<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1998
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
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, 1998
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 March 31, 1998, 20,486,526 shares of the registrant's
common stock (no par value) were outstanding.
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This report contains a total of 26 pages.
1
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
----
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED INCOME STATEMENTS 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS 25
ITEM 2. CHANGES IN SECURITIES 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 5. OTHER INFORMATION 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURES 26
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Dollars in thousands) (Unaudited)
- - - -------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 130,163 $ 105,059
Federal funds sold and securities purchased under
agreement to resell 360,255 321,773
Investment securities, at fair value 1,058,249 1,013,904
Loans, net of unearned income 1,242,014 1,174,645
Allowance for loan losses (40,400) (37,700)
- - - -------------------------------------------------------------------------------
Net loans 1,201,614 1,136,945
Premises and equipment 5,216 4,460
Other real estate owned 689 689
Accrued interest receivable and other assets 44,714 42,293
- - - -------------------------------------------------------------------------------
Total assets $2,800,900 $2,625,123
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Liabilities:
Noninterest-bearing demand deposits $ 766,925 $ 788,442
NOW deposits 13,654 21,348
Money market deposits 1,680,395 1,497,996
Time deposits 136,226 124,621
- - - -------------------------------------------------------------------------------
Total deposits 2,597,200 2,432,407
Other liabilities 16,144 18,235
- - - -------------------------------------------------------------------------------
Total liabilities 2,613,344 2,450,642
- - - -------------------------------------------------------------------------------
Shareholders' Equity:
Preferred stock, no par value:
20,000,000 shares authorized; none outstanding
Common stock, no par value:
60,000,000 shares authorized; 20,486,526 and
19,940,474 shares outstanding at March 31, 1998
and December 31, 1997, respectively 87,920 83,009
Retained earnings 102,579 94,999
Unearned compensation (5,499) (5,946)
Accumulated other comprehensive income:
Net unrealized gain on available-for-sale investments 2,556 2,419
- - - -------------------------------------------------------------------------------
Total shareholders' equity 187,556 174,481
- - - -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,800,900 $2,625,123
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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
--------------------------
March 31, March 31,
1998 1997
(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited)
- - - --------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans, including fees $31,102 $22,936
Investment securities 13,997 8,721
Federal funds sold and securities purchased under
agreement to resell 4,442 3,236
- - - --------------------------------------------------------------------------------
Total interest income 49,541 34,893
- - - --------------------------------------------------------------------------------
Interest expense:
Deposits 17,601 11,036
Other borrowings 3 -
- - - --------------------------------------------------------------------------------
Total interest expense 17,604 11,036
- - - --------------------------------------------------------------------------------
Net interest income 31,937 23,857
Provision for loan losses 5,480 3,348
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Net interest income after provision for loan losses 26,457 20,509
- - - --------------------------------------------------------------------------------
Noninterest income:
Disposition of client warrants 2,440 3,163
Letter of credit and foreign exchange income 1,711 979
Investment gains 474 2
Deposit service charges 373 365
Other 393 321
- - - --------------------------------------------------------------------------------
Total noninterest income 5,391 4,830
- - - --------------------------------------------------------------------------------
Noninterest expense:
Compensation and benefits 11,621 9,056
Business development and travel 1,555 960
Professional services 1,426 1,436
Furniture and equipment 1,039 661
Net occupancy expense 990 762
Telephone 522 305
Postage and supplies 432 360
Advertising and promotion 391 278
Cost of other real estate owned 26 (8)
Other 902 857
- - - --------------------------------------------------------------------------------
Total noninterest expense 18,904 14,667
- - - --------------------------------------------------------------------------------
Income before income tax expense 12,944 10,672
Income tax expense 5,365 4,482
- - - --------------------------------------------------------------------------------
Net income $ 7,579 $ 6,190
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
Basic earnings per share $ 0.38 $ 0.33
Diluted earnings per share $ 0.36 $ 0.31
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</TABLE>
See notes to interim consolidated financial statements.
4
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the three months ended
-------------------------------
March 31, March 31,
1998 1997
(Dollars in thousands) (Unaudited) (Unaudited)
- - - ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 7,579 $ 6,190
Other comprehensive income, net of tax:
Unrealized gain/(loss) on available-for-sale investments:
Unrealized holding gain/(loss) arising during period 1,827 (2,311)
Less: Reclassification adjustment for gain included
in net income (1,690) (1,836)
- - - ------------------------------------------------------------------------------------------------------
Other comprehensive income 137 (4,147)
- - - ------------------------------------------------------------------------------------------------------
Comprehensive income $ 7,716 $ 2,043
- - - ------------------------------------------------------------------------------------------------------
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</TABLE>
See notes to interim consolidated financial statements.
5
<PAGE>
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the three months ended
---------------------------
March 31, March 31,
1998 1997
(Dollars in thousands) (Unaudited) (Unaudited)
- - - ---------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,579 $ 6,190
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 5,480 3,348
Depreciation and amortization 321 344
Net gain on sales of investment securities (474) (2)
Net gain on sales of other real estate owned - (45)
Increase in accrued interest receivable (1,598) (1,509)
Increase in prepaid expenses (439) (50)
Increase in unearned income 244 717
Decrease in accrued liabilities (5,415) (5,091)
Increase in income taxes payable 5,226 3,074
Other, net (820) (759)
- - - ---------------------------------------------------------------------------------
Net cash provided by operating activities 10,104 6,217
- - - ---------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and paydowns of
investment securities 385,659 340,046
Proceeds from sales of investment securities 79,688 14,754
Purchases of investment securities (508,068) (369,663)
Net increase in loans (71,563) (69,222)
Proceeds from recoveries of charged off loans 1,170 892
Net proceeds from sales of other real estate owned - 567
Purchases of premises and equipment (1,114) (106)
- - - ---------------------------------------------------------------------------------
Net cash applied to investing activities (114,228) (82,732)
- - - ---------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 164,793 25,379
Proceeds from issuance of common stock,
net of issuance costs 2,917 1,147
- - - ---------------------------------------------------------------------------------
Net cash provided by financing activities 167,710 26,526
- - - ---------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 63,586 (49,989)
Cash and cash equivalents at January 1, 426,832 433,177
- - - ---------------------------------------------------------------------------------
Cash and cash equivalents at March 31, $ 490,418 $ 383,188
- - - ---------------------------------------------------------------------------------
- - - ---------------------------------------------------------------------------------
Supplemental disclosures:
Interest paid $ 17,483 $ 10,965
Income taxes paid $ 206 $ 1,409
- - - ---------------------------------------------------------------------------------
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</TABLE>
See notes to interim consolidated financial statements.
6
<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 1997 consolidated financial
statements to conform to the 1998 presentations. Such reclassifications had
no effect on the results of operations or shareholders' equity. The following
is a summary of the significant accounting and reporting policies used in
preparing the interim consolidated financial statements.
NATURE OF OPERATIONS
The Company is a bank holding company whose principal subsidiary is Silicon
Valley Bank (the "Bank"), a California-chartered bank with headquarters in
Santa Clara, California. The Bank maintains regional banking offices in
Northern and Southern California, and additionally has loan offices in
Arizona, Colorado, Georgia, Illinois, Maryland, Massachusetts, Oregon, Texas,
and Washington. The Bank serves emerging growth and middle-market companies
in 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, 1998, the results of its operations for the three month periods
ended March 31, 1998, and March 31, 1997, and the results of its cash flows
for the three month periods ended March 31, 1998, and March 31, 1997. The
December 31, 1997, 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 1997 Annual Report on Form 10-K. The results of operations for the
three month period ended March 31, 1998, may not necessarily be indicative of
the Company's operating results for the full year.
7
<PAGE>
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 $255,000 and $273,000 at March
31, 1998, and December 31, 1997, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for all entities for reporting comprehensive
income and its components in financial statements. This statement requires that
all items which are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income is equal to net income plus the change in "other comprehensive income,"
as defined by SFAS No. 130. The only component of other comprehensive income
currently applicable to the Company is the net unrealized gain or loss on
available-for-sale investments. SFAS No. 130 requires that an entity: (a)
classify items of other comprehensive income by their nature in a financial
statement, and (b) report the accumulated balance of other comprehensive
8
<PAGE>
income separately from common stock and retained earnings in the equity
section of the balance sheet. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 1997.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
This statement establishes standards for publicly held entities to follow in
reporting information about operating segments in annual financial statements
and requires that those entities also report selected information about
operating segments in interim financial statements. This statement also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement is effective for
financial statements issued for periods beginning after December 15, 1997.
2. EARNINGS PER SHARE
The following is a reconciliation of basic earnings per share (EPS) to
diluted EPS for the three month periods ended March 31, 1998 and 1997. The
number of shares and earnings per share have been restated to reflect a
two-for-one stock split for common shares of record as of April 17, 1998.
<TABLE>
<CAPTION>
Net Per Share
(Dollars and shares in thousands, Income Shares Amount
except per share amounts) (Unaudited) (Unaudited) (Unaudited)
- - - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months ended March 31, 1998:
Basic EPS:
Income available to common shareholders $7,579 20,065 $0.38
Effect of Dilutive Securities:
Stock options and restricted stock - 788 -
- - - ------------------------------------------------------------------------------------------------------
Diluted EPS:
Income available to common shareholders
plus assumed conversions $7,579 20,853 $0.36
- - - ------------------------------------------------------------------------------------------------------
- - - ------------------------------------------------------------------------------------------------------
Three months ended March 31, 1997:
Basic EPS:
Income available to common shareholders $6,190 18,988 $0.33
Effect of Dilutive Securities:
Stock options and restricted stock - 983 -
- - - ------------------------------------------------------------------------------------------------------
Diluted EPS:
Income available to common shareholders
plus assumed conversions $6,190 19,971 $0.31
- - - ------------------------------------------------------------------------------------------------------
- - - ------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
3. LOANS
The detailed composition of loans, net of unearned income of $8.3 million and
$8.0 million at March 31, 1998, and December 31, 1997, respectively, is
presented in the following table:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Dollars in thousands) (Unaudited)
- - - -----------------------------------------------------------------
<S> <C> <C>
Commercial $1,086,590 $1,051,218
Real estate construction 62,032 53,583
Real estate term 50,494 33,395
Consumer and other 42,898 36,449
- - - -----------------------------------------------------------------
Total loans $1,242,014 $1,174,645
- - - -----------------------------------------------------------------
- - - -----------------------------------------------------------------
</TABLE>
4. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the three month periods
ended March 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
Quarter Ended March 31, (Unaudited) (Unaudited)
- - - -----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Balance at January 1, $37,700 $32,700
Provision for loan losses 5,480 3,348
Loans charged off (3,950) (540)
Recoveries 1,170 892
- - - -----------------------------------------------------------------
Balance at March 31, $40,400 $36,400
- - - -----------------------------------------------------------------
- - - -----------------------------------------------------------------
</TABLE>
The aggregate recorded investment in loans for which impairment has been
determined in accordance with SFAS No. 114 totaled $19.3 million and $15.0
million at March 31, 1998, and March 31, 1997, respectively. Allocations of
the allowance for loan losses related to impaired loans totaled $7.8 million
at March 31, 1998, and $5.8 million at March 31, 1997. Average impaired loans
for the first quarter of 1998 and 1997 totaled $26.1 million and $14.9
million, respectively.
10
<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 circumstances which
may affect the Company's future results. Such forward-looking 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 this discussion and analysis, as well as
those described in the Company's 1997 Annual Report on Form 10-K.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements included herein, which speak only as of the date
made. The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect unanticipated
events and circumstances occurring after the date of such statements.
Certain reclassifications have been made to the Company's 1997 consolidated
financial statements to conform to the 1998 presentations. Such
reclassifications had no effect on the results of operations or shareholders'
equity.
EARNINGS SUMMARY
The Company reported net income of $7.6 million, or $0.36 per diluted share,
for the first quarter of 1998, compared with net income of $6.2 million, or
$0.31 per diluted share, for the first quarter of 1997. The annualized return
on average assets (ROA) was 1.2% in the first quarter of 1998 compared with
1.3% in the 1997 first quarter. The annualized return on average equity (ROE)
for the first quarter of 1998 was 16.9%, compared with 18.1% for the first
quarter of 1997.
The increase in net income during the first quarter of 1998, as compared with
the first quarter of 1997, was primarily attributable to growth in net
interest income and noninterest income, partially offset by increases in both
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, 1998 and 1997, and are discussed in
more detail below.
<TABLE>
<CAPTION>
1998 to 1997
Quarter Ended March 31, 1998 1997 Increase
- - - ----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Net interest income $31,937 $23,857 $8,080
Provision for loan losses 5,480 3,348 2,132
Noninterest income 5,391 4,830 561
Noninterest expense 18,904 14,667 4,237
- - - ----------------------------------------------------------------------------------
Income before income taxes 12,944 10,672 2,272
Income tax expense 5,365 4,482 883
- - - ----------------------------------------------------------------------------------
Net income $ 7,579 $ 6,190 $1,389
- - - ----------------------------------------------------------------------------------
- - - ----------------------------------------------------------------------------------
</TABLE>
11
<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 tables set forth average assets, liabilities and shareholders'
equity, interest income and interest expense, average yields and rates, and
the composition of the Company's net interest margin for the three months
ended March 31, 1998 and 1997, respectively.
12
<PAGE>
<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES, RATES AND YIELDS
- - - --------------------------------------------------------------------------------------------------------------------
For the three months ended March 31,
--------------------------------------------------------------------------
1998 1997
(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) $ 324,295 $ 4,442 5.6% $ 246,331 $ 3,236 5.3%
Investment securities:
Taxable 901,459 13,335 6.0 586,059 8,541 5.9
Non-taxable (2) 61,113 1,019 6.8 13,822 277 8.1
Loans:
Commercial 1,038,665 27,690 10.8 753,544 20,380 11.0
Real estate construction and term 93,463 2,526 11.0 71,397 1,714 9.7
Consumer and other 38,950 886 9.2 37,590 842 9.1
- - - ------------------------------------- ---------------------------------- -----------------------------------
Total loans 1,171,078 31,102 10.8 862,531 22,936 10.8
- - - ------------------------------------- ---------------------------------- -----------------------------------
Total interest-earning assets 2,457,945 49,898 8.2 1,708,743 34,990 8.3
- - - ------------------------------------- ---------------------------------- -----------------------------------
Cash and due from banks 127,989 161,240
Allowance for loan losses (39,364) (35,121)
Other real estate owned 689 1,842
Other assets 48,443 34,906
- - - ------------------------------------- ---------- ----------
Total assets $2,595,702 $1,871,610
- - - ------------------------------------- ---------- ----------
- - - ------------------------------------- ---------- ----------
Funding sources:
Interest-bearing liabilities:
NOW deposits $ 15,129 74 2.0 $ 14,635 68 1.9
Regular money market deposits 325,151 2,171 2.7 317,569 2,108 2.7
Bonus money market deposits 1,217,538 13,917 4.6 720,567 7,961 4.5
Time deposits 129,980 1,439 4.5 91,424 899 4.0
Other borrowings 222 3 6.0 - - -
- - - ------------------------------------- ---------------------------------- -----------------------------------
Total interest-bearing liabilities 1,688,020 17,604 4.2 1,144,195 11,036 3.9
Portion of noninterest-bearing
funding sources 769,925 564,548
- - - ------------------------------------- ---------------------------------- -----------------------------------
Total funding sources 2,457,945 17,604 2.9 1,708,743 11,036 2.6
- - - ------------------------------------- ---------------------------------- -----------------------------------
Noninterest-bearing funding sources:
Demand deposits 705,909 573,075
Other liabilities 19,479 15,432
Shareholders' equity 182,294 138,908
Portion used to fund
interest-earning assets (769,925) (564,548)
- - - ------------------------------------- ---------- ----------
Total liabilities and shareholders'
equity $2,595,702 $1,871,610
- - - ------------------------------------- ---------- ----------
- - - ------------------------------------- ---------- ----------
Net interest income and margin $32,294 5.3% $23,954 5.7%
- - - ------------------------------------- ------- ---- ------- ----
- - - ------------------------------------- ------- ---- ------- ----
Memorandum: Total deposits $2,393,707 $1,717,270
- - - ------------------------------------- ---------- ----------
- - - ------------------------------------- ---------- ----------
</TABLE>
(1) Includes average interest-bearing deposits in other financial
institutions of $266 and $331 for the three months ended March 31, 1998
and 1997, respectively.
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in 1998
and 1997. The tax equivalent adjustments were $357 and $97 for the three
months ended March 31, 1998 and 1997, respectively.
13
<PAGE>
Net interest income is affected by changes in the amount and mix of
interest-earning assets and interest-bearing liabilities, referred to as
"volume change." Net interest income is also affected by changes in yields
earned on interest-earning assets and rates paid on interest-bearing
liabilities, referred to as "rate change." The following table sets forth
changes in interest income and interest expense for each major category of
interest-earning assets and interest-bearing liabilities. The table also
reflects the amount of change attributable to both volume and rate changes
for the periods indicated. Changes relating to investments in non-taxable
municipal securities are presented on a fully taxable-equivalent basis using
the federal statutory rate of 35% in 1998 and 1997.
<TABLE>
<CAPTION>
1998 Compared to 1997
------------------------------------
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 $ 1,068 $ 138 $ 1,206
Investment securities 5,409 127 5,536
Loans 8,195 (29) 8,166
- - - ---------------------------------------------------------------------------------
Increase in interest income 14,672 236 14,908
- - - ---------------------------------------------------------------------------------
Interest expense:
NOW deposits 2 4 6
Regular money market deposits 51 12 63
Bonus money market deposits 5,681 275 5,956
Time deposits 427 113 540
Other borrowings 3 - 3
- - - ---------------------------------------------------------------------------------
Increase in interest expense 6,164 404 6,568
- - - ---------------------------------------------------------------------------------
Increase (decrease) in net interest income $ 8,508 $ (168) $ 8,340
- - - ---------------------------------------------------------------------------------
- - - ---------------------------------------------------------------------------------
</TABLE>
Net interest income, on a fully taxable-equivalent basis, totaled $32.3
million for the first quarter of 1998, an increase of $8.3 million, or 34.8%,
from the $24.0 million total for the first quarter of 1997. The increase in
net interest income was the result of a $14.9 million, or 42.6%, increase in
interest income, offset by a $6.6 million, or 59.5%, increase in interest
expense over the comparable prior year period.
The $14.9 million increase in interest income for the first quarter of 1998,
as compared to the first quarter of 1997, was the result of a $14.7 million
favorable volume variance combined with a $0.2 million favorable rate
variance. The favorable volume variance resulted from a $749.2 million, or
43.8%, increase in average interest-earning assets over the comparable prior
year period. The increase in average interest-earning assets resulted from
strong growth in the Company's deposits, which increased $676.4 million, or
39.4%, compared to the first quarter of 1997. The increase in average
interest-earning assets consisted of loans, which were up $308.5 million,
plus a combination of highly liquid, lower-yielding federal funds sold,
securities purchased under agreement to resell and investment securities,
which collectively increased $440.7 million, accounting for 58.8% of the
total increase in average interest-earning assets.
Average loans increased $308.5 million, or 35.8%, in the first quarter of
1998 as compared to the 1997 first quarter, resulting in a $8.2 million
favorable volume variance. This growth was widely distributed throughout the
loan portfolio, as reflected by increased loan balances in most of the
14
<PAGE>
Company's technology, life sciences and special industry niche practices, in
specialized lending products, and throughout the Company's loan offices
located across the nation.
Average investment securities for the first quarter of 1998 increased $362.7
million, or 60.5%, as compared to the 1997 first quarter, resulting in a $5.4
million favorable volume variance. The aforementioned strong growth in
average deposits exceeded the growth in average loans over the past year, and
generated excess funds that were largely invested in U.S. agency securities,
U.S. Treasury securities, mortgage-backed securities, and municipal
securities. The growth in the investment portfolio reflected Management's
actions to both increase the Company's portfolio of longer-term securities in
an effort to obtain available higher yields, and to increase as well as to
further diversify the Company's portfolio of short-term investments in
response to a significant increase in liquidity.
Average federal funds sold and securities purchased under agreement to resell
in the first quarter of 1998 increased a combined $78.0 million, or 31.7%,
over the prior year first quarter, resulting in a $1.1 million favorable
volume variance. This increase was also a result of the aforementioned strong
growth in average deposits during the past year coupled with Management's
actions to further diversify the Company's portfolio of short-term
investments.
A favorable rate variance associated with federal funds sold, securities
purchased under agreement to resell and investment securities, partially
offset by an unfavorable rate variance related to loans, resulted in
increased interest income for the 1998 first quarter of $0.2 million compared
to the respective prior year period. The average yields on federal funds
sold, securities purchased under agreement to resell and investment
securities were higher in the first quarter of 1998 versus the comparable
prior year period, and resulted from both an increase in short-term market
interest rates and Management's actions to increase the Company's portfolio
of longer-term securities in an effort to obtain available higher yields.
The overall decrease in the yield on average interest-earning assets of 10
basis points for the first quarter of 1998, as compared to the 1997 first
quarter, was due to a shift in the composition of average interest-earning
assets towards a higher percentage of highly liquid, lower-yielding federal
funds sold, securities purchased under agreement to resell and investment
securities. This shift in the composition of average interest-earning assets
resulted from the aforementioned deposit growth having exceeded the growth in
loans.
Total interest expense in the 1998 first quarter increased $6.6 million from
the first quarter of 1997. This increase was due to an unfavorable volume
variance of $6.2 million and an unfavorable rate variance of $0.4 million.
The unfavorable volume variance resulted from a $543.8 million, or 47.5%,
increase in average interest-bearing liabilities in the first quarter of 1998
as compared with the first quarter of 1997. This increase was largely
concentrated in the Company's bonus money market deposit product, which
increased $497.0 million, or 69.0%, and was explained by high levels of
client liquidity attributable to a strong inflow of investment capital into
the venture capital community during the past year, and by growth in the
number of clients served by the Company. The $0.4 million unfavorable rate
variance was largely attributable to an increase in the average rate paid on
the Company's bonus money market deposit product which resulted from an
increase in short-term market interest rates.
15
<PAGE>
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 $5.5 million for the first
quarter of 1998, a $2.1 million, or 63.7%, increase compared to the $3.3
million provision for the first quarter of 1997. See "Financial Condition -
Credit Quality and the Allowance for Loan Losses" for additional related
discussion.
NONINTEREST INCOME
The following table summarizes the components of noninterest income for the
quarters ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Quarter Ended March 31, 1998 1997
- - - -------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Disposition of client warrants $2,440 $3,163
Letter of credit and foreign exchange income 1,711 979
Investment gains 474 2
Deposit service charges 373 365
Other 393 321
- - - -------------------------------------------------------------------------------
Total noninterest income $5,391 $4,830
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
</TABLE>
Noninterest income increased $0.6 million, or 11.6%, to a total of $5.4
million in the first quarter of 1998 versus $4.8 million in the prior year
first quarter. The increase in noninterest income was largely due to both a
$0.7 million increase in letter of credit fees, foreign exchange fees and
other trade finance income and a $0.5 million increase in gains on sales of
investment securities. This increase was offset by a $0.7 million decline in
income from the disposition of client warrants in the 1998 first quarter as
compared to the respective prior year period.
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, 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
depend upon factors beyond the control of the Company, including the general
condition of the public equity markets as well as the merger and acquisition
environment, and therefore cannot be predicted with any degree of accuracy
and are likely to vary materially from period to period. During the first
quarter of 1998, as well as throughout 1997, 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 increases to the provision for loan losses during those
periods. As opportunities present themselves in future periods, the Company
16
<PAGE>
may continue to reinvest some or all of the income realized from the
disposition of client warrants in furthering its business strategies.
Letter of credit fees, foreign exchange fees and other trade finance income
totaled $1.7 million in the first quarter of 1998, an increase of $0.7
million, or 74.8%, from the $1.0 million earned in the first quarter of 1997.
The growth in this category of noninterest income reflects a concerted effort
by Management to expand the penetration of trade finance products and
services among the Company's growing client base, a large percentage of which
provide products and services in international markets.
The Company realized a $0.5 million gain on sales of investment securities
during the first quarter of 1998, compared to a nominal gain on sales of
investment securities during the prior year first quarter. All investment
securities sold were classified as available-for-sale, and all sales were
conducted as a normal component of the Company's asset/liability and
liquidity management activities. For additional related discussion, see the
Item 2 section entitled "Liquidity."
Deposit service charges totaled $0.4 million for both the first quarters of
1998 and 1997. 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.
Other noninterest income largely consists of service-based fee income, and
increased $0.1 million, or 22.4%, to $0.4 million in the first quarter of
1998 from $0.3 million in the first quarter of 1997. The increase during 1998
was primarily due to a higher volume of cash management services related to
the Company's growing client base.
NONINTEREST EXPENSE
Noninterest expense in the first quarter of 1998 totaled $18.9 million, a
$4.2 million, or 28.9%, increase from the $14.7 million incurred in the
comparable 1997 period. Management closely monitors the level of noninterest
expense using a variety of financial ratios, including the efficiency ratio.
The efficiency ratio is calculated by dividing the amount of noninterest
expense, excluding costs associated with other real estate owned, by adjusted
revenues, defined as the total of net interest income and noninterest income,
excluding income from the disposition of client warrants and gains or losses
related to sales of investment securities. This ratio reflects the level of
operating expense required to generate $1 of operating revenue. The Company's
efficiency ratio for the 1998 first quarter was 54.9% versus 57.5% for the
first quarter of 1997. The following table presents the detail of noninterest
expense and the incremental contribution of each line item to the Company's
efficiency ratio:
17
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------
1998 1997
------------------- ----------------------
Percent of Percent of
Adjusted Adjusted
(Dollars in thousands) Amount Revenues Amount Revenues
- - - -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Compensation and benefits $11,621 33.8% $ 9,056 35.5%
Business development and travel 1,555 4.5 960 3.8
Professional services 1,426 4.1 1,436 5.6
Furniture and equipment 1,039 3.0 661 2.6
Net occupancy expense 990 2.9 762 3.0
Telephone 522 1.5 305 1.2
Postage and supplies 432 1.3 360 1.4
Advertising and promotion 391 1.1 278 1.1
Other 902 2.6 857 3.4
- - - -------------------------------------------------------------------------------
Total excluding cost of other
real estate owned 18,878 54.9% 14,675 57.5%
Cost of other real estate owned 26 (8)
- - - -------------------------------------------------------------------------------
Total noninterest expense $18,904 $14,667
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
</TABLE>
Compensation and benefits expenses totaled $11.6 million in the first quarter
of 1998, a $2.6 million, or 28.3%, increase over the $9.1 million incurred in
the first quarter of 1997. This increase in compensation and benefits
expenses was largely the result of an increase in the number of average
full-time equivalent (FTE) personnel employed by the Company. Average FTE
were 474 for the first quarter of 1998 versus 393 for the prior year first
quarter. The increase in FTE was primarily due to a combination of the
Company's efforts to develop and support new markets through geographic
expansion, to develop and expand products, services and niches, and to build
an infrastructure sufficient to support present and prospective business
activities. Further growth in the Company's FTE is likely to occur during
future years as a result of the continued expansion of the Company's business
activities.
During the third and fourth quarters of 1997, the Company granted a total of
209,000 shares of its common stock (restated to reflect a two-for-one stock
split for common shares of record as of April 17, 1998) to numerous
employees, subject to certain vesting requirements and resale restrictions
(restricted stock). For these restricted stock grants, unearned compensation
equivalent to the aggregate $5.9 million market value of the Company's common
stock on the dates of grant was charged to shareholders' equity and will
subsequently be amortized into compensation and benefits expense over the
four-year vesting period.
Business development and travel expenses totaled $1.6 million in the first
quarter of 1998, a $0.6 million, or 62.0%, increase from the $1.0 million
incurred in the first quarter of 1997. The increase in business development
and travel expenses was largely attributable to overall growth in the
Company's business, including both an increase in the number of FTE and
expansion into new geographic markets.
Professional services expenses, which consist of costs associated with
corporate legal services, litigation settlements, accounting and auditing
services, consulting, and the Company's Board of Directors, totaled $1.4
million in both the first quarter of 1998 and 1997. The level of professional
services expenses during 1998 and 1997 reflects the extensive efforts
undertaken by the Company to continue to build and support its
infrastructure, as well as evaluate and pursue
18
<PAGE>
new business opportunities, and also reflects the Company's efforts in
outsourcing several corporate functions, such as internal audit, facilities
management and credit review, where the Company believes it can achieve a
combination of cost savings and increased quality of service.
Certain lawsuits and claims arising in the ordinary course of business have
been filed or are pending against the Company and/or the Bank. Based upon
information available to the Company, its review of such claims to date and
consultation with its legal counsel, Management believes the liability
relating to these actions, if any, will not have a material adverse effect on
the Company's liquidity, consolidated financial position or results of
operations.
Occupancy, furniture and equipment expenses totaled $2.0 million in the first
quarter of 1998, a $0.6 million, or 42.6%, increase compared to $1.4 million
in the prior year respective period. The increase in occupancy, furniture and
equipment expenses in 1998, as compared to 1997, was primarily the result of
investments in computer equipment and software associated with technology
upgrades and the Company's aforementioned growth in personnel. Occupancy,
furniture and equipment expenses were also impacted by costs related to
furniture, computer equipment and other related costs associated with the
Company opening new loan offices in West Los Angeles, California, and
Rosemont, Illinois, in early 1998. The Company intends to continue its
geographic expansion into other emerging technology marketplaces across the
U.S. during future years.
In July 1997, the Bank finalized an amendment to the original lease
associated with its corporate headquarters. The amendment provides for the
lease of additional premises, approximating 56,000 square feet, adjacent to
the existing headquarters facility. Construction of the interior of the
building commenced in February 1998, and it is projected the Company could
begin occupying these additional premises between July 1998 and August 1998.
Future minimum rental payments related to the additional premises are
projected to be approximately $0.8 million for 1998, $1.1 million per year
for 1999 through 2001, $1.2 million per year for 2002 through 2003, $1.3
million in the year 2004, and $0.6 million in the year 2005. The Company
expects to incur other occupancy, furniture and equipment expenses in 1998
and future periods associated with the construction, furnishing and
maintenance of these additional premises, in addition to the future minimum
rental payments detailed above.
The Company and the Bank are aware of the "year 2000" issue and the related
potential risks. The Bank has engaged a third party vendor, a recognized
expert in assisting in all phases of year 2000 compliance, as part of a
multiphase project to assist the Bank with addressing the year 2000 issue.
The first two phases of the year 2000 compliance project, systems inventory
and risk assessment, are projected to be completed during the second quarter
of 1998. The expense and related potential impact on the Company's pre-tax
earnings of the first two phases of the year 2000 compliance project is
expected to approximate $250,000. The original last phase of the project,
which included systems replacement and/or modification and client
notification, has been segmented into two additional phases. Phase three,
renovation, consists of analysis, remediation and unit testing, and is
projected to be completed by the end of 1998. The expense and related
potential impact on the Company's pre-tax earnings of phase three of the year
2000 compliance project is expected to approximate $1,250,000. The fourth and
final phase, validation and implementation, is expected to begin in the first
quarter of 1999. Management has not yet assessed the potential financial
impact of the last phase of the project.
19
<PAGE>
Total telephone expenses were $0.5 million in the first quarter of 1998 and
$0.3 million in the 1997 first quarter. The increase in telephone expenses in
the first quarter of 1998, as compared to the prior year respective period,
was largely the result of overall growth in the Company's business, including
both an increase in the number of FTE and expansion into new geographic
markets.
INCOME TAXES
The Company's effective tax rate was 41.4% in the 1998 first quarter,
compared to 42.0% in the prior year first quarter. The decrease in the
Company's effective income tax rate was attributable to adjustments in the
Company's estimate of its tax liabilities.
FINANCIAL CONDITION
- - - -------------------
The Company's total assets were $2.8 billion at March 31, 1998, an increase
of $175.8 million, or 6.7%, compared to $2.6 billion at December 31, 1997.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell totaled
a combined $360.3 million at March 31, 1998, an increase of $38.5 million, or
12.0%, compared to the $321.8 million outstanding at the prior year end. This
increase was attributable to the Company investing excess funds, resulting
from the strong growth in deposits during the first quarter of 1998 having
exceeded the growth in loans, in these types of short-term, liquid
investments, and was coupled with Management's actions to diversify the
Company's portfolio of short-term investments.
INVESTMENT SECURITIES
Investment securities totaled $1.1 billion at March 31, 1998, an increase of
$44.3 million, or 4.4%, from the December 31, 1997, balance of $1.0 billion.
This increase resulted from excess funds that were generated by strong growth
in the Company's deposits outpacing the growth in loans during the first
three months of 1998, and primarily consisted of U.S. agency securities. The
growth in the investment portfolio reflected Management's actions to both
increase the portfolio of longer-term securities in an effort to obtain
available higher yields, and to increase as well as to further diversify the
Company's portfolio of short-term investments in response to a significant
increase in liquidity.
LOANS
Total loans, net of unearned income, at March 31, 1998, were $1.2 billion, a
$67.4 million, or 5.7%, increase compared to the roughly $1.2 billion total
at December 31, 1997. The increase in loans from the 1997 year-end total was
widely distributed throughout the loan portfolio. This diversified growth was
evidenced by increased quarter-end loan balances in many of the Company's
market niches, specialized lending products and loan offices.
20
<PAGE>
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 and earnings.
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.
The allowance for loan losses totaled $40.4 million at March 31, 1998, an
increase of $2.7 million, or 7.2%, compared to the $37.7 million balance at
December 31, 1997. This increase was due to $5.5 million in additional
provisions to the allowance for loan losses, offset by net charge-offs of
$2.8 million for the first three months of 1998. Gross charge-offs for the
first three months of 1998 were $4.0 million and included a charge-off
totaling $3.0 million related to one commercial credit in the Bank's
Diversified Industries practice.
In general, Management believes the allowance for loan losses is adequate as
of March 31, 1998. 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 and other
foreclosed assets. The table below sets forth certain relationships between
nonperforming loans, nonperforming assets and the allowance for loan losses:
21
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Dollars in thousands) (Unaudited) (Unaudited)
- - - --------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming assets:
Loans past due 90 days or more $ 1,080 $ 1,016
Nonaccrual loans 19,297 24,476
- - - --------------------------------------------------------------------------------
Total nonperforming loans 20,377 25,492
OREO and other foreclosed assets 1,858 1,858
- - - --------------------------------------------------------------------------------
Total nonperforming assets $22,235 $27,350
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
Nonperforming loans as a percentage of total loans 1.6% 2.2%
OREO and other foreclosed assets as a percentage
of total assets 0.1% 0.1%
Nonperforming assets as a percentage of total assets 0.8% 1.0%
Allowance for loan losses: $40,400 $37,700
As a percentage of total loans 3.2% 3.2%
As a percentage of nonaccrual loans 209.4% 154.0%
As a percentage of nonperforming loans 198.3% 147.9%
</TABLE>
Nonperforming loans totaled $20.4 million, or 1.6% of total loans, at March
31, 1998, compared to $25.5 million, or 2.2% of total loans, at December 31,
1997. The decrease in nonperforming loans from the prior year end was
primarily due to one credit in excess of $7.0 million being returned to
accrual status during the first quarter of 1998.
In addition to the loans disclosed in the foregoing analysis, Management has
identified four loans with principal amounts aggregating approximately $15.7
million, that, on the basis of information known by Management, were judged
to have a higher than normal risk of becoming nonperforming. The Company is
not aware of any other loans where known information about possible problems
of the borrower casts serious doubts about the ability of the borrower to
comply with the loan repayment terms.
OREO and other foreclosed assets totaled a combined $1.9 million at both
March 31, 1998, and December 31, 1997. The OREO and other foreclosed assets
balance at March 31, 1998, consisted of two OREO properties and one other
asset which was acquired through foreclosure. The OREO properties each
consist of multiple undeveloped lots and were acquired by the Company prior
to June 1993. The one other asset acquired through foreclosure, which totaled
$1.2 million at March 31, 1998, consists of a favorable leasehold right under
a master lease which the Company acquired upon foreclosure of a loan during
the third quarter of 1997.
DEPOSITS
Total deposits were $2.6 billion at March 31, 1998, an increase of $164.8
million, or 6.8%, from the prior year-end total of $2.4 billion. A
significant portion of the increase in deposits during the first three months
of 1998 was concentrated in the Company's highest-rate paying deposit
product, its bonus money market deposit product, which increased $204.9
million, or 17.9%, to a total of $1.4 billion at the end of the first quarter
of 1998. This increase was explained by high levels of client liquidity
attributable to a strong inflow of investment capital into the venture
22
<PAGE>
capital community, and by growth during the first quarter of 1998 in the
number of clients served by the Company.
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, 1998, the Bank's ratio of
liquid assets to total deposits was 52.0%. This ratio is well in excess of
the Bank's minimum policy guidelines and is slightly lower than the
comparable ratio of 52.1% as of December 31, 1997. In addition to monitoring
the level of liquid assets relative to total deposits, the Bank also utilizes
other policy measures in its liquidity management activities. As of March 31,
1998, the Bank was in compliance with all of these policy measures.
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, defined contribution plans and
employee stock purchase plan.
Shareholders' equity totaled $187.6 million at March 31, 1998, an increase of
$13.1 million from the $174.5 million balance at December 31, 1997. This
increase resulted from net income of $7.6 million combined with capital
generated primarily through the Company's employee benefit
23
<PAGE>
plans of $5.4 million and an increase in the after-tax net unrealized gain on
available-for-sale investments of $0.1 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 and Tier 1 risk-based capital ratio requirements are 10.0%
and 6.0%, respectively, of risk-weighted assets and certain off-balance sheet
items for a "well capitalized" depository institution.
The Federal Reserve Board has also established minimum capital leverage ratio
guidelines for state member banks. The ratio is determined using Tier 1
capital divided by quarterly average total assets. The guidelines require a
minimum of 5.0% for a well capitalized depository institution.
The Company's and the Bank's risk-based capital ratios were in excess of
regulatory guidelines for a well capitalized depository institution as of
March 31, 1998, and December 31, 1997. Capital ratios for the Company are set
forth below:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
- - - -------------------------------------------------------------------------------
<S> <C> <C>
Total risk-based capital ratio 11.9% 11.5%
Tier 1 risk-based capital ratio 10.6% 10.2%
Tier 1 leverage ratio 7.1% 7.1%
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
</TABLE>
The improvement in the Company's total risk-based capital ratio and Tier 1
risk-based capital ratio from December 31, 1997, to March 31, 1998, was
attributable to an increase in Tier 1 capital, partially offset by an
increase in total assets. 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 1998.
24
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item
pending at March 31, 1998, or at the date of this report.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
3.1 Articles of Incorporation of the Company, as amended
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1998.
25
<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: April 30, 1998 /s/ Christopher T. Lutes
---------------------------------------
Christopher T. Lutes
Senior Vice President and Controller
(Principal Accounting Officer)
26
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
SILICON VALLEY BANCSHARES
John C. Dean and A. Catherine Ngo certify that:
1. They are the President and the Secretary, respectively, of Silicon
Valley Bancshares.
2. SubSection (a) of Article III of the Articles of Incorporation is
amended to read in its entirety as follows:
"(a) This corporation is authorized to issue two
classes of shares designated "Preferred Stock" and "Common
Stock," respectively. The number of shares of Preferred
Stock authorized to be issued is Twenty Million (20,000,000)
and the number of shares of Common Stock authorized to be
issued is Sixty Million (60,000,000). Upon amendment of
this Article III (a), each outstanding share of Common
Stock is split up and converted into two (2) shares of
Common Stock."
3. The foregoing amendment of the Articles of Incorporation was duly
approved by the Board of Directors at its duly held meeting on March 19, 1998
at which a quorum was present and acting throughout.
1
<PAGE>
4. No shares of Preferred Stock are outstanding. Pursuant to Section
902 (c) of the California Corporations Code, shareholder approval is not
required for this action.
5. The foregoing amendment of the Articles of Incorporation of Silicon
Valley Bancshares shall be effective as of the close of business on April 17,
1998.
The undersigned declare under penalty of perjury that the matters set
forth in the foregoing certificate are true of their own knowledge.
Executed at Santa Clara, California on March 19, 1998.
/s/ John C. Dean
--------------------------------------
John C. Dean, President
/s/ A. Catherine Ngo
--------------------------------------
A. Catherine Ngo, Secretary
2
<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 BANCSHARES FOR THE THREE MONTHS ENDED MARCH 31, 1998, 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 130,163
<INT-BEARING-DEPOSITS> 255
<FED-FUNDS-SOLD> 360,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,058,249
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,242,014
<ALLOWANCE> 40,400
<TOTAL-ASSETS> 2,800,900
<DEPOSITS> 2,597,200
<SHORT-TERM> 0
<LIABILITIES-OTHER> 16,144
<LONG-TERM> 0
0
0
<COMMON> 82,421
<OTHER-SE> 105,135
<TOTAL-LIABILITIES-AND-EQUITY> 2,800,900
<INTEREST-LOAN> 31,102
<INTEREST-INVEST> 13,997
<INTEREST-OTHER> 4,442
<INTEREST-TOTAL> 49,541
<INTEREST-DEPOSIT> 17,601
<INTEREST-EXPENSE> 17,604
<INTEREST-INCOME-NET> 31,937
<LOAN-LOSSES> 5,480
<SECURITIES-GAINS> 474
<EXPENSE-OTHER> 18,904
<INCOME-PRETAX> 12,944
<INCOME-PRE-EXTRAORDINARY> 7,579
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,579
<EPS-PRIMARY> 0.38<F1>
<EPS-DILUTED> 0.36<F2>
<YIELD-ACTUAL> 5.3
<LOANS-NON> 19,297
<LOANS-PAST> 1,080
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 15,722
<ALLOWANCE-OPEN> 37,700
<CHARGE-OFFS> 3,950
<RECOVERIES> 1,170
<ALLOWANCE-CLOSE> 40,400
<ALLOWANCE-DOMESTIC> 27,379
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 13,021
<FN>
<F1>REPRESENTS BASIC EARNINGS PER SHARE.
<F2>REPRESENTS DILUTED EARNINGS PER SHARE.
</FN>
</TABLE>
