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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 000-22407
SVB Financial Services, Inc.
(Exact name of registrant as specified in its charter)
New Jersey 22-3438058
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
70 East Main Street, Somerville, New Jersey 08876
(Address of principal executive officers) (Zip Code)
(908) 541-9500
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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.
|X| Yes |_| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Exchange Act).
|_| Yes |X| No
As of November 12, 2003 there were 3,846,029 shares of common stock, $2.09 par
value outstanding. The number of shares outstanding has been adjusted for a
declared stock dividend of 5% on October 30, 2003.
SVB FINANCIAL SERVICES, INC.
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
ITEM 2 - Management's Discussion and Analysis or Plan of Operation
ITEM 3 - Controls and Procedures
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
ITEM 2 - Changes in Securities
ITEM 3 - Defaults Upon Senior Securities
ITEM 4 - Submission of Matters to a Vote of Security Holders
ITEM 5 - Other Information
ITEM 6 - Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
SVB FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
As of September 30, 2003 and December 31, 2002
September 30, December 31,
2003 2002
------------- ------------
(in thousands) (Unaudited)
ASSETS
Cash & Due from Banks $ 30,548 $ 11,672
Federal Funds Sold 2,164 20,778
Other Short Term Investments 250 7,293
------------------------
Total Cash and Cash Equivalents 32,962 39,743
------------------------
Interest Bearing Time Deposits 11,850 13,839
Securities
Available for Sale, at Fair Value 48,879 46,569
Held to Maturity (Fair Value $58,233 in 2003 57,801 56,209
and $54,843 in 2002)
------------------------
Total Securities 106,680 102,778
------------------------
Loans 260,840 238,185
Allowance for Loan Losses (2,581) (2,407)
Unearned Income (358) (379)
------------------------
Net Loans 257,901 235,399
------------------------
Premises & Equipment, Net 5,587 5,660
Bank Owned Life Insurance 4,139 3,000
Other Assets 4,950 4,565
------------------------
Total Assets $ 424,069 $ 404,984
========================
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Demand
Non-interest Bearing $ 53,360 $ 54,221
NOW 74,883 73,426
Savings 47,342 41,314
Money Market 55,685 49,951
Time
Greater than $100,000 27,371 27,504
Less than $100,000 115,993 118,006
------------------------
Total Deposits 374,634 364,422
------------------------
Other Borrowings 16,186 9,214
Obligation Under Capital Lease 401 411
Guaranteed Preferred Beneficial Interest in the Corporation
Subordinated Debentures 6,500 6,500
------------------------
Total Borrowings 23,087 16,125
------------------------
Other Liabilities 1,393 1,259
------------------------
Total Liabilities 399,114 381,806
------------------------
SHAREHOLDERS' EQUITY
Common Stock $2.09 Par Value: 20,000,000 7,656 7,631
Shares Authorized; 3,662,885 Shares in 2003 and
3,453,420 Shares in 2002 Issued and Outstanding
Additional Paid-in Capital 12,122 12,041
Retained Earnings 5,198 3,111
Accumulated Other Comprehensive (Loss)/Income (21) 395
------------------------
Total Shareholders' Equity 24,955 23,178
------------------------
Total Liabilities and Shareholders' Equity $ 424,069 $ 404,984
========================
SVB FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Period Ended September 30
For the Three Months Ended For the Nine Months Ended
2003 2002 2003 2002
-----------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(in thousands except per share data)
INTEREST INCOME
Loans $ 4,221 $ 4,168 $ 12,444 $ 11,931
Securities Available for Sale 357 420 1,263 1,216
Securities Held to Maturity 420 572 1,368 1,702
Other Short Term Investments 3 19 13 68
Interest Bearing Time Deposits 99 142 337 408
Federal Funds Sold 18 51 73 200
--------------------------------------------------
Total Interest Income 5,118 5,372 15,498 15,525
--------------------------------------------------
INTEREST EXPENSE
Deposits 1,322 1,667 4,211 5,205
Other Borrowings 128 96 342 254
Obligation Under Capital Lease 5 8 15 26
Guaranteed Preferred Beneficial Interest
in the Corporation Subordinated Debentures 78 90 238 203
--------------------------------------------------
Total Interest Expense 1,533 1,861 4,806 5,688
--------------------------------------------------
Net Interest Income 3,585 3,511 10,692 9,837
PROVISION FOR LOAN LOSSES 95 125 397 360
--------------------------------------------------
Net Interest Income after Provision for Loan Losses 3,490 3,386 10,295 9,477
--------------------------------------------------
OTHER INCOME
Service Charges on Deposit Accounts 214 214 642 628
Gains on the Sale of Securities Available for Sale, Net 22 50 98 73
Gains on the Sale of Loans 146 26 298 149
Bank Owned Life Insurance 48 -- 139 --
Other Income 120 86 420 354
--------------------------------------------------
Total Other Income 550 376 1,597 1,204
--------------------------------------------------
OTHER EXPENSE
Salaries and Employee Benefits 1,468 1,379 4,460 4,035
Occupancy Expense 445 391 1,350 1,158
Equipment Expense 159 142 479 408
Other Expenses 860 814 2,486 2,242
--------------------------------------------------
Total Other Expense 2,932 2,726 8,775 7,843
--------------------------------------------------
Income Before Provision for Income Taxes 1,108 1,036 3,117 2,838
Provision for Income Taxes 370 386 1,030 1,061
--------------------------------------------------
Net Income $ 738 $ 650 $ 2,087 $ 1,777
==================================================
EARNINGS PER SHARE - Basic (1) $ 0.19 $ 0.17 $ 0.54 $ 0.48
==================================================
EARNINGS PER SHARE - Diluted (1) $ 0.19 $ 0.17 $ 0.53 $ 0.47
==================================================
(1) Amounts have been restated for stock dividends (see Note 7).
SVB FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Period Ended September 30, 2003
(Unaudited)
ACCUMULATED
ADDITIONAL OTHER COMPREHENSIVE TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE INCOME/ SHAREHOLDERS'
(in thousands) STOCK CAPITAL EARNINGS INCOME/(LOSS) (LOSS) EQUITY
-----------------------------------------------------------------------------
BALANCE, JANUARY 1, 2003 $7,631 $12,041 $3,111 $395 $23,178
Issuance of Common Stock, Net 25 81 106
Net Income 2,087 $2,087 2,087
Accumulated Other Comprehensive
Income Net of Reclassification
Adjustment and Taxes (416) (416) (416)
------
Total Comprehensive Income $1,671
--------------------------------------------------------------------------
BALANCE, September 30, 2003 $7,656 $12,122 $5,198 $(21) $24,955
==========================================================================
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
For the Period Ended September 30, For the Three Months Ended For the Nine Months Ended
2003 2002 2003 2002
----------------------------------------------------
(in thousands) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Income $738 $650 $2,087 $1,777
Other Comprehensive Income, Net of Tax
Unrealized (Losses)/Gains Arising in the
(347) 105 (416) 175
Period, Net of Reclassification Adjustments
----------------------------------------------
Comprehensive Income $391 $755 $1,671 $1,952
==============================================
SVB FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
2003 2002
------------------------
For the Period Ended September 30, (Unaudited) (Unaudited)
(in thousands)
OPERATING ACTIVITIES
Net Income $ 2,087 $ 1,777
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan Losses 397 360
Depreciation and Amortization 511 467
Amortization of Securities Premium 641 388
Gains on the Sale of Securities
Available for Sale, Net (98) (73)
Gains on the Sale of Loans (298) (149)
Increase in Other Assets (172) (753)
Increase in Other Liabilities 134 339
Increase in Cash Surrender Value of Bank Owned Life Insurance (139) --
(Decrease)/Increase in Unearned Income (21) 138
---------------------
Net Cash Provided By Operating Activities 3,042 2,494
---------------------
INVESTING ACTIVITIES
Decrease/(Increase) in Interest Bearing Time Deposits 1,989 (3,579)
Proceeds from the Sale of Securities
Available for Sale 5,010 6,021
Proceeds from Maturities of Securities
Available for Sale 22,472 10,898
Held to Maturity 27,549 20,333
Purchases of Securities
Available for Sale (30,638) (29,254)
Held to Maturity (29,467) (33,067)
Increase in Loans, Net (22,580) (27,217)
Capital Expenditures (438) (990)
Purchase of Bank Owned Life Insurance (1,000) --
---------------------
Net Cash Used for Investing Activities (27,103) (56,855)
---------------------
FINANCING ACTIVITIES
Net Increase in Demand Deposits 596 20,218
Net Increase in Savings Deposits 6,028 6,199
Net Increase in Money Market Deposits 5,734 11,558
Net (Decrease)/Increase in Time Deposits (2,146) 10,380
Proceeds of Other Borrowings
One Year or Less 14,000 1,000
Over One Year 4,000 3,500
Repayment of Other Borrowings
One Year or Less (10,000) (1,000)
Over One Year (1,028) (24)
Decrease in Obligation Under Capital Lease (10) (6)
Issuance of Guaranteed Preferred Beneficial Interest in the Corporation
Subordinated Debentures -- 2,500
Proceeds from the Issuance of Common Stock, Net 106 796
---------------------
Net Cash Provided by Financing Activities 17,280 55,121
---------------------
(Decrease)/Increase in Cash and Cash Equivalents (6,781) 760
Cash and Cash Equivalents, Beginning of Year 39,743 31,687
---------------------
Cash and Cash Equivalents, End of Period $ 32,962 $ 32,447
=====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Year for Interest $ 4,904 $ 5,796
=====================
Cash Paid During the Year for Federal Income Taxes $ 1,069 $ 1,075
=====================
SVB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 (UNAUDITED)
1. SVB Financial Services, Inc., (the "Company") is a bank holding company
and the parent holding company for Somerset Valley Bank ("the Bank"), a full
service commercial bank. SVB Bald Eagle Statutory Trust I and SVB Bald Eagle
Statutory Trust II, subsidiaries of the Company, were created to issue trust
preferred securities to assist the Company to raise additional regulatory
capital. The Bank has one subsidiary, Somerset Valley Investment Company, Inc..
Somerset Valley Investment Company, Inc. is the parent company of West End One
Corp., a company incorporated in the State of Delaware, which manages an
investment portfolio for the benefit of Somerset Valley Investment Company.
The consolidated financial statements included herein have been prepared
without an audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
The accompanying condensed consolidated financial statements reflect all
adjustments, which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. Such adjustments are
of a normal recurring nature. These consolidated condensed financial statements
should be read in conjunction with the audited financial statements and the
notes thereto. The results for the nine months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2003.
The consolidated financial statements include the accounts of Somerset
Valley Bank. All significant inter-company accounts and transactions have been
eliminated.
2. Loans
At September 30, 2003 and December 31, 2002 the composition of outstanding
loans is summarized as follows:
September 30, December 31,
2003 2002
------------- ------------
(in thousands)
Secured by Real Estate:
Residential Mortgage $ 76,129 $ 73,084
Commercial Mortgage 124,523 102,623
Construction 26,216 25,011
Commercial and Industrial 22,378 24,229
Loans to Individuals 11,229 12,324
Other Loans 365 914
-------- --------
$260,840 $238,185
======== ========
There were $1,000 in loans past due 90 days or more and still accruing at
September 30, 2003. There were no loans past due 90 days or more and still
accruing at December 31, 2002. Loans in non-accrual status totaled $890,000 at
September 30, 2003 and $658,000 at December 31, 2002. Interest income that would
have been earned for the three and nine months ended September 30, 2003 totaled
approximately $18,000 and $45,000, respectively. Interest income that would have
been earned for the three and nine months ended September 30, 2002 totaled
approximately $14,000 and $34,000, respectively.
Loans considered to be impaired totaled $1,127,000 at September 30, 2003,
a valuation reserve of $171,000 is attributed to these loans.
3. Allowance for Loan Losses
The allowance for loan losses is based on estimates and ultimate losses
may vary from the current estimates. These estimates are reviewed periodically
and as adjustments become necessary, they are reflected in operations in the
period in which they become known. An analysis of the allowance for loan losses
is as follows:
Nine Months
Ended Year Ended
September 30, December 31,
(in thousands) 2003 2002
------------- ------------
Balance January 1, $ 2,407 $ 2,111
Provision Charged to Operations 397 455
Charge Offs (228) (206)
Recoveries 5 47
------- -------
Balance End of Period $ 2,581 $ 2,407
======= =======
4. Guaranteed Preferred Beneficial Interest in the Corporation Subordinated
Debentures
The Company participates in two separate pooled institutional placements
of trust preferred securities arranged by a third party. The Company formed and
purchased the common stock of SVB Bald Eagle Statutory Trust I on July 30, 2001
followed by the funding of the trust preferred securities on July 31, 2001. This
subordinated debenture will be redeemed in the year 2031. At September 30, 2003,
the rate paid on this subordinated debenture of $4.0 million was based on
3-month LIBOR plus 358 basis points or 4.69% and is adjusted quarterly in
January, April, July and October.
On June 25, 2002, the Company formed and purchased the common stock of SVB
Bald Eagle Statutory Trust II followed by the funding of the trust preferred
securities on June 26, 2002. This subordinated debenture will be redeemed in the
year 2032. At September 30, 2003, the rate paid on this subordinated debenture
of $2.5 million based on 3-month LIBOR plus 345 basis points or 4.59% and is
adjusted quarterly in March, June, September and December.
5. New Accounting Pronouncement
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." The Company adopted the disclosure provisions of FIN No. 45 in the
fourth quarter of 2002 and, for guarantees issued or modified after December 31,
2002, adopted the initial recognition and measurement provisions on January 1,
2003. Adoption of the initial recognition and measurement provisions did not
materially impact the Company's financial condition or results of operations at
or for the nine months ended September 30, 2003.
While certain guarantees are only subject to the disclosure provisions of
this Interpretation, others are subject to both the disclosure and initial
recognition and measurement provisions. For guarantees that fall within the
scope of the initial recognition and measurement provisions, FIN No. 45 requires
a guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. Under the
previous accounting rules, the Company did not record a liability when
guaranteeing obligations unless it became probable that the Company would have
to perform under the guarantee.
The Company issues financial and performance standby letters of credit,
both of which are subject to the disclosure and initial recognition and
measurement provisions of FIN No. 45. Financial and performance standby letters
of credit are conditional commitments issued by the Bank to assure the financial
and performance obligations of a customer to a third party. At September 30,
2003, the Company was contingently liable on financial letters of credit
totaling $6,727,000, of which $3,176,000 were originated in the first nine
months of this year. The Company's commitments under standby letters of credit
expire at various dates through September 30, 2004. Amounts due under these
letters of credit would be reduced by any proceeds that the Company would be
able to obtain in liquidating the collateral for the loans, which varies
depending on the customer. The Bank generally holds collateral and/or obtains
personal guarantees supporting these commitments. The extent of collateral held
for these commitments at September 30, 2003 varied from 0% to 100%, and averaged
28%.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN No. 46). On October 31, 2003, the FASB issued
an Exposure Draft related to the consolidation of Variable Interest Entities,
and the interpretation of FIN No. 46 ("FIN No. 46 Interpretation"). The
consolidation requirements, as amended by FASB Staff Position (FSP) 46-6,
"Effective Date of FIN No. 46", apply to existing entities in the first fiscal
year or interim period beginning after December 15, 2003. FIN No. 46 also
requires a variable interest entity to be consolidated by a Company if that
Company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns, or both. FIN No. 46 also requires disclosures about variable interest
entities that a Company is not required to consolidate, but in which it has a
significant variable interest. Certain of the disclosure requirements apply in
all financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. FIN No. 46 does not materially impact
the Company.
The Company has also evaluated the impact of FIN No. 46 on variable
interest entities consolidated by the Company prior to the issuance of FIN No.
46. Management has determined that SVB Bald Eagle Statutory Trust I and SVB Bald
Eagle Statutory Trust II ("The Trusts") qualify as variable interest entities
under FIN No. 46. The Trusts issued mandatorily redeemable preferred stock to
investors and loaned the proceeds to the Company. The Trusts hold, as its sole
asset, subordinated debentures issued by the Company in 2002 and 2001. The
timing and amount of payments on the subordinated debentures are the same as the
timing and amount of payments by The Trusts on the mandatorily redeemable
preferred stock. The Trusts are currently included in the Company's consolidated
balance sheet and statements of income. Management believes that The Trusts
should continue to be included in the Company's consolidated financial
statements after the effective date of FIN No. 46. However, as additional
interpretations related to entities similar to The Trusts become available,
management will reevaluate its conclusion that The Trusts should be included in
the consolidated financial statements and its potential impact to its Tier I
capital calculation under such interpretations.
In April 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149 is
generally effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. All provisions of
this Statement shall be applied prospectively. Based on the Company's current
business operations, the adoption of the provisions of SFAS No. 149 did not
materially impact the Company's financial condition, results of operations, or
disclosures.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 is generally effective for financial instruments entered
into or modified after May 31, 2003, and otherwise effective at the beginning of
the first interim period beginning after June 15, 2003. Based on the Company's
current business operations, the provisions of SFAS No. 150 did not impact the
Company's financial condition, results of operations, or disclosures.
6. Stock-Based Compensation
For the three months ended September 30, 2003, there were no stock options
granted. There were no options granted during 2002.
For the nine months ended September 30, 2003, there were 174,134 stock
options granted. The fair value of each option granted during this period is
estimated on the date of grant using the Black Scholes pricing model with the
following assumptions: no dividend yield, expected volatility 32.43%, a
risk-free interest rate of 2.85% and an expected life of 5.00 years.
Had compensation costs for the quarter been determined based on the fair
value of the options at the grant dates consistent with the method SFAS No. 123
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share, basic and diluted, would have been as reduced to the proforma amounts
indicated below for the three month and nine month periods ended September 30,
2003:
For the Three Months For the Nine Months
Ended September 30 Ended September 30
- ------------------------------------------------------------------------------------------
(in thousands except per share data) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------
Net Income as Reported $ 738 $ 650 $ 2,087 $ 1,777
Less: Stock-Based Compensation Costs -- -- (607) --
-----------------------------------------------
Proforma Net Income $ 738 $ 650 $ 1,480 $ 1,777
Earnings Per Share Basic
As Reported $ 0.19 $ 0.17 $ 0.54 $ 0.48
Proforma $ 0.19 $ 0.17 $ 0.39 $ 0.48
Earnings Per Share Diluted
As Reported $ 0.19 $ 0.17 $ 0.53 $ 0.47
Proforma $ 0.19 $ 0.17 $ 0.38 $ 0.47
7. Subsequent Event
On October 30, 2003, the Board of Directors of the Company declared a 5%
stock dividend payable December 3, 2003 to holders of record as of November 17,
2003. Per share information in this Form 10-QSB report has been restated to
reflect the affects of the stock dividend.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Critical Accounting Policies, Judgments and Estimates
- -----------------------------------------------------
The Company's business is dynamic and complex. Consequently, management
must exercise judgment in choosing and applying accounting policies and
methodologies. These choices are important; not only are they necessary to
comply with accounting principles generally accepted in the United States, they
also reflect the exercise of management's judgment in determining the most
appropriate manner in which to record and report the Company's overall financial
performance. All accounting policies are important, and all policies should be
reviewed for greater understanding of how the Company's financial performance is
recorded and reported.
In management's opinion, some areas of accounting are likely to have a
more significant effect than others on the Company's financial results and
expose those results to potentially greater volatility. This is because they
apply to areas of relatively greater business importance and/or require
management to exercise judgment in making assumptions and estimates that affect
amounts reported in the financial statements. Because these assumptions and
estimates are based on current circumstances, they may change over time or prove
to be inaccurate based on actual experience. For the Company, the area that
relies most heavily on the use of assumptions and estimates includes but is not
limited to accounting for the allowance for loan losses. Our accounting policies
related to this area are described further in this report under the section
labeled "Allowance for Loan Losses."
The AICPA's Accounting Standards Executive Committee has issued an
exposure draft of a proposed Statement of Position (SOP), "Allowance for Credit
Losses." The proposed SOP addresses the recognition and measurement by creditors
of the allowance for credit losses related to all loans, as that term is defined
in Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," with
certain exceptions. If adopted, the proposed SOP would apply to all creditors
other than state and local governmental entities and federal governmental
entities. The Corporation is currently reviewing the components of the proposed
SOP and the impact it will have on its consolidated financial position and
results of operations.
Overview
- --------
Management of SVB Financial Services, Inc. (the "Company") is not aware of
any known trends, events or uncertainties that will have or are reasonably
likely to have a material effect on the Company's liquidity, capital resources
or results of operations. The following discussion and analysis should be read
in conjunction with the detailed information and consolidated financial
statements, including notes thereto, included elsewhere in this report. The
consolidated financial condition and results of operations of the Company are
essentially those of the Bank. Therefore, the analysis that follows is directed
to the performance of the Bank. Such financial condition and results of
operations are not intended to be indicative of future performance.
In addition to historical information, this discussion and analysis
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include, but
are not limited to, those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as the date hereof. The
Company undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date hereof.
Non Banking Products and Affiliations
- -------------------------------------
The Company has a service agreement with Aurora Financial Group, Inc. to
provide origination/processing and closing services for residential mortgage
loans. The Company sells mortgage loans to Aurora Financial Group, Inc. on a
non-recourse basis and receives fee income. An employee of Aurora Financial
Group, Inc. is on-site for these purposes.
The Company acts as an agent for AIG Annuity Insurance Company under an
agreement defining the terms and conditions under which the Company's licensed
producers generate fixed insurance products.
The Company also maintains a dual employee arrangement with Linsco Private
Ledger to obtain commissions for the sale of variable annuities, mutual funds
and other investment products.
Results of Operations
- ---------------------
Net income for the first nine months of 2003 was $2,087,000, an increase
of $310,000 or 17% as compared to the same period in 2002. Earnings per
share-Basic were $.54 in 2003 and $.48 in 2002. Earnings per share-Diluted were
$.53 in 2003 and $.47 in 2002. Earnings per share have been restated for the
stock dividends.
Net Interest Income
- -------------------
Net interest income for the first nine months of 2003 was $10,692,000
compared to $9,837,000 during 2002, an increase of $855,000 or 9%.
This increase can be mainly attributed to growth in average earning assets
of $35.4 million. Average earning assets for the period ending September 30,
2003 were $379.5 million, which represented a 10% increase from 2002. Loans
averaged $250.0 million during the first nine months of 2003, an increase of
$27.9 million or 13%. This increase in loan balances caused interest income to
increase $1,429,000. Investment securities averaged $105.1 million, an increase
of $17.3 million or 20% from the same period last year.
The yield on loans decreased from 7.18% in 2002 to 6.66% during 2003. The
decrease in yield caused interest income on loans to decline by $916,000.
Investment securities experienced a decrease of 116 basis points in total yield
to 3.38% causing interest income to decline by $783,000, which more than offset
the increase in growth. These decreases can be attributed to the overall 75
basis point reduction of the prime rate since November of 2002 as well as the
decrease in other market rates. These rates were also effected by prepayments on
fixed rate loans by commercial and consumer customers who wished to take
advantage of lower rates. The yield on earning assets was 5.46% for the first
nine months of 2003 and 6.03% for the same period in 2002. Overall, interest
income increased $855,000.
The overall cost of interest-bearing liabilities decreased from 2.21%
during 2002 to 1.69% this year. Average interest-bearing deposits were $315.3
million for the first nine months of 2003, an increase of $32.0 million or 11%
from last year. The increase in interest-bearing deposits caused interest
expense to grow by $523,000. Declines in rates paid on all types of deposits
caused interest expense to decrease $1,517,000. The Bank continues to maintain
an aggressive, yet competitive effort to control its interest costs, which has
helped to almost offset the effect of the decline in the yield of earning
assets. Federal Home Loan Bank advances accounted for $5.7 million of the
increase in total average interest-bearing liabilities.
Growth in the balance sheet in conjunction with an effort to reduce
interest costs caused net interest income to increase $855,000 over 2002. The
net interest margin decreased from 3.82% in 2002 to 3.77% this year.
Provision for Loan Losses
- -------------------------
The provision for loan losses was $397,000 in the first nine months of
2003 as compared to $360,000 during the first nine months of 2002. The increase
in provision is based on the Company's most recent analysis and an increase in
loans in non-accrual status of $198,000 since September 30, 2002.
Other Income
- ------------
During the first nine months of 2003, total other income increased
$393,000 or 33% from 2002. An increase in the cash value of bank owned life
insurance represented $139,000 of this amount and fees from the sale of
annuities and mutual funds were $91,000. Both of these sources of non-interest
income represented 59% of the increase over 2002. Service charges on deposit
accounts increased $14,000 from the same period last year.
The Bank recognized an increase in the net gains on the sale of securities
available for sale of $25,000 from the first nine months of 2002.
Gains on the sale of loans increased $149,000 or 100% from the same period
in 2002. The Company is a preferred SBA lender and, as such, originates SBA
loans and sells the government guaranteed portions in the secondary market while
retaining the servicing. The amount of gains recognized on SBA loans is
dependent on the volume of new SBA loans generated each quarter.
Other income increased $66,000 or 19% as compared to 2002 which is
attributed to the increase in the cash value of bank owned life insurance and
fees from the sale of annuities and mutual funds. This was offset by a decrease
from last year's mortgage servicing fees, as well as a one-time gain realized
from the demutualization of the Company's health insurance provider during 2002.
Other Expense
- -------------
Total other expense for the first nine months of 2003 increased $932,000
or 12% for the same period last year. Due to the growth in assets and the effort
to expand services, the Company has had to hire additional personnel. During
2002, the Company established a department to administer to Company's efforts to
sell insurance, annuities and mutual funds. In addition, the Company opened the
Warren office in late 2002, which added to an increase in expenses. These
additions, together with normal salary increases and higher benefit costs,
caused salary and benefits to increase $425,000 or 11% from the same period last
year.
Rent on the Warren branch, along with increases in rent due to the
relocation of the lending offices to our expanded facility at 70 East Main
Street, Somerville, New Jersey, resulted in a $192,000 or 17% increase in
occupancy costs. Additionally, depreciation expenses related to building and
improvement costs for these locations contributed to this increase.
Equipment expense increased $71,000 or 17% from 2002 due to increased
depreciation on furniture and equipment and an increase in equipment rentals for
the locations mentioned above.
Other expense increased $244,000 or 11% from the same period last year.
Advertising expenses, data processing expenses and insurance costs represented
$124,000, $75,000, and $50,000 of this increase, respectively. Advertising costs
increased due to the promotion of our introduction into the annuity and mutual
fund market, as well as advertising new banking products, most notably the newly
created "Preferred" and "Premier" relationship checking accounts.
Financial Condition
September 30, 2003 compared to December 31, 2002
- ------------------------------------------------
Total assets were $424.1 million at September 30, 2003 increasing $19.1
million from December 31, 2002. Total loans increased $22.7 million. Loans
secured by real estate increased by $26.2 million. Commercial and industrial
loans, loans to individuals and other loans decreased $1.9 million, $1.1 million
and $549,000, respectively. Investment securities grew by $3.9 million while
interest bearing time deposits decreased by $2.0 million.
Total deposits increased $10.2 million during the first nine months of
2003. Savings accounts, money market accounts and NOW accounts increased $6.0
million, $5.7 million and $1.5 million, respectively. Total certificates of
deposits and non-interest bearing accounts decreased $2.1 million and $861,000,
respectively.
Asset Quality
- -------------
There were $1,000 in loans past due 90 days or more and still accruing as
of September 30, 2003. There were no loans past due 90 days and still accruing
as of December 31, 2002.
Loans in a non-accrual status totaled $890,000 at September 30, 2003 and
represented 0.34% of total loans. Loans in non-accrual status totaled $658,000
at December 31, 2002 and represented 0.28% of total loans.
The Company had no other real estate owned at September 30, 2003.
Allowance for Loan Losses
- -------------------------
The Company maintains an allowance for loan losses at a level deemed
sufficient to absorb losses, which are inherent in the loan portfolio at each
balance sheet date. Management determines the adequacy of the allowance on a
monthly basis to ensure that the provision for loan losses has been charged
against earnings in an amount necessary to maintain the allowance at a level
that is appropriate based on management's assessment of probable estimated
losses. The Company's methodology for assessing the appropriateness of the
allowance for loan losses consists of several key elements. These elements
include a specific allowance for all commercial loans based upon a risk rating
assigned to the loan, an allowance for homogeneous types of loans such as
consumer installment loans, residential mortgage loans and home equity loans,
and an additional allowance for loans deemed to be impaired and an unallocated
portion. The Company consistently applies the following comprehensive
methodology:
All commercial loans are assigned a two-digit risk rating at the time of
closing. The first digit of the rating refers to the strength of the borrower
based on their financial condition and past history. Current economic conditions
and the effect on the borrower's business are also taken into account. The
second digit refers to the collateral strength and liquidity with zero being
assigned to unsecured loans. An allowance amount is then assigned to each risk
rating. Since, in its twelve-year history, the Company has had very few
commercial loan losses, the amount of the allowance is based on the experience
of management and their judgment with respect to these types of loans. A risk
rating may be changed with the approval of the senior loan officer. A rating
change may be requested if the individual loan officer or the Bank's credit
analyst is aware of a change in the borrower's financial condition. In addition,
approximately 60% of the dollar amount of commercial loans are reviewed on an
annual basis by an outside independent loan review firm at which time a change
to the risk rating may be recommended.
The allowance for homogenous loans is established based on a number of
factors, including current economic conditions and the loss experience with
these types of loans as well as management's judgment.
The AICPA's Accounting Standards Executive Committee has issued an exposure
draft of a proposed Statement of Position (SOP), "Allowance for Credit Losses."
The proposed SOP addresses the recognition and measurement by creditors of the
allowance for credit losses related to all loans, as that term is defined in
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," with
certain exceptions. If adopted, the proposed SOP would apply to all creditors
other than state and local governmental entities and federal governmental
entities. The Corporation is currently reviewing the components of the proposed
SOP and the impact it will have on its consolidated financial position and
results of operations.
Loans are deemed to be impaired if they are 60 days or more past due for
principal or interest or are in a non-accrual status. If there is insufficient
collateral to pay the amount of the loan an allowance is determined over and
above the amount required by the risk rating by taking the difference between
the carrying amount of the loan and the present value of expected future cash
flows discounted at the loan's current rate less any amounts already established
by the risk rating.
The Company also maintains an unallocated allowance. The unallocated
allowance is used to cover any factors or conditions, which may cause a
potential loan loss but are not specifically identifiable. This amount totaled
$4,000 at September 30, 2003. It is prudent to maintain an unallocated portion
of the allowance because no matter how detailed an analysis of potential loan
losses is performed, these estimates by definition lack precision.
Since all identified losses are immediately charged off, no portion of the
allowance for loan losses is restricted to any individual loan or groups of
loans, and the entire allowance is available to absorb any and all loan losses.
A loan is placed in a non-accrual status at the time when ultimate
collectibility of principal or interest, wholly or partially, is in doubt. Past
due loans are those loans which were contractually past due 90 days or more as
to interest or principal payments but are well secured and in the process of
collection.
At September 30, 2003, the allowance for loan losses was $2.6 million and
represented 0.99% of total loans and 262.03% of non-performing loans compared to
an allowance for loan losses at December 31, 2002 of $2.4 million or 1.01% of
total loans and 263.06% of non-performing loans.
Net charge-offs for the first nine months of 2003 totaled $223,000
compared to $159,000 for the year ended December 31, 2002. Most of the
charge-offs for 2002 were concentrated in one loan, which occurred during the
first quarter. Of the 2003 charge-offs, $139,000 occurred during the third
quarter and are represented one loan.
Capital Resources
- -----------------
Total Shareholders' Equity was $25.0 million at September 30, 2003
compared to $23.2 million at December 31, 2002. Subordinated debentures in the
amount of $6.5 million are also included in the calculation of regulatory
capital ratios with certain limitations, as permitted by FDIC regulations.
Under the FDIC Improvement Act of 1991, banks are required to maintain a
minimum ratio of total capital to risk based assets of 8% of which at least 4%
must be in the form of Tier I Capital (primarily Shareholders' Equity). The
following are the Company's capital ratios at the end of the periods indicated.
September 30, December 31,
2003 2002
------------- ------------
Tier 1 Capital to Risk Weighted Assets 10.31% 10.22%
Total Capital to Risk Weighted Assets 11.19% 11.09%
Leverage Ratio 7.15% 7.53%
Liquidity
- ---------
Cash and Cash Equivalents totaled $33.0 million at September 30, 2003, a
decrease of $6.8 million since December 31, 2002.
The decrease in Cash and Cash Equivalents resulted from a combination of
various components of the balance sheet. Net cash used for investing activities
totaled $27.1 million. Of this total, $22.6 million was used to increase loan
balances and $5.1 million was used in net purchases of investment securities.
Partially offsetting these usages $10.2 million was provided by a net increase
in the Bank's deposits with savings and money market deposits experiencing the
greatest increases. An additional $7.0 million was provided through FHLB
advances.
ITEM 3 - CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer
(collectively, the "Certifying Officers") are responsible for establishing and
maintaining disclosure controls and procedures for the Company. Such officers
have concluded (based upon their evaluation of these controls and procedures as
of a date within 90 days of the filing of this report) that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in this report is accumulated and
communicated to the Company's management, including its principal executive
officers as appropriate, to allow timely decisions regarding required
disclosure.
The Certifying Officers also have indicated that there were no significant
changes in the Company's internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation,
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.
PART II-OTHER INFORMATION
-------------------------
ITEM 1- Legal Proceedings
-----------------
The Company is party in the ordinary course of business to litigation
involving collection matters, contract claims and other miscellaneous
causes of action arising from its business. Management does not consider
that such proceedings depart from usual routine litigation and, in its
judgment, the Company's financial position and results of operations will
not be affected materially by such proceedings.
ITEM 2- Changes in Securities
---------------------
None.
ITEM 3- Defaults upon Senior Securities
-------------------------------
None.
ITEM 4- Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
ITEM 5- Other Information
------------------
The common stock of the Company is traded on the Nasdaq National Market
Small-Cap, under the trading symbol SVBF. On September 30, 2003, the
closing bid of the Company's common stock was $16.30 per share.
The Company has a web site located at www.somersetvalleybank.com.
ITEM 6- Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits
--------
31 Certifications
32 906 Certification
(b) Form 8-K
--------
There have been two reports on Form 8-K filed during the second quarter of
2003.
July 15, 2003----------Second Quarter Earnings Release
August 21, 2003--------Contract for Purchase of Real Estate
SIGNATURES
I, Robert P. Corcoran, hereby certify that the periodic report being filed
herewith containing financial statements fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 (16 U.S. C. 78m or
78o(d)) and that information contained in said periodic report fairly presents,
in all material respects, the financial condition and results of operations of
SVB Financial Services, Inc. for the period covered by said periodic report.
SVB FINANCIAL SERVICES, INC.
(Registrant)
/s/ Robert P. Corcoran
----------------------------
Robert P. Corcoran
Chief Executive Officer
I, Keith B. McCarthy, hereby certify that the periodic report being filed
herewith containing financial statements fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 (16 U.S. C. 78m or
78o(d)) and that information contained in said periodic report fairly presents,
in all material respects, the financial condition and results of operations of
SVB Financial Services, Inc. for the period covered by said periodic report.
SVB FINANCIAL SERVICES, INC.
(Registrant)
/s/ Keith B. McCarthy
----------------------------
Keith B. McCarthy
Chief Financial Officer
Chief Accounting Officer
Dated: November 13, 2003