As filed with the Securities and Exchange Commission on November 13, 1996
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ________.
Commission File Number: 33-41102
SILICON VALLEY BANCSHARES
(Exact name of registrant as specified in its charter)
California 94-2856336
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3003 Tasman Drive
Santa Clara, California 95054-1191
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 654-7282
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
At October 31, 1996, 9,304,966 shares of the registrant's common stock
(no par value) were outstanding.
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This report contains a total of 26 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 25
ITEM 2. CHANGES IN SECURITIES 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 5. OTHER INFORMATION 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURES 26
2
PART I - FINANCIAL INFORMATION
ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1996 1995
(Dollars in thousands) (Unaudited)
- -----------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 85,478 $ 85,187
Federal funds sold and securities purchased under
agreement to resell 280,394 257,138
Investment securities, at fair value 493,132 321,309
Loans, net of unearned income 840,778 738,405
Allowance for loan losses (30,000) (29,700)
- -----------------------------------------------------------------------------------------
Net loans 810,778 708,705
Premises and equipment 4,127 4,697
Other real estate owned 2,720 4,955
Accrued interest receivable and other assets 27,141 25,596
- -----------------------------------------------------------------------------------------
Total assets $1,703,770 $1,407,587
=========================================================================================
Liabilities and Shareholders' Equity:
Liabilities:
Noninterest-bearing demand deposits $ 489,369 $ 451,318
Money market and NOW deposits 1,005,904 773,292
Time deposits 73,559 65,450
- -----------------------------------------------------------------------------------------
Total deposits 1,568,832 1,290,060
Other liabilities 9,813 12,553
- -----------------------------------------------------------------------------------------
Total liabilities 1,578,645 1,302,613
- -----------------------------------------------------------------------------------------
Shareholders' Equity:
Preferred stock, no par value:
20,000,000 shares authorized;
none outstanding
Common stock, no par value:
30,000,000 shares authorized;
9,296,293 and 8,963,662 shares outstanding at
September 30, 1996 and December 31, 1995, respectively 64,598 59,357
Retained earnings 61,440 45,855
Net unrealized loss on available-for-sale investments (547) (198)
Unearned compensation (366) (40)
- -----------------------------------------------------------------------------------------
Total shareholders' equity 125,125 104,974
- -----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,703,770 $1,407,587
=========================================================================================
See notes to interim consolidated financial statements.
3
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
For the three months ended For the nine months ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Interest income:
Loans $23,236 $19,193 $65,536 $59,371
Investment securities 7,040 2,111 16,455 6,831
Federal funds sold and securities
purchased under agreement to resell 3,019 3,894 9,527 7,307
- -------------------------------------------------------------------------------------------------------------------
Total interest income 33,295 25,198 91,518 73,509
- -------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 10,353 7,282 27,438 19,062
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 10,353 7,282 27,438 19,062
- -------------------------------------------------------------------------------------------------------------------
Net interest income 22,942 17,916 64,080 54,447
Provision for loan losses 2,962 3,337 6,550 6,098
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 19,980 14,579 57,530 48,349
- -------------------------------------------------------------------------------------------------------------------
Noninterest income:
Disposition of client warrants 618 3,823 2,880 5,626
Letter of credit and foreign
exchange income 759 807 2,493 2,267
Deposit service charges 359 315 1,200 1,000
Investment gains (losses) - - 1 (770)
Other 277 153 825 434
- -------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,013 5,098 7,399 8,557
- -------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and benefits 7,914 6,517 23,259 20,374
Professional services 1,122 1,032 3,398 3,620
Equipment 859 1,473 2,452 2,678
Occupancy 706 1,007 2,329 2,655
Corporate legal and litigation 207 179 140 571
Data processing services 119 214 319 767
Client services 23 82 225 339
Cost of other real estate owned 19 23 345 37
FDIC deposit insurance 1 14 173 1,210
Other 2,237 1,370 6,314 4,143
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense 13,207 11,911 38,954 36,394
- -------------------------------------------------------------------------------------------------------------------
Income before income tax expense 8,786 7,766 25,975 20,512
Income tax expense 3,514 2,303 10,390 7,788
- -------------------------------------------------------------------------------------------------------------------
Net income $ 5,272 $ 5,463 $15,585 $12,724
===================================================================================================================
Net income per common and
common equivalent share $0.54 $0.59 $1.61 $1.40
===================================================================================================================
See notes to interim consolidated financial statements.
4
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended
------------------------------
September 30, September 30,
1996 1995
(Dollars in thousands) (Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 15,585 $ 12,724
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 6,550 6,098
Net (gain) loss on sales of investment securities (1) 770
Depreciation and amortization 880 1,633
Net gain on sales of other real estate owned (407) (124)
Provision for other real estate owned 551 -
Increase (decrease) in unearned income 1,182 (277)
Increase in accrued interest receivable (3,671) (429)
(Increase) decrease in accounts receivable 629 (362)
Increase (decrease) in accrued liabilities (2,804) 643
Other, net (3,369) 730
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 15,125 21,406
- -------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and paydowns of
investment securities 716,999 37,366
Proceeds from sales of investment securities 9,699 31,316
Purchases of investment securities (893,856) (83,569)
Net increase in loans (111,751) (1,406)
Proceeds from recoveries of charged off loans 1,946 5,224
Net proceeds from sales of other real estate owned 2,092 2,093
Purchases of premises and equipment (310) (5,151)
- -------------------------------------------------------------------------------------------------
Net cash applied to investing activities (275,181) (14,127)
- -------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 278,772 72,977
Proceeds from issuance of common stock,
net of issuance costs 4,831 4,333
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 283,603 77,310
- -------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 23,547 84,589
Cash and cash equivalents at January 1, 342,325 289,849
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at September 30, $ 365,872 $374,438
=================================================================================================
Supplemental disclosures:
Interest paid $ 27,405 $ 18,964
Income taxes paid $ 11,932 $ 9,124
=================================================================================================
See notes to interim consolidated financial statements.
5
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Silicon Valley Bancshares (the
"Company") and its subsidiaries conform with generally accepted accounting
principles and prevailing practices within the banking industry. Certain
reclassifications have been made to the Company's 1995 consolidated financial
statements to conform to the 1996 presentations. Such reclassifications had no
effect on the results of operations or shareholders' equity. The following is a
summary of the significant accounting and reporting policies used in preparing
the interim consolidated financial statements.
Nature of Operations
- --------------------
The Company is a bank holding company whose principal subsidiary is Silicon
Valley Bank (the "Bank"), a California-chartered bank with headquarters in Santa
Clara, California. The Bank maintains regional banking offices in Northern and
Southern California, and additionally has loan offices in Colorado, Maryland,
Massachusetts, Oregon, Texas, and Washington. The Bank serves emerging and
middle-market growth companies in specific targeted niches and focuses on the
technology and life sciences industries, while identifying and capitalizing on
opportunities to serve other groups of clients with unique financial needs.
Substantially all of the assets, liabilities and earnings of the Company relate
to its investment in the Bank.
Consolidation
- -------------
The interim consolidated financial statements include the accounts of the
Company and those of its wholly owned subsidiaries, the Bank and SVB Leasing
Company (inactive). The revenues, expenses, assets, and liabilities of the
subsidiaries are included in the respective line items in the interim
consolidated financial statements after elimination of intercompany accounts and
transactions.
Interim Consolidated Financial Statements
- -----------------------------------------
In the opinion of Management, the interim consolidated financial statements
contain all adjustments (consisting of only normal, recurring adjustments)
necessary to present fairly the Company's consolidated financial position at
September 30, 1996, and the results of its operations and cash flows for the
three and nine month periods ended September 30, 1996 and September 30, 1995.
The December 31, 1995 consolidated financial statements were derived from
audited financial statements, and certain information and footnote disclosures
normally presented in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted.
The interim consolidated financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in the
Company's 1995 Annual Report on Form 10-K. The results of operations for the
three and nine month periods ended September 30, 1996 may not necessarily be
indicative of the Company's operating results for the full year.
6
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basis of Financial Statement Presentation
- -----------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and judgments that
affect the reported amounts of assets and liabilities as of the balance sheet
date and the results of operations for the period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
possible change in the near term relate to the determination of the allowance
for loan losses and the valuation of other real estate owned (OREO). An estimate
of possible changes or range of possible changes cannot be made.
Net Income Per Share Computation
- --------------------------------
Net income per common and common equivalent share is calculated using weighted
average shares outstanding, including the dilutive effect of stock options
outstanding during the period. Weighted average shares outstanding were
9,735,778 and 9,660,785 for the three and nine month periods ended September 30,
1996 and 9,305,261 and 9,073,862 for the three and nine month periods ended
September 30, 1995.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents as reported in the consolidated statements of cash
flows includes cash on hand, cash balances due from banks, federal funds sold,
and securities purchased under agreement to resell.
Federal Funds Sold and Securities Purchased Under Agreement to Resell
- ---------------------------------------------------------------------
Federal funds sold and securities purchased under agreement to resell as
reported in the consolidated balance sheets includes interest-bearing deposits
in other financial institutions of $394,000 and $138,000 at September 30, 1996
and December 31, 1995, respectively.
Nonaccrual Loans
- ----------------
Loans are placed on nonaccrual status when they become 90 days past due as to
principal or interest payments (unless the principal and interest are well
secured and in the process of collection), when the Company has determined that
the timely collection of principal or interest is doubtful, or when the loans
otherwise become impaired under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan." When a loan is placed on nonaccrual status, the accrued interest is
reversed against interest income and the loan is accounted for on the cash or
cost recovery method thereafter until qualifying for return to accrual status.
Generally, a loan will be returned to accrual status when all delinquent
interest and principal becomes current in accordance with the terms of the loan
agreement and full collection of the principal appears probable.
7
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements
- -----------------------------
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 establishes financial
accounting and reporting standards for stock-based compensation plans, including
employee stock purchase plans, stock options and restricted stock. SFAS No. 123
encourages all entities to adopt a fair value method of accounting for stock-
based compensation plans, whereby compensation cost is measured at the grant
date based on the fair value of the award and is realized as an expense over the
service or vesting period. However, SFAS No. 123 also allows an entity to
continue to measure compensation cost for these plans using the intrinsic value
method of accounting prescribed by Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," which is the method currently
being used by the Company. Under the intrinsic value method, compensation cost
is the excess, if any, of the quoted market price of the stock at the grant date
or other measurement date over the amount which must be paid to acquire the
stock.
The Company adopted SFAS No. 123 effective January 1, 1996, but will continue to
account for employee and director stock-based compensation plans under the
intrinsic value accounting methodology prescribed by APB Opinion No. 25. SFAS
No. 123 requires that stock-based compensation to other parties be accounted for
under the fair value method. The effect of adoption of this statement on the
interim consolidated financial position and results of operations of the Company
was not material.
2. LOANS
The detailed composition of loans is presented in the following table:
September 30, December 31,
(Dollars in thousands) 1996 1995
- ----------------------------------------------------------
Commercial $711,355 $622,488
Real estate term 60,872 56,845
Real estate construction 35,865 17,194
Consumer and other 32,686 41,878
- ----------------------------------------------------------
Total loans (1) $840,778 $738,405
==========================================================
(1) Loans are presented net of unearned income of $4,995 and $3,813 at September
30, 1996 and December 31, 1995, respectively.
3. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the three and nine month
periods ended September 30, 1996 and 1995 was as follows:
8
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3. ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Dollars in thousands) 1996 1995 1996 1995
- ------------------------------------------------------------------------------
Beginning balance $29,000 $22,500 $29,700 $20,000
Provision for loan losses 2,962 3,337 6,550 6,098
Loans charged off (2,502) (1,948) (8,196) (4,322)
Recoveries 540 3,111 1,946 5,224
- ------------------------------------------------------------------------------
Balance at September 30, $30,000 $27,000 $30,000 $27,000
==============================================================================
The aggregate recorded investment in loans for which impairment has been
realized in accordance with SFAS No. 114 totaled $19.9 million at September 30,
1996. Allocations to the allowance for loan losses at September 30, 1996 related
to these loans were $6.5 million. Average impaired loans for the third quarter
of 1996 were $18.7 million.
4. REGULATORY MATTERS
During 1993, the Company and the Bank consented to a formal supervisory order by
the Federal Reserve Bank of San Francisco and the Bank consented to a formal
supervisory order by the California State Banking Department. The Federal
Reserve Bank removed its supervisory order effective March 27, 1996, and the
California State Banking Department terminated its supervisory order effective
April 9, 1996. These orders required, among other actions, the following:
suspension of cash dividends; restrictions on transactions between the Company
and the Bank without prior regulatory approval; development of a capital plan to
ensure the Bank maintains adequate capital levels subject to regulatory
approval; development of plans to improve the quality of the Bank's loan
portfolio through collection or improvement of the credits within specified time
frames; changes to the Bank's loan policies which require the Directors' Loan
Committee to approve all loans to any one borrower exceeding $3.0 million and
requiring the Board of Directors to become more actively involved in loan
portfolio management and monitoring activities; review of, and changes in, the
Bank's loan policies to implement (i) policies for controlling and monitoring
credit concentrations, (ii) underwriting standards for all loan products, and
(iii) standards for credit analysis and credit file documentation; development
of an independent loan review function and related loan review policies and
procedures; development of Board of Directors oversight programs to establish
and maintain effective control and supervision of Management and major Bank
operations and activities; development of a plan, including a written
methodology, to maintain an adequate allowance for loan losses, defined as a
minimum of 2.0% of total loans; development of business plans to establish
guidelines for growth and ensure maintenance of adequate capital levels; a
review and evaluation of existing compensation practices and development of
officer compensation policies and procedures by the Boards of Directors of the
Company and the Bank; policies requiring that changes in fees paid to directors
as well as bonuses paid to executive officers first receive regulatory approval;
and development of a detailed internal audit plan for approval by the Board of
Directors of the Bank. The California State Banking Department order further
required the Bank to maintain a minimum tangible equity-to-assets ratio of 6.5%.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Earnings Summary
- ----------------
The Company reported net income of $5.3 million, or $0.54 per share, for the
third quarter of 1996, compared with net income of $5.5 million, or $0.59 per
share, for the third quarter of 1995. Net income was $15.6 million, or $1.61 per
share, for the nine months ended September 30, 1996, versus $12.7 million, or
$1.40 per share, for the respective 1995 period. The annualized return on
average assets (ROA) was 1.3% in the third quarter of 1996 compared to 1.8% in
the 1995 third quarter. The annualized return on average equity (ROE) in the
third quarter of 1996 was 17.2%, compared to 22.4% in the third quarter of 1995.
For the first nine months of 1996, ROA was 1.4% and ROE was 17.9% versus 1.5%
and 19.3%, respectively, for the comparable prior year period.
The decrease in net income during the quarter ended September 30, 1996, as
compared with the prior year respective period, resulted from a decrease in
noninterest income, an increase in noninterest expense, and a higher effective
tax rate, offset by an increase in net interest income and a lower provision for
loan losses. The increase in net income for the nine month period ended
September 30, 1996, as compared with the prior year respective period, was due
to an increase in net interest income, offset by a higher provision for loan
losses, an increase in noninterest expense, and lower noninterest income. The
major components of net income as well as changes in these components are
summarized in the following table for the three and nine month periods ended
September 30, 1996 and 1995, and are discussed in more detail below.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
(Dollars in thousands) 1996 1995 1996 1995
- -------------------------------------------------------------------------------
Net interest income $22,942 $17,916 $64,080 $54,447
Provision for loan losses 2,962 3,337 6,550 6,098
Noninterest income 2,013 5,098 7,399 8,557
Noninterest expense 13,207 11,911 38,954 36,394
- -------------------------------------------------------------------------------
Income before income taxes 8,786 7,766 25,975 20,512
Income tax expense 3,514 2,303 10,390 7,788
- -------------------------------------------------------------------------------
Net income $ 5,272 $ 5,463 $15,585 $12,724
===============================================================================
10
Net Interest Income and Margin
- ------------------------------
Net interest income represents the difference between interest earned, primarily
on loans and investments, and interest paid on funding sources, primarily
deposits, and is the principal source of revenue for the Company. Net interest
margin is the amount of net interest income, on a fully taxable-equivalent
basis, expressed as a percentage of average interest-earning assets. The average
yield earned on interest-earning assets is the amount of taxable-equivalent
interest income expressed as a percentage of average interest-earning assets.
The average rate paid on funding sources expresses interest expense as a
percentage of average interest-earning assets.
The following tables set forth average assets, liabilities and shareholders'
equity, interest income and interest expense, average yields and rates, and the
composition of the Company's net interest margin for the three and nine month
periods ended September 30, 1996 and 1995, respectively.
11
- --------------------------------------------------------------------------------
AVERAGE BALANCES, RATES AND YIELDS
- --------------------------------------------------------------------------------
For the three months ended September 30,
------------------------------------------------------------------------
1996 1995
(Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Federal funds sold and securities
purchased under agreement to resell (1) $ 226,543 $ 3,019 5.3% $ 264,361 $ 3,894 5.9%
Investment securities:
Taxable 470,391 6,912 5.8 134,047 2,001 6.0
Non-taxable (2) 8,683 196 9.0 6,686 169 10.1
Loans:
Commercial 684,832 20,203 11.7 570,022 16,831 11.8
Real estate construction and term 90,841 2,062 9.0 72,497 1,843 10.2
Consumer and other 40,574 971 9.5 21,420 519 9.7
- ---------------------------------------- ----------------------------------- ---------------------------------
Total loans 816,247 23,236 11.3 663,939 19,193 11.6
- ---------------------------------------- ----------------------------------- ---------------------------------
Total interest-earning assets 1,521,864 33,363 8.7 1,069,033 25,257 9.5
- ---------------------------------------- ----------------------------------- ---------------------------------
Cash and due from banks 127,463 111,873
Allowance for loan losses (30,004) (24,549)
Other real estate owned 2,925 5,446
Other assets 28,515 26,519
- ---------------------------------------- ---------- ----------
Total assets $1,650,763 $1,188,322
======================================== ========== ==========
Funding sources:
Interest-bearing liabilities:
Money market and NOW deposits $ 991,521 9,601 3.9 $ 651,752 6,679 4.1
Time deposits 73,129 752 4.1 63,998 603 3.8
- ---------------------------------------- ----------------------------------- ---------------------------------
Total interest-bearing liabilities 1,064,650 10,353 3.9 715,750 7,282 4.1
Portion of noninterest-bearing
funding sources 457,214 353,283
- ---------------------------------------- ----------------------------------- ---------------------------------
Total funding sources 1,521,864 10,353 2.7 1,069,033 7,282 2.7
- ---------------------------------------- ----------------------------------- ---------------------------------
Noninterest-bearing funding sources:
Demand deposits 452,322 360,919
Other liabilities 11,957 15,015
Portion used to fund interest-earning
assets (457,214) (353,283)
Shareholders' equity 121,834 96,638
- ---------------------------------------- ---------- ----------
Total liabilities and shareholders'
equity $1,650,763 $1,188,322
======================================== ========== ==========
Net interest income and margin $ 23,010 6.0% $17,975 6.7%
======================================== ========== ======= ======= =====
Memorandum: Total deposits $1,516,972 $1,076,669
======================================== ========== ==========
(1) Includes average interest-bearing deposits in other financial institutions
of $402 and $128 for the three months ended September 30, 1996 and 1995,
respectively.
(2) Interest income on non-taxable investments is presented on a fully taxable-
equivalent basis. The tax-equivalent adjustments were $68 and $59 for the
three months ended September 30, 1996 and 1995, respectively.
12
- --------------------------------------------------------------------------------
AVERAGE BALANCES, RATES AND YIELDS
- --------------------------------------------------------------------------------
For the nine months ended September 30,
-----------------------------------------------
1996 1995
(Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Federal funds sold and securities
purchased under agreement to resell (1) $ 238,334 $ 9,527 5.3% $166,227 $ 7,307 5.9%
Investment securities:
Taxable 377,788 16,125 5.7 146,261 6,483 5.9
Non-taxable (2) 7,045 507 9.6 7,064 536 10.1
Loans:
Commercial 647,670 56,201 11.6 588,841 52,547 11.9
Real estate construction and term 79,534 6,421 10.8 69,269 5,287 10.2
Consumer and other 42,250 2,914 9.2 18,777 1,537 10.9
- --------------------------------------------- -------------------------------------- ---------------------------
Total loans 769,454 65,536 11.4 676,887 59,371 11.7
- --------------------------------------------- -------------------------------------- ---------------------------
Total interest-earning assets 1,392,621 91,695 8.8 996,439 73,697 9.9
- --------------------------------------------- -------------------------------------- ---------------------------
Cash and due from banks 127,426 115,424
Allowance for loan losses (30,266) (22,886)
Other real estate owned 3,948 5,939
Other assets 28,171 22,085
- --------------------------------------------- ---------- ----------
Total assets $1,521,900 $1,117,001
============================================= ========== ==========
Funding sources:
Interest-bearing liabilities:
Money market and NOW deposits $ 885,139 25,401 3.8 $595,922 17,372 3.9
Time deposits 68,461 2,037 4.0 64,034 1,690 3.5
- --------------------------------------------- -------------------------------------- ---------------------------
Total interest-bearing liabilities 953,600 27,438 3.8 659,956 19,062 3.9
Portion of noninterest-bearing funding sources 439,021 336,483
- ---------------------------------------------- -------------------------------------- ---------------------------
Total funding sources 1,392,621 27,438 2.6 996,439 19,062 2.6
- --------------------------------------------- -------------------------------------- ---------------------------
Noninterest-bearing funding sources:
Demand deposits 440,851 355,606
Other liabilities 11,508 13,157
Portion used to fund interest-earning assets (439,021) (336,483)
Shareholders' equity 115,941 88,282
- --------------------------------------------- ---------- ----------
Total liabilities and shareholders' equity $1,521,900 $1,117,001
============================================= ========== ==========
Net interest income and margin $ 64,257 6.2% $ 54,635 7.3%
============================================= ========== ========== ========== =====
Memorandum: Total deposits $1,394,451 $1,015,562
============================================= ========== ==========
(1) Includes average interest-bearing deposits in other financial institutions
of $341 and $459 for the nine months ended September 30, 1996 and 1995,
respectively.
(2) Interest income on non-taxable investments is presented on a fully taxable-
equivalent basis. The tax-equivalent adjustments were $177 and $188 for the
nine months ended September 30, 1996 and 1995, respectively.
13
Net interest income is affected by changes in the amount and mix of interest-
earnings assets and interest-bearing liabilities, referred to as "volume
change." Net interest income is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing liabilities, referred
to as "rate change." The following table sets forth changes in interest income
and interest expense for each major category of interest-earning assets and
interest-bearing liabilities. Changes which are the combined result of volume
and rate changes have been allocated to volume. Changes relating to investment
securities are presented on a fully taxable-equivalent basis using the federal
statutory rate of 35% in 1996 and 1995.
1996 Versus 1995
---------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
---------------------------------------------------------------
(Dollars in thousands) Volume Rate Total Volume Rate Total
- -------------------------------------------------------------------------------------------------------------------------
Interest income:
Federal funds sold and securities
purchased under agreement to resell $ (515) $(360) $ (875) $ 2,889 $ (669) $ 2,220
Investment securities 5,014 (76) 4,938 10,012 (399) 9,613
Loans 4,283 (240) 4,043 7,939 (1,774) 6,165
- -------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest income 8,782 (676) 8,106 20,840 (2,842) 17,998
- -------------------------------------------------------------------------------------------------------------------------
Interest expense:
Money market and NOW deposits 3,272 (350) 2,922 8,316 (287) 8,029
Time deposits 92 57 149 133 214 347
- -------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense 3,364 (293) 3,071 8,449 (73) 8,376
- -------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income $5,418 $(383) $5,035 $12,391 $(2,769) $ 9,622
=========================================================================================================================
Net interest income, on a fully taxable-equivalent basis, totaled $23.0 million
for the third quarter of 1996, an increase of $5.0 million, or 28.0%, from the
$18.0 million total for the third quarter of 1995. The increase in net interest
income was the result of a $8.1 million, or 32.1%, increase in interest income,
offset by a $3.1 million, or 42.2%, increase in interest expense over the
comparable prior year period.
The $8.1 million increase in interest income for the third quarter of 1996, as
compared to the third quarter of 1995, was the result of a $8.8 million
favorable volume variance offset by a $0.7 million unfavorable rate variance.
The favorable volume variance resulted from a $452.8 million, or 42.4%, increase
in average interest-earning assets over the comparable prior year period. The
increase in average interest-earning assets resulted from growth in the
Company's deposits and was composed of increases in loans and investment
securities, offset by a decline in federal funds sold and securities purchased
under agreement to resell. The growth in average loans, which were up $152.3
million, or 22.9%, compared to the third quarter of 1995, primarily resulted
from an increase in commercial loans and personal lines of credit offered to
executives of clients. Average investment securities for the third quarter of
1996 increased $338.3 million, or 240.4%, over the respective prior year period.
This growth largely consisted of investments in notes issued by U.S. agencies as
well as in commercial paper. Average federal funds sold and securities purchased
under agreement to resell decreased $37.8 million, or 14.3%, over the comparable
1995 period, as a portion of funds previously invested in federal funds sold
were shifted to short-term investment securities. The change in the mix of
average investment securities and average federal funds sold and securities
purchased under agreement to resell was
14
the result of Management's decision to further diversify the Company's portfolio
of short-term investments in connection with its liquidity management
activities. Further, the increase in average investment securities reflected
Management's decision to lengthen the average life of the Company's investment
portfolio in an effort to obtain the higher yields available due to the
steepening of the yield curve during 1996.
Interest income for the third quarter of 1996 decreased $0.7 million from the
comparable prior year period due to an unfavorable rate variance. The
unfavorable rate variance was the result of a decline in market interest rates
during the last half of 1995 and the first quarter of 1996. Lower yields on
loans in the 1996 third quarter accounted for $0.2 million of the total
unfavorable rate variance, as a substantial portion of the Company's loans are
prime rate-based. This unfavorable rate variance would have been higher had the
Company not realized $1.2 million in loan interest income that resulted from the
payoff of two nonperforming loans during the 1996 third quarter. The remaining
$0.5 million portion of the total unfavorable rate variance was attributable to
lower yields on federal funds sold and securities purchased under agreement to
resell, and investment securities.
The overall decrease in the yield on average interest-earning assets of 80 basis
points for the third quarter of 1996, as compared to the third quarter of 1995,
was due to a combination of the decline in market interest rates and a shift in
the composition of average interest-earning assets towards a higher percentage
of short-term investment securities. This shift in the composition of average
interest-earning assets resulted from growth in the Company's deposits combined
with the Company's liquidity and investment management activities.
Total interest expense in the 1996 third quarter increased $3.1 million from the
total for the 1995 third quarter. This increase was due to an unfavorable volume
variance of $3.4 million slightly offset by a $0.3 million favorable rate
variance. The unfavorable volume variance resulted from a $348.9 million, or
48.7%, increase in average interest-bearing liabilities in the third quarter of
1996 as compared with the third quarter of 1995. This increase was concentrated
in higher-rate money market deposits, and was attributable to market conditions
combined with the successful business development efforts of the Company.
Changes in the rates paid on interest-bearing liabilities had a $0.3 million
favorable impact on interest expense in the third quarter of 1996 versus the
1995 third quarter, as the average rate paid on interest-bearing liabilities
decreased 20 basis points from the third quarter of 1995. This slight decrease
resulted from a reduction in the rates paid on the Company's higher-rate money
market deposits on account of the declining interest rate environment during the
last half of 1995 and the first quarter of 1996, offset by the aforementioned
growth of higher-rate money market deposits.
Net interest income, on a fully taxable-equivalent basis, totaled $64.3 million
for the first nine months of 1996, an increase of $9.6 million, or 17.6%, from
the $54.6 million total for the first nine months of 1995. The increase in net
interest income was the result of an $18.0 million, or 24.4%, increase in
interest income, offset by a $8.4 million, or 43.9%, increase in interest
expense over the comparable prior year period.
The $18.0 million increase in interest income for the first nine months of 1996,
as compared to the first nine months of 1995, was the result of a $20.8 million
favorable volume variance offset by a $2.8 million unfavorable rate variance.
The favorable volume variance resulted from a $396.2 million, or 39.8%, increase
in average interest-earning assets over the comparable prior year period. The
increase in average interest-earning assets for the first nine months of 1996,
15
compared with the first nine months of 1995, was composed of increases in loans,
investment securities, and liquid investments in federal funds sold and
securities purchased under agreement to resell, and resulted from the
aforementioned growth in deposits. The unfavorable rate variance was
attributable to the previously mentioned decline in market interest rates during
the last half of 1995 and the first quarter of 1996, offset by the
aforementioned loan interest income realized in connection with the payoff of
two nonperforming loans during the 1996 third quarter.
The overall decrease in the yield on average interest-earning assets of 110
basis points for the first nine months of 1996, over the comparable period in
1995, was due to a combination of the decline in market interest rates and a
shift in the composition of average interest-earning assets towards a higher
percentage of short-term investment securities. This shift in the composition of
average interest-earning assets resulted from growth in the Company's deposits
combined with the Company's liquidity and investment management activities.
Total interest expense for the first nine months of 1996 increased $8.4 million
from the total for the first nine months of 1995. This increase was due to an
unfavorable volume variance of $8.5 million offset by a favorable rate variance
of $0.1 million. The unfavorable volume variance resulted from a $293.6 million,
or 44.5%, increase in average interest-bearing liabilities for the first nine
months of 1996 over the comparable prior year period. This increase was
concentrated in higher-rate money market deposits, and was attributable to
market conditions combined with the successful business development efforts of
the Company. Changes in the rates paid on interest-bearing liabilities had a
$0.1 million favorable impact on interest expense for the first nine months of
1996, as compared to the respective 1995 period. This slight decrease in
interest expense resulted from a reduction in the rates paid on the Company's
higher-rate money market deposits on account of the declining interest rate
environment during the last half of 1995 and the first quarter of 1996, offset
by the aforementioned growth of higher-rate money market deposits.
Provision For Loan Losses
- -------------------------
The provision for loan losses is based on Management's evaluation of the
adequacy of the existing allowance for loan losses in relation to total loans,
and on Management's continuous assessment of the inherent and identified risk
dynamics of the loan portfolio resulting from reviews of selected individual
loans and loan commitments.
The provision for loan losses totaled $3.0 million for the third quarter of
1996, a $0.4 million, or 11.2%, decrease compared to the $3.3 million provision
for the third quarter of 1995. The provision for loan losses increased $0.5
million, or 7.4%, to $6.6 million for the first nine months of 1996, versus $6.1
million for the comparable 1995 period. See "Financial Condition - Credit
Quality and the Allowance for Loan Losses" for additional related discussion.
Noninterest Income
- ------------------
The following table summarizes the components of noninterest income for the
three and nine month periods ended September 30, 1996 and 1995:
16
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Dollars in thousands) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------
Disposition of client warrants $ 618 $3,823 $2,880 $5,626
Letter of credit and foreign exchange income 759 807 2,493 2,267
Deposit service charges 359 315 1,200 1,000
Investment gains (losses) - - 1 (770)
Other 277 153 825 434
- ---------------------------------------------------------------------------------------------
Total noninterest income $2,013 $5,098 $7,399 $8,557
=============================================================================================
Total noninterest income for the three and nine month periods ended September
30, 1996 amounted to $2.0 million and $7.4 million, a decrease of $3.1 million
and $1.2 million, respectively, from the $5.1 million and $8.6 million totals
for the comparable 1995 periods. The decrease in noninterest income during 1996
was primarily explained by a decrease in income from the disposition of client
warrants.
Income from the disposition of client warrants was $0.6 million in the third
quarter of 1996 and $2.9 million for the first nine months of 1996 versus $3.8
million and $5.6 million for the respective 1995 periods. The Company has
historically obtained rights to acquire stock (in the form of warrants) in
certain nonpublic clients as part of negotiated credit facilities. The receipt
of warrants does not change the loan covenants or other collateral control
techniques employed by the Company to mitigate the risk of a loan becoming
nonperforming. Interest rates, loan fees and collateral requirements on loans
with warrants are similar to lending arrangements where warrants are not
obtained. The timing and amount of income from the disposition of client
warrants typically depends upon factors beyond the control of the Company,
including the general condition of the capital markets, and therefore cannot be
predicted with any degree of accuracy and is likely to vary materially from
period to period.
Letter of credit fees, foreign exchange fees and other trade finance income was
$0.8 million during both the 1996 and 1995 third quarters, and $2.5 million for
the first nine months of 1996, compared to $2.3 million for the first nine
months of 1995. The slight growth in this category of noninterest income in 1996
was due to increased foreign exchange fees, offset by lower letter of credit
fees on account of a decline in transaction volume resulting from increased
competition.
Deposit service charges totaled $0.4 million and $1.2 million for the three and
nine month periods ended September 30, 1996, respectively, versus $0.3 million
and $1.0 million for the comparable 1995 periods. Clients compensate the Company
for depository services either through earnings credits computed on their demand
deposit balances or via explicit payments recognized as deposit service charges.
The increase during 1996 was primarily related to growth in the Company's client
base.
The Company incurred no gains or losses on sales of investment securities in
both the 1996 and 1995 third quarters. The Company realized a nominal gain on
sales of investment securities during the first nine months of 1996, and
incurred $0.8 million in losses through such sales during the first nine months
of 1995. The securities sold during the first nine months of 1995 were primarily
mortgage-backed securities. All sales of investment securities were conducted as
a normal component of the Company's interest rate risk and liquidity management
activities.
17
Other noninterest income is composed primarily of service-based fee income, and
increased to $0.3 million and $0.8 million for the 1996 third quarter and the
first nine months of 1996, respectively, from $0.2 million and $0.4 million for
the comparable prior year periods. The increase during 1996 was primarily due to
increased examination fees on client accounts receivable.
Noninterest Expense
- -------------------
Noninterest expense during the third quarter of 1996 totaled $13.2 million, a
$1.3 million, or 10.9%, increase from the $11.9 million incurred in the
comparable 1995 period. Noninterest expense was $39.0 million for the first nine
months of 1996, an increase of $2.6 million, or 7.0%, over the $36.4 million
total for the comparable 1995 period. Management closely monitors the level of
noninterest expense using a variety of financial ratios, including the
efficiency ratio. The efficiency ratio is calculated by dividing the amount of
noninterest expense, excluding costs associated with other real estate owned, by
adjusted revenues, defined as the total of net interest income and noninterest
income, excluding income from the disposition of client warrants and gains or
losses incurred through sales of investment securities. This ratio reflects the
level of operating expense required to generate $1 of operating revenue. The
Company's efficiency ratio improved to 54.2% for the 1996 third quarter, down
from 61.9% for the third quarter of 1995. The Company's efficiency ratio for the
first nine months of 1996 was 56.3%, versus 62.5% for the comparable 1995
period. The following tables present the detail of noninterest expense and the
incremental contribution of each line item to the Company's efficiency ratio:
Three Months Ended September 30,
-------------------------------------------
1996 1995
------------------- --------------------
Percent of Percent of
Adjusted Adjusted
(Dollars in thousands) Amount Revenues Amount Revenues
- ---------------------------------------------------------------------------------
Compensation and benefits $ 7,914 32.5% $ 6,517 34.0%
Professional services 1,122 4.6 1,032 5.4
Equipment 859 3.5 1,473 7.7
Occupancy 706 2.9 1,007 5.2
Corporate legal and litigation 207 0.9 179 0.9
Data processing services 119 0.5 214 1.1
Client services 23 0.1 82 0.4
FDIC deposit insurance 1 0.0 14 0.1
Other 2,237 9.2 1,370 7.1
- --------------------------------------------------------------------------------
Total excluding cost of other
real estate owned 13,188 54.2% 11,888 61.9%
Cost of other real estate owned 19 23
- --------------------------------------------------------------------------------
Total noninterest expense $13,207 $11,911
================================================================================
18
Nine Months Ended September 30,
-------------------------------------------
1996 1995
------------------- --------------------
Percent of Percent of
Adjusted Adjusted
(Dollars in thousands) Amount Revenues Amount Revenues
- --------------------------------- ------- ----------- ------- -----------
Compensation and benefits $23,259 33.9% $20,374 35.0%
Professional services 3,398 4.9 3,620 6.2
Equipment 2,452 3.6 2,678 4.6
Occupancy 2,329 3.4 2,655 4.6
Data processing services 319 0.5 767 1.3
Client services 225 0.3 339 0.6
FDIC deposit insurance 173 0.3 1,210 2.1
Corporate legal and litigation 140 0.2 571 1.0
Other 6,314 9.2 4,143 7.1
- --------------------------------------------------------------------------------
Total excluding cost of other
real estate owned 38,609 56.3% 36,357 62.5%
Cost of other real estate owned 345 37
- --------------------------------------------------------------------------------
Total noninterest expense $38,954 $36,394
================================================================================
Compensation and benefits expenses totaled $7.9 million in the third quarter of
1996, a $1.4 million, or 21.4%, increase over the $6.5 million incurred in the
third quarter of 1995. For the first nine months of 1996, compensation and
benefits expenses totaled $23.3 million, an increase of $2.9 million, or 14.2%,
over the $20.4 million total for the comparable 1995 period. The increase during
1996 in compensation and benefits expenses was largely the result of an increase
in the number of average full-time equivalent (FTE) staff employed by the
Company. Average FTE were 369 and 358 for the three and nine month periods ended
September 30, 1996, respectively, compared to 339 and 331 for the respective
prior year periods. The increase in FTE was primarily attributable to the
expansion of the Company's lending staff in an effort to develop new markets, as
well as in response to the Company's growing client base.
19
Professional services expenses totaled $1.1 million in the third quarter of
1996, a $0.1 million, or 8.7%, increase from the $1.0 million incurred in the
third quarter of 1995. This increase was the result of higher accounting and
auditing fees, offset by lower legal expenses on account of client
reimbursements received by the Company in connection with the previously
mentioned payoff of two nonperforming loans during the 1996 third quarter.
Professional services expenses decreased $0.2 million, or 6.1%, to a total of
$3.4 million for the first nine months of 1996 versus $3.6 million for the
comparable 1995 period. This decrease was primarily related to lower legal
expenses resulting from the client reimbursements discussed above.
Equipment expenses in the third quarter of 1996 totaled $0.9 million, a decrease
of $0.6 million, or 41.7%, from the 1995 third quarter total of $1.5 million.
Equipment expenses for the first nine months of 1996 totaled $2.5 million, a
decrease of $0.2 million, or 8.4%, from the $2.7 million incurred in the
comparable prior year period. The lower equipment expenses in 1996, compared to
1995, were primarily the result of the Company recognizing certain non-recurring
costs in connection with a move into a new headquarters facility in the third
quarter of 1995, offset by higher equipment costs in 1996 due to investments in
computer equipment as well as other costs associated with the Company's growth
in personnel.
Occupancy expenses totaled $0.7 million and $2.3 million for the three and nine
month periods ended September 30, 1996. This was a decrease of $0.3 million, or
29.9%, and $0.3 million, or 12.3%, from the $1.0 million and $2.7 million totals
incurred in the respective 1995 periods. This decrease in occupancy expenses was
the result of the aforementioned non-recurring costs incurred in connection with
the Company's move into a new headquarters facility in the third quarter of
1995, offset by additional rent expense associated with several new loan offices
opened by the Company during the first half of 1996.
Corporate legal and litigation expenses totaled $0.2 million for both the third
quarter of 1996 and 1995. Total corporate legal and litigation expenses were
$0.1 million for the first nine months of 1996, versus $0.6 million for the
first nine months of 1995. This decrease in expenses during 1996 was the result
of the Company realizing a $0.4 million gain in the 1996 second quarter related
to the net proceeds received from a legal settlement.
Data processing services expenses were $0.1 million and $0.3 million for the
three and nine month periods ended September 30, 1996, a decrease of $0.1
million, or 44.4%, and $0.4 million, or 58.4%, compared to the $0.2 million and
$0.8 million totals for the comparable 1995 periods. The decrease during 1996 in
data processing services expenses was due to the Company's conversion to an in-
house data processing center during late 1995.
Client services expenses include courier expenses and related costs of loan and
deposit operations. Total client services expenses were nominal during the third
quarter of 1996, compared to $0.1 million incurred in the third quarter of 1995.
Client services expenses totaled $0.2 million for the first nine months of 1996,
versus $0.3 million for the comparable prior year period. The year-to-year
decrease in these expenses from 1995 to 1996 was due to the timing of
reimbursements from clients.
The Company realized minimal FDIC deposit insurance expense in both the third
quarter of 1996 and 1995. Total FDIC deposit insurance expense for the first
nine months of 1996 amounted to $0.2 million, a $1.0 million, or 85.7%, decrease
from the $1.2 million incurred in the first nine months of 1995. This decrease
was attributable to reductions in the Bank's assessment rate during both the
third quarter of 1995 and the first quarter of 1996 due to completion of the
recapitalization of the Bank Insurance Fund. The Bank's assessment rate was
further reduced to the statutory minimum annual assessment of $2,000, effective
July 1, 1996.
Other noninterest expenses in the third quarter of 1996 totaled $2.2 million, a
$0.9 million, or 63.3%, increase from the $1.4 million incurred in the third
quarter of 1995. For the first nine months of 1996, other noninterest expenses
increased $2.2 million, or 52.4%, to a total of $6.3 million compared to $4.1
million for the first nine months of 1995. The increase during 1996 largely
resulted from increased marketing and business development efforts combined with
an increase in other miscellaneous expenses resulting from the Company's growth
in personnel.
Net costs associated with other real estate owned were minimal in both the third
quarter of 1996 and 1995. For the first nine months of 1996, net costs
associated with OREO increased $0.3 million from the comparable 1995 period,
primarily due to the 1996 first quarter write-down of one property owned by the
Company. The costs associated with OREO include: maintenance expenses; property
taxes; marketing costs; net operating expense or income associated with income-
producing properties; property write-downs; and gains or losses on the sales of
such properties.
20
Income Taxes
- ------------
The Company's effective tax rate was 40.0% in the 1996 third quarter, compared
to 29.7% in the third quarter of the prior year. For the nine months ended
September 30, 1996, the Company's effective tax rate was 40.0%, versus 38.0% in
the comparable 1995 period. The lower effective tax rates in 1995, as compared
to 1996, were attributable to a 1995 third quarter adjustment in the Company's
estimate of its tax liabilities.
FINANCIAL CONDITION
- -------------------
The Company's total assets were $1.7 billion at September 30, 1996 compared to
$1.4 billion at December 31, 1995.
Federal Funds Sold and Securities Purchased Under Agreement to Resell
- ---------------------------------------------------------------------
Federal funds sold and securities purchased under agreement to resell totaled
$280.4 million at September 30, 1996, an increase of $23.3 million, or 9.0%,
compared to the $257.1 million balance at December 31, 1995. This increase was
the result of growth in the Company's deposits during 1996, offset by loan
growth and by Management's decision to invest a significant portion of the
deposit growth in investment securities in connection with the Company's
liquidity and investment management activities.
Investment Securities
- ---------------------
Investment securities totaled $493.1 million at September 30, 1996. This
represented a $171.8 million, or 53.5%, increase over the December 31, 1995
balance of $321.3 million. The increase in investment securities was related to
growth in the Company's total deposits coupled with the Company's liquidity and
investment management activities, and was primarily centered in notes issued by
U.S. agencies as well as in commercial paper. The Company's liquidity and
investment management activities involved Management's decisions to further
diversify the Company's portfolio of short-term investments as well as lengthen
the average life of the investment portfolio in an effort to obtain the higher
yields available due to the steepening of the yield curve during 1996.
Loans
- -----
Total loans, net of unearned income, at September 30, 1996 were $840.8 million,
a $102.4 million, or 13.9%, increase compared to the $738.4 million balance
outstanding at December 31, 1995. The increase in loans from the 1995 year-end
total was largely concentrated in the commercial loan portfolio, and can be
attributed to the Company's increased business development efforts.
Credit Quality and the Allowance for Loan Losses
- ------------------------------------------------
Lending money involves an inherent risk of nonpayment. Through the
administration of loan policies and monitoring of the portfolio, Management
seeks to reduce such risks. The allowance for loan losses is an estimate to
provide a financial buffer for losses, both identified and unidentified, in the
loan portfolio.
21
Management regularly reviews and monitors the loan portfolio to determine the
risk profile of each credit and to identify credits whose risk profiles have
changed. This review includes, but is not limited to, such factors as payment
status, the financial condition of the borrower, borrower compliance with loan
covenants, underlying collateral values, potential loan concentrations, and
general economic conditions. Potential problem credits are identified and, based
upon known information, action plans are developed.
The allowance for loan losses was $30.0 million at September 30, 1996, an
increase of $0.3 million, or 1.0%, compared to the $29.7 million balance at
December 31, 1995. This increase was due to additional provisions to the
allowance for loan losses of $6.6 million, offset by net charge-offs of $6.3
million for the first nine months of 1996. Gross charge-offs for the first nine
months of 1996 were $8.2 million, and primarily related to four commercial
credits.
In general, Management believes, based on currently known information, that the
allowance for loan losses is adequate as of September 30, 1996. However, future
changes in circumstances, economic conditions or other factors could cause
Management to increase or decrease the allowance for loan losses as deemed
necessary.
Nonperforming assets consist of loans that are past due 90 days or more but
still accruing interest, loans on nonaccrual status and OREO. The table below
sets forth certain relationships between nonperforming loans, nonperforming
assets and the allowance for loan losses:
September 30, December 31,
1996 1995
(Dollars in thousands) (Unaudited)
- ------------------------------------------------------------------------------------
Nonperforming assets:
Loans past due 90 days or more $ 359 $ 906
Nonaccrual loans 19,936 27,867
- ------------------------------------------------------------------------------------
Total nonperforming loans 20,295 28,773
OREO 2,720 4,955
- ------------------------------------------------------------------------------------
Total nonperforming assets $23,015 $33,728
====================================================================================
Nonperforming loans as a percent of total loans 2.4% 3.9%
OREO as a percent of total assets 0.2% 0.4%
Nonperforming assets as a percent of total assets 1.4% 2.4%
Allowance for loan losses: $30,000 $29,700
As a percent of total loans 3.5% 4.0%
As a percent of nonaccrual loans 150.5% 106.6%
As a percent of nonperforming loans 147.8% 103.2%
Nonperforming loans were $20.3 million, or 2.4% of total loans, at September 30,
1996. This was down from the total of $28.8 million or 3.9% of total loans, at
the prior year-end. Nonperforming loans at September 30, 1996 included two
credits, one of which is collateralized with real estate, totaling $11.1
million. Management believes each of these two credits, based on currently known
information, is adequately covered with collateral and specific reserves.
22
Management has identified one loan in excess of $1.5 million, that, on the basis
of information known by Management as of September 30, 1996, was judged to have
a higher than normal risk of becoming nonperforming. The Company is not aware of
any other loans at September 30, 1996 where known information about possible
problems of the borrower casts serious doubts about the ability of the borrower
to comply with the loan repayment terms.
OREO totaled $2.7 million at September 30, 1996, a decrease of $2.2 million, or
45.1%, from the $5.0 million balance at December 31, 1995. This decrease
primarily resulted from the previously mentioned write-down of one property
combined with sales of several properties during the first nine months of 1996.
Deposits
- --------
Total deposits were $1.6 billion at September 30, 1996, an increase of $278.8
million, or 21.6%, from the prior year-end total of $1.3 billion. The majority
of this increase was in interest-bearing deposits, which increased $240.7
million, or 28.7%, to $1.1 billion at September 30, 1996 from $838.7 million as
of December 31, 1995. This increase was largely concentrated in higher-rate
money market deposits and resulted from market conditions combined with
increased business development efforts by the Company. Noninterest-bearing
demand deposits were $489.4 million at September 30, 1996, representing a $38.1
million, or 8.4%, increase from the $451.3 million balance at December 31, 1995.
LIQUIDITY
- ---------
Management regularly reviews general economic and financial conditions, both
external and internal, and determines whether the positions taken with respect
to liquidity and interest rate sensitivity are appropriate. The objectives of
liquidity management are to provide funds, at an acceptable cost, to meet loan
demand and depositors' needs, and to service other liabilities as they come due.
The Company assesses the likelihood of projected funding requirements by
reviewing historical funding patterns, current and forecasted economic
conditions and individual client funding needs. One measure Management uses to
assess the Company's liquidity is the level of liquid assets (as defined by the
Company) relative to total deposits. Liquid assets include cash and due from
banks, federal funds sold, securities purchased under agreement to resell, and
investment securities maturing within one year. At September 30, 1996, the
Company's liquid assets as a percentage of deposits were 34.9% compared to 41.0%
at December 31, 1995. This decrease resulted primarily from growth in the
Company's deposits combined with Management's decision to lengthen the average
life of the investment portfolio.
CAPITAL RESOURCES
- -----------------
Management seeks to maintain adequate capital to support anticipated asset
growth and credit risks and to ensure that the Company and the Bank are in
compliance with all regulatory capital guidelines. The primary source of new
capital for the Company has been the retention of earnings. Aside from current
earnings, an additional source of new capital for the Company has been proceeds
from the issuance of common stock under the Company's employee benefit plans,
including the Company's 1983 and 1989 stock option plans, the employee stock
ownership plan and the employee stock purchase plan.
23
Shareholders' equity was $125.1 million at September 30, 1996, an increase of
$20.2 million, or 19.2%, from the $105.0 million balance at December 31, 1995.
This increase resulted from net income of $15.6 million and capital generated
through the Company's employee benefit plans of $4.9 million in the first nine
months of 1996, slightly offset by a $0.3 million increase in the unrealized
loss on available-for-sale investments.
The Company and the Bank are subject to capital adequacy guidelines issued by
the Federal Reserve Board. Under these guidelines, the minimum total risk-based
capital requirement is 10.0% of risk-weighted assets and certain off-balance
sheet items for a "well capitalized" depository institution. At least 6.0% of
the 10.0% total risk-based capital ratio must consist of Tier 1 capital, defined
as tangible common equity, and the remainder may consist of subordinated debt,
cumulative preferred stock, and a limited amount of the allowance for loan
losses.
The Federal Reserve Board has established minimum capital leverage ratio
guidelines for banking organizations. This ratio is determined using Tier 1
capital divided by quarterly average total assets. The guidelines require a
minimum of 5.0% for a "well capitalized" depository institution.
The Company's risk-based capital ratios were in excess of regulatory guidelines
for a "well-capitalized" depository institution as of September 30, 1996 and
December 31, 1995. Capital ratios for the Company are set forth below:
- --------------------------------------------------------------------------------
September 30, December 31,
1996 1995
- --------------------------------------------------------------------------------
Total risk-based capital ratio 12.1% 11.9%
Tier 1 risk-based capital ratio 10.8% 10.6%
Tier 1 leverage ratio 7.6% 8.0%
================================================================================
The increase in the Company's total and Tier 1 risk-based capital ratios from
December 31, 1995 to September 30, 1996 was attributable to growth in the
Company's capital, combined with the Company investing a substantial portion of
the deposit growth during 1996 in lower risk-weighted assets. The decrease in
the Company's Tier 1 leverage ratio from December 31, 1995 to September 30, 1996
was attributable to an increase in quarterly average assets that resulted from
the aforementioned 1996 deposit growth.
24
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item
pending at September 30, 1996, or at the date of this report.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
--------
10.32 Executive Change in Control Severance Benefits Agreement
10.33 Change in Control Severance Policy For Non-executives
27 Financial Data Schedule
(b) Reports on Form 8-K:
-------------------
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 1996.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SILICON VALLEY BANCSHARES
Date: November 13, 1996 /s/ Christopher T. Lutes
------------------------
Christopher T. Lutes
Senior Vice President and Controller
(Principal Accounting Officer)
26