-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, El78L70OnK1R8XjXTsEzLXQPy9t7YxRxSDPnMc4gN5rh1clsZmayHxfUcmgWxWlJ ApP3Ms8FkdvRJHdNp/5r6Q== 0001047469-98-018394.txt : 19980514 0001047469-98-018394.hdr.sgml : 19980514 ACCESSION NUMBER: 0001047469-98-018394 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980430 DATE AS OF CHANGE: 19980513 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SILICON VALLEY BANCSHARES CENTRAL INDEX KEY: 0000719739 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 942856336 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15637 FILM NUMBER: 98611416 BUSINESS ADDRESS: STREET 1: 3003 TASMAN DRIVE, M/S NC820 CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4086547400 MAIL ADDRESS: STREET 1: 3003 TASMAN DRIVE, M/S NC820 CITY: SANTA CLARA STATE: CA ZIP: 95054 10-Q 1 EXHIBIT 10-Q 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. - - - -------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------- This report contains a total of 26 pages. 1 TABLE OF CONTENTS ----------------- PAGE ---- PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS 3 CONSOLIDATED INCOME STATEMENTS 4 CONSOLIDATED STATEMENTS OF 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 PART I - FINANCIAL INFORMATION ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS SILICON VALLEY BANCSHARES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1998 1997 (Dollars in thousands) (Unaudited) - - - ------------------------------------------------------------------------------- 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 - - - ------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------
See notes to interim consolidated financial statements. 3 SILICON VALLEY BANCSHARES AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS
For the three months ended -------------------------- March 31, March 31, 1998 1997 (Dollars in thousands, except per share amounts) (Unaudited) (Unaudited) - - - -------------------------------------------------------------------------------- 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 - - - -------------------------------------------------------------------------------- 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 - - - -------------------------------------------------------------------------------- - - - --------------------------------------------------------------------------------
See notes to interim consolidated financial statements. 4 SILICON VALLEY BANCSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended ------------------------------- March 31, March 31, 1998 1997 (Dollars in thousands) (Unaudited) (Unaudited) - - - ------------------------------------------------------------------------------------------------------ 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 - - - ------------------------------------------------------------------------------------------------------ - - - ------------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements. 5 SILICON VALLEY BANCSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended --------------------------- March 31, March 31, 1998 1997 (Dollars in thousands) (Unaudited) (Unaudited) - - - --------------------------------------------------------------------------------- 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 - - - --------------------------------------------------------------------------------- - - - ---------------------------------------------------------------------------------
See notes to interim consolidated financial statements. 6 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 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 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.
Net Per Share (Dollars and shares in thousands, Income Shares Amount except per share amounts) (Unaudited) (Unaudited) (Unaudited) - - - ------------------------------------------------------------------------------------------------------ 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 - - - ------------------------------------------------------------------------------------------------------ - - - ------------------------------------------------------------------------------------------------------
9 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:
March 31, December 31, 1998 1997 (Dollars in thousands) (Unaudited) - - - ----------------------------------------------------------------- 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 - - - ----------------------------------------------------------------- - - - -----------------------------------------------------------------
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:
1998 1997 Quarter Ended March 31, (Unaudited) (Unaudited) - - - ----------------------------------------------------------------- (Dollars in thousands) 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 - - - ----------------------------------------------------------------- - - - -----------------------------------------------------------------
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 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.
1998 to 1997 Quarter Ended March 31, 1998 1997 Increase - - - ---------------------------------------------------------------------------------- (Dollars in thousands) 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 - - - ---------------------------------------------------------------------------------- - - - ----------------------------------------------------------------------------------
11 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
- - - -------------------------------------------------------------------------------------------------------------------- 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 - - - -------------------------------------------------------------------------------------------------------------------- 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 - - - ------------------------------------- ---------- ---------- - - - ------------------------------------- ---------- ----------
(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 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.
1998 Compared to 1997 ------------------------------------ Increase (Decrease) Due to Change in ------------------------------------ (Dollars in thousands) Volume Rate Total - - - --------------------------------------------------------------------------------- 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 - - - --------------------------------------------------------------------------------- - - - ---------------------------------------------------------------------------------
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 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 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:
Quarter Ended March 31, 1998 1997 - - - ------------------------------------------------------------------------------- (Dollars in thousands) 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 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 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
Three Months Ended March 31, --------------------------------------------- 1998 1997 ------------------- ---------------------- Percent of Percent of Adjusted Adjusted (Dollars in thousands) Amount Revenues Amount Revenues - - - ------------------------------------------------------------------------------- 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 - - - ------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------
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 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 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 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
March 31, December 31, 1998 1997 (Dollars in thousands) (Unaudited) (Unaudited) - - - -------------------------------------------------------------------------------- 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%
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 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 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:
March 31, December 31, 1998 1997 (Unaudited) - - - ------------------------------------------------------------------------------- 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% - - - ------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------
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 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 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 EX-3.1 2 EXHIBIT 3.1 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 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 EX-27 3 EXHIBIT 27
9 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. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 130,163 255 360,000 0 1,058,249 0 0 1,242,014 40,400 2,800,900 2,597,200 0 16,144 0 0 0 82,421 105,135 2,800,900 31,102 13,997 4,442 49,541 17,601 17,604 31,937 5,480 474 18,904 12,944 7,579 0 0 7,579 0.38 0.36 5.3 19,297 1,080 0 15,722 37,700 3,950 1,170 40,400 27,379 0 13,021 REPRESENTS BASIC EARNINGS PER SHARE. REPRESENTS DILUTED EARNINGS PER SHARE.
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