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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
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, 2004 there were 4,058,641 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 28, 2004.
SVB FINANCIAL SERVICES, INC.
----------------------------
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk
ITEM 4 - 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
SIGNATURES
CERTIFICATIONS
SVB FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2004 2003
---------------------------
(in thousands) (Unaudited)
ASSETS
Cash & Due from Banks $ 24,270 $ 24,983
Federal Funds Sold 3,040 6,584
Other Short Term Investments 67 184
-----------------------
Total Cash and Cash Equivalents 27,377 31,751
-----------------------
Interest Bearing Time Deposits 14,831 13,142
Securities
Available for Sale, at Fair Value 49,746 42,855
Held to Maturity (Fair Value $72,352 in 2004 72,420 58,290
and $58,578 in 2003)
-----------------------
Total Securities 122,166 101,145
-----------------------
Loans 292,503 271,543
Allowance for Loan Losses (2,826) (2,680)
Unearned Income (384) (334)
-----------------------
Net Loans 289,293 268,529
-----------------------
Premises & Equipment, Net 7,853 7,356
Bank Owned Life Insurance 7,834 4,187
Other Assets 5,548 4,964
-----------------------
Total Assets $ 474,902 $ 431,074
=======================
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Demand
Non-interest Bearing $ 61,437 $ 59,601
NOW 87,457 71,813
Savings 48,661 48,290
Money Market 74,635 56,547
Time
Greater than $100,000 36,409 27,755
Less than $100,000 111,999 115,007
-----------------------
Total Deposits 420,598 379,013
-----------------------
Other Borrowings 17,143 18,176
Obligation Under Capital Lease 388 397
Subordinated Debentures 6,702 --
Guaranteed Preferred Beneficial Interest in the
Corporation Subordinated Debentures -- 6,500
-----------------------
Total Borrowings 24,233 25,073
-----------------------
Other Liabilities 1,588 1,299
-----------------------
Total Liabilities 446,419 405,385
-----------------------
SHAREHOLDERS' EQUITY
Common Stock $2.09 Par Value: 20,000,000 8,077 8,041
Shares Authorized; 3,864,873 Shares in 2004 and
3,847,294 Shares in 2003 Issued and Outstanding
Additional Paid-in Capital 14,903 14,786
Retained Earnings 5,583 2,955
Accumulated Other Comprehensive Loss (80) (93)
-----------------------
Total Shareholders' Equity 28,483 25,689
-----------------------
Total Liabilities and Shareholders' Equity $ 474,902 $ 431,074
=======================
SVB FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Period Ended September 30
(Unaudited)
For the Three Months Ended For the Nine Months Ended
2004 2003 2004 2003
------------------------------------------------------
(in thousands except per share data)
INTEREST INCOME
Loans $ 4,425 $ 4,221 $ 13,001 $ 12,444
Securities Available for Sale 403 357 1,011 1,263
Securities Held to Maturity 533 420 1,464 1,368
Other Short Term Investments 4 3 13 13
Interest Bearing Time Deposits 109 99 296 337
Federal Funds Sold 21 18 79 73
--------------------------------------------------
Total Interest Income 5,495 5,118 15,864 15,498
--------------------------------------------------
INTEREST EXPENSE
Deposits 1,293 1,322 3,722 4,211
Other Borrowings 147 128 440 342
Obligation Under Capital Lease 5 5 14 15
Subordinated Debentures 88 -- 246 --
Guaranteed Preferred Beneficial Interest
in the Corporation Subordinated Debentures -- 78 -- 238
--------------------------------------------------
Total Interest Expense 1,533 1,533 4,422 4,806
--------------------------------------------------
Net Interest Income 3,962 3,585 11,442 10,692
PROVISION FOR LOAN LOSSES 95 95 260 397
--------------------------------------------------
Net Interest Income after Provision for Loan Losses 3,867 3,490 11,182 10,295
--------------------------------------------------
OTHER INCOME
Service Charges on Deposit Accounts 190 214 570 642
Gains on the Sale of Securities Available for Sale 19 22 55 98
Gains on the Sale of Loans 144 146 273 298
Gain on the Sale of a Branch 244 -- 244 --
Bank Owned Life Insurance 65 48 147 139
Other Income 188 120 598 420
--------------------------------------------------
Total Other Income 850 550 1,887 1,597
--------------------------------------------------
OTHER EXPENSE
Salaries and Employee Benefits 1,657 1,468 4,771 4,460
Occupancy Expense 399 445 1,244 1,350
Equipment Expense 173 159 503 479
Other Expenses 894 860 2,617 2,486
--------------------------------------------------
Total Other Expense 3,123 2,932 9,135 8,775
--------------------------------------------------
Income Before Provision for Income Taxes 1,594 1,108 3,934 3,117
Provision for Income Taxes 526 370 1,306 1,030
--------------------------------------------------
Net Income $ 1,068 $ 738 $ 2,628 $ 2,087
==================================================
EARNINGS PER SHARE - Basic (1) $ 0.27 $ 0.18 $ 0.65 $ 0.51
==================================================
==================================================
EARNINGS PER SHARE - Diluted (1) $ 0.26 $ 0.18 $ 0.63 $ 0.50
==================================================
(1) Amounts have been restated for stock dividends.
SVB FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Period Ended September 30, 2004
(Unaudited)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE SHAREHOLDERS'
(in thousands) STOCK CAPITAL EARNINGS LOSS INCOME EQUITY
---------------------------------------------------------------------------------
Balance, January 1, 2004 $8,041 $14,786 $2,955 $ (93) $25,689
Exercise of Stock Options 36 117 153
Net Income 2,628 $2,628 2,628
Accumulated Other Comprehensive
Income Net of Reclassification
Adjustment and Taxes 13 13 13
------
Total Comprehensive Income $2,641
------------------------------------------------------------------------------
Balance, September 30, 2004 $8,077 $14,903 $5,583 $ (80) $28,483
==============================================================================
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
For the Period Ended September 30,
For the Three Months Ended For the Nine Months Ended
2004 2003 2004 2003
--------------------------------------------------------
(Unaudited) (Unaudited)
(in thousands)
Net Income $1,068 $ 738 $2,628 $2,087
Other Comprehensive Income, Net of Tax
Unrealized Gains/(Losses) Arising in the
Period, Net of Reclassification Adjustments 260 (347) 13 (416)
---------------------------------------------------
Comprehensive Income $1,328 $ 391 $2,641 $1,671
===================================================
SVB FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period Ended September 30,
(Unaudited)
2004 2003
-------- --------
(in thousands)
OPERATING ACTIVITIES
Net Income $ 2,628 2,087
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan Losses 260 397
Depreciation 554 511
Amortization of Securities Premium 479 641
Gains on the Sale of Securities Available for Sale (55) (98)
Gains on the Sale of Loans (273) (298)
Gain on the Sale of a Branch (244) --
Increase in Other Assets (389) (172)
Increase in Other Liabilities 289 134
Increase in Cash Surrender Value of Bank Owned Life Insurance (147) (139)
Increase/(Decrease) in Unearned Income 50 (21)
---------------------
Net Cash Provided By Operating Activities 3,152 3,042
---------------------
INVESTING ACTIVITIES
(Increase)/Decrease in Interest Bearing Time Deposits (1,689) 1,989
Proceeds from the Sale of Securities Available for Sale 3,985 5,010
Proceeds from Maturities of Securities
Available for Sale 18,531 22,472
Held to Maturity 20,944 27,549
Purchases of Securities
Available for Sale (29,549) (30,638)
Held to Maturity (35,336) (29,467)
Increase in Loans, Net (20,801) (22,580)
Capital Expenditures (1,990) (438)
Net Proceeds from the Sale of a Branch 1,183 --
Purchase of Bank Owned Life Insurance (3,500) (1,000)
---------------------
Net Cash Used for Investing Activities (48,222) (27,103)
---------------------
FINANCING ACTIVITIES
Net Increase in Demand Deposits 17,480 596
Net Increase in Savings Deposits 371 6,028
Net Increase in Money Market Deposits 18,088 5,734
Net Increase/(Decrease) in Time Deposits 5,646 (2,146)
Proceeds of Other Borrowings
One Year or Less 3,000 14,000
Over One Year 2,500 4,000
Repayment of Other Borrowings
One Year or Less (6,000) (10,000)
Over One Year (533) (1,028)
Decrease in Obligation Under Capital Lease (9) (10)
Proceeds from the Exercise of Stock Options 153 106
---------------------
Net Cash Provided by Financing Activities 40,696 17,280
---------------------
Decrease in Cash and Cash Equivalents (4,374) (6,781)
Cash and Cash Equivalents, Beginning of Year 31,751 39,743
---------------------
Cash and Cash Equivalents, End of Period $ 27,377 $ 32,962
=====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Period for Interest $ 4,454 $ 4,904
=====================
Cash Paid During the Period for Federal Income Taxes $ 1,350 $ 1,069
=====================
SVB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 (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, Inc.
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, 2004 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2004.
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, 2004 and December 31, 2003 the composition of outstanding
loans is summarized as follows:
September 30, December 31,
2004 2003
------------- ------------
(in thousands)
Secured by Real Estate:
Residential Mortgage $ 75,728 $ 75,513
Commercial Mortgage 151,657 131,434
Construction 31,527 29,734
Commercial and Industrial 25,791 23,496
Loans to Individuals 7,378 10,397
Other Loans 422 969
-------- --------
$292,503 $271,543
======== ========
There were $145,000 in restructured loans at September 30, 2004. There
were no restructured loans at December 31, 2003. There were $3,000 in loans past
due 90 days or more and still accruing at September 30, 2004. There were no
loans past due 90 days or more and still accruing at December 31, 2003. Loans in
non- accrual status totaled $1,087,000 at September 30, 2004 and $1,012,000 at
December 31, 2003. Interest income that would have been earned for the three and
nine months ended September 30, 2004 totaled approximately $10,000 and $42,000
respectively. 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.
Loans considered to be impaired totaled $1,043,000 at September 30, 2004,
a valuation reserve of $67,000 is attributed to these loans and is included in
the allowance for loan losses.
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,
2004 2003
------------- ------------
(in thousands)
Balance January 1, $ 2,680 $ 2,407
Provision Charged to Operations 260 502
Charge Offs (122) (238)
Recoveries 8 9
-------- --------
Balance End of Period $ 2,826 $ 2,680
======== ========
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, 2004,
the rate paid on this subordinated debenture of $4.1 million was based on
3-month LIBOR plus 358 basis points or 5.27% 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, 2004, the rate paid on this subordinated debenture
of $2.6 million based on 3-month LIBOR plus 345 basis points or 5.40% and is
adjusted quarterly in March, June, September and December.
5. Letter of Credits
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,
2004, the Company was contingently liable on financial letters of credit
totaling $5,941,000, of which $670,000 were originated in the first nine months
of this year. The Company's commitments under standby letters of credit expire
at various dates through March 17, 2006. 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, 2004 varied from 0% to 100%, and averaged 23%.
6. New Accounting Pronouncements
Variable Interest Entities
Management has determined that SVB Bald Eagle Statutory Trust I and SVB
Bald Eagle Statutory Trust II qualify as variable interest entities under FIN
46, as revised. SVB Bald Eagle Statutory Trust I and SVB Bald Eagle Statutory
Trust II preferred entities issued mandatorily redeemable preferred stock to
investors and loaned the proceeds to the Company. SVB Bald Eagle Statutory Trust
I and SVB Bald Eagle Statutory Trust II are included in the Company's
consolidated balance sheet and statements of income as of and for the year ended
December 31, 2003. Subsequent to the issuance of FIN 46 in January 2003, the
FASB issued a revised interpretation, FIN 46(R) Consolidation of Variable
Interest Entities, the provisions of which must be applied to certain variable
interest entities by March 31, 2004.
The Company adopted the provisions under the revised interpretation in the
first quarter of 2004. Accordingly, the Company no longer consolidates SVB Bald
Eagle Statutory Trust I and SVB Bald Eagle Statutory Trust II. FIN 46(R)
precludes consideration of the call option embedded in the preferred stock when
determining if the Company has the right to a majority of SVB Bald Eagle
Statutory Trust I and SVB Bald Eagle Statutory Trust II expected residual
returns. The deconsolidation in the investment in the common stock of SVB Bald
Eagle Statutory Trust I and SVB Bald Eagle Statutory Trust II caused the
entities to be included in other assets as of September 30, 2004 and the
corresponding increase in outstanding debt of $202,000. In addition, the income
received on the Company's common stock investment is included in other income.
The adoption of FIN 46(R) did not have a material impact on the financial
position or results of operations.
The Federal Reserve has issued proposed guidance on the regulatory capital
treatment for the trust preferred securities issued by SVB Bald Eagle Statutory
Trust I and SVB Bald Eagle Statutory Trust II as a result of the adoption of FIN
46(R). The proposed rule would retain the current maximum percentage of total
capital permitted for trust preferred securities at 25%, but would enact other
changes to the rules governing trust preferred securities that affect their use
as part of the collection of entities known as "restricted core capital
elements". The rule would take effect March 31, 2007; however, a three year
transition period starting now and leading up to that date would allow bank
holding companies to continue to count trust preferred securities as Tier 1
Capital after applying FIN 46(R). Management has evaluated the effects of the
proposed rule and does not anticipate a material impact on its capital ratios
when the proposed rule is finalized.
Securities - EITF 03-1
In November 2003, the Emerging Issues Task Force (EITF) of the FASB issued
EITF Abstract 03-1, The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments (EITF 03-1). The quantitative and qualitative
disclosure provisions of EITF 03-1 were effective for years ending after
December 15, 2003 and were included in the Company's 2003 Form 10-K. In March
2004, the EITF issued a Consensus on Issue 03-1 requiring that the provisions of
EITF 03-1 be applied for reporting periods beginning after June 15, 2004 to
investments accounted for under SFAS Nos. 115 and 124. EITF 03-1 establishes a
three-step approach for determining whether an investment is considered
impaired, whether that impairment is other-than-temporary and the measurement of
an impairment loss. In September 2004, the FASB issued a proposed Staff
Position, EITF Issue 03-1-a, Implementation Guidance for the Application of
Paragraph 16 of EITF 03-1 (EITF 03-1-a). EITF 03-1-a would provide
implementation guidance with respect to debt securities that are impaired solely
due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment under paragraph 16 of EITF 03-1. In September
2004, the FASB issued a Staff Position, EITF Issue 03-1-1, Effective Date of
Paragraphs 10-20 of EITF Issue No. 03-1 (EITF 03-1-1). FSP EITF Issue No.
03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments
delays the effective date of certain provisions of EITF Issue 03-1, including
steps two and three of the Issue's three-step approach for determining whether
an investment is other-than-temporarily impaired. However, step one of that
approach must still be initially applied for impairment evaluations in reporting
periods beginning after June 15, 2004. The delay of the effective date for
paragraphs 10- 20 of EITF Issue 03-1 will be superseded with the final issuance
of proposed FSP EITF Issue 03-1-a, Implementation Guidance for the Application
of Paragraph 16 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. The Company is in the
process of determining the impact that this EITF will have on its financial
statements.
Loan Commitments
The SEC recently released Staff Accounting Bulletin (SAB) No. 105,
Application of Accounting Principles to Loan Commitments. SAB 105 provides
guidance about the measurement of loan commitments recognized at fair value
under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. SAB 105 also requires companies to disclose their accounting policy
for those loan commitments including methods and assumptions used to estimate
fair value and associated hedging strategies. SAB 105 is effective for all loan
commitments accounted for as derivatives that are entered into after March 31,
2004. The adoption of SAB 105 is not expected to have a material effect on the
Company's consolidated financial statements.
Stock Options
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued
a proposed Statement, Share-Based Payment an Amendment of FASB Statements No.
123 and APB No. 95, that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. Under the FASB's proposal, all forms of
share-based payments to employees, including employee stock options, would be
treated the same as other forms of compensation by recognizing the related cost
in the income statement. The expense of the award would generally be measured at
fair value at the grant date. Current accounting guidance requires that the
expense relating to so-called fixed plan employee stock options only be
disclosed in the footnotes to the financial statements. The proposed Statement
would eliminate the ability to account for share-based compensation transactions
using APB Opinion No. 25, Accounting for Stock Issued to Employees. On October
13, 2004, FASB voted to delay the adoption of this proposed standard by public
companies until their first fiscal quarter beginning after June 15, 2005. The
Company is currently evaluating this proposed statement and its effects on its
results of operations.
7. Stock-Based Compensation
For the three months ended September 30, 2004, there were no stock options
granted. For the nine months ended September 30, 2004, there were 122,902 stock
options granted, as adjusted for the 5% stock dividend declared October 28,
2004. The fair value of each option granted during this period was $3.06, as
adjusted, and was estimated on the date of grant using the Black Scholes pricing
model with the following assumptions: no dividend yield, expected volatility
13.00%, a risk-free interest rate of 2.73% and an expected life of 5.00 years.
Had compensation costs for the first nine months 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 and nine month periods ended
September 30:
For the Three Months For the Nine Months
Ended September 30 Ended September 30
- -------------------------------------------------------------------------------------------
(in thousands except per share data) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------
Net Income as Reported $1,068 $738 $2,628 $2,087
Less: Stock-Based Compensation Costs -- -- (248) (607)
-----------------------------------------------
Proforma Net Income $1,068 $738 $2,380 $1,480
Earnings Per Share Basic
As Reported $ 0.27 $0.18 $ 0.65 $ 0.51
Proforma $ 0.27 $0.18 $ 0.59 $ 0.37
Earnings Per Share Diluted
As Reported $ 0.26 $0.18 $ 0.63 $ 0.50
Proforma $ 0.26 $0.18 $ 0.57 $ 0.36
8. Subsequent Event
On October 28, 2004, the Board of Directors of the Company declared a 5%
stock dividend payable on December 1, 2004 to holders of record as of
November 15, 2004. Per share information in this Form 10-Q report has been
restated to reflect the effects 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 contained
in Note 2 ("Significant Accounting Policies"), which begins on page 8 of the
Annual Report to Shareholders for 2003, 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 these areas are discussed in this report under the section
labeled "Allowance for Loan Losses."
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. This
discussion and analysis is generally the financial condition and results of
operations for the three and nine month periods ended September 30, 2004 and
2003. 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 an arrangement for two dual employees 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 three months ended September 30, 2004 was $1,068,000 an
increase of $330,000 or 45% as compared to the same period in 2003. Earnings per
share-Basic were $0.27 in 2004 and $0.18 in 2003. Earnings per share-Diluted
were $0.26 in 2004 and $0.18 in 2003.
Net income for the nine months ended September 30, 2004 was $2,628,000 an
increase of $541,000 or 26% as compared to the same period in 2003. Earnings per
share-Basic were $0.65 in 2004 and $0.51 in 2003. Earnings per share-Diluted
were $0.63 in 2004 and $0.50 in 2003.
Included in net income for the three and nine months ended September 30,
2004 was a one time gain on the sale of the Company's Aberdeen office of
$244,000 on a pretax basis. The Company sold its only Monmouth County facility
in order to concentrate their expansion efforts in Somerset, Middlesex and
Hunterdon counties.
Net Interest Income
- -------------------
Net interest income for the three months ended September 30, 2004 was
$3,962,000, an increase of $377,000 or 11% as compared to the same period in
2003. For the nine months ended September 30, 2004 net interest income was
$11,442,000, an increase of $750,000 from the same period during 2003.
Average earning assets increased $44 million or 11% over the comparable
quarterly periods. Average loans, which were the Company's highest yielding
asset, represented 66% of earnings assets in 2004 and 67% in 2003. Average
investments, the Company's second highest yielding earning asset, grew by $18
million. During the third quarter of 2004, total loans increased $20 million
over the previous quarter which experienced a decline from the first quarter.
Loan growth was a major contributor to the Company's improved earnings.
The growth in earning assets, during the comparable quarters, was funded
primarily by the growth in average interest bearing deposits of $30 million of
which 86% was in the form of core deposits; such as savings, money market and
NOW accounts, which generally carry a lower interest rate than time deposits.
Average Federal Home Loan Bank advances increased $2 million. The increase of
non-interest bearing deposits of $9 million funded the remainder of the growth
of earning assets.
The United States continues to experience historically low interest rates.
The Federal Funds Rate was lowered to 1.00% in June 2003. In 2004, rates have
slowly begun to increase for the first time in three years. During the second
quarter the Federal Funds Rate increased to 1.25% and during the third quarter
it increased an additional 50 basis points. The Prime Lending Rate, which the
Company uses to price a large portion of its loan portfolio, rose to 4.75% in
lock step with Federal Funds.
During this period of low interest rates, the yields on all earning asset
categories declined as assets priced with floating rates saw declines while
assets maturing were generally reinvested at lower rates. For example, the yield
on loans dropped 23 basis points over the comparable quarters. However, due to
the recent increases in market rates this yield improved by 11 basis points from
the second quarter of 2004. While the yield on Federal Funds showed an immediate
increase of 40 basis points for the comparable quarters, the decline in yields
on loans and short-term investments, as well as the mix of the balance sheet,
caused the yield on earning assets to decline by 17 basis points to 5.10%.
For the nine months ending September 30, 2004, the yield on earning assets
was 5.12% as compared to 5.46% for the same period during 2003.
The cost to fund earning assets also declined during the third quarter
period from 2003 to 2004 by 16 basis points to 1.42%. The rate paid on interest
bearing deposits declined 17 basis points, while the yield on subordinated
debentures reflected an increase of 18 basis points. For the nine month period
ending September 30, 2004, the cost to fund earning assets decreased by 26 basis
points to 1.43%.
As a result, the net interest margin for the third quarter of 2004
declined by only 1 basis point to 3.68% as compared to the same period of 2003.
The net interest margin showed an improvement of 11 basis points from the second
quarter of 2004. For the nine months ended September 30, 2004, the net interest
margin declined by 8 basis points to 3.69% as compared to the same period of
2003.
While the growth of the Company's balance sheet, during the third quarter,
provided approximately $408,000 in additional net interest income, the reduction
in the net interest margin reduced net interest income by $32,000 leaving an
increase in the comparable third quarters of $377,000 or 11%. For the nine month
period ending September 30, 2004 growth in the Company's balance sheet provided
approximately $1,195,000 in additional net interest income, while the reduction
in the net interest margin reduced net interest income approximately $445,000
resulting in an increase of $750,000 for the same period of 2003.
Provision for Loan Losses
- -------------------------
The provision for loan losses was $95,000 in the three months ended
September 30, 2004, as well as for the same period in 2003. The calculation of
the provision was a result of the Company's most recent analysis of the loan
portfolio. The allowance for loan losses was 229% of non performing loans as of
September 30, 2004 compared to 265% at December 31, 2003.
Other Income
- ------------
Total other income for the three months ended September 30, 2004 increased
$300,000 or 55%. The gain on the sale of the Aberdeen branch represented
$244,000 of the increase. The five-year old branch was the only location in
Monmouth County and the Company made the decision to focus its expansion efforts
in Somerset, Middlesex and Hunterdon counties. Other income increased $68,000 or
57% over the comparable quarterly periods. Fees from the sale of annuities and
mutual funds increased by $29,000. Income from bank owned life insurance (BOLI)
increased $17,000 due to the purchase of an additional $3.5 million in BOLI. The
remainder was the result of the increase in the cash surrender value of
insurance policies purchased as part of the Company's SERP plan.
Service charges on deposit accounts declined $24,000. Overdraft, wire
transfer and sweep account service charges accounted for most of the decline.
Gains on the sale of loans and gains on the sale of securities also showed
a decrease for the comparable quarters.
For the nine month period ending September 30, 2004 total other income
increased $290,000 or 18%. The gain on the sale of the Aberdeen branch
represented 84% of the increase.
Other Expense
- -------------
Total other expense increased $191,000 or 7% during the three months ended
September 30, 2004 in comparison with the same period in 2003.
Salaries and Benefits expense increased $189,000 over the comparable
quarters ending September 30, 2004. Annual salary increases and additions to
staff, as well as an increase in overall benefit costs accounted for most of the
variance. The Company also resumed its accrual for year end bonuses as a result
of record earnings and increased the amount by $49,000.
The Company was able to reduce its occupancy cost by $46,000 or 10% over
the comparable quarters. The Company's lease obligation for the original
Hillsborough office expired in December. The Company also purchased the
facilities at 103 and 117 West End Avenue in Somerville and thereby eliminated
those lease obligations. The sale of the Aberdeen branch accounted for
approximately $15,000 of the decrease. Part of this was offset by the opening of
the Reading Ridge office in February 2004.
Equipment expense increased $14,000 or 9% from the third quarter of 2003,
due to increased costs to upgrade and maintain computer equipment, as well as
rental of copying and postage equipment.
Other expenses increased $34,000 or 4% over the comparable quarter of
2003. Increases in transaction volume, as well as enhancements to services
caused data processing costs to grow by $26,000 as compared to the third quarter
of 2003. Directors fees increased $12,000 as retainers were added to Director
compensation. Insurance expense also increased $37,000 for the comparable
quarters. These increases were partially offset by decreases in advertising
expense ($42,000), legal fees ($27,000) and losses incurred on disposed fixed
assets ($21,000).
Total other expense increased $360,000 for the nine months ended September
30, 2004 as compared to the same period in 2003. Of this increase, salary and
benefits costs accounted for $311,000 and other expenses $131,000. These
increases were offset in decreased occupancy expense of $106,000 for the same
period in 2003.
Financial Condition
September 30, 2004 compared to December 31, 2003
- ------------------------------------------------
At September 30, 2004, total assets were $475 million, an increase of $44
million or 10% from December 31, 2003. This increase was funded by growth in
deposits of $42 million. Most of the deposit growth occurred within three
categories. NOW accounts increased by $16 million, money market accounts by $18
million and time deposits greater than $100,000 by $9 million. Time deposits
less than $100,000 decreased $3 million.
The NOW and money market accounts contain deposits of municipalities and
businesses, such as attorney and title insurance company accounts which can be
volatile. The growth in deposits was used to fund new loans and purchase
investments securities. Total security investments grew $21 million.
Loans increased $21 million since December 31, 2003. After increasing $8
million during the first quarter of 2004 and declining $7 million during the
second quarter, loans increased $20 million primarily in commercial mortgages
during the third quarter.
Asset Quality
- -------------
There were $3,000 in loans past due 90 days or more and still accruing as
of September 30, 2004. There were no loans past due 90 days and still accruing
as of December 31, 2003.
Loans in a non-accrual status totaled $1,087,000 at September 30, 2004 and
represented 0.37% of total loans. Loans in non-accrual status totaled $1,012,000
at December 31, 2003 and represented 0.37% of total loans.
The Company had no other real estate owned at September 30, 2004 or
December 31, 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 thirteen-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 Company 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
$20,000 at September 30, 2004. 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, 2004, the allowance for loan losses was $2.8 million and
represented 0.97% of total loans and 229% of non-performing loans compared to an
allowance for loan losses at December 31, 2003 of $2.7 million or 0.99% of total
loans and 265% of non-performing loans.
Net charge-offs for the first nine months of 2004 totaled $114,000
compared to $229,000 for the year ended December 31, 2003. Of the 2003
charge-offs, $139,000 occurred during the third quarter and represented one
loan.
Capital Resources
- -----------------
Total Shareholders' Equity was $28.5 million at September 30, 2004
compared to $25.7 million at December 31, 2003. 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,
2004 2003
------------- ------------
Leverage Ratio 7.10% 7.39%
Tier 1 Capital to Risk Weighted Assets 9.91% 10.06%
Total Capital to Risk Weighted Assets 10.74% 10.94%
Liquidity
- ---------
Cash and Cash Equivalents totaled $27 million at September 30, 2004, a
decrease of $4 million since December 31, 2003.
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 $48 million. New loans represented $21 million of the amount invested
and a net of $25 million was used for the purchase of securities. The Company
purchased an additional $3.5 million in Bank Owned Life Insurance.
Net cash provided by financing activities totaled $41 million. Deposits
funded all of this activity as money market deposits increased $18 million,
demand deposits increased $17 million and time deposits increased $6 million.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk is defined as the sensitivity of the Company's current
and future earnings as well as its capital to changes in the level of market
interest rates. The Company's exposure to interest rate risk results from, among
other things, the difference in maturities on interest earning assets and
interest bearing liabilities. The relationship between the interest rate
sensitivity of the Bank's assets and liabilities is continually monitored by the
Bank's Asset/Liability Management Committee (the "ALCO"). The purpose of the
ALCO is to review and monitor the volume, mix and pricing of the interest
earning assets and interest bearing liabilities consistent with the Bank's
overall liquidity, capital, growth, profitability and interest rate risk goals.
Loans make up the largest portion of the Bank's assets. In making
commercial loans, the emphasis is placed on either floating rate loans tied to
the Prime Lending Rate or fixed rate loans with prepayment penalties depending
upon the Bank's overall rate sensitivity position. Fixed rate commercial loans
are generally written so that the rates can be adjusted within 3 to 7 years with
payouts up to 25 years. Mortgage loans are currently written to be adjusted
annually after the first 3, 5 or 10-year term with payouts up to 30 years. Home
equity lines of credit are tied to the Prime Lending Rate although special
promotions may offer a fixed rate for periods of not greater than one year.
These loans also contain interest rate floors. Fixed rate home equity loans are
offered with a maturity of 5 or 10 years, amortizing over a 15-year period.
Installment loans are written at fixed rates amortizing over 1 to 5 years.
The Bank utilizes its securities to manage its liquidity and rate
sensitivity. Fixed rate agency and corporate securities are purchased for terms
of 5 years or less. Callable securities can be purchased for terms of 5 years or
less with a call period of 3 months to 2 years. Bank qualified tax exempt
municipal securities can be purchased for terms up to 5 years. Fixed rate
mortgage-backed securities are purchased with estimated average lives at the
time of purchase of not more than 5 years. Adjustable rate securities require an
estimated average life at time of purchase of 10 years or less. These securities
are reviewed for changes in yield and average life resulting from changes in
interest rates. The Bank also invests in FDIC insured CDs of other financial
institutions with a maturity of 3 months to 3 years for amounts up to $100,000.
The Bank also has invested in a Community Investment Fund, designed to support
underlying community development activities as defined in the Community
Reinvestment Act. This Fund is long-term in nature.
Short-term rate sensitivity is also managed through the investment into
high quality short-term money market securities, US Government Agency securities
and/or US Treasury securities made available through money market funds, which
can be liquidated at anytime. In general, the day-to-day rate sensitivity is
managed through the sale or purchase of Federal Funds from approved
correspondent banks all of which must be "well-capitalized" as defined by the
FDIC.
A significant portion of the Bank's assets have been funded with
Certificates of Deposits ("CDs") including jumbo CDs. Unlike other deposit
products, such as checking and savings accounts, CDs carry a high degree of
interest rate sensitivity and competitiveness of the Bank's interest rates. The
Bank has attempted to price its CDs competitively. Interest rates on savings
accounts, NOW and money market accounts are variable and can be changed at the
discretion of the Company. These accounts are not tied to any particular index.
As members of the Federal Home Loan Bank, the Company can borrow advances
at a fixed or floating rate and on a non-amortizing or amortizing basis. These
advances can be for terms ranging from overnight to up to 30 years. The advances
can be matched against various earning assets.
The nature of the Bank's current operations is such that it is not subject
to foreign currency exchange or commodity price risk. Additionally, neither the
Company nor the Bank owns any trading assets. At September 30, 2004, the Bank
did not have any hedging transactions in place.
INTEREST RATE SENSITIVITY ANALYSIS
One measure of the Bank's interest rate sensitivity is through the use of
a sensitivity gap analysis. The interest rate sensitivity gap is defined as the
difference between the amount of interest earning assets maturing or repricing
within a specific time period and the amount of interest bearing liabilities
maturing or repricing within that same time period. A gap is positive when the
amount of interest earning assets maturing or repricing exceeds the amount of
interest bearing liabilities maturing or repricing within that same period and
is negative when the amount of interest bearing liabilities maturing or
repricing exceeds the amount of interest earning assets maturing or repricing
within the same period. Accordingly, during a period of rising interest rates,
an institution with a negative gap position would not be in as favorable a
position, compared to an institution with a positive gap, to invest in higher
yielding assets. A negative gap may result in the yield on an institution's
interest earning assets increasing at a slower rate than the increase in an
institution's cost of interest bearing liabilities than if it had a positive
gap. During a period of falling interest rates, an institution with a negative
gap would experience a repricing of its interest earning assets at a slower rate
than its interest bearing liabilities, which consequently, may result in its net
interest income growing at a faster rate than an institution with a positive gap
position.
The ALCO attempts to maintain the Company's cumulative gap ratios at
+/-15% for 90 days or less, +/- 20% for four to six months and +/-25% for
between six months and one year.
The following table depicts the Company's gap position as of September 30,
2004.
INTEREST RATE SENSITIVITY AT
SEPTEMBER 30, 2004
MATURITY OR REPRICING IN (1)
DUE IN BETWEEN AFTER NON-
90 DAYS 91 DAYS - ONE INTEREST
($ in thousands) OR LESS ONE YEAR YEAR BEARING TOTAL
- -----------------------------------------------------------------------------------------------------------------
ASSETS:
Securities $ 16,803 $ 36,434 $ 68,929 $ -- $ 122,166
Federal Funds Sold 3,040 -- -- -- 3,040
Other Short Term Investments 67 -- -- -- 67
Interest Bearing Time Deposits 2,786 5,379 6,666 -- 14,831
Loans 86,831 11,609 192,976 703 292,119
Allowance For Loan Losses -- -- -- (2,826) (2,826)
Non-interest Earning Assets -- -- -- 45,505 45,505
- -----------------------------------------------------------------------------------------------------------------
Total Assets $ 109,527 $ 53,422 $ 268,571 $ 43,382 $ 474,902
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Liabilities:
Money Market $ 16,420 $ 30,600 $ 27,615 $ -- $ 74,635
NOW 5,247 31,485 50,725 -- 87,457
Savings Deposits 2,920 9,732 36,009 -- 48,661
Time Deposits over $100,000 15,850 13,075 7,484 -- 36,409
Other Time Deposits 28,670 44,590 38,739 -- 111,999
Other Borrowings -- 3,500 13,643 -- 17,143
Obligation Under Capital Lease 3 11 374 -- 388
Subordinated Debentures 6,702 -- -- -- 6,702
- -----------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 75,812 132,993 174,589 -- 383,394
- -----------------------------------------------------------------------------------------------------------------
Non-interest Bearing Demand Deposits 6,144 10,444 44,849 -- 61,437
Other Liabilities -- -- -- 1,588 1,588
Stockholder's Equity -- -- -- 28,483 28,483
- -----------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 81,956 $ 143,437 $ 219,438 $ 30,071 $ 474,902
- -----------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Gap $ 27,571 $ (90,015) $ 49,133 $ 13,311
- -----------------------------------------------------------------------------------------------------------------
Cumulative Gap $ 27,571 $ (62,444) $ (13,311)
- -----------------------------------------------------------------------------------------------------------------
Cumulative Gap to Total Assets 5.81% (13.15)% (2.80)%
- -----------------------------------------------------------------------------------------------------------------
(1) The following are the assumptions that were used to prepare the Gap
analysis:
(A) Interest rates increased 25 basis points each on August 10, and
September 21, 2004, i.e. a Prime Rate of 4.75% and a Federal Funds
Rate of 1.75%.
(B) Callable agency securities are spread at their call dates or
maturity date depending upon the relationship of the rate of the
securities to the treasury yield curve as dictated by the rates
listed in (A).
(C) Prepayments on mortgage-backed securities as well as various types
of loans are based on estimates in relationship to the rates listed
in (A).
(D) Loans are spread based on the earlier of their actual maturity date
or the date of their first potential rate adjustment.
(E) The maturity or decay rate of non maturity deposits, i.e. money
market, NOW, savings and non-interest bearing demand deposits is
estimated.
(F) Time deposits are spread based on their actual maturity dates.
While gap analysis is a general indicator of the potential effect that
changing interest rates may have on net interest income, the gap itself does not
present a complete picture of interest rate sensitivity. First, changes in the
general level of interest rates do not affect all categories of assets and
liabilities equally or simultaneously. Second, assumptions must be made to
construct a gap analysis. Management can influence the actual repricing of the
deposits independent of the gap assumption. Third, certain securities are
callable and, therefore, repriceable prior to their maturity dates depending on
the level of interest rates. The cash flows of certain loans and mortgage-backed
securities and the repricing of those cash flows will vary under different
interest rates. Fourth, the gap analysis represents a one-day position and
cannot incorporate a changing mix of assets and liabilities over time as
interest rates change. Volatility in interest rates can also result in
disintermediation, which is the flow of funds away from financial institutions
into direct investments, such as U.S. Government and corporate securities and
other investment vehicles, including mutual funds, which, because of the absence
of federal insurance premiums and reserve requirements, generally pay higher
rates of return than financial institutions.
As indicated in the previous table, the Bank has had a positive gap
position in the period of 1 to 90 days. During periods of continual increases in
short-term rates the Company will generally experience expansion of its net
interest margin.
In 2003, the Federal Funds Rate and the Prime Lending Rate remained flat
for 5 months and were then reduced 25 basis points in June to 1.00% and 4.00%,
respectively. These rates had not been this low since 1958. They remained at
this level until June 30, 2004 when they were increased to 1.25% and 4.25%,
respectively. Since that time, both the Federal Funds Rate and the Prime Lending
Rate have increased 50 basis points to 1.75% and 4.75%, respectively. Both the
increase in interest rates and the Company's positive gap position contributed
to the increase in net interest margin during the third quarter of 2004 to
3.68%. For further discussion see "Net Interest Income."
Past performance is no indication of future results. The net interest
margin can be affected by more than the change in the level of interest rates.
Such items as the changes in the mix of assets and liabilities and a change in
the competitive factors governing the pricing of assets and liabilities can also
greatly impact the net interest margin.
An additional analysis of the Bank's interest rate risk is a forecast of
changes in the Bank's Market Value of Portfolio Equity (MVPE) under alternative
interest rate environments. The MVPE is defined as the net present value of the
Bank's existing assets, liabilities and off-balance sheet instruments. The
calculated estimated change in MVPE for the Bank at September 30, 2004 is as
follows:
(in thousands) +200 BASIS POINTS -200 BASIS POINTS
================================================================================
Change from MVPE $(2,637) $(4,805)
Percentage of Assets (0.56)% (1.01)%
- --------------------------------------------------------------------------------
The policy of the Company requires that a parallel shock of +/-200 basis points
may not change the MVPE by more than 1% of total assets. For September 30, 2004,
this amount would be $4.8 million.
It is important to note that as of September 30, 2004 a downward parallel
shock of 200 basis points could not be applied to all assets and liabilities.
For example, at September 30, 2004 the Federal Funds Rate was at 1.75%. Certain
loans rates, such as home equity loans, have contractual floors which at
September 30, 2004 were above the current market rates. In addition, certain
deposit rates could not realistically be reduced by 200 basis points.
Assumptions were made as to implied floors for these rates. The Company also
uses simulation models to measure the impact of changing interest rates on its
operations. The simulation model attempts to capture the cash flow and repricing
characteristics of the current assets and liabilities on the Company's balance
sheet. Assumptions regarding such things as prepayments, rate change behaviors,
levels and composition of new balance sheet activity, new product lines, and
decay rates on core deposits are incorporated into the simulation model. Net
interest income is simulated over a twelve month horizon under a variety of
yield changes subject to certain limits agreed to by ALCO. The Company uses
three interest rate scenarios provided by Global Insight, a third party
econometric modeling service.
The first scenario is a projection by Global Insight of what rates are
most likely to be over a twelve month time horizon given the most recent set of
facts and circumstances. The remaining scenarios are a rising and a declining
rate scenario that are purely hypothetical in nature. These three scenarios are
then compared to the base case of a flat rate scenario. The following table
depicts the approximate change in net interest income after taxes (35% tax rate)
under the three rate scenarios at September 30, 2004.
Point To Point Dollar Change In
Change In The Thousands In Net
Prime Lending Interest Income
Rate Over From Flat Rate
Scenarios Twelve Months Scenario
----------------- ------------- ----------------
($ in thousands)
Most Likely 1.08% $ 269
Rising 1.43% 273
Declining (1.43)% (412)
Actual results may differ from the simulated results due to such factors as the
timing, magnitude and frequency of interest rate changes, changes in market
conditions, management strategies and differences in actual versus forecasted
balance sheet composition and activity.
ITEM 4 - 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,
2004, the closing bid of the Company's common stock was $17.75 per
share. This price is not retroactively adjusted for the 5% stock
dividend declared October 28, 2004.
The Company has a web site located at www.somersetvalleybank.com.
ITEM 6- Exhibits
--------
(a) Exhibits
--------
31 Certifications
32 906 Certification
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.
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(Registrant)
/s/ Keith B. McCarthy
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Keith B. McCarthy
Chief Financial Officer
Chief Accounting Officer
Dated: November 15, 2004