<PAGE>
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
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)
2232 North First Street 95131
San Jose, California (Zip Code)
(Address of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
At April 30, 1995, 8,660,523 shares of the registrant's Common Stock
(no par value) were outstanding.
- - --------------------------------------------------------------------------------
This Report Contains a Total of 20 Pages
<PAGE>
SILICON VALLEY BANCSHARES
FORM 10-Q
MARCH 31, 1995
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 SILICON VALLEY BANCSHARES AND SUBSIDIARIES
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 9
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 19
ITEM 2 CHANGES IN SECURITIES 19
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 19
ITEM 5 OTHER INFORMATION 19
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1
SILICON VALLEY BANCSHARES
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
- - ---------------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
1995 1994 1994
(DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Cash and Due from Banks $ 153,527 $ 139,792 $ 88,086
Federal Funds Sold and Interest-Bearing
Deposits in Other Banks 105,062 150,057 80,039
Investment Securities:
At Fair Value 148,390 148,703 248,248
At Cost (Note 3) 7,169 7,786 8,506
Loans, Net of Unearned Income 696,602 703,809 557,681
Allowance for Loan Losses 21,500 20,000 25,000
- - ---------------------------------------------------------------------------------------------------------
Net Loans 675,102 683,809 532,681
Bank Premises and Equipment 2,437 2,221 2,760
Other Real Estate Owned 5,952 7,089 11,365
Accrued Interest Receivable and Other Assets 21,708 22,082 19,075
- - ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,119,347 $1,161,539 $990,760
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-Bearing Demand Deposits $ 378,594 $ 401,455 $344,948
Money Market, NOW and Savings Deposits 579,263 585,171 502,047
Time Deposits 65,788 88,747 64,827
- - ---------------------------------------------------------------------------------------------------------
Total Deposits 1,023,645 1,075,373 911,821
Other Liabilities 11,722 8,910 7,179
- - ---------------------------------------------------------------------------------------------------------
Total Liabilities 1,035,367 1,084,282 919,001
- - ---------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Common Stock, No Par Value: 55,600 54,068 52,636
30,000,000 Shares Authorized;
8,639,858 Shares Outstanding at March 31, 1995;
8,509,194 Shares Outstanding at December 31, 1994;
8,351,582 Shares Outstanding at March 31, 1994.
Retained Earnings 30,983 27,702 20,370
Net Unrealized Loss on Available-for-Sale Investments (2,169) (4,159) (758)
Unearned Compensation (436) (355) (488)
- - ---------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 83,979 77,257 71,760
- - ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,119,347 $1,161,539 $990,760
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
CONDENSED INCOME STATEMENTS
- - ---------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, March 31,
1995 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED)
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Loans, including Fees $20,179 $13,211
Investment Securities:
Taxable 2,232 2,915
Non-Taxable 122 139
Other 1,476 688
- - ---------------------------------------------------------------------------------------------------------
Total Interest Income 24,008 16,954
INTEREST EXPENSE:
Deposits 5,843 3,222
Other Borrowings -- --
- - ---------------------------------------------------------------------------------------------------------
Total Interest Expense 5,843 3,222
- - ---------------------------------------------------------------------------------------------------------
Net Interest Income 18,165 13,732
Provision for Loan Losses 1,355 637
- - ---------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 16,810 13,095
NON-INTEREST INCOME:
Disposition of Client Warrants 225 1,088
Deposit Service Charges 351 305
Letter of Credit and Foreign Exchange Income 705 467
Investment Gains (Losses) (422) --
Other 118 134
- - ---------------------------------------------------------------------------------------------------------
Total Non-Interest Income 977 1,994
NON-INTEREST EXPENSE:
Compensation and Benefits 7,090 6,213
Professional Services 1,116 1,470
Occupancy/Furniture and Equipment 1,462 914
FDIC Deposit Insurance 598 609
Cost of Other Real Estate Owned (5) 1,232
Other 1,807 1,603
- - ---------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 12,068 12,041
- - ---------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 5,719 3,048
INCOME TAX EXPENSE 2,439 1,314
- - ---------------------------------------------------------------------------------------------------------
NET INCOME $ 3,280 $ 1,734
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ 0.37 $ 0.21
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
- - ---------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
------------------------------
1995 1994
(DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS WERE PROVIDED BY (APPLIED TO):
OPERATIONS:
Net Income (Loss) $ 3,280 $ 1,734
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided by Operations:
Provision for Loan Losses 1,355 637
(Increase) Decrease in Value of Other Real Estate Owned (53) 745
Depreciation and Amortization 520 237
Deferred Income Tax Expense -- --
(Increase) Decrease in Accrued Interest Receivable (53) (126)
Increase (Decrease) in Accrued Interest Payable (55) 23
Increase (Decrease) in Deferred Loan Fees (421) (59)
Net (Gain) Loss on Sale of Investment Securities 422 --
Other, Net 2,595 367
- - ---------------------------------------------------------------------------------------------------------
Net Cash Provided by (Applied to) Operations 7,590 3,558
- - ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from Maturities & Sales of Investment Securities 31,300 108,520
Purchases of Investment Securities (27,132) (104,468)
Net (Increase) Decrease in Loans 6,805 2,914
Proceeds from Sale of Other Real Estate Owned 1,189 5,829
Capital Asset Expenditures (736) (539)
- - ---------------------------------------------------------------------------------------------------------
Net Cash Provided by (Applied to) Investment Activities 11,426 12,256
- - ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net Increase (Decrease) in Deposits (51,727) (3,102)
Proceeds from Sale of Common Stock, Net of Issuance Costs 1,451 437
- - ---------------------------------------------------------------------------------------------------------
Net Cash Provided by (Applied to) Financing Activities (50,276) (2,665)
- - ---------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (31,260) 13,149
Cash and Cash Equivalents at December 31, 289,849 154,976
- - ---------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at March 31, $258,589 $ 168,125
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
OTHER CASH FLOW INFORMATION:
Interest Paid $ 5,898 $ 3,199
Income Taxes Paid $ 90 $ 560
- - ---------------------------------------------------------------------------------------------------------
NON-CASH FINANCING AND INVESTING ACTIVITIES
Transfer of Loans to Other Real Estate Owned -- $ 748
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accounting and financial reporting policies of Silicon Valley
Bancshares (the Company) and its subsidiaries conform with generally
accepted accounting principles and prevailing practices within the banking
industry.
The unaudited interim consolidated financial statements include the
accounts of the Company and those of its wholly owned subsidiaries, Silicon
Valley Bank (the Bank) and SVB Leasing Company (inactive). The revenue,
expenses, assets, and liabilities of the subsidiaries are included in the
respective line items in the unaudited interim consolidated financial
statements after elimination of intercompany accounts and transactions.
In the opinion of Management, the unaudited interim consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the Company's consolidated
financial position at March 31, 1995, December 31, 1994, and March 31,
1994, and the results of its operations and cash flows for the three month
periods ending March 31, 1995 and March 31, 1994.
Certain information and footnote disclosures normally presented in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. These unaudited interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's 1994 Annual Report to Shareholders. The results of operations
for the three month period ending March 31, 1995 may not necessarily be
indicative of the operating results for the full year.
Certain reclassifications have been made to the Company's 1994 consolidated
financial statements to conform to the 1995 presentations. Such
reclassifications had no effect on the results of operations or on
shareholders' equity.
Amounts presented in tables throughout this report have been rounded to the
nearest thousand. Totals or subtotals may appear to differ slightly due to
the effects of rounding.
2. NET INCOME PER SHARE COMPUTATION
Net income per common and common equivalent share is calculated using
weighted average shares, adjusted for the dilutive effect of stock options
outstanding during the period, totaling: 8,836,953 for the quarter ended
March 31, 1995, and 8,444,728 for the quarter ended March 31, 1994.
6
<PAGE>
3. INVESTMENT SECURITIES
The fair market value of investment securities classified as "held-to-
maturity" was $7,500 at March 31, 1995, $8,050 at December 31, 1994, and
$8,989 at March 31, 1994.
4. NEW ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." This standard, including its amendment by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures," was adopted by the Company on January 1,
1995. SFAS No. 114 requires the Company to measure impairment of a loan
based upon the present value of expected future cash flows discounted at
the loan's effective interest rate, except that as a practical expedient, a
creditor may measure impairment based on a loan's observable market price
or the fair value of the collateral if the loan is collateral-dependent. A
loan is considered impaired when, based upon current information and
events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement.
At the time of adoption, certain insubstance foreclosure loans previously
classified as other real estate owned were reclassified to nonaccrual
loans. The amount of loans reclassified to conform with this new
accounting standard was $10.9 million at March 31, 1994 and $1.4 million at
December 31, 1994.
The aggregate recorded investment in loans for which impairment has been
recognized in accordance with SFAS No. 114 totaled $14.6 million at March
31, 1995. Average impaired loans for the quarter ended March 31, 1995 were
$13.9 million. General and specific allocations in the allowance for loan
losses related to impaired loans totaled $4.2 million at March 31, 1995.
The activity in the allowance for loan losses for the three month periods
ended March 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
-------------------------------------------------------
<S> <C> <C>
Balance January 1, $20,000 $25,000
Provision from Operations 1,355 637
Charge-offs (823) (1,904)
Recoveries 968 1,267
-------------------------------------------------------
Balance March 31, $21,500 $25,000
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
Loans are placed on nonaccural status when they become 90 days past due as
to principal or interest payments, or otherwise become impaired under the
provisions of SFAS No. 114. When a loan is placed on nonaccrual status,
the accrued interest receivable is reversed and the loan is accounted for
on the cash or cost recovery method thereafter. There was no interest
income recognized on impaired loans during the first quarter of 1995.
7
<PAGE>
5. REGULATORY MATTERS
During 1993, the Company and Bank consented to formal supervisory orders by
the Federal Reserve Bank of San Francisco and the Bank consented to a
formal supervisory order by the California State Banking Department.
These orders require, 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 Banks' loan policy requiring the Directors'
Loan Committee to approve all loans to any one borrower exceeding $3
million and requiring the directors to become more actively involved in
loan portfolio management and monitoring activities;
review of, and changes in, the Bank's loan policy 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 policy and procedures; development of
Board 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; review and evaluation of
existing compensation practices and development of officer compensation
policies and procedures by the Board of Directors of the Company and Bank;
changes in fees paid to directors and bonuses paid to executive officers
receive regulatory approval; and development of a detailed internal audit
plan for approval by the Board of Directors of the Bank. The State Banking
Department order further requires the Bank to maintain a tangible equity-
to-assets ratio of 6.5%.
In addition, such plans, policies, and procedures may not be amended
without prior regulatory approval. The Company and the Bank have taken
steps to address these requirements. The Company believes compliance with
these actions has not and will not have a material adverse impact on the
business of the Bank, its clients, or the Company. The Company and the
Bank were in substantial compliance with such orders at March 31, 1995.
8
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Silicon Valley Bancshares (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 Oregon and Massachusetts. The Bank focuses on specific segments
within each of its selected markets, including a variety of high technology,
life science, and other emerging growth industries. Substantially all assets,
liabilities, and earnings of the Company relate to its investment in the Bank.
Early in 1995, the Bank received regulatory approval to relocate its corporate
headquarters and main branch to a new 100,000 square foot facility in Santa
Clara. Concurrent with this move, the Bank will close its existing offices in
San Jose and consolidate them with the nearby headquarters office.
Additionally, the Bank received regulatory approval in early 1995 to open a loan
production office in San Diego, California.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
The Company reported net income of $3.3 million, or $0.37 per share, for the
first quarter of 1995. This represented an increase in net income of $1.5
million, or $0.16 per share, when compared with net income of $1.7 million, or
$0.21 per share, for the first quarter of 1994. The increase in the first
quarter 1995 net income as compared with the first quarter of 1994 was primarily
due to significant loan and deposit growth during the past year, coupled with a
higher net interest margin and a substantial reduction in nonperforming assets.
The Company's performance resulted in an annualized return on average assets of
1.2% for the first quarter of 1995, and up from the 0.7% return on average
assets for the first quarter of 1994. The annualized return on average
shareholders' equity continued to increase, up to 16.3% for the first quarter of
1995, from 9.5% for the first quarter of 1994.
NET INTEREST INCOME AND MARGIN
Net interest income is the principal source of revenue for the Company. It
represents the difference between interest earned on loans and investments and
interest paid on funding sources, primarily deposits.
9
<PAGE>
The following table sets forth average assets, liabilities, and shareholders'
equity, current period interest income and interest expense, average rates and
yields, and the composition of the net interest margin for the periods ending
March 31, 1995 and March 31, 1994:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES, RATES AND YIELDS
- - ------------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------------------
1995 1994
(UNAUDITED) (Unaudited)
- - ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE Average
AVERAGE YIELD/ Average Yield/
(Dollars in thousands) BALANCE INTEREST RATE Balance Interest Rate
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FUNDING USES:
Interest-Earning Assets:
Federal Funds Sold $ 104,228 $ 1,476 5.7% $ 89,060 $ 688 3.1%
Investment Securities:
Taxable 153,865 2,232 5.9 212,047 2,915 5.6
Non-Taxable (1) 7,384 187 10.3 8,407 214 10.3
Loans:
Commercial 614,353 17,958 11.9 454,582 11,391 10.2
Real Estate Construction and Term 70,362 1,753 10.1 65,080 1,300 8.1
Consumer and Other 18,192 468 10.4 26,230 520 8.0
- - -------------------------------------- ----------------------------------------- -----------------------------------------
Total Loans 702,907 20,179 11.6 545,892 13,211 9.8
- - -------------------------------------- ----------------------------------------- -----------------------------------------
Total Interest-Earning Assets $ 968,384 $24,073 10.1% $ 855,406 $17,029 8.1%
- - -------------------------------------- ----------------------------------------- -----------------------------------------
Cash and Due from Banks 120,434 122,825
Allowance for Loan Losses (21,564) (25,813)
Other Real Estate Owned 6,521 13,650
Accrued Interest Receivable and
Other Assets 19,363 13,034
- - -------------------------------------- ---------- ---------
TOTAL ASSETS $1,093,138 $ 979,103
- - -------------------------------------- ---------- ---------
- - -------------------------------------- ---------- ---------
FUNDING SOURCES:
Interest-Bearing Liabilities:
Money Market, NOW and
Savings Deposits $ 581,749 $ 5,275 3.7% $ 506,561 $ 2,802 2.2%
Time Deposits 68,201 568 3.4 69,164 420 2.5
Federal Funds Purchased -- -- -- -- -- --
- - -------------------------------------- ----------------------------------------- -----------------------------------------
Total Interest-Bearing Liabilities 649,950 5,843 3.6 575,726 3,222 2.3
Portion of Noninterest-Bearing
Funding Sources 318,434 279,681
- - -------------------------------------- ----------------------------------------- -----------------------------------------
Total Funding Sources $ 968,384 $ 5,843 2.4% $ 855,406 $ 3,222 1.5%
- - -------------------------------------- ----------------------------------------- -----------------------------------------
Noninterest-Bearing Funding Sources:
Noninterest-Bearing Demand Deposits 350,544 328,642
Noninterest-Bearing Funding Sources
Used to Fund Earning Assets (318,434) (279,681)
Other Liabilities 11,194 1,721
Shareholders' Equity 81,450 73,014
- - -------------------------------------- ---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $1,093,138 $ 979,103
- - -------------------------------------- ---------- ---------
- - -------------------------------------- ---------- ---------
NET INTEREST INCOME $18,230 $13,807
------- -------
------- -------
NET INTEREST MARGIN 7.6% 6.5%
--- ---
--- ---
MEMO: TOTAL DEPOSITS $1,000,494 $ 904,368
- - -------------------------------------- ---------- ---------
- - -------------------------------------- ---------- ---------
<FN>
(1) Interest income on non-taxable investments is presented on a fully taxable-
equivalent basis. The tax equivalent adjustments were $65 and $75 at
March 31, 1995 and 1994, respectively.
</TABLE>
10
<PAGE>
Net interest income on a fully taxable-equivalent basis was $18.2 million, up
$4.4 million, or 32%, from the $13.8 million earned in the first quarter of
1994. This increase resulted from growth in earning assets and a higher net
interest margin. The net interest margin for the quarter ended March 31, 1995
was 7.6%, compared to 6.5% for the first quarter of 1994. The increase in net
interest margin resulted from higher market interest rates, in combination with
the Company's interest rate repricing structure. It is Management's objective
to maintain a modestly asset-sensitive position (where interest-earning assets
reprice sooner than interest-bearing liabilities), so that the net interest
margin increases as market interest rates rise and decreases when rates decline.
It is likely that the net interest margin will stabilize or decline should
interest rates stabilize or decline in future periods.
Average loans increased 28.8%, or $157.0 million, to $702.9 million at March 31,
1995 from $545.9 million at March 31, 1994. This increase occurred primarily in
the commercial loan portfolio. Loan demand increased during the past four
quarters due to improving economic conditions and continued marketing efforts by
the Company. Another factor affecting the level of interest-earning assets and
interest income growth was an improvement in credit quality, as evidenced by the
decline in nonaccrual loans and other real estate owned (OREO).
The growth in average loans, higher interest rates, and improved credit quality
combined to increase interest and fee income on loans to $20.2 million for the
first quarter of 1995, up $7.0 million, or 52.7%, from $13.2 million for the
first quarter of 1994.
Average investment securities decreased to $155.5 million for the first quarter
of 1995 from the $220.6 million for the first quarter of 1994. The proceeds
from maturities and sales of the available-for-sale investment portfolio have
been used to fund a portion of the growth in loans.
Average total deposits increased to $1.0 billion during the first quarter of
1995, up $96.1 million, or 10.6%, from $904.4 million during the first quarter
of 1994. A significant portion of this growth occurred in money market
accounts, which increased $75.2 million to average $581.7 million for the first
quarter of 1995. Additionally, average demand deposits increased 6.7% from the
first quarter of 1994 to the first quarter of 1995. Demand deposits represented
35.0% of average total deposits for the first quarter of 1995 compared to 36.3%
of total deposits for the first quarter of 1994.
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 Management's continuous assessment of the inherent and identified risk
dynamics of the loan portfolio resulting from reviews of selected individual
loans and loan commitments.
The provision for loan losses was $1.4 million during the first quarter of 1995,
compared with $.6 million during the first quarter of 1994. The increase in the
first quarter provision in 1995 as compared with 1994 was attributable to the
growth of the loan portfolio. See "FINANCIAL CONDITION -- Credit Risk and the
Allowance for Loan Losses" for further discussion.
11
<PAGE>
NONINTEREST INCOME
Total noninterest income declined 51% to $1.0 million for the 1995 first
quarter, from $2.0 million in the 1994 first quarter. This decline was largely
due to a 79.3% reduction in the income related to the exercise of client
warrants from $1.1 million in the first quarter of 1994 to $0.2 million in the
first quarter of 1995.
The Company has historically obtained rights to acquire stock (in the form of
warrants) in some 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 Bank, and interest rates and loan fees
charged on such loans are similar to lending arrangements where warrants are not
available. Income from the disposition of warrants typically depends on factors
beyond the control of the Company, and therefore cannot be predicted and may
vary materially on a year-to-year basis.
Losses of $0.4 million on the sale of investment securities classified as
available-for-sale also contributed to the decline in first quarter noninterest
income, as there were no losses on investment securities recorded during the
first quarter of 1994. The sales of investment securities were conducted as a
normal component of the Company's interest rate risk and liquidity management
activities. Securities sold during the first quarter of 1995 totaled $14.5
million and were comprised primarily of mortgage-backed securities.
First quarter deposit service charges increased slightly, from $0.3 million in
1994 to $0.4 million in 1995. Letter of credit and foreign exchange income
increased 50.9% from $0.5 million in the first quarter of 1994 to $0.7 million
in the first quarter of 1995.
12
<PAGE>
NONINTEREST EXPENSE
Noninterest expense was level at $12.1 million and $12.0 million for the first
quarters of 1995 and 1994 respectively. However, the Company's efficiency ratio
improved substantially from 73.8% in the first quarter of 1994 to 62.4% in the
first quarter of 1995. The following table presents the detail of noninterest
expenses and the incremental contributions of each line item to the efficiency
ratio:
<TABLE>
<CAPTION>
Three Months Ended March 31,
- - -------------------------------------------------------------------------------
1995 1994
- - -------------------------------------------------------------------------------
Percent Percent
of Adjusted of Adjusted
Amount Revenues(1) Amount Revenues(1)
- - -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and Benefits $ 7,090 36.7% $ 6,213 42.4%
Professional Services 963 5.0 732 5.0
Corporate Legal Expenses and
Litigation 154 0.8 738 5.0
FDIC Deposit Insurance 598 3.1 609 4.2
Occupancy 932 4.8 524 3.6
Client Services 213 1.1 287 2.0
Furniture and Equipment 530 2.7 390 2.7
Data Processing Services 329 1.7 264 1.8
Other 1,265 6.5 1,053 7.2
------- --- ------- ---
Total Excluding Cost of OREO 12,073 10,809
Efficiency Ratio 62.4% 73.8%
---- ----
---- ----
Cost of OREO (5) 1,232
------- -------
Total Non-Interest Expense $12,068 $12,041
------- -------
------- -------
<FN>
(1) The efficiency ratio is calculated by dividing non-interest expense
(excluding cost of OREO) by adjusted revenues, defined as the sum of net
interest income and non-interest income (excluding warrant income and
gain/loss on sale of investment securities).
</TABLE>
Management monitors the level of noninterest expenses using a variety of
financial ratios. The efficiency ratio is calculated by dividing the amount of
noninterest expense (excluding costs associated with OREO) by adjusted revenues,
defined as the total of net interest income and noninterest income, excluding
warrant income and gains or losses from securities sales. This ratio reflects
the level of operating expense required to generate $1 of operating revenue.
Salaries and related employee benefit expenses increased $0.9 million, or 14.1%,
to $7.1 million at March 31, 1995 from $6.2 million at March 31, 1994. Average
full-time equivalent staff for the first quarter of 1995 was 323, compared with
295 for the first quarter of 1994. The growth in headcount year-over-year was
primarily due to expansion of the lending staff during 1994.
13
<PAGE>
Occupancy, furniture and equipment, and data processing expenses have all
increased as a result of the growth in personnel. During 1995, these expense
categories may be affected by $1.0 million to $2.0 million in non-recurring
costs related to the Company's move to new corporate headquarters and its
conversion to an in-house computer system.
As a result of the reduction in nonperforming assets throughout the past four
quarters, there was a $5,000 net recovery related to other real estate owned
(OREO) during the first quarter of 1995, compared with $1.2 million of expense
during the first quarter of 1994. The cost of OREO includes: maintenance
expenses, property taxes, marketing costs, net operating expense or (income) of
income-producing properties, write-downs, and losses or (gains) on the sale of
such properties. The total amount of OREO declined to $6.0 million at March 31,
1995, from $11.4 million at March 31, 1994.
INCOME TAXES
The Company's effective tax rate was 42.6% for the first quarter of 1995 and
43.1% for the first quarter of 1994. The Company's effective tax rate does not
differ significantly from the statutory rate structure, currently 35.0% for
Federal income taxes, and approximately 11.5% for California franchise taxes.
FINANCIAL CONDITION
Total assets were $1.1 billion at March 31, 1995, compared with $1.2 billion at
December 31, 1994, and $1.0 billion at March 31, 1994.
FEDERAL FUNDS SOLD AND INVESTMENT SECURITIES
Federal funds sold and interest-bearing deposits in other banks totaled $105.1
million at the end of the first quarter of 1995, compared with $150.1 million at
year-end 1994, and $80.0 million at the end of the first quarter of 1994.
Investment securities were $155.6 million at March 31, 1995, consistent with
$156.5 million at December 31, 1994, and lower than the $256.8 million in the
investment portfolio at March 31, 1994. The decrease in investment securities,
year to year, was primarily in response to the growth of the loan portfolio.
Investment securities (primarily mortgage-backed securities) with an amortized
cost of $14.5 million were sold during the first quarter of 1995, with an
associated loss on sale of investment securities of $0.4 million. All sales
were conducted as a normal component of the Company's interest rate risk and
liquidity management activities.
LOANS
As of March 31, 1995, total loans were $696.6 million, down 1.0% from the $703.8
million at year-end 1994, but up 24.9% from the $557.7 million at the end of the
first quarter of 1994. Loan growth over the past four quarters was concentrated
in the commercial loan portfolio. Commercial loans were $614.2 million and
accounted for 88.2% of the total loan portfolio at
14
<PAGE>
March 31, 1995. This represents a 31.0% increase in the commercial loan
portfolio from the $469.0 million one year prior.
Commercial loans to clients served by the Bank's Technology Group and Special
Industries Group (middle market commercial and real estate lending) are
generally secured by business and personal assets. The analysis of credit risk,
for all borrowers, is performed utilizing the same set of underwriting criteria.
The evaluation of appropriate collateral levels, guarantees, and other credit
requirements does not vary among broad marketing groups.
CREDIT RISK AND THE ALLOWANCE FOR LOAN LOSSES
Lending money involves an inherent risk of nonpayment. Through the
administration of the loan policies and monitoring of the portfolio, Management
seeks to reduce such risks to an acceptable level. The allowance for loan
losses provides a financial buffer for losses, both identified and unidentified,
in the 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 collateral values, potential loan concentrations, and general
economic conditions. Potential problem credits are identified and appropriate
action plans are developed.
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.
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------
CREDIT QUALITY
- - ---------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
1995 1994 1994
(DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NONPERFORMING ASSETS:
Loans Past Due 90 Days or More $ 202 $ 444 $ 2,627
Nonaccrual Loans(1) $14,589 11,269 35,621
- - ---------------------------------------------------------------------------------------------
Total Nonperforming Loans 14,791 11,713 38,248
OREO (1) 5,952 7,089 11,365
- - ---------------------------------------------------------------------------------------------
Total Nonperforming Assets $20,743 $18,802 $49,613
- - ---------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------
Nonperforming loans as a Percent of Total Loans 2.1% 1.7% 6.9%
OREO as a Percent of Total Assets 0.5% 0.6% 1.1%
Nonperforming Assets as a Percent of Total Assets 1.9% 1.6% 5.0%
ALLOWANCE FOR LOAN LOSSES $21,500 $20,000 $25,000
As a Percent of Total Loans 3.1% 2.8% 4.5%
As a Percent of Nonaccrual Loans 147.4% 177.5% 70.2%
As a Percent of Nonperforming Loans 145.4% 170.8% 65.4%
<FN>
(1) In accordance with Statement of Financial Accounting Standard No. 114,
insubstance foreclosure loans have been reclassified from OREO to
Nonaccrual Loans. The reclassified amounts are: $10,894 at March 31, 1994
and $1,377 at December 31, 1994.
</TABLE>
15
<PAGE>
Nonperforming loans have shown substantial improvement, declining to $11.7
million at December 31, 1994 and $14.8 million at March 31, 1995, from the $38.2
million reported at March 31, 1994. OREO declined to $7.1 million at the end of
1994 and $6.0 million in the first quarter of 1995, from $11.4 million in the
first quarter of 1994. The improvement in nonperforming assets resulted from
the concerted efforts of Management to maintain strong credit discipline and
consistent administration of credit policies and procedures.
As of January 1, 1995, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan." as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan --
Income Recognition and Disclosures." At the time of adoption, approximately
$1.4 million of insubstance foreclosure loans previously classified as other
real estate owned were reclassified to nonaccrual loans. Prior period
presentations of insubstance foreclosure loans have been reclassified to conform
with this accounting standard.
In addition to loans included in nonperforming assets, Management has identified
four loans with principal amounts aggregating approximately $1.6 million that,
on the basis of information available to Management as of March 31, 1995, were
judged to have a higher than normal risk of becoming nonperforming. The Company
is not aware of any other loans at March 31, 1995, 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.
DEPOSITS
The growth in total assets over the past four quarters was funded, primarily, by
the growth in total deposits. Total deposits were $1,023.6 million at March 31,
1994, compared with $1,075.4 million at December 31, 1994 and $911.8 million at
March 31, 1994. Noninterest-bearing demand deposits were $378.6 million during
the first quarter of 1995, compared with $401.5 million at year-end 1994, and
$344.9 million at the end of the first quarter of 1994. Money market, NOW, and
savings accounts totaled $502.0 million at March 31, 1994, $585.1 million at
December 31, 1994, and $579.2 million at March 31, 1995. The increase in
deposits during the past four quarters resulted from renewed marketing efforts
by the Bank.
LIQUIDITY MANAGEMENT
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 depositor's needs, and to service other liabilities as they come due.
As of March 31, 1995, liquid assets as a percentage of deposits were 28.8%,
compared with 30.4% at December 31, 1994 and 25.8% at March 31, 1994. Liquid
assets include cash and due from banks, short-term time deposits, federal funds
sold, and investment securities maturing within one year.
16
<PAGE>
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 meet all
regulatory capital guidelines. The primary source of increased 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 sale
of common stock under the Company's employee benefit plans including the
Company's Stock Option Plan, Employee Stock Ownership Plan, and Employee Stock
Purchase Plan. Capital generated through employee benefit plans during the
first quarter of 1995 was $1.5 million, compared with $0.5 million during the
first quarter of 1994. Finally, total shareholders' equity improved between
December 31, 1994 and March 31, 1995 due to a decline in the unrealized loss on
investment securities from $4.2 million to $2.2 million.
The Company and Bank are subject to capital adequacy guidelines issued by the
Federal Reserve Board. Under these guidelines, the minimum total capital
requirement is 8.0% of assets and certain off-balance sheet items, weighted by
risk. At least 4.0% of the total 8.0% capital ratio must consist of Tier 1
capital, defined as tangible common equity, and the remainder may consist of
subordinated debt, cumulative preferred stock, and a limited amount of the
allowance for loan losses.
The Federal Reserve Board has established minimum capital leverage ratio
guidelines for state member banks. The ratio is determined using Tier 1 capital
divided by quarterly average total assets. The guidelines require a minimum of
3.0%; however, banks experiencing high growth rates are expected to maintain
capital positions well above minimum supervisory levels.
In addition to the foregoing requirements, the Bank is also subject to a capital
requirement established by the California State Banking Department. Under the
regulatory consent order with the State Banking Department, the Bank must
maintain a minimum tangible equity-to-assets ratio of 6.5%. The Bank's tangible
equity-to-assets ratio at March 31, 1995 was 7.4%, compared with 6.5% at
December 31, 1994 and 6.9% at March 31, 1994.
The Company and the Bank had capital ratios in excess of regulatory guidelines
as of March 31, 1995. Capital ratios for the Company are set forth below:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------
March 31, December 31, March 31,
1995 1994 1994
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Risk-Based Capital Ratio 10.8% 10.1% 11.6%
Total Tier 1 Capital Ratio 9.6% 8.9% 10.2%
Total Tier 1 Leverage Ratio 7.9% 8.3% 7.4%
Equity to Assets Ratio 7.5% 6.7% 7.2%
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
</TABLE>
The decrease in Total and Tier 1 risk-based capital ratios from March to
December, 1994, was primarily the result of growth in loans and commitments
outstanding at year-end. As outstanding loan balances decreased slightly during
the first quarter of 1995 and shareholders' equity
17
<PAGE>
continued to increase, the Total and Tier 1 risk-based capital ratios improved
to 10.8% and 9.6%, respectively, at March 31,1995.
CURRENT OPERATING ENVIRONMENT
A general economic recovery of moderate proportions has taken hold in
California. A large portion of the Company's client base operates in California
technology markets, and the Company is therefore directly affected by this
recovery. Throughout 1995, the recovery is expected to remain moderate as a
result of continued cutbacks in defense-related spending.
During the first quarter of 1995, economic growth has been less robust than the
end of 1994 and has shown distinct signs of weakness in some areas, most
notably, housing and industrial production. The housing sector has suffered as
a result of higher mortgage rates and winter weather conditions, while
manufacturing activity has slowed, largely in reaction to a build-up of
inventories.
The recent economic slowdown and acceptable levels of inflation have lowered any
pressure on the Federal Reserve Board to raise interest rates further. While no
immediate tightening of monetary policy appears likely, there remains a
possibility of higher interest rates in the second half of 1995.
If interest rates throughout the remainder of the year remain little changed
from March 31, 1995, the net interest margin is expected to decline modestly,
assuming deposit rates will gradually increase to adjust for the rise in market
interest rates during 1994 and early 1995.
Current financial results should not be considered to be an indicator of future
financial performance, and investors should not use historical trends to
anticipate results or trends in future periods.
The Company remains subject to the regulatory consent orders discussed in Note
5. While the Company cannot predict the effect of any specific requirement of
these actions, the Company believes that continued compliance with these actions
will not have a significant adverse impact on the business of the Bank, its
clients or the Company.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain lawsuits and claims arising in the ordinary course of business have been
filed or are pending against the Bank and/or the Company. Based upon
information available to the Company, its review of such claims to date, and
consultation with its counsel, Management believes that the liability relating
to these actions, if any, will not have a material adverse effect on its
consolidated financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by registrant during the three months
ended March 31, 1995.
19
<PAGE>
Pursuant to the requirements 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
(Registrant)
Date: May 12, 1995 By: (s) John C. Dean
------------------------------ --------------------------------
John C. Dean
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 1995 By: (s) Dennis G. Uyemura
------------------------------ --------------------------------
Dennis G. Uyemura
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 12, 1995 By: (s) Mary S. Hale
------------------------------ --------------------------------
Mary S. Hale
Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS, RELATED NOTES, AND
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTAINED IN THE REPORT ON FORM 10-Q FOR
THE QUARTER ENDED MARCH 31 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 153,527
<INT-BEARING-DEPOSITS> 62
<FED-FUNDS-SOLD> 105,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 148,390
<INVESTMENTS-CARRYING> 7,169
<INVESTMENTS-MARKET> 7,500
<LOANS> 696,602
<ALLOWANCE> 21,500
<TOTAL-ASSETS> 1,119,347
<DEPOSITS> 1,023,645
<SHORT-TERM> 0
<LIABILITIES-OTHER> 11,722
<LONG-TERM> 0
<COMMON> 55,164
0
0
<OTHER-SE> 28,814
<TOTAL-LIABILITIES-AND-EQUITY> 1,119,347
<INTEREST-LOAN> 20,179
<INTEREST-INVEST> 2,354
<INTEREST-OTHER> 1,476
<INTEREST-TOTAL> 24,008
<INTEREST-DEPOSIT> 5,843
<INTEREST-EXPENSE> 5,843
<INTEREST-INCOME-NET> 18,165
<LOAN-LOSSES> 1,355
<SECURITIES-GAINS> (422)
<EXPENSE-OTHER> 1,399
<INCOME-PRETAX> 5,719
<INCOME-PRE-EXTRAORDINARY> 5,719
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,280
<EPS-PRIMARY> $0.37
<EPS-DILUTED> $0.37
<YIELD-ACTUAL> .010
<LOANS-NON> 14,589
<LOANS-PAST> 202
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,600
<ALLOWANCE-OPEN> 20,000
<CHARGE-OFFS> 823
<RECOVERIES> 968
<ALLOWANCE-CLOSE> 21,500
<ALLOWANCE-DOMESTIC> 14,394
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,106
</TABLE>
