<PAGE>
As filed with the Securities and Exchange Commission on May 14, 1997
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 April 30, 1997, 9,548,113 shares of the registrant's common stock (no
par value) were outstanding.
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This report contains a total of 25 pages.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
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.............................................................. 24
ITEM 2. CHANGES IN SECURITIES.......................................................... 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................ 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................ 24
ITEM 5. OTHER INFORMATION.............................................................. 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................... 24
SIGNATURES............................................................................. 25
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1--INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
1997 DECEMBER 31,
(DOLLARS IN THOUSANDS) (UNAUDITED) 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks.......................................... $ 107,864 $ 122,836
Federal funds sold and securities purchased under agreement to
resell......................................................... 275,324 310,341
Investment securities, at fair value............................. 635,420 625,022
Loans, net of unearned income.................................... 931,457 863,492
Allowance for loan losses........................................ (36,400) (32,700)
- ---------------------------------------------------------------------------------------------
Net loans...................................................... 895,057 830,792
Premises and equipment........................................... 3,917 4,155
Other real estate owned.......................................... 1,426 1,948
Accrued interest receivable and other assets..................... 32,514 29,450
- ---------------------------------------------------------------------------------------------
Total assets..................................................... $ 1,951,522 $1,924,544
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- ---------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Liabilities:
Noninterest-bearing demand deposits.............................. $ 605,313 $ 599,257
NOW deposits..................................................... 18,058 8,443
Money market deposits............................................ 1,072,163 1,081,391
Time deposits.................................................... 104,149 85,213
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Total deposits................................................. 1,799,683 1,774,304
Other liabilities................................................ 11,594 14,840
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Total liabilities................................................ 1,811,277 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; 9,535,491 and
9,329,993 shares outstanding at March 31, 1997
and December 31, 1996, respectively........................... 68,748 65,968
Retained earnings................................................ 73,511 67,321
Net unrealized gain (loss) on available-for-sale investments..... (1,691) 2,456
Unearned compensation............................................ (323) (345)
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Total shareholders' equity....................................... 140,245 135,400
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Total liabilities and shareholders' equity....................... $ 1,951,522 $1,924,544
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</TABLE>
See notes to interim consolidated financial statements.
3
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
------------------------
<S> <C> <C>
MARCH 31, MARCH 31,
1997 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED)
- ---------------------------------------------------------------------------------------------
Interest income:
Loans, including fees............................................ $ 22,936 $ 21,105
Investment securities............................................ 8,721 4,279
Federal funds sold and securities purchased under agreement to
resell.......................................................... 3,236 2,821
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Total interest income.............................................. 34,893 28,205
Interest expense:
Deposits.......................................................... 11,036 7,932
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Total interest expense............................................. 11,036 7,932
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Net interest income................................................ 23,857 20,273
Provision for loan losses.......................................... 3,348 1,523
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Net interest income after provision for loan losses................ 20,509 18,750
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Noninterest income:
Disposition of client warrants.................................... 3,163 291
Letter of credit and foreign exchange income...................... 979 879
Deposit service charges........................................... 365 396
Investment gains.................................................. 2 1
Other.............................................................. 321 266
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Total noninterest income........................................... 4,830 1,833
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Noninterest expense:
Compensation and benefits......................................... 9,056 7,788
Professional services............................................. 1,436 957
Business development and travel................................... 960 553
Net occupancy expense............................................. 762 850
Furniture and equipment........................................... 661 653
Postage and supplies.............................................. 360 377
Telephone......................................................... 305 310
Advertising and promotion......................................... 278 305
Cost of other real estate owned................................... (8) 450
Other............................................................. 857 545
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Total noninterest expense.......................................... 14,667 12,788
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Income before income tax expense................................... 10,672 7,795
Income tax expense................................................. 4,482 3,118
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Net income......................................................... $ 6,190 $ 4,677
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Net income per common and
common equivalent share........................................... $ 0.62 $ 0.49
- ---------------------------------------------------------------------------------------------
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</TABLE>
See notes to interim consolidated financial statements.
4
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
------------------------
MARCH 31, MARCH 31,
1997 1996
(DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 6,190 $ 4,677
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses.......................................... 3,348 1,523
Provision for other real estate owned.............................. -- 551
Depreciation and amortization...................................... 344 306
Net gain on sales of investment securities......................... (2) (1)
Net gain on sales of other real estate owned....................... (45) (173)
Increase in accrued interest receivable............................ (1,509) (1,119)
(Increase) decrease in prepaid expenses............................ (50) 2,900
Increase (decrease) in unearned income............................. 717 (452)
Decrease in accrued liabilities.................................... (5,091) (4,564)
Increase in income taxes payable................................... 3,074 2,308
Other, net......................................................... (759) 262
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities............................ 6,217 6,218
- -------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and paydowns of investment securities..... 340,046 272,319
Proceeds from sales of investment securities....................... 14,754 732
Purchases of investment securities................................. (369,663) (284,188)
Net increase in loans.............................................. (69,222) (11,133)
Proceeds from recoveries of charged off loans...................... 892 616
Net proceeds from sales of other real estate owned................. 567 184
Purchases of premises and equipment................................ (106) (61)
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Net cash applied to investing activities............................. (82,732) (21,531)
- -------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits........................................... 25,379 11,821
Proceeds from issuance of common stock, net of issuance costs...... 1,147 807
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities............................ 26,526 12,628
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Net decrease in cash and cash equivalents............................ (49,989) (2,685)
Cash and cash equivalents at January 1,.............................. 433,177 342,325
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Cash and cash equivalents at March 31,............................... $ 383,188 $ 339,640
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Supplemental disclosures:
Interest paid...................................................... $ 10,965 $ 7,903
Income taxes paid.................................................. $ 1,409 $ 810
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</TABLE>
See notes to interim consolidated financial statements.
5
<PAGE>
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
Colorado, Maryland, Massachusetts, Oregon, Texas, and Washington. The Bank is
currently in the process of opening a loan office in Atlanta, Georgia. 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
March 31, 1997, and the results of its operations and cash flows for the
three month periods ended March 31, 1997 and March 31, 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 month period ended March 31, 1997 may not necessarily be indicative of
the Company's operating results for the full year.
6
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $324,000 and $341,000 at March
31, 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
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
9,996,565 for the quarter ended March 31, 1997 and 9,545,307 for the quarter
ended March 31, 1996. Fully diluted earnings per common and common equivalent
share were approximately equal to primary earnings per common and common
equivalent share for the quarters ended March 31, 1997 and March 31, 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
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
The pro forma EPS amounts, computed pursuant to the provisions of SFAS No.
128, for the three month periods ended March 31, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
NET INCOME SHARES PER SHARE
QUARTER ENDED MARCH 31, 1997 (NUMERATOR) (DENOMINATOR) AMOUNT
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic EPS:
Income available to common shareholders.................................. $ 6,190 9,494 $ 0.65
Effect of Dilutive Securities:
Stock options outstanding................................................ -- 503
- ----------------------------------------------------------------------------------------------------------------------
Diluted EPS:
Income available to common shareholders plus assumed conversions......... $ 6,190 9,997 $ 0.62
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NET INCOME SHARES PER SHARE
QUARTER ENDED MARCH 31, 1996 (NUMERATOR) (DENOMINATOR) AMOUNT
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic EPS:
Income available to common shareholders.................................. $ 4,677 9,104 $ 0.51
Effect of Dilutive Securities:
Stock options outstanding................................................ -- 441
- ----------------------------------------------------------------------------------------------------------------------
Diluted EPS:
Income available to common shareholders plus assumed conversions......... $ 4,677 9,545 $ 0.49
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 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. Unless a registrant's most recent Form 10-K fully
complies with the new disclosure requirements, these disclosures must be
included in a registrant's first applicable filing containing financial
statements issued for a period ending after June 15, 1997. The quantitative
and qualitative disclosure requirements regarding market risks are effective
for all bank and thrift registrant filings that include annual financial
statements issued for periods ending after June 15, 1997. Management does not
believe that the adoption of these amendments will have a material impact on
the Company's consolidated financial position or results of operations.
2. LOANS
The detailed composition of loans, net of unearned income of $6,375 and
$5,658 at March 31, 1997 and December 31, 1996, respectively, is presented in
the following table:
<TABLE>
<CAPTION>
MARCH 31,
1997 DECEMBER 31,
(DOLLARS IN THOUSANDS) (UNAUDITED) 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial........................................................ $ 816,180 $ 755,699
Real estate term.................................................. 47,471 44,475
Real estate construction.......................................... 27,261 27,540
Consumer and other................................................ 40,545 35,778
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Total loans....................................................... $ 931,457 $ 863,492
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</TABLE>
10
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the three month periods
ended March 31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1997 1996
QUARTER ENDED MARCH 31, (UNAUDITED) (UNAUDITED)
- ----------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at January 1,.............................................. $ 32,700 $ 29,700
Provision for loan losses.......................................... 3,348 1,523
Loans charged off.................................................. (540) (1,639)
Recoveries......................................................... 892 616
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Balance at March 31,............................................... $ 36,400 $ 30,200
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</TABLE>
The aggregate recorded investment in loans for which impairment has been
determined in accordance with SFAS No. 114 totaled $15.0 million and $27.9
million at March 31, 1997 and March 31, 1996, respectively. Allocations of
the allowance for loan losses related to impaired loans totaled $5.8 million
at March 31, 1997 and $7.3 million at March 31, 1996. Average impaired loans
for the first quarters of 1997 and 1996 totaled $14.9 million and $29.2
million, respectively.
11
<PAGE>
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 $6.2 million, or $0.62 per share, for the
first quarter of 1997, compared with net income of $4.7 million, or $0.49 per
share, for the first quarter of 1996. The annualized return on average assets
was 1.3% in the first quarter of 1997 compared with 1.4% in the 1996 first
quarter. The annualized return on average equity for the first quarter of
1997 was 18.1%, compared with 17.1% for the first quarter of 1996.
The increase in net income during the first quarter of 1997, as compared with
the first quarter of 1996, resulted from growth in net interest income and
noninterest income, offset by an increase in both the provision for loan
losses and noninterest expense. The major components of net income and
changes in these components are summarized in the following table for the
quarters ended March 31, 1997 and 1996, and are discussed in more detail
below.
<TABLE>
<CAPTION>
1997 TO 1996
QUARTER ENDED MARCH 31, 1997 1996 INCREASE
- --------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net interest income........................................................... $ 23,857 $ 20,273 $ 3,584
Provision for loan losses..................................................... 3,348 1,523 1,825
Noninterest income............................................................ 4,830 1,833 2,997
Noninterest expense........................................................... 14,667 12,788 1,879
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes.................................................... 10,672 7,795 2,877
Income tax expense............................................................ 4,482 3,118 1,364
- --------------------------------------------------------------------------------------------------------------------
Net income.................................................................... $ 6,190 $ 4,677 $ 1,513
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
NET INTEREST INCOME AND MARGIN
Net interest income represents the difference between interest earned,
primarily on loans and investments, and interest paid on funding sources,
primarily deposits, and is the principal source of revenue for the Company.
Net interest margin is the amount of net interest income, on a fully
taxable-equivalent basis, expressed as a percentage of average
interest-earning assets. The average yield earned on interest-earning assets
is the amount of taxable-equivalent interest income expressed as a percentage
of average interest-earning assets. The average rate paid on funding sources
expresses interest expense as a percentage of average interest-earning assets.
The following table sets forth average assets, liabilities and shareholders'
equity, interest income and interest expense, average yields and rates, and
the composition of the Company's net interest margin for the three month
periods ended March 31, 1997 and 1996, respectively.
13
<PAGE>
AVERAGE BALANCES, RATES AND YIELDS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------
1997 1996
(UNAUDITED) (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
(DOLLARS IN THOUSANDS) BALANCE INTEREST RATE BALANCE INTEREST RATE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and
securities purchased under
agreement to resell (1).... $246,331 $ 3,236 5.3% $ 209,302 $ 2,821 5.4%
Investment securities:
Taxable.................... 586,059 8,541 5.9 299,072 4,178 5.6
Non-taxable (2)............ 13,822 277 8.1 6,128 155 10.2
Loans:
Commercial................. 753,544 20,380 11.0 607,698 17,930 11.9
Real estate construction and
term..................... 71,397 1,714 9.7 72,136 2,174 12.1
Consumer and other......... 37,590 842 9.1 43,124 1,001 9.3
------------------------------------- --------------------------------------
Total loans................. 862,531 22,936 10.8 722,958 21,105 11.7
------------------------------------- --------------------------------------
Total interest-earning
assets..................... 1,708,743 34,990 8.3 1,237,460 28,259 9.2
------------------------------------- --------------------------------------
Cash and due from banks...... 161,240 130,996
Allowance for loan losses.... (35,121) (30,026)
Other real estate owned...... 1,842 4,919
Other assets................. 34,906 28,995
--------- ------------
--------- ------------
Total assets................ $1,871,610 $ 1,372,344
--------- ------------
Funding sources:
Interest-bearing liabilities:
NOW deposits................ $14,635 68 1.9 $ 12,079 70 2.3
Regular money market
deposits................... 317,569 2,108 2.7 295,716 1,980 2.7
Bonus money market
deposits................... 720,567 7,961 4.5 457,526 5,261 4.6
Time deposits............... 91,424 899 4.0 64,270 621 3.9
------------------------------------- --------------------------------------
Total interest-bearing
liabilities................ 1,144,195 11,036 3.9 829,591 7,932 3.8
Portion of noninterest-
bearing funding sources.... 564,548 (407,869)
------------------------------------- --------------------------------------
Total funding sources........ 1,708,743 11,036 2.6 1,237,460 7,932 2.6
------------------------------------- --------------------------------------
Noninterest-bearing funding
sources:
Demand deposits.............. 573,075 420,469
Other liabilities............ 15,432 12,096
Shareholders' equity......... 138,908 110,188
Portion used to fund
interest-earning assets.... (564,548) (407,869)
--------- ------------
--------- ------------
Total liabilities and
shareholders' equity....... $1,871,610 $ 1,372,344
--------- ------------
--------- ------------
Net interest income and
margin................... $ 23,954 5.7% $ 20,327 6.6%
----------- ----- --------- -------
----------- ----- --------- -------
Memorandum: Total deposits.. $1,717,270 $ 1,250,060
---------- ------------
---------- ------------
</TABLE>
- ------------------------
(1) Includes average interest-bearing deposits in other financial institutions
of $331 and $201 for the three months ended March 31, 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 $97 and $54 for the three months
ended March 31, 1997 and 1996, respectively.
14
<PAGE>
Net interest income is affected by changes in the amount and mix of
interest-earnings assets and interest-bearing liabilities, referred to as
"volume change." Net interest income is also affected by changes in yields
earned on interest-earning assets and rates paid on interest-bearing
liabilities, referred to as "rate change." The following table sets forth
changes in interest income and interest expense for each major category of
interest-earning assets and interest-bearing liabilities. 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.
<TABLE>
<CAPTION>
1997 COMPARED TO 1996
----------------------
INCREASE (DECREASE)
DUE TO CHANGE IN
------------------------------------------
(DOLLARS IN THOUSANDS) VOLUME RATE TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Federal funds sold and securities purchased under agreement to
resell.............................................................. $ 463 $ (48) $ 415
Investment securities................................................. 4,296 189 4,485
Loans................................................................. 3,537 (1,706) 1,831
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest income................................. 8,296 (1,565) 6,731
- -------------------------------------------------------------------------------------------------------------------
Interest expense:
NOW deposits.......................................................... 11 (13) (2)
Regular money market deposits......................................... 129 (1) 128
Bonus money market deposits........................................... 2,862 (162) 2,700
Time deposits......................................................... 262 16 278
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense................................ 3,264 (160) 3,104
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income............................. $ 5,032 $ (1,405) $ 3,627
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Net interest income, on a fully taxable-equivalent basis, totaled $24.0
million for the first quarter of 1997, an increase of $3.6 million, or 17.8%,
from the $20.3 million total for the first quarter of 1996. The increase in
net interest income was the result of a $6.7 million, or 23.8%, increase in
interest income, offset by a $3.1 million, or 39.1%, increase in interest
expense over the comparable prior year period.
The $6.7 million increase in interest income for the first quarter of 1997,
as compared to the first quarter of 1996, was the result of a $8.3 million
favorable volume variance offset by a $1.6 million unfavorable rate variance.
The favorable volume variance resulted from a $471.3 million, or 38.1%,
increase in average interest-earning assets over the comparable prior year
period. The increase in average interest-earning assets consisted of
increases in each component of the Company's interest-earning assets, and
resulted from significant growth in the Company's deposits, which were up
$467.2 million, or 37.4%, from the comparable prior year period.
The growth in average loans for the 1997 first quarter, which were up $139.6
million, or 19.3%, compared to the first quarter of 1996, was attributable to
the Company's market niches, products developed by the Company during the
past three years and loan offices opened by the Company during the past two
years.
15
<PAGE>
Average investment securities for the first quarter of 1997 increased $294.7
million, or 96.6%, over the respective prior year period, as a significant
portion of the funds generated from the aforementioned deposit growth were
invested in U.S. agencies securities, U.S. Treasury securities and commercial
paper. This growth reflected a continuation of Management's recent actions to
both increase the portfolio of longer-term investment securities in an effort
to obtain the higher yields offered on these types of investments, as well as
to further diversify the Company's portfolio of short-term investments.
Average federal funds sold and securities purchased under agreement to resell
increased $37.0 million, or 17.7%, in the first quarter of 1997 as compared
to the 1996 first quarter. This increase was also a result of the
aforementioned strong growth in deposits.
Interest income for the first quarter of 1997 decreased $1.6 million from the
comparable prior year period due to an unfavorable rate variance. The overall
decrease in the yield on average interest-earning assets of 90 basis points
for the first quarter of 1997, as compared to the 1996 first quarter, was
primarily centered in loans, as the yield on average loans declined due to
both increased competition and a decline in the average prime rate charged by
the Company, as a substantial portion of the Company's loans are prime
rate-based.
Total interest expense in the 1997 first quarter increased $3.1 million from
the first quarter of 1996. This increase was due to an unfavorable volume
variance of $3.3 million, partially offset by a favorable rate variance of
$0.2 million. The unfavorable volume variance resulted from a $314.6 million,
or 37.9%, increase in average interest-bearing liabilities in the first
quarter of 1997 as compared with the first quarter of 1996. This increase was
largely concentrated in the Company's bonus money market deposit product,
which increased $263.0 million, or 57.5%, and was explained by high levels of
client liquidity attributable to the strong inflow of investment capital into
the venture capital community and into the public equity markets during 1996,
and, to a lesser extent, in the first quarter of 1997.
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 $3.3 million for the first
quarter of 1997, a $1.8 million, or 119.8%, increase as compared to the $1.5
million provision for the first quarter of 1996. For a more detailed
discussion of credit quality and the allowance for loan losses, see the Item
2 section entitled "Financial Condition--Credit Quality and the Allowance for
Loan Losses."
16
<PAGE>
NONINTEREST INCOME
The following table summarizes the components of noninterest income for the
quarters ended March 31, 1997 and 1996:
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 1997 1996
- -------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Disposition of client warrants............................................. $ 3,163 $ 291
Letter of credit and foreign exchange income............................... 979 879
Deposit service charges.................................................... 365 396
Investment gains........................................................... 2 1
Other...................................................................... 321 266
- -------------------------------------------------------------------------------------------------
Total noninterest income................................................... $ 4,830 $ 1,833
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
--------- ---------
</TABLE>
Noninterest income increased $3.0 million, or 163.5%, to $4.8 million in the
first quarter of 1997, as compared to $1.8 million in the first quarter of
1996. The increase in noninterest income was largely attributable to a $2.9
million increase in income from the disposition of client warrants, which
totaled $3.2 million in the first quarter of 1997. The income from the
disposition of client warrants which was recognized in the 1997 first quarter
primarily related to one client of the Bank.
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 quarter 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
totaled $1.0 million in the first quarter of 1997, an increase of $0.1
million, or 11.4%, from the $0.9 million earned in the first quarter 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 Company's client base, a large percentage of which provide
products and services in international markets.
Income related to deposit service charges totaled $0.4 million in both the
first quarters of 1997 and 1996. 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.
17
<PAGE>
Other noninterest income largely consists of service-based fee income, and
increased $0.1 million, or 20.7%, to $0.3 million in the first quarter of
1997. The increase was the result of increased fees associated with the
Company's periodic examinations of client accounts receivables which are
pledged as collateral on loans.
NONINTEREST EXPENSE
Noninterest expense in the first quarter of 1997 totaled $14.7 million, a
$1.9 million, or 14.7%, increase from the $12.8 million incurred in 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
incurred through sales of investment securities. This ratio reflects the
level of operating expense required to generate $1 of operating revenue. The
Company's efficiency ratio for the first quarter of 1997 was 57.5%, compared
to 56.6% for the 1996 first quarter. The following table presents the detail
of noninterest expense and the incremental contribution of each line item to
the Company's efficiency ratio:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------
1997 1996
-------------------- -----------------------
PERCENT OF PERCENT OF
ADJUSTED ADJUSTED
(DOLLARS IN THOUSANDS) AMOUNT REVENUES AMOUNT REVENUES
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Compensation and benefits............................................. $ 9,056 35.5% $ 7,788 35.7%
Professional services................................................. 1,436 5.6 957 4.4
Business development and travel....................................... 960 3.8 553 2.5
Net occupancy expense................................................. 762 3.0 850 3.9
Furniture and equipment............................................... 661 2.6 653 3.0
Postage and supplies.................................................. 360 1.4 377 1.7
Telephone............................................................. 305 1.2 310 1.4
Advertising and promotion............................................. 278 1.1 305 1.4
Other................................................................. 857 3.4 545 2.5
- -----------------------------------------------------------------------------------------------------------------------
Total excluding cost of other real estate owned....................... 14,675 57.5% 12,338 56.6%
Cost of other real estate owned....................................... (8) 450
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest expense............................................. $ 14,667 $ 12,788
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
Compensation and benefits expenses totaled $9.1 million in the first quarter
of 1997, a $1.3 million, or 16.3%, increase over the $7.8 million incurred in
the first quarter of 1996. This increase was largely the result of an
increase in the number of average full-time equivalent (FTE) staff employed
by the Company from 350 for the first quarter of 1996 to 393 for the first
quarter of 1997. The increase in FTE was primarily due to the Company's
efforts to develop and support new markets through geographic expansion, as
well as through the development of new products and niches, and to its
efforts in building an infrastructure sufficient to support present and
prospective business activities. The Company's growth in FTE is likely to
continue during future years as a result of both further geographic
expansion, such as the Company's planned opening of a loan office in Atlanta,
Georgia in the second quarter of 1997, and the development of additional
products and niches.
Professional services expenses totaled $1.4 million in the first quarter of
1997, an increase of $0.5 million, or 50.1%, from the $1.0 million incurred
in the comparable 1996 period, and primarily consist of costs associated with
legal consultation, accounting and auditing, consulting, and the Company's
directors. This increase was primarily related to the timing of accounting
and auditing and director expenses, as well as to an increase in legal fees
related to credit workouts.
Business development and travel expenses totaled $1.0 million in the first
quarter of 1997, a $0.4 million, or 73.6%, increase from the $0.6 million
incurred in the first quarter of 1996. The increase in business development
and travel expenses reflects the Company's continuing emphasis on business
development efforts, as well as on expansion into new geographic markets and
niches.
Other noninterest expenses in the first quarter of 1997 totaled $0.9 million,
a $0.3 million, or 57.2%, increase from the $0.5 million incurred in the
first quarter of 1996. This increase was largely due to both the timing of
reimbursements related to client services and an increase in costs associated
with certain vendor provided services.
Net costs associated with other real estate owned (OREO) which were incurred
in the first quarter of 1997 decreased $0.5 million from the comparable prior
year period due to the write-down in the first quarter of 1996 of one
property owned by the Bank. 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 income tax rate was 42.0% in the 1997 first quarter,
compared to 40.0% in the first quarter of the prior year. The increase in the
Company's effective income tax rate was attributable to adjustments in the
Company's estimate of its tax liabilities.
19
<PAGE>
FINANCIAL CONDITION
The Company's total assets were $2.0 billion at March 31, 1997, an increase
of $27.0 million, or 1.4%, 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
$275.3 million at March 31, 1997, a decrease of $35.0 million, or 11.3%,
compared to the $310.3 million outstanding at December 31, 1996. This
decrease was due to a decrease in the Company's liquidity as loan growth
outpaced deposit growth in the 1997 first quarter.
INVESTMENT SECURITIES
Investment securities totaled $635.4 million at March 31, 1997. This
represented a $10.4 million, or 1.7%, increase over the December 31, 1996
balance of $625.0 million. The slight increase in investment securities was
related to the Company's liquidity activities, as purchases of investment
securities slightly exceeded maturities, paydowns and sales during the first
quarter of 1997.
LOANS
Total loans, net of unearned income, at March 31, 1997 were $931.5 million, a
$68.0 million, or 7.9%, increase compared to the $863.5 million outstanding
at December 31, 1996. The increase in loans from the 1996 year-end total was
concentrated in the commercial loan portfolio, and was primarily attributable
to growth in the Company's technology and life sciences niche.
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 compliance with
loan covenants, underlying collateral values, potential loan concentrations,
and general economic conditions. Potential problem credits are identified
and, based upon known information, action plans are developed.
20
<PAGE>
The allowance for loan losses totaled $36.4 million at March 31, 1997, an
increase of $3.7 million, or 11.3%, compared to the $32.7 million balance at
December 31, 1996. This increase was due to $3.3 million in additional
provisions to the allowance for loan losses combined with net recoveries of
$0.4 million in the first quarter of 1997. Gross charge-offs in the first
quarter of 1997 were $0.5 million.
In general, Management believes the allowance for loan losses is adequate as
of March 31, 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:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
(DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming assets:
Loans past due 90 days or more.................................... $ 1,142 $ 8,556
Nonaccrual loans.................................................. 15,001 14,581
- ---------------------------------------------------------------------------------------------
Total nonperforming loans......................................... 16,143 23,137
OREO.............................................................. 1,426 1,948
- ---------------------------------------------------------------------------------------------
Total nonperforming assets........................................ $ 17,569 $ 25,085
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Nonperforming loans as a percent of total loans................... 1.7% 2.7%
OREO as a percent of total assets................................. 0.1% 0.1%
Nonperforming assets as a percent of total assets................. 0.9% 1.3%
Allowance for loan losses:........................................ $ 36,400 $ 32,700
As a percent of total loans....................................... 3.9% 3.8%
As a percent of nonaccrual loans.................................. 242.7% 224.3%
As a percent of nonperforming loans............................... 225.5% 141.3%
</TABLE>
Nonperforming loans totaled $16.1 million, or 1.7% of total loans, at March
31, 1997. This represented a decrease of $7.0 million, or 30.2%, compared to
$23.1 million, or 2.7% of total loans, at December 31, 1996. The decrease
from the prior year end was primarily due to the first quarter 1997 payoff by
the Export-Import Bank of the U.S. of one credit in excess of $8.0 million
that was more than 90 days past due as of December 31, 1996.
In addition to the loans disclosed in the foregoing analysis, Management has
identified three loans with principal amounts aggregating approximately $5.2
million, that, on the basis of information known by Management as of March
31, 1997, were judged to have a higher than normal risk of becoming
nonperforming. The Company is not aware of any other loans at March 31, 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.
21
<PAGE>
OREO totaled $1.4 million at March 31, 1997, a decrease of $0.5 million, or
26.8%, from the $1.9 million balance at December 31, 1996. The remaining OREO
balance at March 31, 1997 was composed of two properties, each consisting of
multiple nudeveloped lots, and each acquired prior to June 1993. The decrease
in the OREO balance during the first quarter of 1997 resulted from sales of
lots in one of these two remaining properties.
DEPOSITS
Total deposits were $1.8 billion at March 31, 1997, a slight increase of
$25.4 million, or 1.4%, from the prior year-end amount. The majority of this
increase was in interest-bearing deposits, which increased $19.3 million, or
1.6%. This increase was primarily concentrated in time deposits and NOW
deposits, and was partially offset by a decrease in regular money market
deposits. Noninterest-bearing demand deposits totaled $605.3 million at March
31, 1997, an increase of $6.1 million, or 1.0%, from the $599.3 million
balance at December 31, 1996.
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.
Bank policy guidelines provide that liquid assets as a percentage of total
deposits should not fall below 20.0%. At March 31, 1997, the Company's liquid
assets as a percentage of total deposits were 47.2%, compared to 47.3% at
December 31, 1996. These ratios are well in excess of the Bank's minimum
policy guidelines.
22
<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 are in
compliance with all regulatory capital guidelines. The primary source of new
capital for the Company has been the retention of earnings. Aside from
current earnings, an additional source of new capital for the Company has
been 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 $140.2 million at March 31, 1997, an increase of
$4.8 million from the $135.4 million balance at December 31, 1996. This
increase resulted from net income of $6.2 million combined with capital
generated through the Company's employee benefit plans of $2.8, offset by a
decrease in the after-tax net unrealized gain on available-for-sale
investments of $4.1 million from the prior year end.
The Company and the Bank are subject to capital adequacy guidelines issued by
the Federal Reserve Board. Under these capital guidelines, the minimum total
risk-based capital requirement is 10.0% of risk-weighted assets and certain
off-balance sheet items for a "well capitalized" depository institution. At
least 6.0% of the 10.0% total risk-based capital ratio must consist of Tier 1
capital, defined as common stock, retained earnings, noncumulative perpetual
preferred stock (cumulative perpetual preferred stock for bank holding
companies), and minority interests in consolidated subsidiaries, less most
intangible assets, and the remainder may consist of eligible term
subordinated debt, cumulative perpetual preferred stock, long-term preferred
stock, a limited amount of the allowance for loan losses, and certain other
instruments with some characteristics of equity.
The Federal Reserve Board has established minimum capital leverage ratio
guidelines for state member banks. The ratio is determined using Tier 1
capital divided by quarterly average total assets. The guidelines require a
minimum of 5.0% for a well capitalized depository institution.
The Company's risk-based capital ratios were in excess of regulatory
guidelines for a well capitalized depository institution as of March 31, 1997
and December 31, 1996. Capital ratios for the Company are set forth below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Total risk-based capital ratio.................................... 11.7% 11.5%
Tier 1 risk-based capital ratio................................... 10.5% 10.2%
Tier 1 leverage ratio............................................. 7.6% 7.7%
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
The improvement in the Company's total risk-based capital ratio and Tier 1
risk-based capital ratio from December 31, 1996 to March 31, 1997 is
attributable to an increase in Tier 1 capital. The increase in Tier 1 capital
resulted from the aforementioned net income and capital generated through the
Company's employee benefit plans during the first quarter of 1997. The slight
decrease in the Company's Tier 1 leverage ratio from December 31, 1996 to
March 31, 1997 primarily resulted from an increase in average total assets
during the first quarter of 1997.
23
<PAGE>
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item
pending at March 31, 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
No matters were submitted to a vote by the shareholders of the Company's
common stock during the first quarter of 1997.
ITEM 5--OTHER INFORMATION
None.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter ended
March 31, 1997.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SILICON VALLEY BANCSHARES
Date: May 14, 1997 /s/ Christopher T. Lutes
-------------------------------------
Christopher T. Lutes
Senior Vice President and Controller
(Principal Accounting Officer)
25
<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 FILED
BY SILICON VALLEY BANKSHARES FOR THE QUARTER ENDED MARCH 31, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 107,864
<INT-BEARING-DEPOSITS> 324
<FED-FUNDS-SOLD> 275,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 635,420
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 931,457
<ALLOWANCE> 36,400
<TOTAL-ASSETS> 1,951,522
<DEPOSITS> 1,799,683
<SHORT-TERM> 0
<LIABILITIES-OTHER> 11,594
<LONG-TERM> 0
0
0
<COMMON> 68,425
<OTHER-SE> 71,820
<TOTAL-LIABILITIES-AND-EQUITY> 1,951,522
<INTEREST-LOAN> 22,936
<INTEREST-INVEST> 8,721
<INTEREST-OTHER> 3,236
<INTEREST-TOTAL> 34,893
<INTEREST-DEPOSIT> 11,036
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 23,857
<LOAN-LOSSES> 3,348
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 14,667
<INCOME-PRETAX> 10,672
<INCOME-PRE-EXTRAORDINARY> 6,190
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,190
<EPS-PRIMARY> .62
<EPS-DILUTED> .62
<YIELD-ACTUAL> 5.7
<LOANS-NON> 15,001
<LOANS-PAST> 1,142
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,212
<ALLOWANCE-OPEN> 32,700
<CHARGE-OFFS> 540
<RECOVERIES> 892
<ALLOWANCE-CLOSE> 36,400
<ALLOWANCE-DOMESTIC> 36,400
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 12,636
</TABLE>
