As filed with the Securities and Exchange Commission on November 13, 1997
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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 September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ________.
Commission File Number: 33-41102
SILICON VALLEY BANCSHARES
(Exact name of registrant as specified in its charter)
California 94-2856336
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3003 Tasman Drive
Santa Clara, California 95054-1191
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 654-7282
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ___
At October 31, 1997, 9,917,704 shares of the registrant's common stock
(no par value) were outstanding.
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This report contains a total of 29 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 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 28
ITEM 2. CHANGES IN SECURITIES 28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28
ITEM 5. OTHER INFORMATION 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
SIGNATURES 29
2
PART I - FINANCIAL INFORMATION
ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(Dollars in thousands) (Unaudited)
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Assets:
Cash and due from banks $ 142,031 $ 122,836
Federal funds sold and securities purchased under
agreement to resell 386,290 310,341
Investment securities, at fair value 837,372 625,022
Loans, net of unearned income 1,037,268 863,492
Allowance for loan losses (38,600) (32,700)
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Net loans 998,668 830,792
Premises and equipment 3,601 4,155
Other real estate owned 800 1,948
Accrued interest receivable and other assets 37,077 29,450
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Total assets $2,405,839 $1,924,544
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Liabilities and Shareholders' Equity:
Liabilities:
Noninterest-bearing demand deposits $ 691,486 $ 599,257
NOW deposits 12,693 8,443
Money market deposits 1,406,922 1,081,391
Time deposits 117,109 85,213
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Total deposits 2,228,210 1,774,304
Other liabilities 15,348 14,840
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Total liabilities 2,243,558 1,789,144
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Shareholders' Equity:
Preferred stock, no par value:
20,000,000 shares authorized; none outstanding
Common stock, no par value:
30,000,000 shares authorized; 9,880,647 and
9,329,993 shares outstanding at September 30, 1997
and December 31, 1996, respectively 79,283 65,968
Retained earnings 87,555 67,321
Net unrealized gain on available-for-sale investments 1,969 2,456
Unearned compensation (6,526) (345)
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Total shareholders' equity 162,281 135,400
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Total liabilities and shareholders' equity $2,405,839 $1,924,544
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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
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September 30, September 30, September 30, September 30,
1997 1996 1997 1996
(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
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Interest income:
Loans, including fees $ 28,349 $ 23,236 $ 77,874 $ 65,536
Investment securities 10,897 7,040 29,020 16,455
Federal funds sold and securities purchased under
agreement to resell 4,925 3,019 11,891 9,527
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Total interest income 44,171 33,295 118,785 91,518
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Interest expense:
Deposits 15,117 10,353 38,791 27,438
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Total interest expense 15,117 10,353 38,791 27,438
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Net interest income 29,054 22,942 79,994 64,080
Provision for loan losses 1,716 2,962 7,682 6,550
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Net interest income after provision for loan losses 27,338 19,980 72,312 57,530
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Noninterest income:
Disposition of client warrants 708 618 4,953 2,880
Letter of credit and foreign exchange income 1,159 759 3,249 2,493
Deposit service charges 588 359 1,360 1,200
Investment gains 33 - 78 1
Other 318 277 973 825
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Total noninterest income 2,806 2,013 10,613 7,399
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Noninterest expense:
Compensation and benefits 10,625 7,914 29,100 23,259
Professional services 1,958 1,329 5,088 3,538
Business development and travel 1,077 683 3,063 1,961
Furniture and equipment 1,178 859 2,602 2,452
Net occupancy expense 840 706 2,493 2,329
Postage and supplies 420 359 1,122 1,108
Advertising and promotion 354 437 1,082 1,067
Telephone 370 355 1,004 956
Cost of other real estate owned 30 19 56 345
Other 766 546 2,429 1,939
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Total noninterest expense 17,618 13,207 48,039 38,954
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Income before income tax expense 12,526 8,786 34,886 25,975
Income tax expense 5,261 3,514 14,652 10,390
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Net income $ 7,265 $ 5,272 $ 20,234 $ 15,585
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Net income per common and
common equivalent share $ 0.71 $ 0.54 $ 1.99 $ 1.61
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See notes to interim consolidated financial statements.
4
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended
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September 30, September 30,
1997 1996
(Dollars in thousands) (Unaudited) (Unaudited)
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Cash flows from operating activities:
Net income $ 20,234 $ 15,585
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 7,682 6,550
Provision for other real estate owned - 551
Depreciation and amortization 974 880
Net gain on sales of investment securities (78) (1)
Net gain on sales of other real estate owned (45) (407)
Increase in accrued interest receivable (5,260) (3,671)
(Increase) decrease in prepaid expenses (180) 2,594
Increase in unearned income 1,757 1,182
Increase (decrease) in accrued liabilities 896 (1,866)
Other, net (2,643) (3,398)
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Net cash provided by operating activities 23,337 17,999
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Cash flows from investing activities:
Proceeds from maturities and paydowns of investment
securities 923,336 716,999
Proceeds from sales of investment securities 105,476 9,699
Purchases of investment securities (1,236,675) (893,856)
Net increase in loans (181,605) (111,751)
Proceeds from recoveries of charged off loans 3,121 1,946
Net proceeds from sales of other real estate owned 1,193 2,092
Purchases of premises and equipment (426) (310)
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Net cash applied to investing activities (385,580) (275,181)
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Cash flows from financing activities:
Net increase in deposits 453,906 278,772
Proceeds from issuance of common stock, net of
issuance costs 3,481 1,957
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Net cash provided by financing activities 457,387 280,729
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Net increase in cash and cash equivalents 95,144 23,547
Cash and cash equivalents at January 1,433,177 342,325
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Cash and cash equivalents at September 30, $ 528,321 $ 365,872
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Supplemental Disclosures:
Interest Paid $ 38,514 $ 27,405
Income taxes paid $ 14,585 $ 11,932
Non-cash investing activities:
Transfer of loans to other foreclosed assets $ 1,169 $ -
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See notes to interim consolidated financial statements.
5
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Silicon Valley Bancshares (the
"Company") and its subsidiaries conform with generally accepted accounting
principles and prevailing practices within the banking industry. Certain
reclassifications have been made to the Company's 1996 consolidated financial
statements to conform to the 1997 presentations. Such reclassifications had
no effect on the results of operations or shareholders' equity. The following
is a summary of the significant accounting and reporting policies used in
preparing the interim consolidated financial statements.
NATURE OF OPERATIONS
The Company is a bank holding company whose principal subsidiary is Silicon
Valley Bank (the "Bank"), a California-chartered bank with headquarters in
Santa Clara, California. The Bank maintains regional banking offices in
Northern and Southern California, and additionally has loan offices in
Arizona, Colorado, Georgia, Maryland, Massachusetts, Oregon, Texas, and
Washington. The Bank serves emerging growth and middle-market companies in
specific targeted niches, focusing on the technology and life sciences
industries, while also identifying and capitalizing on opportunities to serve
companies in other industries whose financial services needs are underserved.
Substantially all of the assets, liabilities and earnings of the Company
relate to its investment in the Bank.
CONSOLIDATION
The interim consolidated financial statements include the accounts of the
Company and those of its wholly owned subsidiaries, the Bank and SVB Leasing
Company (inactive). The revenues, expenses, assets, and liabilities of the
subsidiaries are included in the respective line items in the interim
consolidated financial statements after elimination of intercompany accounts
and transactions.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of Management, the interim consolidated financial statements
contain all adjustments (consisting of only normal, recurring adjustments)
necessary to present fairly the Company's consolidated financial position at
September 30, 1997, the results of its operations for the three and nine
month periods ended September 30, 1997 and September 30, 1996 and the results
of its cash flows for the nine month periods ended September 30, 1997 and
September 30, 1996. The December 31, 1996 consolidated financial statements
were derived from audited financial statements, and certain information and
footnote disclosures normally presented in annual financial statements
prepared in accordance with generally accepted accounting principles have
been omitted.
The interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's 1996 Annual Report on Form 10-K. The results of operations for the
three and nine month periods ended September 30, 1997 may not necessarily be
indicative of the Company's operating results for the full year.
6
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and judgments that
affect the reported amounts of assets and liabilities as of the balance sheet
date and the results of operations for the period. Actual results could differ
from those estimates. A material estimate that is particularly susceptible to
possible change in the near term relates to the determination of the allowance
for loan losses. An estimate of possible changes or range of possible changes
cannot be made.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents as reported in the consolidated statements of cash
flows includes cash on hand, cash balances due from banks, federal funds sold,
and securities purchased under agreement to resell. The cash equivalents are
readily convertible to known amounts of cash and are so near their maturity
that they present insignificant risk of changes in value.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell as
reported in the consolidated balance sheets includes interest-bearing deposits
in other financial institutions of $290,000 and $341,000 at September 30, 1997
and December 31, 1996, respectively.
NONACCRUAL LOANS
Loans are placed on nonaccrual status when they become 90 days past due as to
principal or interest payments (unless the principal and interest are well
secured and in the process of collection), when the Company has determined,
based upon currently known information, that the timely collection of principal
or interest is doubtful, or when the loans otherwise become impaired under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan."
When a loan is placed on nonaccrual status, the accrued interest is reversed
against interest income and the loan is accounted for on the cash or cost
recovery method thereafter until qualifying for return to accrual status.
Generally, a loan will be returned to accrual status when all delinquent
principal and interest become current in accordance with the terms of the
loan agreement and full collection of the principal appears probable.
7
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is calculated using
weighted-average shares, including the dilutive effect of stock options
outstanding during the period. Weighted-average shares outstanding were
10,288,505 and 10,143,837 for the three and nine month periods ended September
30, 1997 and 9,735,778 and 9,660,785 for the three and nine month periods ended
September 30, 1996. Fully diluted earnings per common and common equivalent
share were approximately equal to primary earnings per common and common
equivalent share for the three and nine month periods ended September 30, 1997
and September 30, 1996.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings per Share." SFAS No. 128 establishes standards for computing
and reporting earnings per share (EPS) and applies to entities with publicly
held common stock or financial instruments that are potentially convertible
into publicly held common stock. This statement supersedes Accounting
Principles Board (APB) Opinion No. 15, "Earnings per Share." The presentation
of primary EPS, as required by APB Opinion No. 15, is replaced with a
presentation of basic EPS, which is defined in SFAS No. 128. In addition, dual
presentation of basic EPS and diluted EPS, as defined in SFAS No. 128, is
required on the face of the income statement for all entities that have complex
capital structures. Disclosure of a reconciliation between basic EPS and
diluted EPS is also required.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
financial instruments or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed similarly to
the fully diluted EPS computation required by APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. However, an entity is permitted to disclose pro forma EPS amounts
computed using this statement in the notes to interim financial statements in
periods prior to required adoption.
8
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The pro forma EPS amounts, computed pursuant to the provisions of SFAS No. 128,
for the three and nine month periods ended September 30, 1997 and 1996 were as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
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(Dollars and shares in thousands, Net Per Share Net Per Share
except per share amounts) Income Shares Amount Income Shares Amount
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1997:
BASIC EPS:
Income available to common
shareholders $7,265 9,740 $0.75 $20,234 9,606 $2.11
EFFECT OF DILUTIVE SECURITIES:
Stock options outstanding - 549 - - 538 -
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DILUTED EPS:
Income available to common
shareholders plus assumed
conversions $7,265 10,289 $0.71 $20,234 10,144 $1.99
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1996:
BASIC EPS:
Income available to common
shareholders $5,272 9,259 $0.57 15,585 9,182 $1.70
EFFECT OF DILUTIVE SECURITIES:
Stock options outstanding - 477 - - 479 -
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DILUTED EPS:
Income available to common
shareholders plus assumed
conversions $5,272 9,736 $0.54 $15,585 9,661 $1.61
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In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." SFAS No. 129 establishes standards for disclosing
information about an entity's capital structure and applies to all entities.
This statement is effective for financial statements issued for periods
ending after December 15, 1997. Management does not believe that the adoption
of this statement will have a material impact on the Company's consolidated
financial position or results of operations.
9
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for all entities for reporting comprehensive
income and its components in financial statements. This statement requires that
all items which are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income is equal to net income plus the change in "other comprehensive income."
The only component of other comprehensive income currently applicable to the
Company, as defined by SFAS No. 130, is the net unrealized gain or loss on
available-for-sale investments. SFAS No. 130 requires that an entity: (a)
classify items of other comprehensive income by their nature in a financial
statement, and (b) report the accumulated balance of other comprehensive income
separately from common stock and retained earnings in the equity section of the
statement of financial position. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 1997.
Management does not believe that the adoption of this statement will have a
material impact on the Company's consolidated financial position or results of
operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
publicly held entities to follow in reporting information about operating
segments in annual financial statements and requires that those entities report
selected information about operating segments in interim financial statements.
This statement also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement is
effective for financial statements issued for periods beginning after December
15, 1997. Management does not believe that the adoption of this statement will
have a material impact on the Company's consolidated financial position or
results of operations.
In January 1997, the Securities and Exchange Commission (SEC) approved
amendments (Release No. 33-7386) to Regulations S-X and S-K regarding the
disclosure requirements for derivative financial instruments, other financial
instruments and derivative commodity instruments (collectively, "market risk
sensitive instruments"). The amendments require enhanced disclosure of
accounting policies for derivative financial instruments and derivative
commodity instruments in the notes to the financial statements. In addition,
the amendments expand existing disclosure requirements to include quantitative
and qualitative information regarding the market risk inherent in market risk
sensitive instruments. The required quantitative and qualitative information
should be disclosed outside of the financial statements and related notes
thereto.
The accounting policies disclosure requirements are effective for all SEC
registrants in filings that include financial statements issued for periods
ending after June 15, 1997. As the Company's 1996 Annual Report on Form 10-K
fully complied with the new disclosure requirements, no additional accounting
policy disclosures are required during interim filings in 1997. The
quantitative and qualitative information disclosure requirements regarding
market risks are effective for all bank and thrift registrant filings which
include annual financial statements issued for periods ending after June 15,
1997. Management does not believe that the adoption of the amendments will have
a material impact on the Company's consolidated financial position or results
of operations.
10
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
2. LOANS
The detailed composition of loans is presented in the following table:
September 30, December 31,
1997 1996
(Dollars in thousands) (Unaudited)
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Commercial $ 919,275 $755,699
Real estate term 49,643 44,475
Real estate construction 33,152 27,540
Consumer and other 35,198 35,778
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Total loans (1) $1,037,268 $863,492
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(1) Net of unearned income of $7,415 and $5,658 at September 30, 1997 and
December 31, 1996, respectively.
3. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the three and nine month
periods ended September 30, 1997 and 1996 was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
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(Dollars in thousands) 1997 1996 1997 1996
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Beginning balance $37,300 $29,000 $32,700 $29,700
Provision for loan losses 1,716 2,962 7,682 6,550
Loans charged off (1,700) (2,502) (4,903) (8,196)
Recoveries 1,284 540 3,121 1,946
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Balance at September 30, $38,600 $30,000 $38,600 $30,000
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The aggregate recorded investment in loans for which impairment has been
determined in accordance with SFAS No. 114 totaled $23.3 million and $19.9
million at September 30, 1997 and September 30, 1996, respectively. Allocations
of the allowance for loan losses related to impaired loans totaled $11.5
million at September 30, 1997 and $6.5 million at September 30, 1996. Average
impaired loans for the third quarter of 1997 and 1996 totaled $19.5 million and
$18.7 million, respectively.
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's interim
consolidated financial statements as presented in Item 1 of this report. In
addition to historical information, this discussion and analysis includes
certain forward-looking statements regarding events and trends which may
affect the Company's future results. Such statements are subject to risks and
uncertainties that could cause the Company's actual results to differ
materially. These risks and uncertainties include, but are not limited to,
those described in the Company's 1996 Annual Report on Form 10-K.
Certain reclassifications have been made to the Company's 1996 consolidated
financial statements to conform to the 1997 presentations. Such
reclassifications had no effect on the results of operations or shareholders'
equity.
EARNINGS SUMMARY
The Company reported net income of $7.3 million, or $0.71 per share, for the
third quarter of 1997, compared with net income of $5.3 million, or $0.54 per
share, for the third quarter of 1996. Net income totaled $20.2 million, or
$1.99 per share, for the nine months ended September 30, 1997, versus $15.6
million, or $1.61 per share, for the respective 1996 period. The annualized
return on average assets (ROA) was 1.3% for both the third quarter of 1997
and 1996. The annualized return on average equity (ROE) for the third quarter
of 1997 was 18.4%, compared to 17.2% in the 1996 third quarter. For the first
nine months of 1997, ROA was 1.3% and ROE was 18.4% versus 1.4% and 17.9%,
respectively, for the comparable prior year period.
The increase in net income during the three and nine month periods ended
September 30, 1997, as compared with the prior year respective periods,
resulted primarily from growth in both net interest income and noninterest
income, partially offset by an increase in noninterest expense. The major
components of net income and changes in these components are summarized in
the following table for the three and nine month periods ended September 30,
1997 and 1996, and are discussed in more detail below.
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
------------------ -----------------
(Dollars in thousands) 1997 1996 1997 1996
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Net interest income $29,054 $22,942 $79,994 $64,080
Provision for loan losses 1,716 2,962 7,682 6,550
Noninterest income 2,806 2,013 10,613 7,399
Noninterest expense 17,618 13,207 48,039 38,954
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Income before income taxes 12,526 8,786 34,886 25,975
Income tax expense 5,261 3,514 14,652 10,390
- -----------------------------------------------------------------------------
Net income $ 7,265 $ 5,272 $20,234 $15,585
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12
NET INTEREST INCOME AND MARGIN
Net interest income represents the difference between interest earned,
primarily on loans and investments, and interest paid on funding sources,
primarily deposits, and is the principal source of revenue for the Company. Net
interest margin is the amount of net interest income, on a fully
taxable-equivalent basis, expressed as a percentage of average interest-earning
assets. The average yield earned on interest-earning assets is the amount of
taxable-equivalent interest income expressed as a percentage of average
interest-earning assets. The average rate paid on funding sources expresses
interest expense as a percentage of average interest-earning assets.
The following tables set forth average assets, liabilities and shareholders'
equity, interest income and interest expense, average yields and rates, and the
composition of the Company's net interest margin for the three and nine month
periods ended September 30, 1997 and 1996, respectively.
13
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AVERAGE BALANCES, RATES AND YIELDS
- -------------------------------------------------------------------------------
For the three months ended September 30,
--------------------------------------------------------------
1997 1996
(Unaudited) (Unaudited)
----------------------------- ---------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------
Interest-earning assets:
Federal funds sold and
securities purchased under
agreement to resell (1) $ 350,786 $ 4,925 5.6% $ 226,543 $3,019 5.3%
Investment securities:
Taxable 680,886 10,399 6.1 470,391 6,912 5.8
Non-taxable (2) 45,767 766 6.6 8,683 196 9.0
Loans:
Commercial 885,577 25,265 11.3 684,832 20,203 11.7
Real estate construction and term 80,269 2,169 10.7 90,841 2,062 9.0
Consumer and other 35,905 915 10.1 40,574 971 9.5
- -------------------------------------- --------------------------- ----------------------------
Total loans 1,001,751 28,349 11.2 816,247 23,236 11.3
- -------------------------------------- --------------------------- ----------------------------
Total interest-earning assets 2,079,190 44,439 8.5 1,521,864 33,363 8.7
- -------------------------------------- --------------------------- ----------------------------
Cash and due from banks 147,834 127,463
Allowance for loan losses (38,455) (30,004)
Other real estate owned 921 2,925
Other assets 37,507 28,515
- -------------------------------------- ---------- -----------
Total assets $2,226,997 $1,650,763
- -------------------------------------- ---------- -----------
- -------------------------------------- ---------- -----------
Funding sources:
Interest-bearing liabilities:
NOW deposits $ 17,900 94 2.1 $ 9,211 47 2.0
Regular money market deposits 356,449 2,441 2.7 329,883 2,261 2.7
Bonus money market deposits 967,974 11,338 4.6 652,427 7,293 4.4
Time deposits 113,082 1,244 4.4 73,129 752 4.1
- -------------------------------------- --------------------------- ----------------------------
Total interest-bearing liabilities 1,455,405 15,117 4.1 1,064,650 10,353 3.9
Portion of noninterest-bearing
funding sources 623,785 457,214
- -------------------------------------- --------------------------- ----------------------------
Total funding sources 2,079,190 15,117 2.9 1,521,864 10,353 2.7
- -------------------------------------- --------------------------- ----------------------------
Noninterest-bearing funding sources:
Demand deposits 602,078 452,322
Other liabilities 13,033 11,957
Shareholders' equity 156,481 121,834
Portion used to fund
interest-earning assets (623,785) (457,214)
- -------------------------------------- ---------- -----------
Total liabilities and shareholders'
equity $2,226,997 $1,650,763
- -------------------------------------- ---------- -----------
---------- -----------
Net interest income and margin $29,322 5.6% $23,010 6.0%
- -------------------------------------- ------- ---- ------- ----
------- ---- ------- ----
Memorandum: Total deposits $2,057,483 $1,516,972
- -------------------------------------- ---------- -----------
---------- -----------
(1) Includes average interest-bearing deposits in other financial
institutions of $298 and $402 for the three months ended September 30,
1997 and 1996, respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in
1997 and 1996. The tax equivalent adjustments were $268 and $68 for the
three months ended September 30, 1997 and 1996, respectively.
14
- -------------------------------------------------------------------------------
AVERAGE BALANCES, RATES AND YIELDS
- -------------------------------------------------------------------------------
For the nine months ended September 30,
---------------------------------------------------------
1997 1996
(Unaudited) (Unaudited)
----------------------------- ---------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------
Interest-earning assets:
Federal funds sold and
securities purchased under
agreement to resell (1) $ 288,685 $ 11,891 5.5% $ 238,334 $ 9,527 5.3%
Investment securities:
Taxable 625,800 28,146 6.0 377,788 16,125 5.7
Non-taxable (2) 25,049 1,344 7.2 7,045 507 9.6
Loans:
Commercial 833,120 69,475 11.1 647,670 56,201 11.6
Real estate construction and term 75,319 5,775 10.3 79,534 6,421 10.8
Consumer and other 37,556 2,624 9.3 42,250 2,914 9.2
- -------------------------------------- --------------------------- ----------------------------
Total loans 945,995 77,874 11.0 769,454 65,536 11.4
- -------------------------------------- --------------------------- ----------------------------
Total interest-earning assets 1,885,529 119,255 8.5 1,392,621 91,695 8.8
- -------------------------------------- --------------------------- ----------------------------
Cash and due from banks 155,725 127,426
Allowance for loan losses (36,901) (30,266)
Other real estate owned 1,334 3,948
Other assets 35,642 28,171
- -------------------------------------- ---------- -----------
Total assets $2,041,329 $1,521,900
- -------------------------------------- ---------- -----------
- -------------------------------------- ---------- -----------
Funding sources:
Interest-bearing liabilities:
NOW deposits $ 15,175 222 2.0 $ 10,373 173 2.2
Regular money market deposits 344,075 6,960 2.7 312,766 6,353 2.7
Bonus money market deposits 834,645 28,381 4.5 562,000 18,875 4.5
Time deposits 103,132 3,228 4.2 68,461 2,037 4.0
- -------------------------------------- --------------------------- ----------------------------
Total interest-bearing liabilities 1,297,027 38,791 4.0 953,600 27,438 3.8
Portion of noninterest-bearing
funding sources 588,502 439,021
- -------------------------------------- --------------------------- ----------------------------
Total funding sources 1,885,529 38,791 2.8 1,392,621 27,438 2.6
- -------------------------------------- --------------------------- ----------------------------
Noninterest-bearing funding sources:
Demand deposits 583,732 440,851
Other liabilities 13,448 11,508
Shareholders' equity 147,122 115,941
Portion used to fund
interest-earning assets (588,502) (439,021)
- -------------------------------------- ---------- -----------
Total liabilities and shareholders'
equity $2,041,329 $1,521,900
- -------------------------------------- ---------- -----------
---------- -----------
Net interest income and margin $80,464 5.7% $64,257 6.2%
- -------------------------------------- ------- ---- ------- ----
------- ---- ------- ----
Memorandum: Total deposits $1,880,759 $1,394,451
- -------------------------------------- ---------- -----------
---------- -----------
(1) Includes average interest-bearing deposits in other financial
institutions of $315 and $341 for the nine months ended September 30,
1997 and 1996, respectively.
(2) Interest income on non-taxable investments is presented on a
fully taxable-equivalent basis using the federal statutory rate of 35%
in 1997 and 1996. The tax equivalent adjustments were $470 and $177
for the nine months ended September 30, 1997 and 1996, respectively.
15
Net interest income is affected by changes in the amount and mix of
interest-earning assets and interest-bearing liabilities, referred to as
"volume change." Net interest income is also affected by changes in yields
earned on interest-earning assets and rates paid on interest-bearing
liabilities, referred to as "rate change." The following table sets forth
changes in interest income and interest expense for each major category of
interest-earning assets and interest-bearing liabilities. The table also
reflects the amount of change attributable to both volume and rate changes for
the periods indicated. Changes relating to investments in non-taxable municipal
securities are presented on a fully taxable-equivalent basis using the federal
statutory rate of 35% in 1997 and 1996.
1997 Compared to 1996
----------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
--------------------- ---------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
--------------------- ---------------------
(Dollars in thousands) Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------
Interest income:
Federal funds sold and securities
purchased under agreement to resell $ 1,753 $ 153 $ 1,906 $ 2,065 $ 299 $ 2,364
Investment securities 3,823 234 4,057 12,038 820 12,858
Loans 5,313 (200) 5,113 14,473 (2,135) 12,338
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in interest income 10,889 187 11,076 28,576 (1,016) 27,560
- ---------------------------------------------------------------------------------------------------
Interest expense:
NOW deposits 46 1 47 70 (21) 49
Regular money market deposits 188 (8) 180 627 (20) 607
Bonus money market deposits 3,716 329 4,045 9,254 252 9,506
Time deposits 442 50 492 1,083 108 1,191
- ---------------------------------------------------------------------------------------------------
Increase in interest expense 4,392 372 4,764 11,034 319 11,353
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income $ 6,497 $(185) $ 6,312 $17,542 $(1,335) $16,207
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Net interest income, on a fully taxable-equivalent basis, totaled $29.3 million
for the third quarter of 1997, an increase of $6.3 million, or 27.4%, from the
$23.0 million total for the third quarter of 1996. The increase in net interest
income was the result of a $11.1 million, or 33.2%, increase in interest
income, offset by a $4.8 million, or 46.0%, increase in interest expense over
the comparable prior year period.
The $11.1 million increase in interest income for the third quarter of 1997, as
compared to the third quarter of 1996, was the result of a $10.9 million
favorable volume variance combined with a $0.2 million favorable rate variance.
The favorable volume variance resulted from a $557.3 million, or 36.6%,
increase in average interest-earning assets over the comparable prior year
period. The increase in average interest-earning assets resulted from strong
growth in the Company's deposits, which increased $540.5 million, or 35.6%,
from the prior year comparable period. The increase in average interest-earning
assets consisted of loans, which were up $185.5 million, plus a combination of
highly liquid, lower-yielding federal funds sold, securities purchased under
agreement to resell and investment securities, which collectively increased
$371.8 million accounting for 66.7% of the total increase in average
interest-earning assets.
The growth in average loans for the 1997 third quarter, which were up 22.7%
compared to the third quarter of 1996, was widely distributed throughout the
loan portfolio. This diversified growth was evidenced by increased average loan
balances in many of the Company's market niches, products and loan offices.
16
Average investment securities for the third quarter of 1997 increased $247.6
million, or 51.7%, over the respective prior year period, as excess funds
generated as a result of the aforementioned deposit growth having exceeded the
growth in loans were invested in U.S. agency securities, U.S. Treasury
securities, mortgage-backed securities, and municipal securities. The nature of
this growth in the investment portfolio reflected a continuation of
Management's recent actions to increase the portfolio of longer-term investment
securities in an effort to obtain available higher yields, as well as to
further diversify the Company's portfolio of short-term investments in response
to a significant increase in liquidity. Average federal funds sold and
securities purchased under agreement to resell increased a combined $124.2
million, or 54.8%, in the third quarter of 1997 as compared to the 1996 third
quarter. This increase was also a result of the aforementioned strong growth in
deposits.
Interest income for the third quarter of 1997 increased $0.2 million from the
comparable prior year period due to a favorable rate variance associated with
federal funds sold, securities purchased under agreement to resell and
investment securities, partially offset by an unfavorable rate variance related
to loans. The overall decrease in the yield on average interest-earning assets
of 20 basis points for the third quarter of 1997, as compared to the 1996 third
quarter, was due to a shift in the composition of average interest-earning
assets towards a higher percentage of highly liquid, lower-yielding federal
funds sold, securities purchased under agreement to resell and investment
securities. This shift in the composition of average interest-earning assets
resulted from the aforementioned deposit growth having exceeded the growth in
loans.
Total interest expense in the 1997 third quarter increased $4.8 million from
the third quarter of 1996. This increase was due to an unfavorable volume
variance of $4.4 million and an unfavorable rate variance of $0.4 million. The
unfavorable volume variance resulted from a $390.8 million, or 36.7%, increase
in average interest-bearing liabilities in the third quarter of 1997 as
compared with the third quarter of 1996. This increase was largely concentrated
in the Company's bonus money market deposit product, which increased $315.5
million, or 48.4%, and was explained by high levels of client liquidity
attributable to a strong inflow of investment capital into the venture capital
community and into the public equity markets during 1996 and 1997. The $0.4
million unfavorable rate variance was largely attributable to an increase in
the average rate paid on the Company's bonus money market deposit product, as
well as to a shift in the composition of average interest-bearing liabilities
towards a higher percentage of deposits in the bonus money market deposit
product.
Net interest income, on a fully taxable-equivalent basis, totaled $80.5 million
for the first nine months of 1997, an increase of $16.2 million, or 25.2%, from
the $64.3 million total for the first nine months of 1996. The increase in net
interest income was the result of a $27.6 million, or 30.1%, increase in
interest income, offset by a $11.4 million, or 41.4%, increase in interest
expense over the comparable prior year period.
The $27.6 million increase in interest income for the first nine months of
1997, as compared to the first nine months of 1996, was explained by a $28.6
million favorable volume variance, offset by a $1.0 million unfavorable rate
variance. The favorable volume variance was attributable to growth in average
interest-earning assets, which increased $492.9 million, or 35.4%, from the
prior year comparable period. The increase in average interest-earning assets
resulted from strong growth in the Company's deposits, which were up $486.3
million, or 34.9%, from the comparable prior year period, and consisted of an
increase in each component of the Company's interest-earning assets. The growth
in average loans for the first nine months of 1997, which were up $176.5
million, or
17
22.9%, compared to the prior year respective period, was widely distributed
among the Company's market niches, products and loan offices. Average
investment securities for the first nine months of 1997 increased $266.0
million, or 69.1%, over the respective prior year period. The growth in
average investment securities reflected a continuation of Management's recent
actions to increase the portfolio of longer-term investment securities in an
effort to obtain available higher yields, as well as to further diversify the
Company's portfolio of short-term investments in response to a significant
increase in liquidity. Average federal funds sold and securities purchased
under agreement to resell for the first nine months of 1997 increased a
combined $50.4 million, or 21.1%, over the comparable 1996 period due to the
aforementioned strong growth in the Company's deposits.
The unfavorable rate variance of $1.0 million from the prior year comparable
period resulted from an unfavorable rate variance related to loans, partially
offset by favorable rate variances associated with federal funds sold,
securities purchased under agreement to resell and investment securities. The
overall decrease in the yield on average interest-earning assets of 30 basis
points for the first nine months of 1997, as compared to the first nine months
of 1996, was due to a decrease in the yield on average loans, resulting
primarily from increased competition, combined with a shift in the composition
of average interest-earning assets towards a higher percentage of highly
liquid, lower-yielding federal funds sold, securities purchased under agreement
to resell and investment securities. This shift in the composition of average
interest-earning assets resulted from the aforementioned deposit growth having
exceeded the growth in loans.
Total interest expense for the first nine months of 1997 increased $11.4
million from the first nine months of 1996. This increase was due to an
unfavorable volume variance of $11.0 million and an unfavorable rate variance
of $0.3 million. The unfavorable volume variance resulted from a $343.4
million, or 36.0%, increase in average interest-bearing liabilities for the
first nine months of 1997 over the comparable prior year period. The growth in
average interest-bearing liabilities was largely concentrated in the Company's
bonus money market deposit product, which increased $272.6 million, or 48.5%,
and was explained by high levels of client liquidity attributable to a strong
inflow of investment capital into the venture capital community and into the
public equity markets during 1996 and 1997. The $0.3 million unfavorable rate
variance was largely attributable to a shift in the composition of average
interest-bearing liabilities towards a higher percentage of deposits in the
bonus money market deposit product.
PROVISION FOR LOAN LOSSES
The provision for loan losses is based on Management's evaluation of the
adequacy of the existing allowance for loan losses in relation to total
loans, and on Management's periodic assessment of the inherent and identified
risk dynamics of the loan portfolio resulting from reviews of selected
individual loans and loan commitments.
The Company's provision for loan losses totaled $1.7 million for the third
quarter of 1997, a $1.2 million, or 42.1%, decrease compared to the $3.0
million provision for the third quarter of 1996. The provision for loan
losses increased $1.1 million, or 17.3%, to a total of $7.7 million for the
first nine months of 1997, versus $6.6 million for the comparable 1996
period. See "Financial Condition - Credit Quality and the Allowance for Loan
Losses" for additional related discussion.
18
NONINTEREST INCOME
The following table summarizes the components of noninterest income for the
three and nine month periods ended September 30, 1997 and 1996:
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
------------------ -----------------
(Dollars in thousands) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------
Disposition of client warrants $ 708 $ 618 $ 4,953 $2,880
Letter of credit and foreign exchange income 1,159 759 3,249 2,493
Deposit service charges 588 359 1,360 1,200
Investment gains 33 - 78 1
Other 318 277 973 825
- --------------------------------------------------------------------------------------
Total noninterest income $2,806 $2,013 $10,613 $7,399
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Noninterest income increased $0.8 million, or 39.4%, to a total of $2.8 million
in the third quarter of 1997 versus $2.0 million in the prior year third
quarter. The increase in noninterest income was largely due to both a $0.4
million increase in letter of credit fees, foreign exchange fees and other
trade finance income and a $0.2 million increase in deposit service charges.
Noninterest income totaled $10.6 million for the first nine months of 1997, an
increase of $3.2 million, or 43.4%, from the $7.4 million total in the
comparable prior year period. This increase was largely explained by a $2.1
million increase in income from the disposition of client warrants and a $0.8
million increase in letter of credit fees, foreign exchange fees and other
trade finance income.
Income from the disposition of client warrants totaled $0.7 million in the
third quarter of 1997 and $5.0 million for the first nine months of 1997 versus
$0.6 million and $2.9 million for the respective 1996 periods. The Company has
historically obtained rights to acquire stock (in the form of warrants) in
certain clients as part of negotiated credit facilities. The receipt of
warrants does not change the loan covenants or other collateral control
techniques employed by the Company to mitigate the risk of a loan becoming
nonperforming. Interest rates, loan fees and collateral requirements on loans
with warrants are similar to lending arrangements where warrants are not
obtained. The timing and amount of income from the disposition of client
warrants typically depends upon factors beyond the control of the Company,
including the general condition of the public equity markets, and therefore
cannot be predicted with any degree of accuracy and is likely to vary
materially from period to period. During the first nine months of 1997, as well
as throughout 1996, a significant portion of the income realized by the Company
from the disposition of client warrants was offset by expenses related to the
Company's efforts to build an infrastructure sufficient to support present and
prospective business activities, as well as evaluate and pursue new business
opportunities, and was also offset by the need to increase the provision for
loan losses during those periods. As opportunities present themselves in
future periods, the Company may continue to reinvest some or all of the income
realized from the disposition of client warrants in furthering the execution of
its business strategies.
Letter of credit fees, foreign exchange fees and other trade finance income
increased to a total of $1.2 million during the 1997 third quarter, and totaled
$3.2 million for the first nine months of 1997, compared to $0.8 million for
the 1996 third quarter and $2.5 million for the first nine months of 1996. The
growth in this category of noninterest income reflects a concerted effort by
Management to expand the penetration of trade finance-related products and
services among the
19
Company's client base, a large percentage of which provide
products and services in international markets.
Deposit service charges totaled $0.6 million and $1.4 million for the three and
nine month periods ended September 30, 1997, respectively, and $0.4 million and
$1.2 million for the three and nine month periods ended September 30, 1996,
respectively. Clients compensate the Company for depository services either
through earnings credits computed on their demand deposit balances, or via
explicit payments recognized by the Company as deposit service charges income.
The Company realized a nominal gain on sales of investment securities for the
three month period ended September 30, 1997 and realized a $0.1 million gain
through such sales during the first nine months of 1997. The Company reported
no gains or losses on sales of investment securities in the third quarter of
1996 and realized a nominal gain on sales of investment securities during the
first nine months of 1996. All investment securities sold were classified as
available-for-sale, and all sales were conducted as a normal component of the
Company's asset/liability and liquidity management activities.
Other noninterest income, which largely consists of service-based fee income,
totaled $0.3 million and $1.0 million for the three and nine month periods
ended September 30, 1997, compared to $0.3 million and $0.8 million for the
respective prior year periods. The increase during 1997 was primarily due to
increased fees associated with cash management services provided to the
Company's client base.
20
NONINTEREST EXPENSE
Noninterest expense in the third quarter of 1997 totaled $17.6 million, a
$4.4 million, or 33.4%, increase from the $13.2 million incurred in the
comparable 1996 period. Noninterest expense totaled $48.0 million for the
first nine months of 1997, an increase of $9.1 million, or 23.3%, over the
$39.0 million total for the comparable 1996 period. Management closely
monitors the level of noninterest expense using a variety of financial
ratios, including the efficiency ratio. The efficiency ratio is calculated by
dividing the amount of noninterest expense, excluding costs associated with
other real estate owned, by adjusted revenues, defined as the total of net
interest income and noninterest income, excluding income from the disposition
of client warrants and gains or losses related to sales of investment
securities. This ratio reflects the level of operating expense required to
generate $1 of operating revenue. The Company's efficiency ratio for the 1997
third quarter was 56.5% versus 54.2% for the third quarter of 1996. The
Company's efficiency ratio was 56.1% for the first nine months of 1997, down
slightly from 56.3% for the comparable 1996 period. The following tables
present the detail of noninterest expense and the incremental contribution of
each line item to the Company's efficiency ratio.
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1997 1996
(UNAUDITED) (UNAUDITED)
---------------------------------------
Percent of Percent of
Adjusted Adjusted
(DOLLARS IN THOUSANDS) Amount Revenues Amount Revenues
- -----------------------------------------------------------------------
Compensation and benefits $10,625 34.1% $ 7,914 32.5%
Professional services 1,958 6.3 1,329 5.5
Business development and travel 1,077 3.5 683 2.8
Furniture and equipment 1,178 3.8 859 3.5
Net occupancy expense 840 2.7 706 2.9
Postage and supplies 420 1.3 359 1.5
Advertising and promotion 354 1.1 437 1.8
Telephone 370 1.2 355 1.5
Other 766 2.5 546 2.2
- --------------------------------------------------------------------
Total, excluding cost of other
real estate owned 17,588 56.5% 13,188 54.2%
Cost of other real estate owned 30 19
- --------------------------------------------------------------------
Total noninterest expense $17,618 $13,207
- --------------------------------------------------------------------
21
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1997 1996
(UNAUDITED) (UNAUDITED)
---------------------------------------
Percent of Percent of
Adjusted Adjusted
(DOLLARS IN THOUSANDS) Amount Revenues Amount Revenues
- -----------------------------------------------------------------------
Compensation and benefits $29,100 34.0% $23,259 33.9%
Professional services 5,088 5.9 3,538 5.2
Business development and travel 3,063 3.6 1,961 2.9
Furniture and equipment 2,602 3.0 2,452 3.6
Net occupancy expense 2,493 2.9 2,329 3.4
Postage and supplies 1,122 1.3 1,108 1.6
Advertising and promotion 1,082 1.3 1,067 1.6
Telephone 1,004 1.2 956 1.4
Other 2,429 2.8 1,939 2.8
- --------------------------------------------------------------------
Total, excluding cost of other
real estate owned 47,983 56.1% 38,609 56.3%
Cost of other real estate owned 56 345
- --------------------------------------------------------------------
Total noninterest expense $48,039 $38,954
- --------------------------------------------------------------------
Compensation and benefits expenses totaled $10.6 million in the third quarter
of 1997, a $2.7 million, or 34.3%, increase over the $7.9 million incurred in
the third quarter of 1996. For the first nine months of 1997, compensation
and benefits expenses totaled $29.1 million, an increase of $5.8 million, or
25.1%, over the $23.3 million total for the comparable 1996 period. The 1997
increase in compensation and benefits expenses was largely the result of an
increase in the number of average full-time equivalent (FTE) staff employed
by the Company. Average FTE were 428 and 407 for the three and nine month
periods ended September 30, 1997, compared to 369 and 358 for the respective
prior year periods. The increase in FTE was primarily due to a combination of
the Company's efforts: to develop and support new markets through geographic
expansion, to develop and expand products and niches, and to build an
infrastructure sufficient to support present and prospective business
activities. Further growth in the Company's FTE is likely to occur during
future years as a result of the continued expansion of the Company's business
activities.
During the third quarter of 1997, the Company granted a total of 103,000 shares
of its common stock to numerous employees, subject to certain vesting
requirements and resale restrictions (restricted stock). For these restricted
stock grants, unearned compensation equivalent to the $5.8 million market value
of the common stock on the date of grant was charged to shareholders' equity
and will subsequently be amortized into compensation and benefits expense over
the four-year vesting period.
Professional services expenses, which consist of costs associated with legal
consultation, accounting and auditing, consulting, and the Company's board of
directors, totaled $2.0 million in the third quarter of 1997, a $0.6 million,
or 47.3%, increase from the $1.3 million incurred in the third quarter of 1996.
Professional services expenses totaled $5.1 million for the first nine months
of 1997, an increase of $1.6 million, or 43.8%, versus the $3.5 million total
for the comparable 1996 period. The increase in professional services expenses
in 1997 primarily relates to both an increase in consulting fees associated
with several business initiatives and an increase in legal fees related to
credit workouts.
22
Business development and travel expenses totaled $1.1 million and $3.1 million
for the three and nine month periods ended September 30, 1997, an increase of
$0.4 million, or 57.7%, and $1.1 million, or 56.2%, compared to the $0.7
million and 2.0 million totals for the comparable 1996 periods. The increase in
business development and travel expenses in 1997 was largely attributable to a
combination of the Company's expansion during recent quarters into new
geographic markets and increased business development efforts in all aspects of
the Company's business activities.
Net occupancy, furniture and equipment expenses totaled $2.0 million for the
third quarter of 1997 versus $1.6 million for the third quarter of 1996 and
$5.1 million versus $4.8 million for the first nine months of 1997 and 1996,
respectively. The increase in net occupancy, furniture and equipment expenses
in 1997 was primarily the result of investments in computer equipment and
software associated with technology upgrades and the Company's aforementioned
growth in personnel. In July 1997, the Bank finalized an amendment to the
original lease associated with the Company's headquarters facility located at
3003 Tasman Drive in Santa Clara, California. The amendment provides for the
leasing of additional premises, approximating 56,000 square feet, adjacent to
the existing headquarters facility. Construction of the interior of the
building is projected to begin shortly after the later of December 1, 1997 or
the date that the current tenant vacates the premises. Assuming a build-out
period of four to six months beginning January 1, 1998, the Bank could begin
occupying the additional premises between May 1998 and July 1998, with
additional future minimum rental payments of approximately $0.8 million for
1998, $1.1 million per year for 1999 through 2001, $1.2 million per year for
2002 through 2003, $1.3 million in the year 2004, and $0.6 million in the year
2005. The Company expects to incur other occupancy, furniture and equipment
expenses in future periods associated with the construction, furnishing and
maintenance of the additional premises, in addition to future minimum rental
payments detailed above.
Other noninterest expenses totaled $0.8 million in the third quarter of 1997, a
$0.2 million, or 40.3%, increase over the $0.5 million incurred in the third
quarter of 1996. For the first nine months of 1997, other noninterest expenses
increased $0.5 million, or 25.3%, to a total of $2.4 million compared to $1.9
million for the first nine months of 1996. These increases were largely due to
both the timing of reimbursements related to client services and an increase in
costs associated with certain vendor provided services.
The Company incurred minimal costs during the third quarters of 1997 and 1996
associated with other real estate owned (OREO). For the first nine months of
1997, OREO costs incurred decreased $0.3 million from the first nine months of
1996. The decrease in OREO costs in 1997 was primarily due to the write-down in
the first quarter of 1996 of one property owned by the Company, partially
offset by a gain realized in the second quarter of 1996 on the sale of one
property. The Company's net costs associated with OREO include: maintenance
expenses, property taxes, marketing costs, net operating expense or income
associated with income-producing properties, property write-downs, and gains or
losses on the sales of such properties.
INCOME TAXES
The Company's effective tax rate was 42.0% in both the three and nine month
periods ended September 30, 1997, compared to 40.0% in the comparable prior
year periods. The increase in the Company's effective income tax rate was
attributable to adjustments in the Company's estimate of its tax liabilities.
23
FINANCIAL CONDITION
The Company's total assets were $2.4 billion at September 30, 1997 compared
to $1.9 billion at December 31, 1996.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell totaled
$386.3 million at September 30, 1997, an increase of $75.9 million, or 24.5%,
compared to the $310.3 million total at December 31, 1996. The increase was
attributable to the Company investing excess funds, resulting from the
aforementioned strong growth in deposits during the first nine months of
1997, in these types of short-term, liquid investments.
INVESTMENT SECURITIES
Investment securities totaled $837.4 million at September 30, 1997. This
represented a $212.4 million, or 34.0%, increase over the December 31, 1996
balance of $625.0 million. The increase in investment securities was related
to strong growth in the Company's deposits during the first nine months of
1997, and primarily consisted of U.S. Treasury securities, U.S. agency
securities, mortgage-backed securities, and municipal securities, partially
offset by a decrease in commercial paper. This growth reflected a
continuation of Management's recent actions to increase the portfolio of
longer-term investment securities in an effort to obtain available higher
yields, as well as to further diversify the Company's portfolio of short-term
investments in response to a significant increase in liquidity.
LOANS
Total loans, net of unearned income, at September 30, 1997 were in excess of
$1.0 billion, a $173.8 million, or 20.1%, increase compared to the roughly
$0.9 billion total at December 31, 1996. The increase in loans from the 1996
year-end total was widely distributed throughout the loan portfolio. This
diversified growth was evidenced by increased quarter-end loan balances in
many of the Company's market niches, products and loan offices.
CREDIT QUALITY AND THE ALLOWANCE FOR LOAN LOSSES
Credit risk is defined as the possibility of sustaining a loss because other
parties to the financial instrument fail to perform in accordance with the
terms of the contract. While the Bank follows underwriting and credit
monitoring procedures which it believes are appropriate in growing and
managing the loan portfolio, in the event of nonperformance by these other
parties, the Bank's potential exposure to credit losses could significantly
affect the Company's consolidated financial position, earnings and growth.
Lending money involves an inherent risk of nonpayment. Through the
administration of loan policies and monitoring of the portfolio, Management
seeks to reduce such risks. The allowance for loan losses is an estimate to
provide a financial buffer for losses, both identified and unidentified, in
the loan portfolio.
Management regularly reviews and monitors the loan portfolio to determine the
risk profile of each credit, and to identify credits whose risk profiles have
changed. This review includes, but is not limited to, such factors as payment
status, the financial condition of the borrower, borrower
24
compliance with loan covenants, underlying collateral values, potential loan
concentrations, and general economic conditions. Potential problem credits
are identified and, based upon known information, action plans are developed.
The allowance for loan losses totaled $38.6 million at September 30, 1997, an
increase of $5.9 million, or 18.0%, compared to the $32.7 million balance at
December 31, 1996. This increase was due to $7.7 million in additional
provisions to the allowance for loan losses, offset by net charge-offs of
$1.8 million for the first nine months of 1997. Gross charge-offs for the
first nine months of 1997 were $4.9 million and included charge-offs totaling
$2.6 million related to two credits.
In general, Management believes the allowance for loan losses is adequate as
of September 30, 1997. However, future changes in circumstances, economic
conditions or other factors could cause Management to increase or decrease
the allowance for loan losses as deemed necessary.
Nonperforming assets consist of loans that are past due 90 days or more but
still accruing interest, loans on nonaccrual status and OREO. The table below
sets forth certain relationships between nonperforming loans, nonperforming
assets and the allowance for loan losses:
September 30, December 31,
1997 1996
(DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
- ------------------------------------------------------------------------
Nonperforming assets:
Loans past due 90 days or more $ 530 $ 8,556
Nonaccrual loans 23,293 14,581
- ---------------------------------------------------------------------
Total nonperforming loans 23,823 23,137
OREO and other foreclosed assets 1,969 1,948
- ---------------------------------------------------------------------
Total nonperforming assets $25,792 $25,085
- ---------------------------------------------------------------------
Nonperforming loans as a percentage of
total loans 2.3% 2.7%
OREO and other foreclosed assets as a
percentage of total assets 0.1% 0.1%
Nonperforming assets as a percentage
of total assets 1.1% 1.3%
Allowance for loan losses: $38,600 $32,700
As a percentage of total loans 3.7% 3.8%
As a percentage of nonaccrual loans 165.7% 224.3%
As a percentage of nonperforming loans 162.0% 141.3%
Nonperforming loans totaled $23.8 million, or 2.3% of total loans, at
September 30, 1997, compared to $23.1 million, or 2.7% of total loans, at
December 31, 1996. Total nonperforming loans as of September 30, 1997
increased $8.6 million, or 56.2%, from the June 30, 1997 total of $15.3
million. This increase from the prior quarter-end was primarily due to two
credits, totaling approximately $12.4 million, being placed on nonaccrual
status during the third quarter of 1997, partially offset by paydowns and
payoffs on other nonaccrual loans.
In addition to the loans disclosed in the foregoing analysis, Management has
identified six loans with principal amounts aggregating approximately $15.2
million, that, on the basis of information known by Management as of
September 30, 1997, were judged to have a higher than normal risk
25
of becoming nonperforming. The Company is not aware of any other loans at
September 30, 1997 where known information about possible problems of the
borrower casts serious doubts about the ability of the borrower to comply
with the loan repayment terms.
OREO and other foreclosed assets totaled $2.0 million and $1.9 million at
September 30, 1997 and December 31, 1996, respectively. The OREO and other
foreclosed assets balance at September 30, 1997 consisted of two OREO
properties and one other foreclosed asset. The OREO properties each consist
of multiple undeveloped lots and were acquired prior to June 1993. The OREO
balance decreased $1.1 million during the first nine months of 1997 to a
total of $0.8 million at September 30, 1997, resulting from sales of lots
related to one of the aforementioned properties. The other foreclosed asset,
which totaled $1.2 million at September 30, 1997, consisted of a favorable
leasehold right under a master lease that the Bank acquired upon foreclosure
of a loan during the third quarter of 1997.
DEPOSITS
Total deposits were $2.2 billion at September 30, 1997, an increase of $453.9
million, or 25.6%, from the prior year-end total of $1.8 billion. Although
each category of the Company's deposit portfolio experienced growth during
the first nine months of 1997, the largest portion of this increase was in
the Company's bonus money market deposit product, which increased $304.4
million, or 40.3%, to $1.1 billion at September 30, 1997. The increase in the
Company's bonus money market deposit product was explained by high levels of
client liquidity attributable to a strong inflow of investment capital into
the venture capital community and into the public equity markets during 1996
and 1997.
LIQUIDITY
The objective of liquidity management is to ensure that funds are available
in a timely manner to meet loan demand and depositors' needs, and to service
other liabilities as they come due, without causing an undue amount of cost
or risk, and without causing a disruption to normal operating conditions.
The Company regularly assesses the amount and likelihood of projected funding
requirements through a review of factors such as historical deposit
volatility and funding patterns, present and forecasted market and economic
conditions, individual client funding needs, and existing and planned Company
business activities. The asset/liability committee of the Bank provides
oversight to the liquidity management process and recommends policy
guidelines, subject to Board of Directors approval, and courses of action to
address the Company's actual and projected liquidity needs.
The ability to attract a stable, low-cost base of deposits is the Company's
primary source of liquidity. Other sources of liquidity available to the
Company include short-term borrowings, which consist of federal funds
purchased, security repurchase agreements and other short-term borrowing
arrangements. The Company's liquidity requirements can also be met through
the use of its portfolio of liquid assets. Liquid assets, as defined, include
cash and cash equivalents in excess of the minimum levels necessary to carry
out normal business operations, federal funds sold, securities purchased
under resale agreements, investment securities maturing within six months,
investment securities eligible and available for pledging purposes with a
maturity in excess of six months, and anticipated near term cash flows from
investments.
26
Company policy guidelines provide that liquid assets as a percentage of total
deposits should not fall below 20.0%. At September 30, 1997, the Company's
liquid assets as a percentage of total deposits were 51.4%, compared to 47.3%
at December 31, 1996. The increase in this ratio since year-end 1996 was
largely due to increased balances in short-term, liquid investment securities
as a result of the aforementioned strong growth in deposits during the first
nine months of 1997.
CAPITAL RESOURCES
Management seeks to maintain adequate capital to support anticipated asset
growth and credit risks, and to ensure that the Company is in compliance with
all regulatory capital guidelines. The primary source of new capital for the
Company has been the retention of earnings. Aside from current earnings, an
additional source of new capital for the Company has been the issuance of
common stock under the Company's employee benefit plans, including the
Company's stock option plans, employee stock ownership plan and employee
stock purchase plan.
Shareholders' equity totaled $162.3 million at September 30, 1997, an
increase of $26.9 million from the $135.4 million balance at December 31,
1996. This increase resulted from net income of $20.2 million combined with
capital generated through the Company's employee benefit plans of $7.1
million, offset by a decrease in the after-tax net unrealized gain on
available-for-sale investments of $0.5 million from the prior year end.
The Company is subject to capital adequacy guidelines issued by the Federal
Reserve Board. Under these capital guidelines, the minimum total risk-based
capital and Tier 1 risk-based capital ratio requirements are 10.0% and 6.0%,
respectively, of risk-weighted assets and certain off-balance sheet items for
a "well capitalized" depository institution.
The Federal Reserve Board has also established minimum capital leverage ratio
guidelines for state member banks. The ratio is determined using Tier 1
capital divided by quarterly average total assets. The guidelines require a
minimum of 5.0% for a well capitalized depository institution.
The Company's risk-based capital ratios were in excess of regulatory
guidelines for a well capitalized depository institution as of September 30,
1997 and December 31, 1996. Capital ratios for the Company are set forth
below:
- ---------------------------------------------------------------------------
September 30, December 31,
1997 1996
(UNAUDITED)
- ---------------------------------------------------------------------------
Total risk-based capital ratio 12.2% 11.5%
Tier 1 risk-based capital ratio 10.9% 10.2%
Tier 1 leverage ratio 7.2% 7.7%
- ---------------------------------------------------------------------------
The improvement in the Company's total risk-based capital ratio and Tier 1
risk-based capital ratio from December 31, 1996 to September 30, 1997 was
attributable to an increase in Tier 1 capital, partially offset by an
increase in the lower risk-weighted asset categories primarily due to
increased balances in short-term, liquid investment securities resulting from
deposit growth exceeding loan growth during the first nine months of 1997.
The increase in Tier 1 capital was largely due to the aforementioned net
income and capital generated through the Company's employee benefit plans
during the first nine months of 1997. The decrease in the Company's Tier
27
1 leverage ratio from December 31, 1996 to September 30, 1997 primarily
resulted from an increase in average total assets due to the aforementioned
strong growth in deposits during the first nine months of 1997.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item
pending at September 30, 1997, or at the date of this report.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
3.2 Bylaws of the Company, amendment and restatement effective as
of August 21, 1997
10.35 Silicon Valley Bancshares 1988
Employee Stock Purchase Plan Effective June 22, 1988, revised
October 17, 1997
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1997.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SILICON VALLEY BANCSHARES
Date: November 13, 1997 /s/ Christopher T. Lutes
------------------------------------
Christopher T. Lutes
Senior Vice President and Controller
(Principal Accounting Officer)
29