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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 11, 1996
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
Commission File Number: 33-41102
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SILICON VALLEY BANCSHARES
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2856336
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
3003 TASMAN DRIVE 95054-1191
SANTA CLARA, CALIFORNIA (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (408) 654-7282
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK (NO PAR VALUE) NASDAQ NATIONAL MARKET SYSTEM
(Title of each class) (Name of each exchange on which registered)
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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of its common stock on February 9,
1996, on the NASDAQ National Market System was $188,310,442.
At February 9, 1996, 9,075,202 shares of the registrant's common stock (no
par value) were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PARTS OF FORM 10-K
DOCUMENTS INCORPORATED INTO WHICH INCORPORATED
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Definitive proxy statement for the Company's 1996
Annual Meeting of Shareholders to be filed within 120
days of the end of the fiscal year ended December 31,
1995 Part III
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THIS REPORT CONTAINS A TOTAL OF 71 PAGES, INCLUDING EXHIBITS.
THE EXHIBIT INDEX IS ON PAGE 63.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS........................................................................................... 3
ITEM 2. PROPERTIES......................................................................................... 18
ITEM 3. LEGAL PROCEEDINGS.................................................................................. 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................... 19
ITEM 6. SELECTED FINANCIAL DATA............................................................................ 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................ 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............... 60
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................ 60
ITEM 11. EXECUTIVE COMPENSATION............................................................................ 60
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................... 60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................... 60
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................. 60
SIGNATURES................................................................................................. 61
INDEX TO EXHIBITS.......................................................................................... 63
2
PART 1
ITEM 1. BUSINESS
GENERAL
Silicon Valley Bancshares (the "Company") is a California corporation and
bank holding company that was incorporated on April 23, 1982. The Company's
principal subsidiary is Silicon Valley Bank (the "Bank"), a wholly owned
subsidiary of the Company that was organized and incorporated as a California
banking corporation on October 17, 1983. SVB Leasing Company, a wholly owned
subsidiary of the Company, was incorporated on November 14, 1984 as a California
corporation, and has remained inactive since incorporation.
The Bank is a member of the Federal Reserve System and its deposits are
insured by the Federal Deposit Insurance Corporation (FDIC). The Bank maintains
regional banking offices in Northern and Southern California, and additionally
has loan offices in Maryland, Massachusetts and Oregon. The Bank serves emerging
and middle-market growth companies in specific targeted niches, and focuses on
the technology and life sciences industries, while identifying and capitalizing
on opportunities to serve other groups of clients with unique financial needs.
The Company intends to continue the expansion of Bank operations, both in
terms of geographic presence and market opportunities, within California and
other marketplaces across the nation.
MARKET AREA AND CLIENT BASE
The Bank is organized into three major marketing groups: the Technology
Group; the Special Industries Group; and the Strategic Financial Services Group.
These groups serve customers across the nation through branches and/or loan
offices located in Northern and Southern California, Maryland, Massachusetts and
Oregon. The Bank also has a National Accounts Division that targets customers in
other key markets throughout the United States.
The Bank's Technology Group focuses on commercial lending to companies
within a variety of technology and life sciences industries, such as
semiconductors, electronics, software, communications, peripherals, medical
devices, biotechnology and others. The Technology Group serves clients across
the nation and these clients are generally not affected by local economic cycles
as much as they are influenced by the global market conditions for their
industry's products or services.
Lenders in the Bank's Special Industries Group (SIG) serve clients in a
variety of middle-market commercial enterprises, primarily in Northern
California. The Bank's strategy is to identify under-served niches where a
strong opportunity exists to serve targeted clients, generally those with credit
needs under $10.0 million, by developing a high level of knowledge of the target
market and its business cycles and risks. In 1994 and 1995, the Bank identified
the wine industry and religious institutions as two new niches, and in 1996 has
identified a niche within the entertainment industry. The Bank has commenced
lending operations related to all three of these new niches.
Within SIG, the Bank's Real Estate Division is selectively involved in
lending operations related to real estate construction projects, including
"owner-build-to-suit" residences and "pre-leased" commercial buildings. In
addition, the Real Estate Division supports other Bank lending groups with its
expertise in real estate lending. Real estate term loans are usually made to
clients of the Technology or Special Industries Groups to finance commercial
real estate to be operated by the client.
The Bank's Strategic Financial Services Group consists of several fee-based
and specialized lending product divisions. The International Division offers
clients a variety of trade finance products, while the Cash Management Division
provides services to help clients manage cash collections, disbursements and
investments. Both the Factoring Division and the Commercial Finance Division (an
asset-based lending division) offer alternative financing to client companies
that do not qualify for traditional bank loans. The Factoring Division purchases
clients' accounts receivable at a discount, making operating funds immediately
available to the clients, and then manages the collection of the receivables.
The Factoring Division generally serves emerging technology companies and other
start-
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up businesses. The Commercial Finance Division serves client companies later in
their business cycle, typically with secured lines of credit requiring daily
collateral monitoring. As clients of the Commercial Finance Division grow, they
often become eligible for more traditional bank financing from one of the Bank's
other lending groups. The Executive Banking Division serves the personal banking
needs of certain executives and owners of client companies, as well as the
partners of venture capital firms. Finally, the Business Banking Division serves
small, usually non-technology, companies in a variety of industries. Lending
services provided by the Business Banking Division focus on both government-
guaranteed and other small business loans.
EMPLOYEES
As of December 31, 1995, the Company and the Bank, in the aggregate,
employed 348 full-time equivalent staff, consisting of both full-time and
permanent part-time employees. Full-time equivalent is a measurement equivalent
to one full-time employee working a standard day and is based on the number of
hours worked in a given month. The Company's and the Bank's employees are not
represented by a union or covered by a collective bargaining agreement.
Management of the Company and the Bank believes that, in general, its employee
relations are satisfactory.
COMPETITION
The banking and financial services business in California, as well as the
rest of the United States, is highly competitive, particularly in the Bank's
market areas. The increasingly competitive environment is primarily a result of
changes in regulation, changes in technology and product delivery systems, and
the accelerating pace of consolidation among financial services providers. The
Bank competes for client loans, deposits, and other financial services with
other commercial banks, savings and loan associations, securities and brokerage
companies, mortgage companies, insurance companies, finance companies, money
market funds, credit unions, and other non-bank financial services providers.
Many of these competitors are much larger in total assets and capitalization,
have greater access to capital markets and offer a broader array of financial
services than the Bank. In order to compete with the other financial services
providers, the Bank principally relies upon promotional activities in its market
areas, personal relationships with clients, referral sources established by
officers, directors and employees, and specialized services tailored to meet the
Bank's clients' needs.
In those instances where the Bank is unable to accommodate a client's needs,
the Bank will seek to arrange for those services to be provided by its
correspondents. The Bank currently has approximately 440 clients for whom
correspondents provide a variety of services.
ECONOMIC CONDITIONS, GOVERNMENT POLICIES AND LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rates paid by the Bank on its deposits and other
borrowings and the interest rates received by the Bank on loans extended to its
clients and securities held in its portfolio comprise the major portion of the
Company's earnings. These rates are highly sensitive to many factors that are
beyond the control of the Company and the Bank. Accordingly, the financial
position, earnings and growth of the Company are subject to the influence of
domestic and foreign economic conditions, including such factors as inflation,
recession and unemployment.
The commercial banking business is not only affected by prevailing economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
The Federal Reserve Board implements national monetary policies (with objectives
such as curbing inflation and combating recession) through its open-market
operations in United States Government securities, by adjusting the required
level of reserves for depository institutions subject to its reserve
requirements and by varying the federal funds and discount rates applicable to
borrowings by depository institutions. The actions of the Federal Reserve Board
in these areas influence the growth of bank loans, investments and deposits and
also affect interest rates charged on loans, earned on investments and paid on
deposits. The nature and impact on the Company and the Bank of any future
changes in monetary and fiscal policies cannot be predicted.
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From time to time, legislation is enacted which has the effect of increasing
the cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in the U.S. Congress, in the California
legislature and before various bank regulatory and other professional agencies.
For example, legislation was recently introduced in the U.S. Congress that would
merge the deposit insurance funds applicable to banks and savings associations
and impose a one-time assessment on savings associations to recapitalize the
deposit insurance fund applicable to savings associations. In addition,
legislation has been proposed that would repeal the current statutory
restrictions on affiliations between banks and securities firms. Under the
proposed legislation, bank holding companies would be allowed to control both a
bank and a securities affiliate, which could engage in the full range of
investment banking activities, including corporate underwriting. The likelihood
of any major legislative changes and the impact such changes might have on the
Company and the Bank cannot be predicted. See "Item 1. Business -- Supervision
and Regulation."
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain laws
which relate to the regulation of the Company and the Bank. The description does
not purport to be complete and is qualified in its entirety by reference to the
applicable laws and regulations. The nature and impact of any future changes
concerning the regulation of the Company and the Bank cannot be predicted.
FORMAL SUPERVISORY ACTIONS
During 1993, the Company and the Bank consented to formal supervisory orders
by the Federal Reserve Bank of San Francisco and the Bank consented to a formal
supervisory order by the California State Banking Department. These orders
require, among other actions, the following: suspension of cash dividends;
restrictions on transactions between the Company and the Bank without prior
regulatory approval; development of a capital plan to ensure the Bank maintains
adequate capital levels subject to regulatory approval; development of plans to
improve the quality of the Bank's loan portfolio through collection or
improvement of the credits within specified time frames; changes to the Bank's
loan policies which require the Directors' Loan Committee to approve all loans
to any one borrower exceeding $3.0 million and requiring the Board of Directors
to become more actively involved in loan portfolio management and monitoring
activities; review of, and changes in, the Bank's loan policies to implement (i)
policies for controlling and monitoring credit concentrations, (ii) underwriting
standards for all loan products, and (iii) standards for credit analysis and
credit file documentation; development of an independent loan review function
and related loan review policies and procedures; development of Board of
Directors oversight programs to establish and maintain effective control and
supervision of Management and major Bank operations and activities; development
of a plan, including a written methodology, to maintain an adequate allowance
for loan losses, defined as a minimum of 2.0% of total loans; development of
business plans to establish guidelines for growth and ensure maintenance of
adequate capital levels; a review and evaluation of existing compensation
practices and development of officer compensation policies and procedures by the
Boards of Directors of the Company and the Bank; policies requiring that changes
in fees paid to directors as well as bonuses paid to executive officers first
receive regulatory approval; and development of a detailed internal audit plan
for approval by the Board of Directors of the Bank. The California State Banking
Department order further requires the Bank to maintain a minimum tangible
equity-to-assets ratio of 6.5%.
In addition, such plans, policies and procedures may not be amended without
prior regulatory approval. The Company and the Bank have taken steps to address
these requirements. The Company believes compliance with these actions has not
and will not have a material adverse impact on the business of the Bank, its
clients, or the Company. The Company and the Bank were in substantial compliance
with such orders at December 31, 1995.
5
The following discussions are limited by the disclosures on the formal
supervisory actions discussed above.
THE COMPANY
The Company, as a registered bank holding company, is subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company
is required to file with the Federal Reserve Board quarterly, semi-annual and
annual reports, and such additional information as the Federal Reserve Board may
require pursuant to the BHCA. The Federal Reserve Board may conduct examinations
of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an activity
or terminate control of, liquidate or divest certain subsidiaries or affiliates
when the Federal Reserve Board believes the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the financial safety,
soundness or stability of any of its banking subsidiaries. The Federal Reserve
Board also has the authority to regulate provisions of certain bank holding
company debt, including the authority to impose interest rate ceilings and
reserve requirements on such debt. Under certain circumstances, the Company must
file written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve Board, a bank
holding company and its non-banking subsidiaries are prohibited from requiring
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. Further, the Company is required by
the Federal Reserve Board to maintain certain minimum levels of capital. See
"Item 1. Business -- Supervision and Regulation -- Capital Standards."
The Company is required to obtain the prior approval of the Federal Reserve
Board for the acquisition of more than 5.0% of the outstanding shares of any
class of voting securities, or substantially all of the assets, of any bank or
bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank holding
company.
The Company is prohibited by the BHCA, except in certain instances
prescribed by statute, from acquiring direct or indirect ownership or control of
more than 5.0% of the outstanding voting shares of any company that is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. However, the Company, subject to the
prior approval of the Federal Reserve Board, may engage in, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve Board to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In making any such determination, the Federal Reserve
Board considers whether the performance of such activities by the Company or an
affiliate can reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices. The
Federal Reserve Board is also empowered to differentiate between activities
commenced "de novo" and activities commenced by acquisition, in whole or in
part, of a going concern.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the
6
Federal Reserve Board's regulations or both. This doctrine has become known as
the "source of strength" doctrine. Although the U.S. Court of Appeals for the
Fifth Circuit found the Federal Reserve Board's source of strength doctrine
invalid in 1990, stating that the Federal Reserve Board had no authority to
assert the doctrine under the BHCA, the decision, which is not binding on
federal courts outside the Fifth Circuit, was recently reversed by the U.S.
Supreme Court on procedural grounds. The validity of the source of strength
doctrine is likely to continue to be the subject of litigation until
definitively resolved by the courts or by the U.S. Congress.
The Company is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and its subsidiaries
are subject to examination by, and may be required to file reports with, the
California State Banking Department.
Finally, the Company is subject to the periodic reporting requirements of
the Securities Exchange Act of 1934, as amended, including but not limited to,
filing annual, quarterly and other current reports with the Securities and
Exchange Commission.
THE BANK
The Bank, as a California state-chartered bank and a member of the Federal
Reserve System, is subject to primary supervision, periodic examination and
regulation by the California Superintendent of Banks (the "Superintendent") and
the Federal Reserve Board. If, as a result of an examination of the Bank, the
Federal Reserve Board should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity or other
aspects of the Bank's operations are unsatisfactory or that the Bank or its
Management is violating or has violated any law or regulation, various remedies
are available to the Federal Reserve Board. Such remedies include the power to
enjoin "unsafe or unsound" practices, to require affirmative action to correct
any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in
capital, to restrict the growth of the Bank, to assess civil monetary penalties,
to remove officers and directors and ultimately to terminate the Bank's deposit
insurance, which for a California state-chartered bank would result in a
revocation of the Bank's charter. The Superintendent has many of the same
remedial powers. As noted above, the Bank has consented to formal supervisory
actions by both the California State Banking Department and the Federal Reserve
Bank of San Francisco.
The deposits of the Bank are insured by the FDIC in the manner and to the
extent provided by law. For this protection, the Bank pays a quarterly statutory
assessment. See "Item 1. Business -- Supervision and Regulation -- Premiums for
Deposit Insurance." Because the Bank's deposits are insured by the FDIC, the
Bank is also subject to certain FDIC rules and regulations.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including, but not limited to, reserves against deposits, interest
rates payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, locations of branch offices and capital requirements.
Further, the Bank is required to maintain certain minimum levels of capital. See
"Item 1. Business -- Supervision and Regulation -- Capital Standards."
DIVIDENDS AND OTHER TRANSFERS OF FUNDS
The Company is a legal entity separate and distinct from the Bank. The
Company's ability to pay cash dividends is limited by California state law. As
noted above, the Company and the Bank consented to formal regulatory orders by
the Federal Reserve Bank of San Francisco, and the Bank consented to a formal
regulatory order by the California State Banking Department. Under these orders,
the Company is prohibited from paying cash dividends, and the Bank may be
restricted from transferring funds to the Company without prior regulatory
approval.
In addition to the limitations imposed under the formal supervisory orders
noted above, there are statutory and regulatory limitations on the amount of
dividends which may be paid to the Company by the Bank. California law restricts
the amount available for cash dividends by state-chartered banks to
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the lesser of retained earnings or the bank's net income for its last three
fiscal years (less any distributions to shareholders made during such period).
Notwithstanding this restriction, a bank may, with the prior approval of the
Superintendent, pay a cash dividend in an amount not exceeding the greater of
the retained earnings of the bank, the net income for such bank's last preceding
fiscal year and the net income of the bank for its current fiscal year.
As a Federal Reserve member bank, there are separate limitations imposed
under applicable Federal Reserve Board regulations with respect to the Bank's
ability to pay dividends to the Company. In particular, the prior approval of
the Federal Reserve Board is required if the total of all dividends declared by
a Federal Reserve member bank in any calendar year exceeds the bank's net
profits (as defined) for that year combined with its retained net profits (as
defined) for the preceding two years, less any transfers to surplus or to a fund
for the retirement of preferred stock. Such approval authority may be delegated
to the local Federal Reserve Bank under certain circumstances.
The Federal Reserve Board also has the authority to prohibit the Bank from
engaging in activities that, in the Federal Reserve Board's opinion, constitute
unsafe or unsound practices in conducting its business. It is possible,
depending upon the financial condition of the bank in question and other
factors, that the Federal Reserve Board could assert that the payment of
dividends or other payments might, under some circumstances, be an unsafe or
unsound practice. Further, the Federal Reserve Board has established guidelines
with respect to the maintenance of appropriate levels of capital by banks or
bank holding companies under its jurisdiction. Compliance with the standards set
forth in such guidelines and the restrictions that are or may be imposed under
the prompt corrective action provisions of federal law could limit the amount of
dividends which the Bank or the Company may pay. The Superintendent may impose
similar limitations on the conduct of California-chartered banks. As discussed
above, both the Company and the Bank have consented to formal supervisory
actions by their regulators. See "Item 1. Business -- Supervision and Regulation
- -- Prompt Corrective Action and Other Enforcement Mechanisms," and "Supervision
and Regulation -- Capital Standards" for a discussion of these additional
restrictions on capital distributions.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of, or investments in,
stock or other securities thereof, the taking of such securities as collateral
for loans, and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Company or to or in any other affiliate are limited, individually, to 10.0% of
the Bank's capital and surplus (as defined by federal regulations), and such
secured loans and investments are limited, in the aggregate, to 20.0% of the
Bank's capital and surplus (as defined by federal regulations). California law
also imposes certain restrictions with respect to transactions involving the
Company and other controlling persons of the Bank. Additional restrictions on
transactions with affiliates may be imposed on the Bank under the prompt
corrective action provisions of federal law. See "Item 1. Business --
Supervision and Regulation -- Prompt Corrective Action and Other Enforcement
Mechanisms."
CAPITAL STANDARDS
The Federal Reserve Board has adopted minimum risk-based capital guidelines
intended to provide a measure of capital that reflects the degree of risk
associated with a banking organization's operations for both transactions
reported on the balance sheet as assets, and transactions, such as commitments,
letters of credit and recourse arrangements, which are recorded as off-balance
sheet items. Under these guidelines, dollar amounts of assets and credit
equivalent amounts of off-balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0.0% for assets with low credit
risk, such as certain U.S. Treasury securities, to 100.0% for assets with
relatively high credit risk, such as business loans.
8
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk-adjusted assets. Federal banking
regulators measure risk-adjusted assets, which includes off-balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily
of common stock, retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and minority
interests in certain subsidiaries, less most intangible assets. Tier 2 capital
consists of the allowance for loan losses, cumulative preferred stock, long-term
preferred stock, eligible term subordinated debt and certain other instruments
with some characteristics of equity. The inclusion of elements of Tier 2 capital
is subject to certain other requirements and limitations of the federal banking
agencies. The federal banking agencies require a minimum ratio of qualifying
total capital to risk-adjusted assets of 8.0% and a minimum ratio of Tier 1
capital to risk-adjusted assets of 4.0%.
In addition to the risk-based capital guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total quarterly average assets, referred to as the Tier 1 leverage ratio. For a
banking organization rated in the highest of the five categories used by federal
banking regulators to rate banking organizations, the minimum leverage ratio of
Tier 1 capital to total quarterly average assets is 3.0%. For all banking
organizations not rated in the highest category, the minimum leverage ratio must
be at least 100 to 200 basis points above the 3.0% minimum, or 4.0% to 5.0%. In
addition to these uniform risk-based capital guidelines and leverage ratio
requirements that apply across the industry, the federal banking regulators have
the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank's
capital adequacy, an assessment of the exposure to declines in the economic
value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing the
level of a bank's exposure to interest rate risk, which is the subject of a
proposed policy statement issued by the federal banking agencies concurrently
with the final regulations. The proposal would measure interest rate risk in
relation to the effect of a 200 basis point change in market interest rates on
the economic value of a bank. Banks with high levels of measured exposure or
weak management systems generally will be required to hold additional capital
for interest rate risk. The specific amount of capital that may be needed would
be determined on a case-by-case basis by the examiner and the appropriate
federal banking agency.
In January 1995, the federal banking agencies issued a final rule relating
to capital standards and the risks arising from the concentration of credit and
nontraditional banking activities. Institutions which have significant amounts
of their assets concentrated in high risk loans or nontraditional banking
activities, and who fail to adequately manage these risks, will be required to
set aside capital in excess of the regulatory minimums. The federal banking
agencies have not imposed any quantitative assessment for determining when these
risks are significant, but have identified these issues as important factors
they will review in assessing an individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency policy
statement on the allowance for loan and lease losses which, among other things,
establishes certain benchmark percentages of loan loss reserves to classified
assets. The benchmark set forth by such policy statement is the sum of: (a)
100.0% of assets classified loss; (b) 50.0% of assets classified doubtful; (c)
15.0% of assets classified substandard; and (d) estimated credit losses on other
assets over the upcoming 12 months.
Federally supervised banks and savings associations are currently required
to report deferred tax assets in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109. See "Item 1. Business -- Recent Accounting
Pronouncements." The federal banking agencies recently issued final rules,
effective April 1, 1995, which limit the amount of deferred tax assets that are
allowable in computing an institution's regulatory capital. The standard has
been in effect on an interim basis
9
since March 1993. Deferred tax assets that can be realized for taxes paid in
prior carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of (i) the amount that can be realized within one year of
the quarter-end report date, or (ii) 10.0% of Tier 1 Capital. The amount of any
deferred tax asset in excess of this limit would be excluded from Tier 1 Capital
and total assets for purposes of regulatory risk-based capital calculations.
Future changes in regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such a change could
affect the ability of the Bank to grow and could restrict the amount of profits,
if any, available for the payment of dividends.
The following table presents the capital ratios for the Bank, compared to
its minimum regulatory capital requirements, as of December 31, 1995:
ACTUAL MINIMUM CAPITAL
DECEMBER 31, 1995 RATIO REQUIREMENT
- ---------------------------------------------------------------------------- --------- --------------------
Total risk-based capital ratio.............................................. 11.4% 8.0%
Tier 1 risk-based capital ratio............................................. 10.2% 4.0%
Tier 1 leverage ratio....................................................... 7.7% 4.0%
Equity-to-assets ratio...................................................... 7.1% 6.5%(1)
- ------------------------
(1) Required under the formal supervisory agreement with the California State
Banking Department.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal laws require each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including,
but not limited to, those institutions which fall below one or more of the
prescribed minimum required capital ratios. Such laws require each federal
banking agency to promulgate regulations defining the following five categories
in which an insured depository institution will be placed, based on the level of
its capital ratios: "well capitalized;" "adequately capitalized;"
"undercapitalized;" "significantly undercapitalized;" and "critically
undercapitalized."
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal law.
An insured depository institution generally will be classified in the following
categories based on the capital measures indicated below:
TOTAL
RISK-BASED TIER 1 RISK-BASED TIER 1
CAPITAL CATEGORY CAPITAL RATIO CAPITAL RATIO LEVERAGE RATIO
- ---------------------------------------------------- --------------- ----------------- --------------
Well capitalized.................................... 10.0% 6.0% 5.0%
Adequately capitalized.............................. 8.0% 4.0% 4.0%
Undercapitalized.................................... LESS THAN 8.0% LESS THAN 4.0% LESS THAN 4.0%
Significantly undercapitalized...................... LESS THAN 6.0% LESS THAN 3.0% LESS THAN 3.0%
Critically undercapitalized (1)..................... N/A N/A N/A
- ------------------------
(1) Tangible equity to total assets less than 2.0%.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as critically undercapitalized unless its
capital ratio actually warrants such treatment.
10
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions, if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency within 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital restoration plan unless, among other things, it determines that the
plan (i) specifies the steps the institution will take to become adequately
capitalized, (ii) is based on realistic assumptions, and (iii) is likely to
succeed in restoring the depository institution's capital.
In addition, each company controlling an undercapitalized depository
institution must guarantee that the institution will comply with the capital
restoration plan until the depository institution has been classified as
adequately capitalized on an average basis during each of four consecutive
calendar quarters and must otherwise provide adequate assurances of performance.
The aggregate liability of such guarantee is limited to the lesser of (a) an
amount equal to 5.0% of the depository institution's total assets at the time
the institution became undercapitalized, or (b) the amount which is necessary to
bring the institution into compliance with all capital standards applicable to
such institution as of the time the institution fails to comply with its capital
restoration plan. Finally, the appropriate federal banking agency may impose any
of the additional restrictions or sanctions that it may impose on significantly
undercapitalized institutions if it determines that such action will further the
purpose of the prompt corrective action provisions.
An insured depository institution that is significantly undercapitalized, or
is undercapitalized and fails to submit, or in a material respect, to implement,
an acceptable capital restoration plan, is subject to additional restrictions
and sanctions. These include, among other things: (i) a forced sale of voting
shares to raise capital or, if grounds exist for appointment of a receiver or
conservator, a forced merger; (ii) restrictions on transactions with affiliates;
(iii) further limitations on interest rates paid on deposits; (iv) further
restrictions on growth or required shrinkage; (v) modification or termination of
specified activities; (vi) replacement of directors or senior executive
officers; (vii) prohibitions on the receipt of deposits from correspondent
institutions; (viii) restrictions on capital distributions by the holding
companies of such institutions; (ix) required divestiture of subsidiaries by the
institution; and (x) other restrictions as determined by the appropriate federal
banking agency.
Although the appropriate federal banking agency has discretion to determine
which of the foregoing restrictions or sanctions it will seek to impose, it is
required to force a sale of voting shares or merger, impose restrictions on
affiliate transactions, and impose restrictions on rates paid on deposits,
unless it determines that such actions would not further the purpose of the
prompt corrective action provisions. In addition, without the prior written
approval of the appropriate federal banking agency, a significantly
undercapitalized institution may not pay any bonus to its senior executive
officers or provide compensation to any of them at a rate that exceeds each such
officer's average rate of base compensation during the 12 calendar months
preceding the month in which the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of
11
directors of an insured depository institution would not be liable to the
institution's shareholders or creditors for consenting in good faith to the
appointment of a receiver or conservator or to an acquisition or merger as
required by the federal regulators.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease and desist order that can be judicially enforced, the
termination of deposit insurance (in the case of a depository institution), the
imposition of civil monetary penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted.
SAFETY AND SOUNDNESS STANDARDS
In July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by the Federal
Deposit Insurance Corporation Improvement Act (FDICIA). The guidelines set forth
operational and managerial standards relating to internal controls, information
systems and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth and compensation, fees and benefits.
Guidelines for asset quality and earnings standards will be adopted in the
future. The guidelines establish the safety and soundness standards that the
agencies will use to identify and address problems at insured depository
institutions before capital becomes impaired. If an institution fails to comply
with a safety and soundness standard, the appropriate federal banking agency may
require the institution to submit a compliance plan. Failure to submit a
compliance plan or to implement an accepted plan may result in enforcement
action.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective on March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan-to-value limits that do
not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate-related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required: for all transactions with a transaction value of $1.0 million or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federal-related transactions" must now comply with
the federal agencies' appraisal standards. Federal-related transactions include:
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property; the financing or refinancing of real property; and
the use of real property or interests in real property as security for a loan or
investment, including mortgage-backed securities.
PREMIUMS FOR DEPOSIT INSURANCE
Federal law has established several mechanisms to increase funds to protect
deposits insured by the Bank Insurance Fund (BIF) administered by the FDIC. The
FDIC is authorized to borrow up to $30.0 billion from the United States
Treasury, up to 90.0% of the fair market value of assets of institutions
acquired by the FDIC as receiver from the Federal Financing Bank, and from
depository institutions that are members of the BIF. Any borrowings not repaid
by asset sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100
12
of insured deposits. The result of these provisions is that the premium
assessment rate on deposits of BIF members could increase in the future. The
FDIC also has authority to impose special assessments against insured deposits.
The FDIC implemented a final risk-based assessment system, as required by
FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as the BIF's
reserve ratio is less than the specified "designated reserve ratio" of 1.25%,
the total amount raised from BIF members by the risk-based assessment system may
not be less than the amount that would be raised if the assessment rate for all
BIF members were 23 cents per $100 of deposits. On August 8, 1995, the FDIC
announced that the designated reserve ratio had been achieved and, accordingly,
issued final regulations adopting an assessment rate schedule for BIF members of
4 cents to 31 cents per $100 of deposits effective on June 1, 1995. On November
14, 1995, the FDIC further reduced deposit insurance premiums to a range of 0 to
27 cents per $100 of deposits effective for the assessment period beginning
January 1, 1996.
Under the risk-based assessment system, a BIF member institution, such as
the Bank, is categorized into one of the three capital categories: "well
capitalized;" "adequately capitalized;" and "undercapitalized," and one of three
categories based on supervisory evaluations by its primary federal regulator (in
the Bank's case, the FDIC). The three supervisory categories are: financially
sound with only a few minor weaknesses (Group A); demonstrates weaknesses that
could result in significant deterioration (Group B); and poses a substantial
probability of loss (Group C). The capital ratios used by the FDIC to define
"well capitalized," "adequately capitalized," and "undercapitalized" are the
same as in the FDIC's prompt corrective action regulations. The BIF assessment
rates are summarized below; assessment figures are expressed in terms of cents
per $100 in deposits.
ASSESSMENT RATES EFFECTIVE THROUGH THE FIRST HALF OF 1995
CAPITAL CATEGORY GROUP A GROUP B GROUP C
- ----------------------------------------------------------------------- ----------- ----------- -----------
Well capitalized....................................................... 23 26 29
Adequately capitalized................................................. 26 29 30
Undercapitalized....................................................... 29 30 31
ASSESSMENT RATES EFFECTIVE THROUGH THE SECOND HALF OF 1995
CAPITAL CATEGORY GROUP A GROUP B GROUP C
- ----------------------------------------------------------------------- ----------- ----------- -----------
Well capitalized....................................................... 4 7 21
Adequately capitalized................................................. 7 14 28
Undercapitalized....................................................... 14 28 31
ASSESSMENT RATES EFFECTIVE JANUARY 1, 1996
CAPITAL CATEGORY GROUP A GROUP B GROUP C
- ----------------------------------------------------------------------- ----------- ----------- -----------
Well capitalized....................................................... 0* 3 17
Adequately capitalized................................................. 3 10 24
Undercapitalized....................................................... 10 24 27
- ------------------------
* Subject to a statutory minimum assessment of $2,000 per year (which also
applies to all other assessment risk classifications).
At December 31, 1995, the Bank's assessment rate was equivalent to a well
capitalized, group B institution.
A number of proposals have recently been introduced in the U.S. Congress to
address the disparity in bank and thrift deposit insurance premiums. On
September 19, 1995, legislation was approved by the U.S. House of
Representatives Banking Committee that would, among other things: (i) impose
13
a requirement on all Savings Association Insurance Fund (SAIF) member
institutions to fully recapitalize the SAIF by paying a one-time special
assessment of approximately 85 cents per $100 in deposits as of March 31, 1995,
which assessment would be due as of January 1, 1996; (ii) spread the
responsibility for Financing Corporation interest payments across all
FDIC-insured institutions on a pro-rata basis, subject to certain exceptions;
(iii) require that deposit insurance premium assessment rates applicable to SAIF
member institutions be no less than deposit insurance premium assessment rates
applicable to BIF member institutions; (iv) provide for a merger of the BIF and
the SAIF as of January 1, 1998; (v) require savings associations to convert to
state or national bank charters by January 1, 1998; (vi) require savings
associations to divest any activities not permissible for commercial banks
within five years; (vii) eliminate the bad-debt reserve deduction for savings
associations, although savings associations would not be required to recapture
into income their accumulated bad-debt reserves; (viii) provide for the
conversion of savings and loan holding companies into bank holding companies as
of January 1, 1998, although unitary savings and loan holding companies
authorized to engage in activities as of September 13, 1995 would have such
authority grandfathered (subject to certain limitations); and (ix) abolish the
Office of Thrift Supervision (OTS) and transfer the OTS's regulatory authority
to the other federal banking agencies. The legislation would also provide that
any savings association that would become undercapitalized under the prompt
corrective action regulations as a result of the special deposit premium
assessment could be exempted from payment of the assessment, provided that the
institution would continue to be subject to the payment of periodic assessments
under the current rate schedule following the recapitalization of the SAIF.
The U.S. Senate Banking Committee adopted similar legislation on September
20, 1995. The U.S. Senate proposal would similarly impose a one-time special
assessment on savings associations in order to recapitalize the SAIF, and
includes provisions similar to certain others contained in the U.S. House of
Representatives legislation. Unlike the U.S. House of Representatives
legislation, however, the U.S. Senate bill does not include a comprehensive
approach for merging the savings association and commercial bank charters.
In light of the different proposals currently under consideration and the
general uncertainty of the legislative process, Management cannot predict
whether the proposed legislation will be passed or in what form. Accordingly,
the effect of any such legislation on the Company and the Bank cannot be
determined.
INTERSTATE BANKING AND BRANCHING
In September 1994, the Riegel-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") became law. Under the Interstate
Act, beginning one year after the date of enactment, a bank holding company that
is adequately capitalized and managed may obtain approval under the BHCA to
acquire an existing bank located in another state without regard to state law. A
bank holding company would not be permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10.0% of the total amount of
deposits of insured depository institutions in the United States, or (b) 30.0%
or more of the deposits of insured depository institutions in the state in which
the bank is located. A state may limit the percentage of total deposits that may
be held in that state by any one bank or bank holding company if application of
such limitation does not discriminate against out-of-state banks. An
out-of-state bank holding company may not acquire a state bank in existence for
less than a minimum length of time that may be prescribed by state law except
that a state may not impose more than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirements and conditions as for a merger
transaction.
14
In October 1995, California adopted "opt in" legislation under the
Interstate Act that permits out-of-state banks to acquire California banks that
satisfy a five-year minimum age requirement (subject to exceptions for
supervisory transactions) by means of merger or purchases of assets, although
entry through acquisition of individual branches of California institutions and
"de novo" branching into California are not permitted. Although the Interstate
Act and the California branching statute will likely increase competition from
out-of-state banks in the markets in which the Company operates, Management is
unable to assess the impact that such increased competition may have on the
Company's operations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act (CRA) activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of its local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA obligations into
account when regulating and supervising other activities. The Federal Reserve
Board has rated the Bank "satisfactory" in complying with its CRA obligations.
In March 1994, the Federal Interagency Task Force on Fair Lending issued a
policy statement on discrimination in lending. The policy statement describes
the three methods that federal agencies will use to prove discrimination: overt
evidence of discrimination; evidence of disparate treatment; and evidence of
disparate impact. In May 1995, the federal banking agencies issued final
regulations which change the manner in which they measure a bank's compliance
with its CRA obligations. The final regulations adopt a performance-based
evaluation system which bases CRA ratings on an institution's actual lending
service and investment performance rather than the extent to which the
institution conducts needs assessments, documents community outreach or complies
with other procedural requirements.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1990, the Financial Accounting Standards Board (FASB) issued
SFAS No. 106, "Employers' Accounting for Post-Retirement Benefits Other Than
Pensions" effective for fiscal years beginning after December 15, 1992. In
November 1992, the FASB issued SFAS No. 112, "Employers' Accounting For
Post-Employment Benefits" effective for fiscal years beginning after December
15, 1993. SFAS No. 106 and SFAS No. 112 focus primarily on post-retirement
health care benefits. The Company does not provide post-retirement benefits, and
SFAS No. 106 and SFAS No. 112 have no impact on the consolidated financial
position or results of operations of the Company.
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments," which was effective for the Company as of
December 31, 1992. SFAS No. 107 requires financial intermediaries to disclose,
either in the body of their financial statements or in the accompanying notes,
the "fair value" of financial instruments for which it is "practicable to
estimate that value." SFAS No. 107 defines "fair value" as the amount at which a
financial instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. Quoted market prices, if
available, are deemed the best evidence of the fair value of such instruments.
Most deposit and loan instruments issued by financial intermediaries are subject
to SFAS No. 107, and it requires financial statement disclosure of the fair
value of most of the assets and liabilities of financial intermediaries such as
the Company and the Bank. The disclosures required by SFAS No. 107 at December
31, 1995 are presented in Note 11 to the Company's consolidated financial
statements. See "Item 8. Financial Statements and Supplementary Data."
Management is unable to predict what effect, if any, such disclosure
requirements could have on the market price of the common stock of the Company
or its ability to raise funds in the financial markets.
In February 1992, the FASB issued SFAS No. 109, "Accounting for Income
Taxes," which superseded SFAS No. 96 of the same title. SFAS No. 109, which was
adopted by the Company on
15
January 1, 1993, employs an asset and liability approach in accounting for
income taxes payable or refundable at the date of the financial statements as a
result of all events that have been recognized in the financial statements and
as measured by the provisions of enacted tax laws. There was no cumulative or
current period effect of adopting SFAS No. 109 on the Company's consolidated
financial position or results of operations.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 prescribes the recognition criterion for
loan impairment and the measurement methods for certain impaired loans and loans
whose terms are modified in troubled debt restructurings. SFAS No. 114 states
that a loan is impaired when it is probable that a creditor will be unable to
collect all principal and interest amounts due according to the contracted terms
of the loan agreement. A creditor is required to measure impairment by
discounting expected future cash flows at the loan's effective interest rate, by
reference to an observable market price, or by the fair value of the collateral
if the loan is collateral-dependent. SFAS No. 114 also clarifies the existing
accounting for in-substance foreclosures by stating that a collateral-dependent
real estate loan would be reported as other real estate owned only if the lender
had taken possession of collateral.
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures" amended SFAS No. 114 to allow a creditor to use
existing methods for recognizing interest income on an impaired loan. To
accomplish that, SFAS No. 118 eliminated the provisions in SFAS No. 114 that
described how a creditor should report income on an impaired loan. SFAS No. 118
did not change the provisions in SFAS No. 114 that require a creditor to measure
impairment based on the present value of expected future cash flows discounted
at the loan's effective interest rate, or as a practical expedient, at the
observable market price of the loan or the fair value of the collateral if the
loan is collateral-dependent. SFAS No. 118 amended the disclosure requirements
in SFAS No. 114 to require information about the recorded investments in certain
impaired loans and about how a creditor recognizes interest income related to
those impaired loans. The Company adopted SFAS No. 114 and SFAS No. 118 for the
year ended December 31, 1995. The adoption of these two Statements did not have
a material adverse effect on the Company's consolidated financial position or
results of operations.
In May 1993, the FASB issued SFAS No. 115, "Accounting For Certain
Investments in Debt and Equity Securities" addressing the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. These investments are
classified in three categories and accounted for as follows: (i) debt securities
that the entity has the ability and positive intent to hold to maturity would be
classified as "held-to-maturity" and reported at amortized cost; (ii) debt and
equity securities that are held for current resale would be classified as
trading securities and reported at fair value, with unrealized gains and losses
included in the results of operations; and (iii) debt and equity securities not
classified as either securities "held-to-maturity" or as trading securities
would be classified as securities "available-for-sale," and reported at fair
value, with unrealized gains and losses excluded from the results of operations
and reported as a separate component of shareholders' equity. The Company
adopted SFAS No. 115 on January 1, 1994. The cumulative effect of this change in
accounting principle is reflected in the statement of shareholders' equity
presented in the Company's consolidated financial statements. See "Item 8.
Financial Statements and Supplementary Data."
In October 1994, the FASB issued SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." This Statement
addresses additional disclosure requirements for derivatives and other complex
financial instruments. The Company adopted SFAS No. 119 on December 31, 1994.
The Company did not enter into any derivative transactions during 1995 which
would require disclosure under the provisions of SFAS No. 119.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The disclosure requirements of this Statement are effective for
transactions entered into in fiscal
16
years that begin after December 15, 1995. SFAS No. 123 establishes financial
accounting and reporting standards for stock-based compensation plans, including
employee stock purchase plans, stock options and restricted stock. SFAS No. 123
encourages all entities to adopt a fair value method of accounting for
stock-based compensation plans, whereby compensation cost is measured at the
grant date based on the fair value of the award and is realized as an expense
over the service or vesting period. However, SFAS No. 123 also allows an entity
to continue to measure compensation cost for these plans using the intrinsic
value method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Under the intrinsic value
method, compensation cost is the excess, if any, of the quoted market price of
the stock at grant date or other measurement date over the amount which must be
paid to acquire the stock.
The Company adopted SFAS No. 123, effective January 1, 1996. Based upon the
information available as of December 31, 1995, the effect of adoption on the
consolidated financial position and results of operations of the Company is not
expected to be material.
OTHER RISK FACTORS
A number of risk factors which could potentially impact the Company's
consolidated financial position, earnings and growth have been addressed in the
preceding sections within Item 1. These risk factors include the following:
Competition (see Item 1. "Competition");
Economic conditions (see Item 1. "Economic Conditions, Government
Policies and Legislation");
Government policies, legislation and regulation (see Item 1. "Economic
Conditions, Government Policies and Legislation" and "Supervision and
Regulation");
Interest rate risk (see Item 1. "Economic Conditions, Government
Policies and Legislation");
Regulatory enforcement actions (see Item 1. "Supervision and
Regulation");
Regulatory change (see Item 1. "Supervision and Regulation"); and
Capital requirements (see Item 1. "Supervision and Regulation").
In addition to the risk factors listed above, Management has identified
additional risk factors as outlined below. This listing of risk factors is not
intended to be an all inclusive list.
CAPITAL MARKETS
General conditions in the capital markets, in particular those related to
public stock offerings, may have an impact on the Bank. One consequence of an
active market for public stock offerings is the payoff or reduction of a portion
of the Bank's loans by some of its clients which complete public stock
offerings. Such a reduction in outstanding loans, if significant, could
adversely affect the Company's consolidated earnings.
LEGAL PROCEEDINGS
The Bank and the Company are periodically the subjects of certain lawsuits
and claims arising in the ordinary course of business. In the event an adverse
ruling or series of such rulings were to occur, the Bank's and/or the Company's
liability relating to these actions could potentially have a material adverse
effect on the Company's consolidated financial position, earnings and growth.
CREDIT RISK
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 its loan
portfolio, in the event of nonperformance by these other parties, the Bank's
potential exposure to credit losses could significantly affect the Company's
consolidated financial position, earnings and growth.
17
LIQUIDITY RISK
The Bank regularly enters into commitments to extend credit to its
customers. Management's determination of the actual liquidity needs of the Bank
contemplates that a nominal percentage of the total balance of unused and
available commitments will be advanced to the Bank's customers within a
short-term time frame. Were a substantial portion of these available commitments
to be drawn upon during this time frame, the Bank's ability to fund the
commitments, as well as maintain continuing operations, could be adversely
impaired.
ITEM 2. PROPERTIES
Early in 1995, the Bank received regulatory approval to relocate its
corporate headquarters and main branch and entered into a 10 year lease on a two
story office building, consisting of approximately 100,000 square feet, located
at 3003 Tasman Drive, Santa Clara, California. This move was completed by
December 1995. Concurrent with this move, the Bank closed its existing branches
and operational offices in San Jose and Santa Clara, California and consolidated
them into the nearby headquarters. Management believes that the consolidation
and relocation of these banking offices in Northern California will not have an
adverse impact on the business of the Bank, its clients or the Company.
In addition to the headquarters lease in Santa Clara, the Bank has entered
into various other leases for properties that serve as branches and/or loan
offices. These properties are located in the following locations: Palo Alto,
California; Menlo Park, California; Newport Beach, California; San Diego,
California; Rockville, Maryland; Wellesley, Massachusetts; and Beaverton,
Oregon. All Bank properties are occupied under leases which expire at various
dates through June 2005, and in most instances, include options to renew or
extend at market rates and terms.
The Bank has received regulatory approval during 1996 to open loan offices
in Bellevue, Washington, St. Helena, California and Beverly Hills, California.
The Bank owns leasehold improvements and furniture, fixtures and equipment
at its offices, all of which are used in the banking business. Management
believes that the Company's and Bank's facilities are well maintained and are
adequate to meet current and foreseeable future requirements.
ITEM 3. LEGAL PROCEEDINGS
There were no legal proceedings requiring disclosure pursuant to this item
pending at December 31, 1995, or at the date of this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote by the shareholders of the Company's
common stock during the fourth quarter of 1995.
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is traded over the counter on the National
Association of Securities Dealers Automated Quotation (NASDAQ) National Market
System under the symbol "SIVB."
The following table presents the high and low sales prices for the Company's
common stock for each quarterly period during the last two years, based on the
daily closing price as reported by the NASDAQ National Market System:
1995 1994
-------------------- --------------------
QUARTER LOW HIGH LOW HIGH
- -------------------------------------------------------------- --------- --------- --------- ---------
First......................................................... $ 13.00 $ 15.00 $ 9.00 $ 10.50
Second........................................................ $ 13.75 $ 18.00 $ 9.75 $ 10.75
Third......................................................... $ 16.75 $ 21.50 $ 10.25 $ 13.25
Fourth........................................................ $ 19.00 $ 25.00 $ 11.25 $ 13.50
SHAREHOLDERS
The number of shareholders of record of the Company's common stock was 693
as of February 9, 1996.
DIVIDENDS
The Company declared no cash dividends in 1994 or 1995, and is restricted
from paying dividends without prior regulatory approval. See "Item 1. Business
- -- Supervision and Regulation -- Formal Supervisory Actions and -- Dividends and
Other Transfers of Funds," and "Item 8. Financial Statements and Supplementary
Data -- Note 13 to the Consolidated Financial Statements -- Regulatory Matters."
19
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's financial statements and supplementary data as presented in Item 8 of
this report. Certain reclassifications have been made to the Company's prior
years results to conform with 1995 presentations. Such reclassifications had no
effect on the results of operations or shareholders' equity.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1994 1993 1992 1991
------------- ------------- ----------- ----------- -----------
(DOLLARS AND NUMBERS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT SUMMARY:
Net interest income....................... $ 73,952 $ 60,260 $ 50,410 $ 53,832 $ 45,447
Provision for loan losses................. 8,737 3,087 9,702 35,382 4,083
Noninterest income........................ 12,565 4,922 9,316 4,277 2,295
Noninterest expense....................... 47,925 45,599 47,357 26,418 22,430
Income (loss) before taxes................ 29,855 16,496 2,667 (3,691) 21,229
Income tax expense (benefit).............. 11,702 7,430 1,066 (1,479) 8,975
Net income (loss)......................... 18,153 9,066 1,601 (2,212) 12,254
PER COMMON SHARE (1):
Net income (loss)......................... $ 1.98 $ 1.06 $ 0.20 $ (0.28) $ 1.71
Book value................................ 11.71 9.08 8.48 8.36 8.57
Cash dividends declared................... -- -- -- 0.03 0.06
Weighted average common shares
outstanding.............................. 9,164 8,575 8,201 7,836 7,168
YEAR-END BALANCE SHEET SUMMARY:
Loans, net of unearned income............. $ 738,405 $ 703,809 $ 564,555 $ 630,976 $ 593,312
Assets.................................... 1,407,587 1,161,539 992,289 959,312 869,459
Deposits.................................. 1,290,060 1,075,373 914,959 888,069 798,877
Shareholders' equity...................... 104,974 77,257 70,336 65,987 66,395
AVERAGES:
Loans, net of unearned income............. $ 681,255 $ 592,759 $ 574,372 $ 647,537 $ 527,967
Assets.................................... 1,165,004 956,336 917,569 942,256 799,936
Deposits.................................. 1,060,333 877,787 846,298 866,084 739,137
Shareholders' equity...................... 91,710 73,461 68,198 70,860 53,418
CAPITAL RATIOS:
Average shareholders' equity to average
assets................................... 7.9% 7.7% 7.4% 7.5% 6.7%
Total risk-based capital ratio............ 11.9% 10.1% 11.3% 10.2% 11.0%
Tier 1 risk-based capital ratio........... 10.6% 8.9% 10.1% 9.0% 9.8%
Tier 1 leverage ratio..................... 8.0% 8.3% 6.9% 6.5% 6.4%
SELECT FINANCIAL RATIOS:
Net interest margin....................... 7.1% 7.2% 6.4% 6.4% 6.3%
Efficiency ratio.......................... 60.6% 68.3% 68.9% 42.4% 47.3%
Return on average assets.................. 1.6% 0.9% 0.2% (0.2)% 1.5%
Return on average shareholders' equity.... 19.8% 12.3% 2.3% (3.1)% 22.9%
- ------------------------
(1) Per share data has been restated for stock dividends and stock splits.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's financial statements
and supplementary data as presented in Item 8 of this report. Certain
reclassifications have been made to the Company's prior years results to conform
with 1995 presentations. Such reclassifications had no effect on the results of
operations or shareholders' equity.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
The Company reported net income in 1995 of $18.2 million, or $1.98 per
share, compared with net income for 1994 and 1993 of $9.1 million, or $1.06 per
share, and $1.6 million, or $0.20 per share, respectively. Return on average
equity in 1995 was 19.8%, compared with 12.3% in 1994 and 2.3% in 1993. Return
on average assets in 1995 improved to 1.6%, up from 0.9% in 1994 and 0.2% in
1993.
The increase in net income in 1995 as compared with 1994 resulted from
growth in net interest income and noninterest income, offset by increases in
both the provision for loan losses and noninterest expense. The increase in 1994
net income as compared with 1993 was due to growth in net interest income and
improved credit quality, which resulted in a corresponding decrease in the
provision for loan losses and other credit-related expenses from 1993 levels.
The major components of net income and changes in these components are
summarized in the following table for the years ended December 31, 1995, 1994
and 1993, and are discussed in more detail below.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1995 TO 1994 1994 TO 1993
INCREASE INCREASE
1995 1994 (DECREASE) 1993 (DECREASE)
--------- --------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
Net interest income................................ $ 73,952 $ 60,260 $ 13,692 $ 50,410 $ 9,850
Provision for loan losses.......................... 8,737 3,087 5,650 9,702 (6,615)
Noninterest income................................. 12,565 4,922 7,643 9,316 (4,394)
Cost of other real estate owned.................... (12) 1,382 (1,394) 10,234 (8,852)
Other noninterest expense.......................... 47,937 44,217 3,720 37,123 7,094
--------- --------- ------------ --------- ------------
Income before income taxes......................... 29,855 16,496 13,359 2,667 13,829
Income tax expense................................. 11,702 7,430 4,272 1,066 6,364
--------- --------- ------------ --------- ------------
Net income......................................... $ 18,153 $ 9,066 $ 9,087 $ 1,601 $ 7,465
--------- --------- ------------ --------- ------------
--------- --------- ------------ --------- ------------
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.
21
The following table sets forth average assets, liabilities and shareholders'
equity, interest income and interest expense, average yields and rates, and the
composition of the Company's net interest margin for the years ended December
31, 1995, 1994 and 1993.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1995 1994
---------------------------------- ---------------------------------
AVERAGE AVERAGE
AVERAGE YIELD AND AVERAGE YIELD AND
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- --------- ----------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Federal funds sold and
securities purchased
under agreement to
resell (1)............... $ 188,415 $ 11,041 5.9% $ 37,092 $ 1,397 3.8%
Investment securities:
Taxable................... 169,740 9,985 5.9 197,898 10,804 5.5
Non-taxable (2)........... 6,911 699 10.1 8,167 829 10.1
Loans: (3), (4), (5)
Commercia1................ 587,343 70,166 11.9 505,196 54,588 10.8
Real estate construction
and term (6)............. 70,698 7,209 10.2 64,149 5,609 8.7
Consumer and other........ 23,214 2,392 10.3 23,414 2,115 9.0
---------- --------- --- --------- --------- ---
Total loans............. 681,255 79,767 11.7 592,759 62,312 10.5
---------- --------- --- --------- --------- ---
Total interest-earning
assets..................... 1,046,321 101,492 9.7 835,916 75,342 9.0
---------- --------- --- --------- --------- ---
Cash and due from banks..... 114,431 121,792
Allowance for loan losses... (24,055) (25,671)
Other real estate owned..... 5,752 9,711
Other assets................ 22,555 14,588
---------- ---------
Total assets................ $1,165,004 $ 956,336
---------- ---------
---------- ---------
Funding sources:
Interest-bearing
liabilities:
Money market, NOW and
savings deposits......... $ 629,023 24,944 4.0 $ 480,354 12,859 2.7
Time deposits............. 65,426 2,349 3.6 66,365 1,911 2.9
Federal funds purchased... 38 2 5.3 498 22 4.4
---------- --------- --- --------- --------- ---
Total interest-bearing
liabilities.............. 694,487 27,295 3.9 547,217 14,792 2.7
Portion of noninterest-
bearing funding sources.. 351,834 288,699
---------- --------- --- --------- --------- ---
Total funding sources....... 1,046,321 27,295 2.6 835,916 14,792 1.8
---------- --------- --- --------- --------- ---
Noninterest-bearing funding
sources:
Demand deposits........... 365,884 331,068
Portion used to fund
interest-earning
assets................... (351,834) (288,699)
Other liabilities......... 12,923 4,590
Shareholders' equity...... 91,710 73,461
---------- ---------
Total liabilities and
shareholders' equity....... $1,165,004 $ 956,336
---------- ---------
---------- ---------
Net interest income and
margin..................... $ 74,197 7.1% $ 60,550 7.2%
--------- --- --------- ---
--------- --- --------- ---
Memorandum: Total deposits.. $1,060,333 $ 877,787
---------- ---------
---------- ---------
1993
-----------------------------------
AVERAGE AVERAGE YIELD
BALANCE INTEREST AND RATE
--------- --------- -------------
Interest-earning assets:
Federal funds sold and
securities purchased
under agreement to
resell (1)............... $ 91,753 $ 2,772 3.0%
Investment securities:
Taxable................... 113,570 7,129 6.3
Non-taxable (2)........... 9,815 932 9.5
Loans: (3), (4), (5)
Commercia1................ 465,398 46,075 9.9
Real estate construction
and term (6)............. 73,073 4,966 6.8
Consumer and other........ 35,901 2,518 7.0
--
--------- ---------
Total loans............. 574,372 53,559 9.3
--
--------- ---------
Total interest-earning
assets..................... 789,510 64,392 8.2
--
--------- ---------
Cash and due from banks..... 119,416
Allowance for loan losses... (23,350)
Other real estate owned..... 13,372
Other assets................ 18,621
---------
Total assets................ $ 917,569
---------
---------
Funding sources:
Interest-bearing
liabilities:
Money market, NOW and
savings deposits......... $ 459,041 11,330 2.5
Time deposits............. 86,925 2,335 2.7
Federal funds purchased... -- -- --
--
--------- ---------
Total interest-bearing
liabilities.............. 545,966 13,665 2.5
Portion of noninterest-
bearing funding sources.. 243,544
--
--------- ---------
Total funding sources....... 789,510 13,665 1.7
--
--------- ---------
Noninterest-bearing funding
sources:
Demand deposits........... 300,332
Portion used to fund
interest-earning
assets................... (243,544)
Other liabilities......... 3,073
Shareholders' equity...... 68,198
---------
Total liabilities and
shareholders' equity....... $ 917,569
---------
---------
Net interest income and
margin..................... $ 50,727 6.4%
--
--
---------
---------
Memorandum: Total deposits.. $ 846,298
---------
---------
- ------------------------------
(1) Includes average interest-bearing deposits in other financial institutions
of $378, $455, and $71 in 1995, 1994, and 1993, respectively.
22
(2) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 35% in 1995,
1994 and 1993. These adjustments were $245, $290, and $317 for the years
ended December 31, 1995, 1994, and 1993, respectively.
(3) Average loans include average nonaccrual loans of $16,146, $41,362, and
$48,059 in 1995, 1994, 1993, respectively.
(4) Average loans are net of average unearned income of $3,352, $3,965, and
$3,982 in 1995, 1994, and 1993, respectively.
(5) Loan interest income includes loan fees of $7,970, $8,886, and $7,814 in
1995, 1994, and 1993, respectively.
(6) In accordance with Statement of Financial Accounting Standards No. 114,
in-substance foreclosure loans have been reclassified from other real estate
owned (OREO) to real estate construction and term loans. The reclassified
amounts are $6,767 and $22,434 in 1994 and 1993, respectively.
Net interest income is affected by changes in the amount and mix of
interest-earnings assets and interest-bearing liabilities, referred to as
"volume change." Net interest income is also affected by changes in yields
earned on interest-earning assets and rates paid on interest-bearing
liabilities, referred to as "rate change." The following table sets forth
changes in interest income and interest expense for each major category of
interest-earning assets and interest-bearing liabilities. The table also
reflects the amount of change attributable to volume and rate changes for the
years indicated. Changes relating to investments in municipal securities are
presented on a fully taxable-equivalent basis using the federal statutory rate
of 35% in 1995, 1994 and 1993.
1995 COMPARED TO 1994 1994 COMPARED TO 1993
------------------------------- ---------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
CHANGE IN CHANGE IN
------------------------------- ---------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- --------- --------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
Interest income:
Federal funds sold and securities
purchased under agreement
to resell................................ $ 8,867 $ 777 $ 9,644 $ (2,058) $ 683 $ (1,375)
Investment securities..................... (1,779) 830 (949) 4,636 (1,064) 3,572
Loans..................................... 10,362 7,093 17,455 3,621 5,132 8,753
--------- --------- --------- ---------- ---------- ---------
Increase in interest income................. 17,450 8,700 26,150 6,199 4,751 10,950
--------- --------- --------- ---------- ---------- ---------
Interest expense:
Money market, NOW and savings deposits.... 5,895 6,190 12,085 571 958 1,529
Time deposits............................. (34) 472 438 (592) 168 (424)
Federal funds purchased................... (24) 4 (20) 22 -- 22
--------- --------- --------- ---------- ---------- ---------
Increase in interest expense................ 5,837 6,666 12,503 1 1,126 1,127
--------- --------- --------- ---------- ---------- ---------
Increase in net interest income............. $ 11,613 $ 2,034 $ 13,647 $ 6,198 $ 3,625 $ 9,823
--------- --------- --------- ---------- ---------- ---------
--------- --------- --------- ---------- ---------- ---------
Net interest income, on a fully taxable-equivalent basis, totaled $74.2
million in 1995, an increase of $13.6 million, or 22.5%, from the $60.6 million
total in 1994. The increase in net interest income was the result of a $26.2
million, or 34.7%, increase in interest income, offset by a $12.5 million, or
84.5%, increase in interest expense over the comparable prior year period. In
1994, net interest income, on a fully taxable-equivalent basis, increased $9.8
million, or 19.4%, compared to the $50.7 million earned in 1993. This increase
was primarily attributable to an $11.0 million increase in interest income
compared to 1993 due to growth in average loans and the effect of rising market
interest rates throughout 1994.
The $26.2 million increase in 1995 interest income, as compared to 1994, was
the result of a $17.5 million favorable volume variance and a $8.7 million
favorable rate variance. The favorable volume variance resulted from a $210.4
million, or 25.2%, increase in average interest-earning assets over the
comparable prior year period. This increase was comprised of loans, which
increased $88.5 million, and lower-yielding liquid investments in federal funds
sold and securities purchased under agreement to resell, which increased $151.3
million, and was offset by a $29.4 million decrease in investment securities due
to maturities and paydowns. Though average loans in 1995 increased from the
prior
23
year due to commercial loan growth of $82.1 million, average loans were
negatively impacted during 1995 by the initial public offering (IPO) market, as
the Company experienced an unusually large amount of loan payoffs in connection
with a number of its clients completing public stock offerings. The increase in
average federal funds sold and securities purchased under agreement to resell
resulted from significant growth in the Company's deposits, and Management's
decision to invest excess funds in short-term liquid investments due to the
relatively flat interest rate environment during much of 1995.
The increase in market interest rates throughout 1994 and the early part of
1995 also contributed to the growth of interest income in 1995. Interest income
in 1995 increased $8.7 million, as compared to 1994, due to a 70 basis points
increase in the average yield on interest-earning assets. Of this increase, $7.1
million was attributable to loans, as the average yield on loans increased to
11.7% in 1995, up from 10.5% in 1994. This increase in the average yield on
loans during 1995 was related to the aforementioned increase in market interest
rates, as a substantial portion of the Company's loans are prime-rate based.
Interest income increased $11.0 million from 1993 to 1994. The growth in
average interest-earning assets during 1994 resulted in a $6.2 million favorable
impact on interest income as compared to 1993. Average interest-earning assets
increased $46.4 million, or 5.9%, to $835.9 million in 1994, compared to $789.5
million in 1993. During 1994, average loans increased $18.4 million, or 3.2%,
from 1993 due to increased loan demand resulting from improving economic
conditions, increased marketing efforts by the Company, and a general slowing in
the marketplace for IPOs compared to the prior year. Average investment
securities increased and average federal funds sold decreased in 1994 compared
to 1993 as a result of Management's decisions in late 1993 and early 1994 to
invest excess funds in longer-term investment securities as opposed to federal
funds sold. Rising market interest rates throughout 1994 contributed to a $4.8
million increase in interest income over 1993, as the average yield on
interest-earning assets in 1994 increased 80 basis points over the 1993 average
yield.
Total interest expense in 1995 increased $12.5 million from the total in
1994 due to increases in both the volume of and rates paid on interest-bearing
liabilities. The $147.3 million, or 26.9%, increase in average interest-bearing
liabilities during 1995 was concentrated in higher-rate money market deposits,
and resulted in a $5.8 million increase in the cost of funding during 1995.
Changes in the rates paid on interest-bearing liabilities also had an
unfavorable impact on 1995 interest expense as compared to the prior year. The
rising interest rate environment during 1994 and early 1995 led to a $6.7
million increase in interest expense, as the average rate paid on
interest-bearing liabilities increased 120 basis points from 1994 to 1995.
Average interest-bearing liabilities in 1994 were flat compared to 1993,
resulting in little change in interest expense for 1994 as compared to 1993.
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 continuous assessment of the inherent and identified risk
dynamics of the loan portfolio resulting from reviews of selected individual
loans and loan commitments.
The provision for loan losses was $8.7 million in 1995, compared to $3.1
million and $9.7 million in 1994 and 1993, respectively. The $5.6 million, or
183.0%, increase in 1995 as compared to 1994 was related to an increase in
nonperforming loans during 1995. The $6.6 million, or 68.2%, decrease in the
provision for loan losses from 1993 to 1994 reflected Management's election to
charge-off $5.5 million in nonperforming loans at year-end 1994.
For a more detailed discussion of credit quality and the allowance for loan
losses, see the Item 7 section entitled "Financial Condition -- Credit Quality
and the Allowance for Loan Losses."
24
NONINTEREST INCOME
The following table summarizes the components of noninterest income for the
past three years:
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Disposition of client warrants.................................................... $ 8,205 $ 2,840 $ 5,762
Letter of credit and foreign exchange income...................................... 3,007 2,403 1,441
Deposit service charges........................................................... 1,402 1,533 1,712
Investment gains (losses)......................................................... (768) (2,421) 69
Other............................................................................. 719 567 332
--------- --------- ---------
Total noninterest income.......................................................... $ 12,565 $ 4,922 $ 9,316
--------- --------- ---------
--------- --------- ---------
Noninterest income increased $7.6 million, or 155.3%, in 1995 as compared to
1994. This growth was primarily attributable to a $5.4 million increase in
income from the disposition of client warrants, as the Company exercised
warrants held in some of its clients which completed public stock offerings, and
a $1.7 million decrease in losses incurred through the sales of investment
securities. Noninterest income decreased $4.4 million, or 47.2%, in 1994 as
compared to 1993. The decrease in noninterest income from 1993 to 1994 was
primarily due to a $2.9 million decline in income from the disposition of client
warrants, as well as a $2.5 million increase in losses incurred through the
sales of investment securities.
The Company has historically obtained rights to acquire stock (in the form
of warrants) in certain nonpublic clients as part of negotiated credit
facilities. The receipt of warrants does not change the loan covenants or other
collateral control techniques employed by the Company to mitigate the risk of a
loan becoming nonperforming. Interest rates, loan fees and collateral
requirements on loans with warrants are similar to lending arrangements where
warrants are not obtained. The timing and amount of income from the disposition
of client warrants typically depends upon factors beyond the control of the
Company, including the general condition of the capital markets, and therefore
cannot be predicted with any degree of accuracy and is likely to vary materially
from period to period.
Letter of credit fees, foreign exchange fees and other trade finance income
totaled $3.0 million in 1995, an increase of $0.6 million, or 25.1%, from the
$2.4 million earned in 1994, and an increase of $1.6 million, or 108.7%, from
the total in 1993. The growth in this category of noninterest income reflects a
concerted effort by Management to expand the penetration of trade
finance-related services among the Company's client base.
Deposit service charges were $1.4 million, $1.5 million and $1.7 million in
1995, 1994 and 1993, respectively. These service charges decreased $0.1 million,
or 8.6%, from 1994 to 1995, and $0.2 million, or 10.5%, from 1993 to 1994.
Clients compensate the Company for depository services either through earnings
credits computed on their demand deposit balances, or via explicit payments
recognized as deposit service charges. As interest rates rose during 1994 and
early 1995, the earnings credits were higher, thus lowering the amount of
explicit deposit service charges.
The Company incurred $0.8 million in losses through sales of investment
securities during 1995, a $1.7 million, or 68.3%, decrease from the prior year.
The securities sold during 1995 were primarily mortgage-backed securities. The
$2.4 million in securities losses realized during 1994 resulted from the sale of
$129.5 million of the Company's available-for-sale investment portfolio and
included mortgage-backed securities, as well as U.S. Treasury and U.S. agencies
securities. All sales of investment securities were conducted as a normal
component of the Company's interest rate risk and liquidity management
activities.
25
NONINTEREST EXPENSE
Noninterest expense in 1995 totaled $47.9 million, a $2.3 million, or 5.1%,
increase from 1994. Noninterest expense was $45.6 million in 1994, a $1.8
million, or 3.7%, decrease from 1993. Management closely monitors the level of
noninterest expense using a variety of financial ratios, including the
efficiency ratio. The efficiency ratio is calculated by dividing the amount of
noninterest expense, excluding costs associated with other real estate owned, by
adjusted revenues, defined as the total of net interest income and noninterest
income, excluding income from the disposition of client warrants and gains or
losses incurred through sales of investment securities. This ratio reflects the
level of operating expense required to generate $1 of operating revenue. The
Company's efficiency ratio improved to 60.6% in 1995, down from 68.3% in 1994
and 68.9% in 1993. The following table presents the detail of noninterest
expense and the incremental contribution of each line item to the Company's
efficiency ratio:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------ ------------------------
PERCENT OF PERCENT OF PERCENT OF
ADJUSTED ADJUSTED ADJUSTED
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
--------- ------------- --------- ------------- --------- -------------
(DOLLARS IN THOUSANDS)
Compensation and benefits.................. $ 27,161 34.3% $ 23,249 35.9% $ 18,601 34.5%
Professional services...................... 4,565 5.8 4,688 7.2 5,070 9.4
Occupancy.................................. 3,616 4.6 2,639 4.1 1,735 3.2
Equipment.................................. 3,235 4.1 1,712 2.6 1,160 2.2
FDIC deposit insurance..................... 1,385 1.8 2,406 3.7 2,452 4.6
Data processing services................... 824 1.0 1,319 2.0 981 1.8
Corporate legal and litigation............. 595 0.8 2,567 4.0 2,140 4.0
Client services............................ 410 0.4 1,073 1.8 1,489 2.7
Other...................................... 6,146 7.8 4,564 7.0 3,495 6.5
--------- --- --------- --- --------- ---
Total excluding cost of other real estate
owned..................................... 47,937 60.6% 44,217 68.3% 37,123 68.9%
--- --- ---
--- --- ---
Cost of other real estate owned............ (12) 1,382 10,234
--------- --------- ---------
Total noninterest expense.................. $ 47,925 $ 45,599 $ 47,357
--------- --------- ---------
--------- --------- ---------
Compensation and benefits expenses were $27.2 million in 1995, a $3.9
million, or 16.8%, increase over the 1994 total of $23.2 million. Total
compensation and benefits expenses were $18.6 million in 1993. The number of
average full-time equivalent (FTE) staff employed by the Company during 1995 was
336 compared with 299 and 261 in 1994 and 1993, respectively. The increase in
FTE from 1993 through 1995 was primarily due to the expansion of the Company's
lending staff in response to the growth in the client base, as well as an effort
to develop new lending markets.
Professional services expenses were $4.6 million in 1995, a $0.1 million, or
2.6%, decrease from the $4.7 million incurred in 1994. Total professional
services expenses in 1994 were $0.4 million, or 7.5%, lower than the $5.1
million incurred in 1993. The level of these expenses during each of the past
three years reflects the extensive efforts undertaken by the Company to build
its infrastructure.
Occupancy and equipment expenses totaled $6.9 million in 1995, an increase
of $2.5 million, or 57.5%, compared to the prior year total of $4.4 million.
Total occupancy and equipment expenses in 1994 increased $1.5 million, or 50.3%,
from the $2.9 million incurred in 1993. The most significant component of the
increase from 1994 to 1995 was related to certain non-recurring costs incurred
in connection with the Company's move into a new headquarters facility. These
non-recurring costs included both the disposal and purchase of premises and
equipment. The move into the new facility was completed in the fourth quarter of
1995. The increases in occupancy and equipment expenses from 1993 to 1994 and
1994 to 1995 are also related to investments in office space, computer equipment
and other costs associated with the Company's growth in personnel during those
periods.
26
FDIC deposit insurance expense was $1.4 million in 1995, a $1.0 million, or
42.4%, decrease from the total in 1994, and a $1.1 million, or 43.5%, decrease
from the total in 1993. This decrease in 1995 from the expense levels of the
past two years resulted from a reduction in the Bank's assessment rate in the
third quarter of 1995 due to completion of the recapitalization of the Bank
Insurance Fund. The Bank's assessment rate beginning January 1, 1996 was further
reduced from the rate in effect for the fourth quarter of 1995. See "Item 1.
Business -- Supervision and Regulation -- Premiums for Deposit Insurance."
Data processing services expenses were $0.8 million in 1995, a decrease of
$0.5 million, or 37.5%, from 1994. These expenses totaled $1.3 million and $1.0
million in 1994 and 1993, respectively. The increase in data processing services
expenses in 1994 as compared to the total incurred in 1993 and 1995 was due to
$0.4 million of non-recurring data processing conversion costs.
Corporate legal and litigation expenses in 1995 totaled $0.6 million, a $2.0
million, or 76.8%, decrease from the $2.6 million incurred in 1994, and a $1.5
million, or 72.2%, decrease from the $2.1 million incurred in 1993. The 1994 and
1993 legal and litigation expenses incurred by the Company included a
significant amount of expenditures associated with the defense of a shareholder
class action lawsuit filed against the Company in June 1993. This lawsuit was
settled in the third quarter of 1994.
Client services expenses include courier expenses and related costs of loan
and deposit operations. These expenses have declined from the 1993 total of $1.5
million, to $1.1 million in 1994 and $0.4 million in 1995, due to an increase in
reimbursements from clients and a decline in client deposits related to the
title and escrow industry, for which client services were provided.
Other expenses in 1995 totaled $6.1 million, a significant increase from the
$4.6 million and $3.5 million incurred in 1994 and 1993, respectively. The 1995
increase compared to the prior two years was related to increased travel and
other miscellaneous expenses resulting from the Company's growth in staff and
increased business development efforts.
The net costs associated with other real estate owned (OREO) were minimal in
1995, as gains from the sales of OREO properties slightly exceeded the costs of
maintaining all of the Company's OREO properties. The net costs of OREO
decreased $1.4 million, or 100.9%, from 1994 to 1995, and $8.9 million, or
86.5%, from 1993 to 1994, as the Company's credit quality improved and a number
of OREO properties were liquidated. The improvement in credit quality and the
sales of OREO properties reduced the Company's average OREO balance from $13.4
million in 1993, to $9.7 million in 1994 and $5.8 million in 1995. The costs
associated with OREO include: maintenance expenses; property taxes; marketing
costs; net operating expense or income associated with income-producing
properties; property write-downs; and gains or losses on the sales of such
properties.
INCOME TAXES
The Company's effective tax rate was 39.2% in 1995, compared to 45.0% in
1994 and 40.0% in 1993. The reduction in the Company's 1995 effective tax rate,
as compared to 1994, was attributable to adjustments in the Company's estimate
of its tax liabilities. The increase in the effective rate for 1994, as compared
to 1993, primarily relates to a decline in the level of interest income from
non-taxable investments relative to total taxable income.
27
FINANCIAL CONDITION
The Company's total assets were $1.4 billion at December 31, 1995, an
increase of $246.0 million, or 21.2%, compared to $1.2 billion at December 31,
1994.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell
totaled $257.1 million at December 31, 1995, an increase of $107.1 million, or
71.4%, compared to the $150.1 million outstanding at the prior year-end. This
increase resulted from significant growth in the Bank's deposits, and
Management's decision to invest excess funds in short-term investments due to
the relatively flat interest rate environment at the end of 1995.
INVESTMENT SECURITIES
The following table details the composition of investments at December 31,
1995, 1994 and 1993:
DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities................................................... $ 39,898 $ 51,918 $ 45,783
U.S. agencies and corporations:
Discount notes and bonds................................................. 163,757 13,111 79,996
Collateralized mortgage obligations...................................... 57,207 73,541 111,523
Mortgage-backed securities............................................... -- 8,933 11,405
Commercial paper........................................................... 52,523 -- 3,780
Obligations of states and political subdivisions........................... 6,581 7,786 8,506
Other equity securities.................................................... 1,343 1,200 1,013
----------- ----------- -----------
Total...................................................................... $ 321,309 $ 156,489 $ 262,006
----------- ----------- -----------
----------- ----------- -----------
Investment securities totaled $321.3 million at December 31, 1995, which
represented a $164.8 million, or 105.3%, increase over the December 31, 1994
balance of $156.5 million. The increase in investment securities was related to
the Company's liquidity management activities, as a portion of the growth in the
Bank's deposits during 1995 was invested in notes issued by U.S. agencies as
well as commercial paper, rather than in federal funds sold and securities
purchased under agreement to resell.
The Company sold collateralized mortgage obligations and mortgage-backed
securities with an amortized cost of $26.8 million in 1995, and U.S. Treasury
and agencies securities as well as mortgage-backed securities with an amortized
cost of $129.5 million in 1994. All investment securities sold in 1995 and 1994
were classified as available-for-sale, and all sales were conducted as a normal
component of the Company's interest rate risk and liquidity management
activities.
Investment securities held by the Company at December 31, 1995 that were
issued by a single party, excluding the U.S. Government and U.S. Government
agencies and corporations, and exceeded 10.0% of the Company's shareholders'
equity at year-end, consisted solely of $14.8 million in commercial paper issued
by U.S. Lease Capital Corporation.
28
The following table provides the remaining contractual principal maturities
and fully taxable-equivalent yields on investment securities. The weighted
average yield is computed using the amortized cost of available-for-sale
securities, which are reported at fair value. Expected remaining maturities of
collateralized mortgage obligations will differ from contractual maturities
because borrowers may have the right to prepay obligations with or without
penalties. Other equity securities were included in the table below as maturing
after ten years.
MATURING IN
--------------------------------------------------------------------------
AFTER ONE AFTER FIVE
ONE YEAR YEAR TO YEARS TO
TOTAL OR LESS FIVE YEARS TEN YEARS
----------------------- ------------------------ ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE
DECEMBER 31, 1995 VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
- ---------------------- --------- ------------ --------- ------------- --------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
U.S. Treasury
securities........... $ 39,898 6.3% $ 6,069 7.6% $ 33,829 6.1% -- --
U.S. agencies and
corporations:
Discount notes and
bonds.............. 163,757 5.8 127,719 5.7 36,038 5.8 -- --
Collateralized
mortgage
obligations........ 57,207 5.0 -- -- 3,905 4.8 -- --
Commercial paper...... 52,523 5.8 52,523 5.8 -- -- -- --
Obligations of states
and political
subdivisions......... 6,581 10.1 288 9.8 5,270 10.1 $ 1,023 10.3%
Other equity
securities........... 1,343 -- -- -- -- -- -- --
--
--------- --- --------- --------- --- --------- ---
Total................. $ 321,309 5.8% $ 186,599 5.8% $ 79,042 6.2% $ 1,023 10.3%
--
--
--------- --- --------- --------- --- --------- ---
--------- --- --------- --------- --- --------- ---
AFTER
TEN YEARS
------------------------
WEIGHTED
FAIR AVERAGE
DECEMBER 31, 1995 VALUE YIELD
- ---------------------- --------- -------------
U.S. Treasury
securities........... -- --
U.S. agencies and
corporations:
Discount notes and
bonds.............. -- --
Collateralized
mortgage
obligations........ $ 53,302 5.0%
Commercial paper...... -- --
Obligations of states
and political
subdivisions......... -- --
Other equity
securities........... 1,343 --
--
---------
Total................. $ 54,645 5.0%
--
--
---------
---------
Collateralized mortgage obligations (CMOs) pose risks not associated with
fixed maturity bonds, primarily related to the ability of the mortgage borrower
to prepay the loan without penalty. This risk, known as prepayment risk, may
cause the CMO to remain outstanding for a period of time different than that
assumed at the time of purchase. When rates decline, prepayments generally
increase causing the average expected remaining maturity of the CMO to decrease.
Conversely, if interest rates rise, prepayments tend to decrease, lengthening
the CMO's average expected remaining maturity.
LOANS
The composition of the loan portfolio as of December 31, net of unearned
income, for each of the past five years is as follows:
DECEMBER 31,
---------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Commercial...................................... $ 622,488 $ 613,469 $ 470,649 $ 499,609 $ 395,394
Real estate term................................ 56,845 58,977 49,710 44,829 41,553
Real estate construction........................ 17,194 10,512 17,283 44,918 115,143
Consumer and other.............................. 41,878 20,851 26,913 41,620 41,222
----------- ----------- ----------- ----------- -----------
Total loans..................................... $ 738,405 $ 703,809 $ 564,555 $ 630,976 $ 593,312
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Total loans at December 31, 1995 were $738.4 million, a $34.6 million, or
4.9%, increase compared to the $703.8 million outstanding at December 31, 1994.
Though total loans at December 31, 1995 were higher than at the prior year-end,
loan balances throughout 1995 were negatively impacted by the IPO market, as the
Company experienced an unusually large amount of loan payoffs in connection with
a number of its clients having completed public stock offerings. These loan
payoffs primarily
29
affected the Company's commercial loan portfolio. Consumer and other loans at
year-end 1995 were significantly higher than at the prior year-end, as the
Company began offering personal lines of credit to executives of its clients in
late 1994.
The following tables set forth the maturity distribution of the Company's
loans (reported on a gross basis) at December 31, 1995, for fixed and variable
rate commercial and real estate construction loans:
DECEMBER 31, 1995
----------------------------------------------------
AFTER
ONE YEAR AND
ONE YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
----------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
Fixed rate loans:
Commercial................................................. $ 26,429 $ 31,566 $ 23,463 $ 81,458
Real estate construction................................... -- -- 162 162
----------- ------------- ----------- -----------
Total fixed rate loans................................... $ 26,429 $ 31,566 $ 23,625 $ 81,620
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Variable rate loans:
Commercial................................................. $ 370,174 $ 138,483 $ 35,537 $ 544,194
Real estate construction................................... 17,484 -- -- 17,484
----------- ------------- ----------- -----------
Total variable rate loans................................ $ 387,658 $ 138,483 $ 35,537 $ 561,678
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Upon maturity, loans satisfying the Company's credit quality standards may
be eligible for renewal. Such renewals are subject to the normal underwriting
and credit administration practices associated with new loans. The Company does
not grant loans with unconditional extension terms.
Commercial loans to clients served by the Company's Technology and Special
Industries Groups are generally secured by business and personal assets. Client
credit needs are typically in the range of $1.0 million to $7.0 million, and
advance rates do not typically exceed 80.0% of estimated collateral values. The
Company's Technology Group focuses on commercial lending to companies within a
variety of technology and life sciences industries, such as semiconductors,
electronics, software, communications, peripherals, medical devices,
biotechnology and others. The Company's Technology Group serves clients across
the nation. These clients are generally not affected by local economic cycles as
much as they are influenced by the global market conditions for their industry's
products or services.
Lenders in the Company's Special Industries Group (SIG) serve clients in a
variety of middle-market commercial enterprises, primarily in Northern
California. The Company's strategy is to identify under-served niches where a
strong opportunity exists to serve targeted clients, generally those with credit
needs under $10.0 million, by developing a high level of knowledge of the target
market and its business cycles and risks. In 1994 and 1995, the Company
identified the wine industry and religious institutions as two new niches, and
in 1996 has identified a niche within the entertainment industry. The Company
has commenced lending operations related to all three of these new niches.
Within SIG, the Company's Real Estate Division is selectively involved in
lending operations related to real estate construction projects, including
"owner-build-to-suit" residences and "pre-leased" commercial buildings. In
addition, the Real Estate Division supports other Bank lending groups with its
expertise in real estate lending. Real estate term loans are usually made to
clients of the Technology or Special Industries Groups to finance commercial
real estate to be operated by the client. Loan-to-value ratios of real estate
loans generally do not exceed 80.0% of the estimated value of the underlying
real estate.
30
While a substantial percentage of the Company's commercial loans originate
within the Technology Group, such loans are made to both emerging growth and
middle-market companies in a variety of industries, as well as to industry
executives, and no particular industry sector (as identified by Standard
Industrial Codes) represents a significant concentration within the loan
portfolio.
LOAN ADMINISTRATION
Responsibility for the Company's loan policies resides with the Company's
Board of Directors. This responsibility is managed through the approval and
periodic review of the Company's loan policies. The Board of Directors delegates
authority to the Directors' Loan Committee to supervise the loan underwriting,
approval and monitoring activities of the Company. The Directors' Loan Committee
consists of outside Board of Directors members and the Company's Chief Executive
Officer.
Under the oversight of the Directors' Loan Committee, lending authority is
delegated to the Chief Credit Officer and the Company's Internal Loan Committee
consisting of the Chief Credit Officer, lending division managers, and loan
administrators. Requests for new and existing credits which meet certain size
and underwriting criteria may be approved outside of the Company's Internal Loan
Committee by designated division managers or team leaders jointly with a loan
administrator. Credits exceeding $3.0 million must be approved by the Directors'
Loan Committee, as stipulated in the Federal Reserve Bank's regulatory consent
order.
The loan approval and committee system is administered by the Company's
Credit Administration Group. Loan administrators assigned to each lending
division report to the Chief Credit Officer, who also acts as chair of the
Internal Loan Committee. In response to the significant increase in
nonperforming assets and loan charge-offs during 1992, Management began an
extensive review of the Company's loan policies and procedures, portfolio
management practices, and credit review process during the fourth quarter of
that year. The Company also hired experienced loan administrators and loan
review officers in an effort to restore and maintain a high level of asset
quality in its loan portfolio.
CREDIT QUALITY AND THE ALLOWANCE FOR LOAN LOSSES
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.
Management has established an evaluation process designed to determine the
adequacy of the allowance for loan losses. This process attempts to assess the
risk of losses inherent in the portfolio by segregating the allowance for loan
losses into three components: "specific;" "loss migration;" and "general." The
"specific" component is established by allocating a portion of the allowance to
individual classified credits on the basis of specific circumstances and
assessments. The "loss migration" component is calculated as a function of the
historical loss migration experience of the internal loan credit risk rating
categories. The "general" component is an unallocated portion that supplements
the first two components and includes: Management's judgment of the effect of
current and forecasted economic conditions on the Company's borrowers' abilities
to repay; an evaluation of the allowance for loan losses in relation to the size
of the overall loan portfolio; an evaluation of the composition of, and growth
trends within, the loan portfolio; consideration of the relationship of the
allowance for loan losses to nonperforming loans; net charge-off trends; and
other factors. While this evaluation
31
process utilizes historical and other objective information, the classification
of loans and the establishment of the allowance for loan losses, relies, to a
great extent, on the judgment and experience of Management.
An analysis of the allowance for loan losses for the past five years is as
follows:
DECEMBER 31,
------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Beginning balance...................................... $ 20,000 $ 25,000 $ 22,000 $ 11,400 $ 8,550
Charge-offs:
Commercial........................................... (4,248) (10,913) (5,058) (6,770) (308)
Real estate.......................................... (653) (495) (5,967) (18,308) (1,313)
Consumer and other................................... (57) -- -- -- (74)
--------- --------- --------- --------- ---------
Total charge-offs.................................. (4,958) (11,408) (11,025) (25,078) (1,695)
--------- --------- --------- --------- ---------
Recoveries:
Commercial........................................... 3,106 2,398 3,064 132 20
Real estate.......................................... 2,815 923 1,259 164 440
Consumer and other................................... -- -- -- -- 2
--------- --------- --------- --------- ---------
Total recoveries................................... 5,921 3,321 4,323 296 462
--------- --------- --------- --------- ---------
Net (charge-offs) recoveries........................... 963 (8,087) (6,702) (24,782) (1,233)
Provision for loan losses.............................. 8,737 3,087 9,702 35,382 4,083
--------- --------- --------- --------- ---------
Ending balance......................................... $ 29,700 $ 20,000 $ 25,000 $ 22,000 $ 11,400
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net charge-offs (recoveries) to average total loans.... (0.1)% 1.4% 1.2% 3.8% 0.2%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
The following table displays the allocation of the allowance for loan losses
among specific classes of loans as of December 31, 1995, 1994, 1993 and 1992:
DECEMBER 31,
----------------------------------------------------------------------------------------------
1995 1994 1993 1992
---------------------- ---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
Commercial............ $ 16,176 84.3% $ 12,748 87.2% $ 19,374 83.5% $ 14,019 79.3%
Real estate term...... 707 7.7 765 8.4 539 8.8 2,525 7.1
Real estate
construction......... 87 2.4 345 1.4 204 3.0 1,758 7.1
Consumer and other.... 339 5.6 312 3.0 274 4.7 2,353 6.5
Unallocated........... 12,391 N/A 5,830 N/A 4,609 N/A 1,345 N/A
--------- ----- --------- ----- --------- ----- --------- -----
Total................. $ 29,700 100.0% $ 20,000 100.0% $ 25,000 100.0% $ 22,000 100.0%
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
The Company did not allocate the allowance for loan losses among specific
classes of loans prior to 1992.
The allowance for loan losses was $29.7 million at December 31, 1995, an
increase of $9.7 million, or 48.5%, compared to the $20.0 million balance at
December 31, 1994. This increase was due to the Company contributing $8.7
million in additional provisions to the allowance for loan losses in response to
an increase in nonperforming loans during the year, and to the Company realizing
net loan
32
recoveries of $1.0 million in 1995 compared with $8.1 million in net charge-offs
during 1994. Loan recoveries in 1995 included $2.7 million from a real estate
client relationship that had been charged off in 1992.
Net loan charge-offs in 1994 included the partial charge-off of loans to two
commercial borrowers totaling $5.5 million. Net loan charge-offs in 1993 and
1992 and the $35.4 million provision for loan losses during 1992 were directly
influenced by certain events in the third and fourth quarter of 1992. The Real
Estate Division incurred several large charge-offs stemming from declines in
appraised values of real estate collateral. Construction time and delays imposed
by bankruptcy and foreclosure proceedings hampered efforts to gain control and
effectively dispose of collateral in a timely manner. These delays contributed
to a reduction in market values as the deteriorating condition of San Francisco
Bay Area real estate markets caused sales prices to decline rapidly during 1992.
In addition, several Special Industries Group commercial clients filed for
protection under bankruptcy laws, contributing to an impairment of the Company's
collateral and resulting in loan charge-offs.
In general, Management believes that the allowance for loan losses is
adequate as of December 31, 1995. However, future changes in circumstances,
economic conditions or other factors could cause Management to increase or
decrease the allowance for loan losses as deemed necessary.
Nonperforming assets consist of loans that are past due 90 days or more but
still accruing interest, loans on nonaccrual status, and OREO. The table below
sets forth certain relationships between nonperforming loans, nonperforming
assets and the allowance for loan losses:
DECEMBER 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Nonperforming assets:
Loans past due 90 days or more....................... $ 906 $ 444 $ 2,014 $ 319 $ 7,969
Nonaccrual loans (1)................................. 27,867 11,269 43,001 63,691 9,694
--------- --------- --------- --------- ---------
Total nonperforming loans.............................. 28,773 11,713 45,015 64,010 17,663
OREO (1)............................................... 4,955 7,089 14,261 10,864 3,763
--------- --------- --------- --------- ---------
Total nonperforming assets............................. $ 33,728 $ 18,802 $ 59,276 $ 74,874 $ 21,426
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Nonperforming loans as a percent of total loans........ 3.9% 1.7% 8.0% 10.1% 3.0%
OREO as a percent of total assets...................... 0.4% 0.6% 1.4% 1.1% 0.4%
Nonperforming assets as a percent of total assets...... 2.4% 1.6% 6.0% 7.8% 2.5%
Allowance for loan losses.............................. $ 29,700 $ 20,000 $ 25,000 $ 22,000 $ 11,400
As a percent of total loans.......................... 4.0% 2.8% 4.4% 3.5% 1.9%
As a percent of nonaccrual loans..................... 106.6% 177.5% 58.1% 34.5% 117.6%
As a percent of nonperforming loans.................. 103.2% 170.8% 55.5% 34.4% 64.5%
- ------------------------
(1) In accordance with Statement of Financial Accounting Standards No. 114,
in-substance foreclosure loans have been reclassified from OREO to
nonaccrual loans. The reclassified amounts are $1,377, $13,824 and $27,339
at December 31, 1994, 1993 and 1992, respectively. There were no in-
substance foreclosure loans at December 31, 1991.
Nonperforming loans totaled $28.8 million at December 31, 1995, an increase
of $17.1 million, or 145.7%, from the $11.7 million balance at December 31,
1994. This increase was concentrated in two commercial credits, each of which
Management believes, based on currently known information, is adequately secured
with collateral and specific reserves and one of which continues to remain
current in its payments. The significant improvement in nonperforming loans
during 1994 and 1993, compared to the level at the end of 1992, reflects the
concerted efforts of Management to improve the Company's credit discipline and
processes and to strengthen its Credit Administration Group staffing.
33
In addition to the loans disclosed in the foregoing analysis, Management has
identified three loans with principal amounts aggregating approximately $1.6
million, that, on the basis of information known by Management as of December
31, 1995, were judged to have a higher than normal risk of becoming
nonperforming. The Company is not aware of any other loans at December 31, 1995
where known information about possible problems of the borrower casts serious
doubts about the ability of the borrower to comply with the loan repayment
terms.
OREO totaled $5.0 million at December 31, 1995, a decrease of $2.1 million,
or 30.1%, from the $7.1 million balance at December 31, 1994. This decrease
resulted from 1995 sales and paydowns related to OREO properties. The Company
transfered two loans with a reported value of $0.4 million to OREO in 1995.
DEPOSITS
The Company's deposits are primarily obtained from emerging growth and
middle-market businesses, including both venture capital-backed and publicly
financed companies, professional service firms, and business executives, located
in the market areas served by the Company. The Company does not obtain deposits
from conventional retail sources. The following table presents the composition
of the Company's deposits for the last five years:
DECEMBER 31,
-------------------------------------------------------------------
1995 1994 1993 1992 1991
------------- ------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Noninterest-bearing demand deposits......... $ 451,318 $ 401,455 $ 356,806 $ 329,281 $ 261,627
Money market, NOW and savings deposits...... 773,292 585,171 486,700 442,158 409,586
Time deposits............................... 65,450 88,747 71,453 116,630 127,664
------------- ------------- ----------- ----------- -----------
Total deposits.............................. $ 1,290,060 $ 1,075,373 $ 914,959 $ 888,069 $ 798,877
------------- ------------- ----------- ----------- -----------
------------- ------------- ----------- ----------- -----------
Total deposits were $1,290.1 million at December 31, 1995, an increase of
$214.7 million, or 20.0%, from the prior year-end amount of $1,075.4 million. A
significant portion of the increase in deposits during 1995 was concentrated in
higher-rate money market products, which increased $188.8 million, or 32.9%,
from December 31, 1994. The growth in deposits during 1995 was attributable to
the successful marketing efforts of the Company.
Time certificates of deposit in amounts of $100,000 or more totaled $57.3
million at December 31, 1995. As previously noted, the Company seeks deposits
from client businesses within its target markets and does not accept brokered
deposits. No material portion of the Company's deposits has been obtained from a
single depositor and the loss of any one depositor would not materially affect
the business of the Company.
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity is a measure of the exposure of the Company's
future earnings due to changes in interest rates. If assets and liabilities do
not reprice simultaneously and in equal volumes, the potential for such exposure
exists. It is Management's objective to achieve a modestly asset-sensitive
position, such that the net interest margin of the Company increases as market
interest rates rise and decreases when rates decline.
One quantitative measure of the "mismatch" between asset and liability
repricing is the interest rate sensitivity "gap" analysis. All interest-earning
assets and funding sources are classified as to their expected repricing or
maturity date, whichever is sooner. Within each time period, the difference
between asset and liability balances, or "gap," is calculated. Positive
cumulative gaps in early time periods suggest that earnings will increase if
interest rates rise. Negative gaps suggest that earnings will decline when
interest rates rise. The following tables presents the gap analyses for the
Company at December 31, 1995 and 1994:
34
INTEREST RATE SENSITIVITY ANALYSIS AS OF DECEMBER 31, 1995
1 DAY 1 MONTH 3 MONTHS 6 MONTHS 1 YEAR
ASSETS AND LIABILITIES WHICH TO TO TO TO TO AFTER 5
MATURE OR REPRICE IMMEDIATELY 1 MONTH 3 MONTHS 6 MONTHS 1 YEAR 5 YEARS YEARS
- ------------------------------------------ ----------- --------- ----------- ----------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Federal funds sold and securities
purchased under agreement to resell
(1)...................................... -- $ 257,138 -- -- -- -- --
Investment securities: (2)
U.S.Treasury and agencies obligations... 65,680 $ 61,836 $ 2,008 $ 5,010 $ 69,121 --
Collateralized mortgage obligations
(3).................................... 736 1,463 2,170 4,254 34,069 $ 14,516
Obligations of states and political
subdivisions........................... -- 1 198 4 114 5,873 391
Commercial paper........................ 42,620 9,903 -- -- -- --
Other (4)............................... -- 62 -- -- -- -- --
----------- --------- ----------- ----------- ----------- --------- ---------
Total investment securities............... -- 109,099 73,400 4,182 9,378 109,063 14,907
----------- --------- ----------- ----------- ----------- --------- ---------
Loans (5)................................. $ 602,219 3,354 6,420 20,406 12,722 48,254 16,705
----------- --------- ----------- ----------- ----------- --------- ---------
Total Interest-Earning Assets............. $ 602,219 $ 369,591 $ 79,820 $ 24,588 $ 22,100 $ 157,317 $ 31,612
----------- --------- ----------- ----------- ----------- --------- ---------
FUNDING SOURCES:
Deposits:
Money market, NOW and savings deposits.. -- $ 773,292 -- -- -- -- --
Time deposits........................... -- 29,539 $ 21,629 $ 9,170 $ 4,901 $ 211 --
----------- --------- ----------- ----------- ----------- --------- ---------
Total interest-bearing deposits........... -- 802,831 21,629 9,170 4,901 211 --
Portion of noninterest-bearing demand
deposits................................. -- -- -- -- -- -- --
----------- --------- ----------- ----------- ----------- --------- ---------
Total Funding Sources..................... -- $ 802,831 $ 21,629 $ 9,170 $ 4,901 $ 211 --
----------- --------- ----------- ----------- ----------- --------- ---------
GAP....................................... $ 602,219 $(433,240) $ 58,191 $ 15,418 $ 17,199 $ 157,106 $ 31,612
CUMULATIVE GAP............................ $ 602,219 $ 168,979 $ 227,170 $ 242,588 $ 259,787 $ 416,893 $ 448,505
ASSETS AND LIABILITIES WHICH NOT
MATURE OR REPRICE STATED TOTAL
- ------------------------------------------ --------- ----------
INTEREST-EARNING ASSETS:
Federal funds sold and securities
purchased under agreement to resell
(1)...................................... -- $ 257,138
Investment securities: (2)
U.S.Treasury and agencies obligations... -- 203,655
Collateralized mortgage obligations
(3).................................... -- 57,208
Obligations of states and political
subdivisions........................... -- 6,581
Commercial paper........................ -- 52,523
Other (4)............................... $ 1,280 1,342
--------- ----------
Total investment securities............... 1,280 321,309
--------- ----------
Loans (5)................................. 28,325 738,405
--------- ----------
Total Interest-Earning Assets............. $ 29,605 $1,316,852
--------- ----------
FUNDING SOURCES:
Deposits:
Money market, NOW and savings deposits.. -- $ 773,292
Time deposits........................... -- 65,450
--------- ----------
Total interest-bearing deposits........... -- 838,742
Portion of noninterest-bearing demand
deposits................................. $ 478,110 478,110
--------- ----------
Total Funding Sources..................... $ 478,110 $1,316,852
--------- ----------
GAP....................................... $(448,505) --
CUMULATIVE GAP............................ -- --
- ------------------------------
(1) Includes interest-bearing deposits in other financial institutions of $138
as of December 31, 1995.
(2) All securities are reported at market value.
(3) Principal cash flows are based on estimated principal payments as of
December 31, 1995.
(4) Not stated column consists of other equity securities and Federal Reserve
Bank stock.
(5) Not stated column consists of nonperforming loans of $28.8 million and
overdrafts of $3.2 million, offset by unearned income of $3.8 million, at
December 31, 1995.
35
INTEREST RATE SENSITIVITY ANALYSIS AS OF DECEMBER 31, 1994
1 DAY 1 MONTH 3 MONTHS 6 MONTHS 1 YEAR
ASSETS AND LIABILITIES WHICH TO TO TO TO TO AFTER 5
MATURE OR REPRICE IMMEDIATELY 1 MONTH 3 MONTHS 6 MONTHS 1 YEAR 5 YEARS YEARS
- ------------------------------------------ ----------- --------- ----------- ----------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Federal funds sold and securities
purchased under agreement to resell
(1)...................................... -- $ 150,057 -- -- -- -- --
Investment securities: (2)
U.S. Treasury and agencies
obligations............................ -- 1,000 $ 12,104 $ 6,439 $ 12,723 $ 32,763 --
Collateralized mortgage obligations and
mortgage-backed securities (3)......... -- 171 528 674 3,264 76,974 $ 863
Obligations of states and political
subdivisions........................... -- 100 -- -- 630 4,788 2,268
Commercial paper........................ -- -- -- -- -- -- --
Other (4)............................... -- -- -- -- -- -- --
----------- --------- ----------- ----------- ----------- --------- ---------
Total investment securities............. -- 1,271 12,632 7,113 16,617 114,525 3,131
----------- --------- ----------- ----------- ----------- --------- ---------
Loans (5)................................. $ 613,425 6,351 3,493 4,815 17,135 50,003 971
----------- --------- ----------- ----------- ----------- --------- ---------
Total Interest-Earning Assets............. $ 613,425 $ 157,679 $ 16,125 $ 11,928 $ 33,752 $ 164,528 $ 4,102
----------- --------- ----------- ----------- ----------- --------- ---------
FUNDING SOURCES:
Deposits:
Money market, NOW and savings deposits.. -- $ 585,171 -- -- -- -- --
Time deposits........................... -- 54,336 $ 25,065 $ 6,078 $ 3,136 $ 132 --
----------- --------- ----------- ----------- ----------- --------- ---------
Total interest-bearing deposits........... -- 639,507 25,065 6,078 3,136 132 --
Portion of noninterest-bearing demand de-
posits................................... -- -- -- -- -- -- --
----------- --------- ----------- ----------- ----------- --------- ---------
Total Funding Sources..................... -- $ 639,507 $ 25,065 $ 6,078 $ 3,136 $ 132 --
----------- --------- ----------- ----------- ----------- --------- ---------
GAP....................................... $ 613,425 $(481,828) $ (8,940) $ 5,850 $ 30,616 $ 164,396 $ 4,102
CUMULATIVE GAP............................ $ 613,425 $ 131,597 $ 122,657 $ 128,507 $ 159,123 $ 323,519 $ 327,621
ASSETS AND LIABILITIES WHICH NOT
MATURE OR REPRICE STATED TOTAL
- ------------------------------------------ --------- ----------
INTEREST-EARNING ASSETS:
Federal funds sold and securities
purchased under agreement to resell
(1)...................................... -- $ 150,057
Investment securities: (2)
U.S. Treasury and agencies
obligations............................ -- 65,029
Collateralized mortgage obligations and
mortgage-backed securities (3)......... -- 82,474
Obligations of states and political
subdivisions........................... -- 7,786
Commercial paper........................ -- --
Other (4)............................... $ 1,200 1,200
--------- ----------
Total investment securities............. 1,200 156,489
--------- ----------
Loans (5)................................. 7,616 703,809
--------- ----------
Total Interest-Earning Assets............. $ 8,816 $1,010,355
--------- ----------
FUNDING SOURCES:
Deposits:
Money market, NOW and savings deposits.. -- $ 585,171
Time deposits........................... -- 88,747
--------- ----------
Total interest-bearing deposits........... -- 673,918
Portion of noninterest-bearing demand de-
posits................................... $ 336,437 336,437
--------- ----------
Total Funding Sources..................... $ 336,437 $1,010,355
--------- ----------
GAP....................................... $(327,621) --
CUMULATIVE GAP............................ -- --
- ------------------------------
(1) Includes interest-bearing deposits in other financial institutions of $57 as
of December 31, 1994.
(2) All securities are reported at market value, except for obligations of
states and political subdivisions which are reported at amortized cost, at
December 31, 1994.
(3) Principal cash flows are based on estimated principal payments as of
December 31, 1994.
(4) Not stated column consists of other equity securities and Federal Reserve
Bank stock.
(5) Not stated column consists of nonaccrual loans of $11.3 million, offset by
unearned income of $3.7 million, at December 31, 1994.
36
Management has historically maintained a positive cumulative gap position.
This results from a significant portion of the Company's loans being prime
rate-based, while a significant percentage of funding sources are derived from
noninterest-bearing demand deposits. Another contributor to the asset
sensitivity of the Company, in a rising interest rate environment, is that
changes in the Company's money market deposit rates tend to lag changes in the
prime rate.
By year-end 1995, the Company was somewhat more asset sensitive than at the
end of 1994, as evidenced by larger cumulative gaps in all time periods from one
day to one year. Should interest rates stabilize or decline in future periods,
it is reasonable to assume that the Company's net interest margin, as well as
net interest income, may decline correspondingly.
LIQUIDITY
Management regularly reviews general economic and financial conditions, both
external and internal, and determines whether the positions taken with respect
to liquidity and interest rate sensitivity are appropriate. The objectives of
liquidity management are to provide funds, at an acceptable cost, to meet loan
demand and depositors' needs, and to service other liabilities as they come due.
The Company assesses the likelihood of projected funding requirements by
reviewing historical funding patterns, current and forecasted economic
conditions and individual client funding needs. One measure Management uses to
assess the Company's liquidity is the level of liquid assets relative to total
deposits. Liquid assets include cash and due from banks, federal funds sold,
securities purchased under agreement to resell, and investment securities
maturing within one year. At December 31, 1995, the Company's liquid assets as a
percentage of deposits were 41.0% compared to 30.1% at December 31, 1994. The
1995 year-end percentage was greater than the prior year-end percentage due to a
$205.8 million increase in liquid assets. This increase in liquid assets
resulted from significant growth during 1995 in the Bank's deposits, and
Management's decision to invest excess funds in short-term investments due to
the relatively flat interest rate environment at the end of 1995.
As an additional source of funds, the Company has negotiated federal funds
borrowing lines with correspondent banks, and maintains borrowing capacity with
the Federal Reserve Bank of San Francisco. These arrangements, coupled with the
ability to pledge qualifying investment securities and borrow against their fair
value, provide the Company with the temporary liquidity to address clients'
funding requirements in the unlikely event of substantially higher than
projected fundings. At December 31, 1995, the Company's percentage of available
liquid assets, defined as liquid assets plus federal funds borrowing lines and
the borrowing capacity at the Federal Reserve Bank of San Francisco, to total
deposits plus a portion of available unused commitments and letters of credit,
was 43.7% compared to 31.5% at the prior year-end. The increase in the year-end
1995 percentage was due to the aforementioned increase in liquid assets and
additional federal funds borrowing lines obtained by the Company during 1995.
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 proceeds
from the issuance of common stock under the Company's employee benefit plans,
including the Company's 1983 and 1989 stock option plans, the employee stock
ownership plan, and the employee stock purchase plan.
Shareholders' equity was $105.0 million at December 31, 1995, an increase of
$27.7 million, or 35.9%, from the $77.3 million balance at December 31, 1994.
This increase was due to 1995 earnings of $18.2 million, $5.6 million in capital
generated through employee benefit plans during 1995, and a decrease in the net
after-tax unrealized loss on available-for-sale investments of $3.9 million from
the prior year-end. The Company does not have any material commitments for
capital expenditures as of December 31, 1995.
37
The Company paid nominal cash dividends on its common stock from 1989 to
1992 in order to qualify the common stock as an eligible investment for
institutional investors requiring a cash yield. The Board of Directors of the
Company indefinitely suspended plans to pay further cash dividends in the third
quarter of 1992 in response to the net loss and level of nonperforming assets in
the third quarter of 1992. The Company is currently precluded from paying cash
dividends without prior regulatory approval.
The following table presents the relationship between significant financial
ratios:
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
Return on average assets......................................................... 1.6% 0.9% 0.2%
DIVIDED BY
Average equity as a percentage of average assets................................. 7.9% 7.7% 7.4%
EQUALS
Return on average equity......................................................... 19.8% 12.3% 2.3%
TIMES
Earnings retained................................................................ 100.0% 100.0% 100.0%
EQUALS
Internal capital growth.......................................................... 19.8% 12.3% 2.3%
The Company and the Bank are subject to capital adequacy guidelines issued
by the Federal Reserve Board. Under these guidelines, the minimum total
risk-based capital requirement is 10.0% of risk-weighted assets and certain
off-balance sheet items for a "well capitalized" depository institution. At
least 6.0% of the 10.0% total risk-based capital ratio must consist of Tier 1
capital, defined as tangible common equity, and the remainder may consist of
subordinated debt, cumulative preferred stock, and a limited amount of the
allowance for loan losses.
The Federal Reserve Board has established minimum capital leverage ratio
guidelines for state member banks. The ratio is determined using Tier 1 capital
divided by quarterly average total assets. The guidelines require a minimum of
5.0% for a "well capitalized" depository institution.
In addition to the foregoing requirements, the Bank is also subject to a
capital requirement established by the California State Banking Department.
Under the regulatory consent order with the California State Banking Department,
the Bank must maintain a minimum tangible equity-to-assets ratio of 6.5%. The
Bank's tangible equity-to-assets ratios were 7.1% and 6.5% at December 31, 1995
and 1994, respectively.
The Company's risk-based capital ratios were in excess of regulatory
guidelines for a "well-capitalized" depository institution as of December 31,
1995, 1994 and 1993. Capital ratios for the Company are set forth below:
DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
Total risk-based capital ratio....................................................... 11.9% 10.1% 11.3%
Tier 1 risk-based capital ratio...................................................... 10.6% 8.9% 10.1%
Tier 1 leverage ratio................................................................ 8.0% 8.3% 6.9%
The improvement in the Company's total and Tier 1 risk-based capital ratios
from December 31, 1994 to December 31, 1995 is attributable to asset growth
during 1995 primarily occuring in lower risk-weighted assets, and also an
increase in Tier 1 capital. The increase in Tier 1 capital resulted from the
aforementioned 1995 net income and capital generated through the Company's
employee benefit plans. The decrease in the Company's total and Tier 1
risk-based capital ratios from December 31, 1993 to December 31, 1994 primarily
resulted from the growth in loans outstanding and in the level of loan
commitments.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Silicon Valley Bancshares:
We have audited the accompanying consolidated balance sheets of Silicon
Valley Bancshares and subsidiaries (the Company) as of December 31, 1995 and
1994, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The accompanying consolidated statements of
income, changes in shareholders' equity, and cash flows of the Company for the
year ended December 31, 1993, were audited by other auditors whose report
thereon dated January 26, 1994, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1995 and 1994 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Silicon Valley Bancshares and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, in 1994.
KPMG Peat Marwick LLP
San Jose, California
January 18, 1996
39
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
1995 1994
------------- -------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks............................................................. $ 85,187 $ 139,792
Federal funds sold and securities purchased under agreement to resell............... 257,138 150,057
Investment securities:
At fair value..................................................................... 321,309 148,703
At cost........................................................................... -- 7,786
Loans, net of unearned income....................................................... 738,405 703,809
Allowance for loan losses........................................................... (29,700) (20,000)
------------- -------------
Net loans......................................................................... 708,705 683,809
Premises and equipment.............................................................. 4,697 2,221
Other real estate owned............................................................. 4,955 7,089
Accrued interest receivable and other assets........................................ 25,596 22,082
------------- -------------
Total assets.................................................................... $ 1,407,587 $ 1,161,539
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Noninterest-bearing demand deposits................................................. $ 451,318 $ 401,455
Money market, NOW and savings deposits.............................................. 773,292 585,171
Time deposits....................................................................... 65,450 88,747
------------- -------------
Total deposits...................................................................... 1,290,060 1,075,373
Other liabilities................................................................... 12,553 8,909
------------- -------------
Total liabilities............................................................... 1,302,613 1,084,282
------------- -------------
Shareholders' Equity:
Preferred stock, no par value:
20,000,000 shares authorized; none outstanding
Common stock, no par value:
30,000,000 shares authorized; 8,963,662 and 8,509,194 shares outstanding at
December 31, 1995 and 1994, respectively........................................... 59,357 54,068
Retained earnings................................................................... 45,855 27,702
Net unrealized loss on available-for-sale investments............................... (198) (4,159)
Unearned compensation............................................................... (40) (354)
------------- -------------
Total shareholders' equity...................................................... 104,974 77,257
------------- -------------
Total liabilities and shareholders' equity...................................... $ 1,407,587 $ 1,161,539
------------- -------------
------------- -------------
See notes to consolidated financial statements.
40
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
----------- --------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Interest income:
Loans....................................................................... $ 79,767 $ 62,312 $ 53,559
Investment securities....................................................... 10,439 11,343 7,744
Federal funds sold and securities purchased under agreement to resell....... 11,041 1,397 2,772
----------- --------- ---------
Total interest income..................................................... 101,247 75,052 64,075
----------- --------- ---------
Interest expense:
Deposits.................................................................... 27,293 14,770 13,665
Other borrowings............................................................ 2 22 --
----------- --------- ---------
Total interest expense.................................................... 27,295 14,792 13,665
----------- --------- ---------
Net interest income........................................................... 73,952 60,260 50,410
Provision for loan losses..................................................... 8,737 3,087 9,702
----------- --------- ---------
Net interest income after provision for loan losses........................... 65,215 57,173 40,708
----------- --------- ---------
Noninterest income:
Disposition of client warrants.............................................. 8,205 2,840 5,762
Letter of credit and foreign exchange income................................ 3,007 2,403 1,441
Deposit service charges..................................................... 1,402 1,533 1,712
Investment gains (losses)................................................... (768) (2,421) 69
Other....................................................................... 719 567 332
----------- --------- ---------
Total noninterest income.................................................. 12,565 4,922 9,316
----------- --------- ---------
Noninterest expense:
Compensation and benefits................................................... 27,161 23,249 18,601
Professional services....................................................... 4,565 4,688 5,070
Occupancy................................................................... 3,616 2,639 1,735
Equipment................................................................... 3,235 1,712 1,160
FDIC deposit insurance...................................................... 1,385 2,406 2,452
Data processing services.................................................... 824 1,319 981
Corporate legal and litigation.............................................. 595 2,567 2,140
Client services............................................................. 410 1,073 1,489
Cost of other real estate owned............................................. (12) 1,382 10,234
Other....................................................................... 6,146 4,564 3,495
----------- --------- ---------
Total noninterest expense................................................. 47,925 45,599 47,357
----------- --------- ---------
Income before income tax expense.............................................. 29,855 16,496 2,667
Income tax expense............................................................ 11,702 7,430 1,066
----------- --------- ---------
Net income.................................................................... $ 18,153 $ 9,066 $ 1,601
----------- --------- ---------
----------- --------- ---------
Net income per common and common equivalent share............................. $ 1.98 $ 1.06 $ 0.20
----------- --------- ---------
----------- --------- ---------
See notes to consolidated financial statements.
41
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
-------------------------------------------------------------------------------
COMMON STOCK UNREALIZED
---------------------- RETAINED GAIN/(LOSS) ON UNEARNED
SHARES AMOUNT EARNINGS INVESTMENTS COMPENSATION TOTAL
----------- --------- --------- -------------- --------------- -----------
(DOLLARS IN THOUSANDS)
Balance at December 31, 1992............. 7,892,273 $ 48,951 $ 17,035 -- -- $ 65,986
Common stock issued under employee
benefit plans........................... 398,721 3,229 -- -- $ (744) 2,485
Amortization of unearned compensation.... -- -- -- -- 264 264
Net income............................... -- -- 1,601 -- -- 1,601
----------- --------- --------- ------- ------ -----------
Balance at December 31, 1993............. 8,290,994 52,180 18,636 -- (480) 70,336
----------- --------- --------- ------- ------ -----------
Cumulative effect of change in accounting
principle, net.......................... -- -- -- $ 1,493 -- 1,493
Common stock issued under employee
benefit plans........................... 218,200 1,888 -- -- -- 1,888
Amortization of unearned compensation.... -- -- -- -- 126 126
Net change in unrealized gain/ (loss) on
available-for-sale investments.......... -- -- -- (5,652) -- (5,652)
Net income............................... -- -- 9,066 -- -- 9,066
----------- --------- --------- ------- ------ -----------
Balance at December 31, 1994............. 8,509,194 54,068 27,702 (4,159) (354) 77,257
----------- --------- --------- ------- ------ -----------
Common stock issued under employee
benefit plans........................... 454,468 5,289 -- -- -- 5,289
Amortization of unearned compensation.... -- -- -- -- 314 314
Net change in unrealized gain/ (loss) on
available-for-sale investments.......... -- -- -- 3,961 -- 3,961
Net income............................... -- -- 18,153 -- -- 18,153
----------- --------- --------- ------- ------ -----------
Balance at December 31, 1995............. 8,963,662 $ 59,357 $ 45,855 $ (198) $ (40) $ 104,974
----------- --------- --------- ------- ------ -----------
----------- --------- --------- ------- ------ -----------
See notes to consolidated financial statements.
42
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income............................................................ $ 18,153 $ 9,066 $ 1,601
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses........................................... 8,737 3,087 9,702
Net (gain) loss on sales of investment securities................... 768 2,421 (69)
Depreciation and amortization....................................... 1,944 1,491 1,487
Net loss on disposals of premises and equipment..................... 1,117 -- --
Net (gain) loss on sales of other real estate owned................. (271) 471 8,386
Deferred income tax provision (benefit)............................. (3,864) 2,015 (3,542)
(Increase) decrease in accrued interest receivable.................. (102) (1,926) 637
Increase in accounts receivable..................................... (324) (542) (326)
Increase (decrease) in accrued interest payable..................... 57 72 (177)
Increase (decrease) in unearned income.............................. 159 (42) (1,064)
Other, net.......................................................... (1,248) 2,885 2,143
------------ ------------ ------------
Net cash provided by operating activities............................... 25,126 18,998 18,778
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from maturities and paydowns of investment securities........ 194,649 133,921 93,380
Proceeds from sales of investment securities.......................... 40,105 127,037 13,728
Purchases of investment securities.................................... (390,770) (164,645) (234,082)
Net (increase) decrease in loans...................................... (40,121) (164,941) 28,720
Proceeds from recoveries of charged off loans......................... 5,921 3,321 4,323
Net proceeds from sales of other real estate owned.................... 2,837 21,390 19,348
Purchases of premises and equipment................................... (5,561) (2,635) (2,483)
------------ ------------ ------------
Net cash applied to investing activities................................ (192,940) (46,552) (77,066)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in deposits.............................................. 214,687 160,413 26,890
Proceeds from issuance of common stock, net of issuance costs......... 5,603 2,014 2,425
------------ ------------ ------------
Net cash provided by financing activities............................... 220,290 162,427 29,315
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents.................... 52,476 134,873 (28,973)
Cash and cash equivalents at January 1,................................. 289,849 154,976 183,949
------------ ------------ ------------
Cash and cash equivalents at December 31,............................... $ 342,325 $ 289,849 $ 154,976
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures:
Interest paid......................................................... $ 27,239 $ 14,719 $ 13,842
Income taxes paid..................................................... $ 14,677 $ 7,707 $ 534
------------ ------------ ------------
------------ ------------ ------------
Non-cash investing activities:
Transfer of loans to other real estate owned.......................... $ 408 $ 1,873 $ 17,616
Transfer of "held-to-maturity" investment securities to
"available-for-sale" $ 6,196 $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
See notes to consolidated financial statements.
43
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO 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 1994 and 1993 consolidated
financial statements to conform to the 1995 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 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 Maryland,
Massachusetts and Oregon. The Bank serves emerging and middle-market growth
companies in specific targeted niches, and focuses on the technology and life
sciences industries, while identifying and capitalizing on opportunities to
serve other groups of clients with unique financial needs. Substantially all of
the assets, liabilities, and earnings of the Company relate to its investment in
the Bank.
CONSOLIDATION
The 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 consolidated financial
statements after elimination of intercompany accounts and transactions.
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. Material estimates that are particularly
susceptible to possible change in the near term relate to the determination of
the allowance for loan losses and the valuation of other real estate owned
(OREO). 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.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Federal funds sold and securities purchased under agreement to resell
include interest-bearing deposits in other financial institutions of $138,000
and $57,000 at December 31, 1995 and 1994, respectively.
INVESTMENT SECURITIES
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities" on
January 1, 1994. Under this Statement, securities acquired with the ability and
positive intent to hold to maturity are classified as "held-to-maturity," and
are accounted for at historical cost, adjusted for the amortization of premiums
or the accretion of discounts to maturity, where appropriate. Unrealized losses
on held-to-maturity securities due to fluctuations in fair value are realized
when it is determined that an other than temporary decline in value has
occurred. Securities that are held to meet investment objectives
44
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
such as interest rate risk and liquidity management, but which may be sold by
the Company as needed to implement management strategies, are classified as
"available-for-sale," and are accounted for at fair value. Unrealized gains and
losses on available-for-sale securities, after applicable taxes, are excluded
from earnings and are reported as a separate component of shareholders' equity
until realized. Gains and losses realized upon the sale of investment securities
are computed on the specific identification method.
Upon adoption of SFAS No. 115, the Company classified $253.5 million of
investment securities, including U.S. Treasury and agencies securities,
mortgage-backed securities and other taxable debt and equity securities, as
available-for-sale, and recorded a pre-tax unrealized gain on such securities of
$2.5 million. The balance of $8.5 million in state and local municipal bonds was
classified as held-to-maturity.
In November 1995, the Financial Accounting Standards Board issued "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities" ("special report"). Concurrent with the date of this
special report, but no later than December 31, 1995, an enterprise was permitted
to reassess the appropriateness of the classifications of all securities held at
that time. Reclassifications of securities from the held-to-maturity category
that resulted from this one-time reassessment would not call into question the
ability or positive intent of an enterprise to hold other debt securities to
maturity. On December 28, 1995, the Company reclassified its entire $6.2 million
held-to-maturity investment securities portfolio, comprised of state and local
municipal bonds, as available-for-sale, and recorded a pre-tax unrealized gain
on such securities of $0.4 million.
LOANS
Loans are reported at the principal amount outstanding, net of unearned
income. Unearned income includes deferred loan origination and commitment fees
and deferred loan origination costs. The net amount of unearned income is
amortized into interest income over the contractual terms of the underlying
loans and commitments using the interest method or the straight-line method, if
not materially different.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision charged to
expense. It is the Company's policy to charge off loans which, in the judgment
of Management, are deemed to have a substantial risk of loss.
The allowance for loan losses is maintained at a level deemed adequate by
the Company, based upon various estimates and judgments, to provide for known
and inherent risks in the loan portfolio, including loan commitments and letters
of credit. The evaluation of the adequacy of the allowance for loan losses is
based upon a continuous review of a number of factors, including historical loss
experience, a review of specific loans, loan concentrations, prevailing and
anticipated economic conditions that may impact the borrowers' abilities to
repay loans as well as the value of underlying collateral, delinquency analysis,
and an assessment of credit risk in the loan portfolio established through an
ongoing credit review process by the Company and through periodic regulatory
examinations.
NONACCRUAL LOANS
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan --
Income Recognition and Disclosures" effective January 1, 1995. SFAS No. 114
requires the Company to measure impairment of a loan based upon the present
value of expected future cash flows discounted at the loan's effective interest
rate, except that as a practical expedient, the Company may measure impairment
based on
45
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the loan's observable market price or the fair value of the collateral if the
loan is collateral-dependent. A loan is considered impaired when, based upon
currently known information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the
agreement. The adoption of SFAS No. 114 and SFAS No. 118 did not have a material
impact on the consolidated financial position or results of operations of the
Company.
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 SFAS No. 114.
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
interest and principal becomes current in accordance with the terms of the loan
agreement and full collection of the principal appears probable.
PREMISES AND EQUIPMENT
Premises and equipment are reported at cost, less accumulated depreciation
and amortization computed using the straight-line method over the estimated
useful lives of the assets or the terms of the related leases, whichever is
shorter. This time period may range from one to 10 years. The Company has no
capitalized lease obligations.
OTHER REAL ESTATE OWNED
Loans are transferred to OREO at the time of foreclosure. OREO is carried at
the lower of the recorded investment in the loan or the fair value of the
property less estimated costs of disposal. Upon transfer of a loan to OREO, an
appraisal is obtained and any excess of the loan balance over the fair value of
the property less estimated costs of disposal is charged against the allowance
for loan losses. Revenues and expenses associated with OREO, and subsequent
adjustments to the fair value of the property and to the estimated costs of
disposal, are realized and reported as a component of noninterest expense when
incurred.
Upon adoption of SFAS No. 114, certain in-substance foreclosure loans
previously classified as OREO were reclassified as nonaccrual loans. The amount
of loans reclassified to conform with this new accounting standard was $1.4
million at December 31, 1994.
FOREIGN EXCHANGE FORWARD CONTRACTS
The Company enters into foreign exchange forward contracts with customers
involved in international trade finance activities, and enters into offsetting
foreign exchange forward contracts with correspondent banks to hedge against the
risk of fluctuations in foreign currency exchange rates related to the forward
contracts entered into with its customers. The notional or contract amounts
associated with these financial instruments are not recorded as assets or
liabilities in the consolidated balance sheet. Fees on these financial contracts
are included in noninterest income when the transaction is settled. Cash flows
resulting from these financial instruments are classified in the same category
as the cash flows resulting from the items being hedged. The Company is an
end-user of these derivative financial instruments and does not conduct trading
activities for such instruments.
INCOME TAXES
The Company and the Bank file a consolidated federal income tax return.
Consolidated or combined state income tax returns are filed in California,
Massachusetts, and Oregon. Effective
46
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income
Taxes." Under SFAS No. 109, provisions for income taxes are based upon taxes
payable for the current year as well as current year changes in deferred taxes
related to temporary differences between the tax basis and financial statement
balances of assets and liabilities. Deferred tax assets and liabilities are
included in the financial statements at currently enacted income tax rates
applicable to the period in which the deferred tax assets and liabilities are
expected to be realized. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for income taxes.
NET INCOME PER SHARE COMPUTATION
Net income per common and common equivalent share is calculated using
weighted average shares, including the dilutive effect of stock options
outstanding during the period. Weighted average shares outstanding were
9,164,135, 8,575,366 and 8,200,613 in 1995, 1994 and 1993, respectively.
2. RESTRICTIONS ON CASH BALANCES
The Bank is required to maintain reserves against customer deposits by
keeping balances with the Federal Reserve Bank in a noninterest-bearing cash
account. The minimum required reserve amounts were $32.5 million and $27.1
million at December 31, 1995 and 1994, respectively. The average required
reserve balance totaled $24.6 million in 1995 and $19.7 million in 1994.
3. INVESTMENT SECURITIES
The following tables detail the major components of investment securities
classified as held-to-maturity, which are recorded at amortized cost, and those
classified as available-for-sale, which are recorded at fair value. At December
31, 1995, all investment securities were classified as available-for-sale. The
Company does not maintain a trading portfolio.
DECEMBER 31, 1995
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Available-for-sale securities:
U.S. Treasury securities....................................... $ 39,097 $ 830 $ (29) $ 39,898
U.S. agencies and corporations:
Discount notes and bonds..................................... 164,420 103 (766) 163,757
Collateralized mortgage obligations.......................... 57,827 -- (620) 57,207
Commercial paper............................................... 52,847 -- (324) 52,523
Obligations of states and political subdivisions............... 6,196 385 -- 6,581
Other equity securities........................................ 1,258 85 -- 1,343
----------- ----------- ----------- -----------
Total.......................................................... $ 321,645 $ 1,403 $ (1,739) $ 321,309
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
47
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES (CONTINUED)
DECEMBER 31, 1994
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Held-to-maturity securities:
Obligations of states and political subdivisions............... $ 7,786 $ 264 $ (1) $ 8,049
----------- ----------- ----------- -----------
Total.......................................................... $ 7,786 $ 264 $ (1) $ 8,049
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Available-for-sale securities:
U.S. Treasury securities....................................... $ 53,166 $ 48 $ (1,296) $ 51,918
U.S. agencies and corporations:
Discount notes and bonds..................................... 13,074 38 (1) 13,111
Collateralized mortgage obligations.......................... 78,846 1 (5,306) 73,541
Mortgage-backed securities................................... 9,575 -- (642) 8,933
Other equity securities........................................ 1,090 110 -- 1,200
----------- ----------- ----------- -----------
Total.......................................................... $ 155,751 $ 197 $ (7,245) $ 148,703
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The amortized cost and fair value of investment securities classified as
available-for-sale at December 31, 1995, by remaining contractual maturity, are
shown below. Expected remaining maturities of collateralized mortgage
obligations will differ from contractual maturities because borrowers may have
the right to prepay obligations with or without penalties. Other equity
securities were included in the table below as due after ten years.
DECEMBER 31, 1995
---------------------------
AMORTIZED COST FAIR VALUE
-------------- -----------
(DOLLARS IN THOUSANDS)
Due in one year or less.............................................................. $ 187,562 $ 186,599
Due after one year through five years................................................ 77,981 79,042
Due after five years through ten years............................................... 949 1,023
Due after ten years.................................................................. 55,153 54,645
-------------- -----------
Total................................................................................ $ 321,645 $ 321,309
-------------- -----------
-------------- -----------
Investment securities with a fair value of $61.9 million and $36.0 million
at December 31, 1995 and 1994, respectively, were pledged to secure certain
public deposits, foreign exchange activities at a correspondent bank, and a line
of credit at the Federal Reserve Bank discount window.
During 1995, gross gains of $6,000 and gross losses of $774,000 were
realized on sales of available-for-sale debt securities. In 1994, gross losses
realized on sales of available-for-sale debt securities were $2.5 million, while
gross gains were $100,000. During 1993, gross gains of $71,000 and gross losses
of $2,000 were realized on sales of debt securities.
48
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS
The detailed composition of loans is presented in the following table:
DECEMBER 31,
------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
Commercial.............................................................................. $ 622,488 $ 613,469
Real estate term........................................................................ 56,845 58,977
Real estate construction................................................................ 17,194 10,512
Consumer and other...................................................................... 41,878 20,851
----------- -----------
Total loans (1)......................................................................... $ 738,405 $ 703,809
----------- -----------
----------- -----------
- ------------------------
(1) Loans are presented net of unearned income of $3,813 and $3,654 at December
31, 1995 and 1994, respectively.
The Company's loan classifications for financial reporting purposes differ
from those for regulatory reporting purposes. Loans are classified for financial
reporting purposes based upon the purpose and primary source of repayment of the
loans. Loans are classified for regulatory reporting purposes based upon the
type of collateral securing the loans.
5. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized below:
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- ---------- ----------
(DOLLARS IN THOUSANDS)
Balance at January 1,........................................................ $ 20,000 $ 25,000 $ 22,000
Provision for loan losses.................................................... 8,737 3,087 9,702
Loans charged off............................................................ (4,958) (11,408) (11,025)
Recoveries................................................................... 5,921 3,321 4,323
--------- ---------- ----------
Balance at December 31,...................................................... $ 29,700 $ 20,000 $ 25,000
--------- ---------- ----------
--------- ---------- ----------
The aggregate recorded investment in loans for which impairment has been
realized in accordance with SFAS No. 114 totaled $27.9 million at December 31,
1995. Allocations to the allowance for loan losses at December 31, 1995 related
to these impaired loans were $6.8 million. Average impaired loans for 1995 were
$16.1 million. If these loans had not been impaired, $1.4 million in interest
income would have been realized during the year ended December 31, 1995. The
Company realized no interest income on such impaired loans during 1995.
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
DECEMBER 31,
--------------------
1995 1994
--------- ---------
(DOLLARS IN
THOUSANDS)
Cost:
Furniture and equipment................................................................ $ 3,639 $ 6,331
Leasehold improvements................................................................. 2,990 1,301
--------- ---------
Total cost............................................................................... 6,629 7,632
Accumulated depreciation and amortization................................................ (1,932) (5,411)
--------- ---------
Premises and equipment -- net.......................................................... $ 4,697 $ 2,221
--------- ---------
--------- ---------
49
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PREMISES AND EQUIPMENT (CONTINUED)
The Company is obligated under a number of noncancellable operating leases
for premises which expire at various dates through the year 2005. Such leases
may provide for periodic adjustments of rentals based on changes in various
economic indicators. The following table presents minimum payments under
noncancellable operating leases:
(DOLLARS IN
YEARS ENDING DECEMBER 31, THOUSANDS)
- -------------------------------------------------------------------------------------------- --------------------
1996........................................................................................ $ 1,509
1997........................................................................................ 1,620
1998........................................................................................ 1,571
1999........................................................................................ 1,488
2000........................................................................................ 1,347
After 2000.................................................................................. 4,994
--------
Total....................................................................................... $ 12,529
--------
--------
Rent expense for premises leased under operating leases was $2.0 million,
$1.4 million and $1.2 million for the years ended December 31, 1995, 1994, and
1993, respectively.
7. INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes." The implementation of SFAS No. 109 did not materially impact the
Company's consolidated financial position or results of operations for 1993. The
components of the Company's provision for income taxes consist of the following:
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Current provision:
Federal......................................................................... $ 12,137 $ 4,224 $ 3,916
State........................................................................... 3,429 1,191 692
Deferred provision (benefit):
Federal......................................................................... (3,383) 1,163 (3,143)
State........................................................................... (481) 852 (399)
--------- --------- ---------
Income tax expense............................................................ $ 11,702 $ 7,430 $ 1,066
--------- --------- ---------
--------- --------- ---------
A reconciliation between the federal statutory income tax rate and the
Company's effective tax rate is shown below.
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
Federal statutory rate............................................................... 35.0% 35.0% 35.0%
State income taxes, net of the federal tax effect.................................... 6.4 7.5 7.2
Tax-exempt interest income........................................................... (0.5) (1.1) (7.5)
Other -- net......................................................................... (1.7) 3.6 5.3
--- --- ---
Effective tax rate................................................................... 39.2% 45.0% 40.0%
--- --- ---
--- --- ---
50
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following as
accounted for under SFAS No. 109:
YEARS ENDED DECEMBER
31,
--------------------
1995 1994
--------- ---------
Deferred tax assets:
Allowance for loan losses................................................................ $ 11,204 $ 7,442
Other reserves not currently deductible.................................................. 3,094 3,907
State income taxes....................................................................... 1,327 365
Depreciation and amortization............................................................ 394 --
Net unrealized loss on available-for-sale investments.................................... 138 2,890
--------- ---------
Gross deferred tax assets.................................................................. 16,157 14,604
Deferred tax liabilities:
Other deferred tax liabilities........................................................... (457) --
Depreciation and amortization............................................................ -- (16)
--------- ---------
Net deferred tax assets................................................................ $ 15,700 $ 14,588
--------- ---------
--------- ---------
The Company believes a valuation allowance is not needed to reduce the net
deferred tax assets as it is more likely than not that the net deferred tax
assets will be realized through recovery of taxes previously paid and/or future
taxable income.
8. EMPLOYEE BENEFIT PLANS
Effective March 1, 1995, the Company's employee stock ownership plan (ESOP)
was merged with and into the Bank's 401(k) tax-deferred savings plan and the
merged plan was restated and renamed the Silicon Valley Bank 401(k) and Employee
Stock Ownership Plan (the "plan"). Upon adoption of the plan, all unvested
employee balances under the previous 401(k) plan became fully vested. All
employees of the Company are eligible to participate in the plan.
Employees participating in the 401(k) plan may elect to have a portion of
their salary deferred and contributed to the plan. The amount of salary deferred
is not subject to federal or state income taxes at the time of deferral. The
Company matches up to $1,000 of an employee's contributions in any plan year.
The matching contribution vests ratably over five years. Under the current and
previous plans, the Company's matching contributions were $0.3 million, $0.3
million and $0.2 million in 1995, 1994 and 1993, respectively.
All individuals that are employed by the Company on the first and last day
of a fiscal quarter are eligible for quarterly ESOP contributions. On a
quarterly basis, the Company may elect to contribute cash, or the Company's
common stock, in an amount not exceeding 5.0% of an eligible employee's
quarterly base salary. Additionally, for all individuals employed by the Company
on the last day of the fiscal year, the Company may elect to contribute cash, or
the Company's common stock, in an amount not exceeding 10.0% of the eligible
employee's base salary earned in that year. The ESOP contributions vest ratably
over five years. Under the current and previous plans, the Company's
contributions to the ESOP totaled $2.5 million, $1.6 million and $0.9 million in
1995, 1994 and 1993, respectively. At December 31, 1995, the ESOP owned 431,520
equivalent shares of the Company's common stock. All shares held by the ESOP are
treated as outstanding shares in the computation of the Company's net income per
share.
The Company has an employee stock purchase plan (ESPP) under which
participating employees may contribute up to 10.0% of their compensation to
purchase shares of the Company's common stock
51
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
at 85.0% of its fair market value at either the beginning or end of each
six-month offering period, whichever price is less. All employees of the Company
are eligible to participate in the ESPP. The ESPP is noncompensatory and results
in no expense to the Company. For the first six-month offering period of 1995,
25,373 shares of the Company's common stock were issued under the ESPP at $11.48
per share, while 20,824 shares of the Company's common stock were issued at
$15.30 per share for the second six-month offering period of 1995. At December
31, 1995, 168,411 shares of the Company's common stock were reserved for future
issuance under the ESPP.
The Company's 1983 and 1989 stock option plans provide for the granting of
incentive and non-qualified stock options which entitle directors, officers and
key employees, and certain other parties to purchase shares of the Company's
common stock at a price not less than the fair market value of the common stock
on the date the option is granted. Options vest over various periods not in
excess of five years from the date of grant and expire five to ten years from
the date of grant. The following table provides stock option information:
NUMBER OF OPTION PRICE PER
SHARES SHARE
----------- ------------------
Outstanding at January 1, 1993.................................................. 823,039 $ 2.04 - $13.10
Granted....................................................................... 289,500 8.25 - 11.00
Exercised..................................................................... (138,560) 2.04 - 9.98
Forfeited..................................................................... (53,958) 6.80 - 13.10
----------- ------------------
Outstanding at December 31, 1993................................................ 920,021 2.04 - 12.70
Granted....................................................................... 228,250 9.88 - 12.75
Exercised..................................................................... (76,150) 2.04 - 9.98
Forfeited..................................................................... (76,120) 9.88 - 12.25
----------- ------------------
Outstanding at December 31, 1994................................................ 996,001 2.04 - 12.75
----------- ------------------
Granted....................................................................... 372,093 13.25 - 16.00
Exercised..................................................................... (222,811) 2.04 - 13.63
Forfeited..................................................................... (29,081) 6.80 - 16.00
----------- ------------------
Outstanding at December 31, 1995................................................ 1,116,202 $ 2.04 - $16.00
----------- ------------------
----------- ------------------
At December 31, 1995, options for 580,358 shares of the Company's common
stock were exercisable under the stock option plans, and 72,941 shares were
available for future grant.
The Company's 1989 stock option plan also provides for the granting of
shares to directors and employees. Shares granted to directors as compensation
for their services are fully vested on the date of grant. Shares granted to
employees may be subject to certain vesting requirements and resale restrictions
(restricted stock). For restricted stock, unearned compensation equivalent to
the market value of the common stock on the date of grant is charged to
shareholders' equity and subsequently amortized into noninterest expense over
the vesting term. There were 75,000 shares of restricted stock outstanding at
December 31, 1995, and the vesting of these shares occurs at various periods
through 1998.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes
financial accounting and reporting standards for stock-based compensation plans,
including employee stock purchase plans, stock options and restricted stock.
SFAS No. 123 encourages all entities to adopt a fair value method of accounting
for stock-based compensation plans, whereby compensation cost is measured at the
grant date based on the fair value of the award and is realized as an expense
over the service or vesting period. However,
52
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
SFAS No. 123 also allows an entity to continue to measure compensation cost for
these plans using the intrinsic value method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," which is the method currently being used by the Company. Under
the intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date or other measurement date
over the amount which must be paid to acquire the stock.
The Company adopted SFAS No. 123 effective January 1, 1996, but will
continue to account for employee and director stock-based compensation plans
under the intrinsic value accounting methodology prescribed by APB Opinion No.
25. SFAS No. 123 requires that stock-based compensation to other parties be
accounted for under the fair value method. Based upon the information available
as of December 31, 1995, the effect of adoption of this Statement on the
consolidated financial position and results of operations of the Company is not
expected to be material.
9. RELATED PARTIES
At December 31, 1995, the Company had two loans outstanding to related
parties. In 1992, the Board of Directors of the Bank adopted a policy to
prohibit new loan commitments to directors, officers or employees of the Company
and the Bank. Term loans to related parties existing at December 31, 1992 are
allowed to run their full term. When made, these related party loans included
terms, including interest rates and collateral requirements, comparable to those
prevailing at that time for similar transactions with unrelated parties, and did
not involve more than the normal amount of credit risk or present other
unfavorable features. The balance of related party loans totaled $1.5 million at
December 31, 1995, which was a $0.6 million decrease from the prior year-end due
to repayments during 1995.
In 1995, the Silicon Valley Bank Foundation (the "Foundation") was formed.
The Foundation is funded entirely by the Company, and was established by the
Company to maintain good corporate citizenship in its communities. In 1995, the
Company contributed $0.1 million to the initial funding of the Foundation.
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company uses financial instruments
with off-balance sheet risk to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in foreign currency exchange rates.
These financial instruments include commitments to extend credit, commercial and
standby letters of credit, and foreign exchange forward contracts. These
instruments involve, to varying degrees, elements of credit risk. 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.
COMMITMENTS TO EXTEND CREDIT
A commitment to extend credit is a formal agreement to lend funds to a
customer as long as there is no violation of any condition established in the
agreement. Such commitments generally have fixed expiration dates, or other
termination clauses, and usually require a fee paid by the customer upon the
Company issuing the commitment. As of December 31, 1995 and 1994, the Company
had $256.9 million and $374.7 million of available unused loan commitments, of
which $10.4 million and $29.5 million had a fixed interest rate, respectively.
The Company's exposure arising from interest rate risk associated with fixed
rate loan commitments is not considered material. Commitments which are
unavailable for funding due to customers not meeting all collateral, compliance,
and financial covenants required under loan commitment agreements totaled $789.1
million and $474.4 million at December 31, 1995 and 1994, respectively.
53
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
The Company's potential exposure to credit loss, in the event of
nonperformance by the other party to the financial instrument, is the
contractual amount of the available unused loan commitments. The Company uses
the same credit approval and monitoring process in extending loan commitments as
it does in making loans. The actual liquidity needs or the credit risk that the
Company will experience will be lower than the contractual amount of commitments
to extend credit because a significant portion of these commitments expire
without being drawn upon. The Company evaluates each potential borrower and the
necessary collateral on an individual basis. The type of collateral varies, but
may include real property, bank deposits, or business and personal assets. The
potential credit risk associated with these commitments is considered in
Management's evaluation of the adequacy of the allowance for loan losses.
COMMERCIAL AND STANDBY LETTERS OF CREDIT
Commercial and standby letters of credit represent conditional commitments
issued by the Company on behalf of a customer to guarantee the performance of
the customer to a third party. These guarantees are issued primarily for
inventory purchases by customers and are typically short-term in nature. The
letters of credit have fixed expiration dates and generally require a fee paid
by the customer upon the Company issuing the commitment. Fees generated from
these letters of credit are recognized in noninterest income over the commitment
period. At December 31, 1995 and 1994, total commercial and standby letters of
credit were $72.4 million and $64.7 million, respectively.
The credit risk involved in issuing letters of credit is essentially the
same as that involved with extending loan commitments to customers, and
accordingly, the Company uses credit evaluation and collateral requirements
similar to those for loan commitments. The actual liquidity needs or the credit
risk that the Company will experience will be lower than the contractual amount
of letters of credit issued because a significant portion of these conditional
commitments expire without being drawn upon. The potential credit risk
associated with letters of credit is considered in Management's evaluation of
the adequacy of the allowance for loan losses.
FOREIGN EXCHANGE FORWARD CONTRACTS
The Company enters into foreign exchange forward contracts with customers
involved in international trade finance activities, either as the purchaser or
seller of foreign currency at a future date, depending on the customer need. The
Company enters into offsetting foreign exchange forward contracts with
correspondent banks to hedge against the risk of fluctuations in foreign
currency exchange rates related to the forward contracts entered into with its
customers. These contracts are short-term in nature, typically expiring in less
than 90 days. At December 31, 1995 and 1994, the notional amounts of these
contracts were $29.0 million and $14.4 million, respectively. Credit exposure
for foreign exchange forward contracts is equal to the unrealized gains in such
contracts. Total unrealized gains on these contracts with both customers and
correspondent banks amounted to $0.5 million at December 31, 1995 and $0.3
million at December 31, 1994. The Company has incurred no losses from
counterparty nonperformance and anticipates performance by all counterparties to
such foreign exchange forward contracts.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair values for its financial
instruments. Fair value estimates, methods and assumptions, set forth below for
the Company's financial instruments, are made solely to comply with the
requirements of SFAS No. 107 and should be read in conjunction with the
Company's consolidated financial statements and related notes.
54
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair values are based on estimates or calculations at the transaction level
using present value techniques in instances where quoted market prices are not
available. Because broadly traded markets do not exist for most of the Company's
financial instruments, the fair value calculations attempt to incorporate the
effect of current market conditions at a specific time. Fair valuations are
Management's estimates of the values, and they are often calculated based on
current pricing policies, the economic and competitive environment, the
characteristics of the financial instruments, expected losses, and other such
factors. These calculations are subjective in nature, involve uncertainties and
matters of significant judgment, and do not include tax ramifications;
therefore, the results cannot be determined with precision, substantiated by
comparison to independent markets, and may not be realized in an actual sale or
immediate settlement of the instruments. There may be inherent weaknesses in any
calculation technique, and changes in the underlying assumptions used, including
discount rates and estimates of future cash flows, could significantly affect
the results. For all of these reasons, the aggregation of the fair value
calculations presented herein does not represent, and should not be construed to
represent, the underlying value of the Company.
The following methods and assumptions have been used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate the value.
CASH AND CASH EQUIVALENTS: This category includes cash and due from banks,
interest-bearing deposits in other financial institutions, federal funds sold
and securities purchased under agreement to resell. For these short-term
financial instruments, the carrying amount is a reasonable estimate of fair
value.
INVESTMENT SECURITIES: For securities classified as available-for-sale or
held-to-maturity, fair values are based on quoted market prices or dealer
quotes.
LOANS: The fair value of performing fixed and variable rate loans is
calculated by discounting contractual cash flows using discount rates that
reflect the Company's current pricing for loans with similar credit ratings and
for the same remaining maturities. Nonperforming fixed and variable rate loans
and loans classified as special mention, substandard or doubtful are valued
using assumptions as to the expected timing and extent of principal recovery
with no recovery assumed for contractual interest owed.
DEPOSITS: The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings accounts, NOW accounts, and money
market deposits is equal to the amount payable on demand at the reporting date.
The fair value of time deposits is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered by
the Company for time deposits with similar remaining maturities. The fair value
does not include the benefit that results from the low cost of funding provided
by the Company's deposits as compared to the cost of borrowing funds in the
market.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: The Company has not estimated the
fair value of off-balance sheet commitments to extend credit, commercial letters
of credit and standby letters of credit. Because of the uncertainty involved in
attempting to assess the likelihood and timing of a commitment being drawn upon,
coupled with the lack of an established market for these financial instruments,
Management does not believe it is meaningful to provide an estimate of fair
value.
The fair value of foreign exchange forward contracts is based on the
estimated amounts the Company would receive or pay to terminate the contracts at
the reporting date (i.e., mark-to-market value).
LIMITATIONS: The information presented herein is based on pertinent
information available to the Company as of December 31, 1995 and 1994,
respectively. Although Management is not aware of
55
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued since the most recent
year-end and the estimated fair values of these financial instruments may have
changed significantly since that point in time.
The estimated fair values of the Company's financial instruments at December
31, 1995 and 1994 are presented below. Bracketed amounts in the estimated fair
value columns represent estimated cash outflows required to settle the
obligations at market rates as of the respective reporting dates.
DECEMBER 31,
--------------------------------------------------
1995 1994
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Financial Assets:
Cash and due from banks..................................... $ 85,187 $ 85,187 $ 139,792 $ 139,792
Federal funds sold and securities purchased under agreement
to rese11.................................................. 257,138 257,138 150,057 150,057
Available-for-sale securities............................... 321,309 321,309 148,703 148,703
Held-to-maturity securities................................. -- -- 7,786 8,049
Gross loans................................................. 742,218 715,306 707,463 692,810
Less: Allowance for loan losses............................. (29,700) -- (20,000) --
Unearned income........................................ (3,813) -- (3,654) --
----------- ----------- ----------- -----------
Net loans................................................... 708,705 715,306 683,809 692,810
Financial Liabilities:
Noninterest-bearing demand deposits......................... 451,318 451,318 401,455 401,455
Money market, NOW and savings deposits...................... 773,292 773,292 585,171 585,171
Time deposits............................................... 65,450 65,626 88,747 88,914
Off-Balance Sheet Financial Instruments:
Foreign exchange forward contracts -- receive............... -- 14,082 -- 7,193
Foreign exchange forward contracts -- pay................... -- (14,082) -- (7,193)
12. LEGAL MATTERS
On June 1, 1993, a shareholder class action lawsuit was filed in the United
States District Court for the Northern District of California naming the Company
and the Bank, certain directors and officers, and others as defendants. The suit
alleged, among other things, that the defendants misrepresented or failed to
disclose material facts about the Company's operations and financial results
which the plaintiff contends affected the price of the Company's common stock
from January 9, 1991 through October 12, 1992. On September 30, 1994, the
Company entered into a settlement agreement with the plaintiff. The settlement
agreement was approved by the court effective November 28, 1994. Settlement
amounts and costs relating to this agreement were fully realized in the
operating results of the Company for the year ended December 31, 1994.
Additionally, certain lawsuits and claims arising in the ordinary course of
business have been filed or are pending against the Bank and/or the Company.
Based upon information available to the Company, its review of such claims to
date and consultation with its counsel, Management believes 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.
13. REGULATORY MATTERS
During 1993, the Company and the Bank consented to formal supervisory orders
by the Federal Reserve Bank of San Francisco and the Bank consented to a formal
supervisory order by the California State Banking Department. These orders
require, among other actions, the following: suspension
56
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. REGULATORY MATTERS (CONTINUED)
of cash dividends; restrictions on transactions between the Company and the Bank
without prior regulatory approval; development of a capital plan to ensure the
Bank maintains adequate capital levels subject to regulatory approval;
development of plans to improve the quality of the Bank's loan portfolio through
collection or improvement of the credits within specified time frames; changes
to the Bank's loan policies which require the Directors' Loan Committee to
approve all loans to any one borrower exceeding $3.0 million and requiring the
Board of Directors to become more actively involved in loan portfolio management
and monitoring activities; review of, and changes in, the Bank's loan policies
to implement (i) policies for controlling and monitoring credit concentrations,
(ii) underwriting standards for all loan products, and (iii) standards for
credit analysis and credit file documentation; development of an independent
loan review function and related loan review policies and procedures;
development of Board of Directors oversight programs to establish and maintain
effective control and supervision of Management and major Bank operations and
activities; development of a plan, including a written methodology, to maintain
an adequate allowance for loan losses, defined as a minimum of 2.0% of total
loans; development of business plans to establish guidelines for growth and
ensure maintenance of adequate capital levels; a review and evaluation of
existing compensation practices and development of officer compensation policies
and procedures by the Boards of Directors of the Company and the Bank; policies
requiring that changes in fees paid to directors as well as bonuses paid to
executive officers first receive regulatory approval; and development of a
detailed internal audit plan for approval by the Board of Directors of the Bank.
The California State Banking Department order further requires the Bank to
maintain a minimum tangible equity-to-assets ratio of 6.5%.
In addition, such plans, policies and procedures may not be amended without
prior regulatory approval. The Company and the Bank have taken steps to address
these requirements. The Company believes compliance with these actions has not
and will not have a material adverse impact on the business of the Bank, its
clients, or the Company. The Company and the Bank were in substantial compliance
with such orders at December 31, 1995.
14. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The condensed balance sheets of Silicon Valley Bancshares (parent company
only) at December 31, 1995 and 1994, and the related condensed income statements
and condensed statements of cash flows for the years ended December 31, 1995,
1994 and 1993 are presented below:
CONDENSED BALANCE SHEETS
DECEMBER 31,
----------------------
1995 1994
----------- ---------
(DOLLARS IN THOUSANDS)
Assets:
Cash on deposit with subsidiary bank................................................... $ 4,559 $ 1,074
Short-term investments................................................................. 86 110
Other assets........................................................................... 16 --
Investment in subsidiary bank.......................................................... 100,460 76,014
----------- ---------
Total assets......................................................................... $ 105,121 $ 77,198
----------- ---------
----------- ---------
Liabilities.............................................................................. $ 147 $ (59)
Shareholders' equity..................................................................... 104,974 77,257
----------- ---------
Total liabilities and shareholders' equity........................................... $ 105,121 $ 77,198
----------- ---------
----------- ---------
57
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONDENSED INCOME STATEMENTS
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest income................................................................... $ 99 $ 98 $ 74
General and administrative expenses............................................... (86) (53) (81)
Income tax (expense) benefit...................................................... (10) (20) 3
--------- --------- ---------
Income (loss) before equity in net income of subsidiary........................... 3 25 (4)
Equity in net income of subsidiary................................................ 18,150 9,041 1,605
--------- --------- ---------
Net income........................................................................ $ 18,153 $ 9,066 $ 1,601
--------- --------- ---------
--------- --------- ---------
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income...................................................................... $ 18,153 $ 9,066 $ 1,601
Adjustments to reconcile net income to net cash provided by (applied to)
operating activities:
Equity in net income of subsidiary bank....................................... (18,150) (9,041) (1,605)
(Increase) decrease in other assets........................................... (16) 197 728
Increase (decrease) in liabilities............................................ 217 (248) 59
--------- --------- ---------
Net cash provided by (applied to) operating activities............................ 204 (26) 783
--------- --------- ---------
Cash flows from investing activities:
Net decrease in short-term investments.......................................... -- 13 2,158
Investment in subsidiary bank................................................... (2,322) (3,101) (4,000)
--------- --------- ---------
Net cash applied to investing activities.......................................... (2,322) (3,088) (1,842)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs................... 5,603 2,014 2,425
--------- --------- ---------
Net cash provided by financing activities......................................... 5,603 2,014 2,425
--------- --------- ---------
Net increase (decrease) in cash................................................... 3,485 (1,100) 1,366
Cash and cash equivalents at January 1,........................................... 1,074 2,174 808
--------- --------- ---------
Cash and cash equivalents at December 31,......................................... $ 4,559 $ 1,074 $ 2,174
--------- --------- ---------
--------- --------- ---------
58
SILICON VALLEY BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. UNAUDITED QUARTERLY FINANCIAL DATA
1995 1994
------------------------------------------ ------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net interest income.............. $ 18,165 $ 18,367 $ 17,916 $ 19,504 $ 13,732 $ 14,299 $ 15,173 $ 17,056
Provision for loan losses........ 1,355 1,406 3,337 2,639 637 1,055 490 904
Noninterest income............... 977 2,482 5,098 4,008 1,994 1,056 807 1,066
Noninterest expense.............. 12,068 12,416 11,911 11,530 12,041 10,356 11,784 11,420
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes....... 5,719 7,027 7,766 9,343 3,048 3,944 3,706 5,798
Income tax expense............... 2,439 3,046 2,303 3,914 1,314 1,703 1,598 2,815
--------- --------- --------- --------- --------- --------- --------- ---------
Net income....................... $ 3,280 $ 3,981 $ 5,463 $ 5,429 $ 1,734 $ 2,241 $ 2,108 $ 2,983
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Net income per common and common
equivalent share................ $0.37 $0.44 $0.59 $0.58 $0.21 $0.26 $0.24 $0.34
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the sections titled "Proposal No. 1 --
Election of Directors," "Information on Executive Officers," and "Compliance
with Section 16(a) of the Exchange Act" contained in the definitive proxy
statement for the Company's 1996 Annual Meeting of Shareholders is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the sections titled "Information on
Executive Officers," "Report of the Personnel and Compensation Committee of the
Board on Executive Compensation," "Table 1 -- Summary Compensation," "Table 2 --
Option Grants in Fiscal Year 1995," "Table 3 -- Aggregated Option Exercises in
Fiscal Year 1995 and Fiscal Year-End Option Values," "Termination Arrangements,"
and "Director Compensation" contained in the definitive proxy statement for the
Company's 1996 Annual Meeting of Shareholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the sections titled "Security Ownership of
Directors and Executive Officers" and "Security Ownership of Certain Beneficial
Owners" contained in the definitive proxy statement for the Company's 1996
Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the section titled "Certain Relationships
and Related Transactions" in the definitive proxy statement for the Company's
1996 Annual Meeting of Shareholders is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2.
The financial statements and supplementary data contained in Item 8 of
this report are filed as part of this report.
All schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included in
the financial statements or related notes.
(a) 3.
Exhibits are listed in the Index to Exhibits beginning on page 63 of this
report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1995.
60
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
By: _________/s/_JOHN C. DEAN_________
John C. Dean
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Dated: March 11, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------- -----------------------
/s/ DANIEL J. KELLEHER
------------------------------------------- Chairman of the Board of March 11, 1996
Daniel J. Kelleher Directors and Director
/s/ JOHN C. DEAN President, Chief Executive
------------------------------------------- Officer and Director (Principal March 11, 1996
John C. Dean Executive Officer)
Executive Vice President, Chief
/s/ GLEN BLACKMON Information Officer and Chief
------------------------------------------- Financial Officer (Principal March 11, 1996
Glen Blackmon Financial Officer)
/s/ CHRISTOPHER T. LUTES
------------------------------------------- Vice President and Controller March 11, 1996
Christopher T. Lutes (Principal Accounting Officer)
/s/ GARY K. BARR
------------------------------------------- Director March 11, 1996
Gary K. Barr
/s/ JAMES F. BURNS, JR.
------------------------------------------- Director March 11, 1996
James F. Burns, Jr.
/s/ CLARENCE J. FERRARI, JR
------------------------------------------- Director March 11, 1996
Clarence J. Ferrari, Jr.
61
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------- -----------------------
/s/ HENRY M. GAY
------------------------------------------- Director March 11, 1996
Henry M. Gay
/s/ JAMES R. PORTER
------------------------------------------- Director March 11, 1996
James R. Porter
/s/ MICHAEL ROSTER
------------------------------------------- Director March 11, 1996
Michael Roster
/s/ ANN R. WELLS
------------------------------------------- Director March 11, 1996
Ann R. Wells
/s/ DAVID deWILDE
------------------------------------------- Director March 11, 1996
David deWilde
62
INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- ------------ ----------------------------------------------------------------------------------------- ---------------
3.1 Articles of Incorporation of the Company, as amended (1) --
3.2 By-Laws of the Company, as amended (12) --
4.1 Article Three of Articles of Incorporation (included in Exhibit 3.1) (1) --
10.1 Letter of understanding for lease terms between Silicon Valley Bank and John Hancock
Properties, a California corporation; 2262 North First Street, San Jose, California
95113 (1) --
10.1 (a) Seventh amendment to lease outlined in Exhibit 10.1 (10) --
10.1 (b) Eighth amendment to lease outlined in Exhibit 10.1 (10) --
10.3 Employment Agreement between Silicon Valley Bancshares and John C. Dean (10) --
10.5 Silicon Valley Bancshares Incentive Savings Plan (2) --
10.7 Lease Agreement between Silicon Valley Bancshares and Almaden Tower Partners, a
California general partnership; Ten Almaden Blvd., San Jose, California 95113 (5) --
10.9 Lease Agreement between Silicon Valley Bank and Palo Alto Square; Two Palo Alto Square,
Palo Alto, California 94306 (4) --
10.9 (a) Second amendment to lease outlined in Exhibit 10.9 (10) --
10.10 Lease Agreement between Silicon Valley Bank and Sharon Land Company; 3000 Sand Hill Road,
Menlo Park, California 94025 (1) --
10.10(a) First amendment to lease outlined in Exhibit 10.10 (12) --
10.10(b) Second amendment to lease outlined in Exhibit 10.10 (12) --
10.11 Lease Agreement between Silicon Valley Bank and Wellesley Six Company Trust; 45 William
Street, Wellesley, Massachusetts 02181 (7) --
10.11(a) First amendment to lease outlined in Exhibit 10.11 (12) --
10.12 Lease Agreement between Silicon Valley Bank and Forty-Six Hundred, a California Limited
Partnership; 4600 Campus Drive, Suites 103 and 105, Newport Beach, California 92660 (7) --
10.12(a) First amendment to lease outlined in Exhibit 10.12 (10) --
10.12(b) Second amendment to lease outlined in Exhibit 10.12 (12) --
10.13 Silicon Valley Bancshares 1989 Stock Option Plan, as amended (6) --
10.14 Silicon Valley Bancshares Employee Stock Ownership Plan (8) --
10.15 Lease Agreement between Silicon Valley Bank and Ms. Anita McGill; 11000 S.W. Status
Avenue, Suite 170, Beaverton, Oregon 97005 (9) --
10.16 Lease Agreement between Silicon Valley Bank and Westwood Company-Palo Alto, a California
Limited Partnership; 1731 Embarcadero Road, Palo Alto, California 94303 (10) --
63
INDEX TO EXHIBITS (CONTINUED)
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- ------------ ----------------------------------------------------------------------------------------- ---------------
10.17 Lease Agreement between Silicon Valley Bank and WRC Properties, Inc.; 3003 Tasman Drive,
Santa Clara, CA 95054 (12) --
10.18 Lease Agreement between Silicon Valley Bank and Da Rosa Family Trust, Jose G. Da Rosa,
Trustee, and Sorrento Mesa Trust, Mary Alice Gonsalves, Trustee, dba Balboa Travel
Plaza; 5414 Oberlin Drive, San Diego, California, County of San Diego (12) --
10.19 Agreement not to Stand for Re-election as Director of Silicon Valley Bancshares and
Silicon Valley Bank and Mutual General Release of Claims between Dr. Allan C. Kramer and
Silicon Valley Bancshares and Silicon Valley Bank (3) --
10.20 Agreement not to Stand for Re-election as Director of Silicon Valley Bancshares and
Silicon Valley Bank and Mutual General Release of Claims between Barry A. Turkus and
Silicon Valley Bancshares and Silicon Valley Bank (3) --
10.21 Separation Agreement and General Release between Allyn C. Woodward, Jr. and Silicon
Valley Bancshares and Silicon Valley Bank (3) --
10.22 Restricted Stock Bonus and Non-Compete Agreement between Allyn C. Woodward, Jr. and
Silicon Valley Bancshares and Silicon Valley Bank (3) --
10.23 Amendment and Restatement of Silicon Valley Bancshares 1989 Stock Option Plan (3) --
10.24 Lease Agreement between Norman B. Leventhal and Edwin N. Sidman, Trustees and Silicon
Valley Bank; 40 William Street, Wellesley, Massachusetts 02181 (11) --
10.25 Employment Agreement among Silicon Valley Bank, Silicon Valley Bancshares, and Roger V.
Smith (11) --
10.26 Mutual General Release Agreement among Silicon Valley Bank, Silicon Valley Bancshares,
and Dennis G. Uyemura (11) --
10.27 Consulting Agreement among Silicon Valley Bank, Silicon Valley Bancshares, and Dennis G.
Uyemura (11) --
11.1 Calculation of Earnings per Share 66
13.1 Independent Auditors' report on the consolidated statements of income, shareholders'
equity and cash flows for the year ended December 31, 1993 67
21.1 Subsidiaries of Silicon Valley Bancshares 68
23.1 Consent of Independent Auditors 69
23.2 Consent of Independent Auditors 70
27.1 Financial Data Schedule 71
- ------------------------
(1) Incorporated by reference to Exhibits 3.1, 4.1, 10.1 and 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1988.
(2) Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1985.
64
INDEX TO EXHIBITS (CONTINUED)
(3) Incorporated by reference to Exhibits 10.19, 10.20, 10.21, 10.22, and 10.23
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1995.
(4) Incorporated by reference to Exhibit 10.9 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1987.
(5) Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1989.
(6) Incorporated by reference to the Company's Registration Statement on Form
S-8/S-3 filed on October 11, 1994.
(7) Incorporated by reference to Exhibits 10.11 and 10.12 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
(8) Incorporated by reference to Exhibit 10.14 to the Company's Registration
Statement on Form S-8 filed on October 31, 1991.
(9) Incorporated by reference to Exhibit 10.15 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991.
(10) Incorporated by reference to Exhibits 10.1(a), 10.1 (b), 10.3, 10.9(a),
10.12(a), and 10.16 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
(11) Incorporated by reference to Exhibits 10.24, 10.25, 10.26, and 10.27 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995.
(12) Incorporated by reference to Exhibits 3.2, 10.10(a), 10.10(b), 10.11(a),
10.12(b), 10.17, and 10.18 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
65