines
for a "well-capitalized" depository institution as of June 30, 1996 and December
31, 1995. Capital ratios for the Company are set forth below:
June 30, December 31,
1996 1995
-------- ------------
Total risk-based capital ratio 11.6% 11.9%
Tier 1 risk-based capital ratio 10.3% 10.6%
Tier 1 leverage ratio 7.8% 8.0%
=============================== ===== =====
The decrease in all of the Company's capital ratios from December 31, 1995 to
June 30, 1996 is attributable to the growth in the Company's assets during the
first six months of 1996, partially offset by the aforementioned growth in the
Company's capital.
23
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item
pending at June 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
The Annual Meeting of Shareholders was held on April 18, 1996. Each of the
persons named in the Proxy Statement as a nominee for director was elected; an
amendment to the Silicon Valley Bancshares 1989 Stock Option Plan was approved;
an amendment to the Company's Bylaws to change the authorized range of Directors
was approved; and the appointment of KPMG Peat Marwick LLP as the Company's
independent auditors was ratified. The following are the voting results on each
of these matters:
Election of Directors In Favor Withheld
- --------------------- --------- --------
Gary K. Barr 7,421,155 92,238
James F. Burns, Jr. 7,468,815 44,578
John C. Dean 7,450,251 63,142
David M. deWilde 7,443,186 70,207
Clarence J. Ferrari, Jr., Esq. 7,468,615 44,778
Henry M. Gay 7,443,186 70,207
Daniel J. Kelleher 7,447,104 66,289
James R. Porter 7,468,793 44,600
Michael Roster, Esq. 7,468,815 44,578
Ann R. Wells 7,418,503 94,890
Other Matters In Favor Opposed Abstained
- ------------- --------- ------- ---------
Amendment to the Silicon Valley
Bancshares 1989 Stock Option Plan 6,920,422 542,788 50,184
Amendment to the Company's Bylaws
to change the authorized range of
Directors 7,379,610 92,799 40,985
Ratification of the appointment of KPMG
Peat Marwick LLP as the Company's
independent auditors for 1996 7,465,320 92,799 40,985
24
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
---------
3.2 Bylaws of the Company, as amended
10.28 Amendment and Restatement of the Silicon Valley Bancshares 1989
Stock Option Plan
10.29 Silicon Valley Bank Money Purchase Pension Plan
10.30 Amendment and Restatement of the Silicon Valley Bank Money
Purchase Pension Plan
10.31 Amendment and Restatement of the Silicon Valley Bank 401(k) and
Employee Stock Ownership Plan
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 June 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: August 13, 1996 (s) Christopher T. Lutes
------------------------
Christopher T. Lutes
Senior Vice President and Controller
(Principal Accounting Officer)
26