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, 1998
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.)
103 West End Avenue, Somerville, New Jersey 08876
(Address of principal executive officers) (Zip Code)
(908) 704-1188
(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
As of November 13, 1998, there were 2,768,024 shares of common stock, $2.09 par
value outstanding. These numbers have been restated to show a 2 for 1 stock
split effective April 16, 1998.
<PAGE>
SVB FINANCIAL SERVICES, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements and Notes to Consolidated
Financial Statements
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 3 - Market Risk
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
ITEM 5 - Other Information
SIGNATURES
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
STATEMENTS OF CONDITION September 30, December 31,
September 30, 1998 and December 31, 1997 1998 1997
------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash & Due from Banks $ 10,678,170 $ 5,794,622
Federal Funds Sold 15,550,000 --
Interest Bearing Time Deposits 2,194,010 --
Other Short Term Investments 643,363 188,304
------------- -------------
Total Cash and Cash Equivalents 29,065,543 5,982,926
------------- -------------
Securities
Available for Sale 11,975,485 11,266,269
Held to Maturity 11,733,635 22,101,977
------------- -------------
Total Securities 23,709,120 33,368,246
------------- -------------
Loans 116,929,457 106,470,674
Allowance for Possible Loan Losses (1,145,823) (982,198)
Unearned Income (101,604) (99,433)
------------- -------------
Net Loans 115,682,030 105,389,043
------------- -------------
Premises & Equipment, Net 1,767,663 1,733,516
Other Assets 2,168,792 2,075,757
------------- -------------
Total Assets $ 172,393,148 $ 148,549,488
============= =============
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Demand
Non-interest Bearing $ 23,763,367 $ 21,965,676
NOW Accounts 19,592,830 13,014,148
Savings 12,419,112 9,042,660
Money Market Accounts 17,921,323 16,227,255
Time
Greater than $100,000 13,213,032 12,879,808
Less than $100,000 70,269,937 60,800,469
------------- -------------
Total Deposits 157,179,601 133,930,016
------------- -------------
Federal Funds Purchased -- 500,000
Obligations Under Capital Lease 439,617 443,697
Accrued Expenses & Other Liabilities 719,829 580,245
------------- -------------
Total Liabilities 158,339,047 135,453,958
------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
STATEMENTS OF CONDITION (continued) September 30, December 31,
September 30, 1998 and December 31, 1997 1998 1997
------------- --------------
(Unaudited)
<S> <C> <C>
SHAREHOLDERS' EQUITY
Common Stock $2.09 Par Value: 10,000,000 5,785,170 5,739,265
Shares Authorized; 2,768,024 Shares in 1998 and
2,739,220 Shares in 1997 Issued and Outstanding
Additional Paid-in Capital 5,504,982 5,459,397
Retained Earnings 2,709,762 1,859,173
Unrealized Gain on Securities Available for Sale,
Net of Income Taxes 54,187 37,695
------------- -------------
Total Shareholders' Equity 14,054,101 13,095,530
------------- -------------
Total Liabilities and Shareholders' Equity $ 172,393,148 $ 148,549,488
============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME For the Three Months Ended For the Nine Months Ended
For the Period Ended September 30, 1998 and 1997 1998 1997 1998 1997
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest on Loans $2,681,712 $2,205,896 $7,542,138 $6,344,591
Interest on Securities Available for Sale 182,516 204,980 540,753 545,294
Interest on Securities Held to Maturity 214,249 261,357 775,839 697,115
Interest on Other Short Term Investments 19,659 16,630 36,777 45,281
Interest on Federal Funds Sold 84,898 87,147 248,349 230,946
---------- ---------- ---------- ----------
Total Interest Income 3,183,034 2,776,010 9,143,856 7,863,227
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on Deposits 1,416,861 1,269,384 4,105,640 3,571,839
Interest on Federal Funds Purchased -- -- 183 --
Interest on Obligations Under Capital Lease 9,352 4,181 28,143 4,181
---------- ---------- ---------- ----------
Total Interest Expense 1,426,213 1,273,565 4,133,966 3,576,020
---------- ---------- ---------- ----------
Net Interest Income 1,756,821 1,502,445 5,009,890 4,287,207
PROVISION FOR POSSIBLE LOAN LOSSES 90,000 65,000 225,000 215,000
---------- ---------- ---------- ----------
Net Interest Income after Provision For Possible Loan Losses 1,666,821 1,437,445 4,784,890 4,072,207
---------- ---------- ---------- ----------
OTHER INCOME
Service Charges on Deposit Accounts 76,622 60,907 211,183 167,801
Gain on the Sale of Loans 144,402 44,485 263,728 98,593
Gain on the Sale of Securities 3,828 -- 3,828 --
Other Income 35,242 22,175 91,905 80,186
---------- ---------- ---------- ----------
Total Other Income 260,094 127,567 570,644 346,580
---------- ---------- ---------- ----------
OTHER EXPENSE
Salaries and Employee Benefits 678,517 557,172 2,030,793 1,591,605
Occupancy Expense 161,748 121,082 470,416 343,085
Equipment Expense 97,633 76,386 277,813 225,419
Other Expenses 383,803 338,864 1,158,953 979,833
---------- ---------- ---------- ----------
Total Other Expense 1,321,701 1,093,504 3,937,975 3,139,942
---------- ---------- ---------- ----------
Net Income Before Provision for Income Taxes 605,214 471,508 1,417,559 1,278,845
Provision for Income Taxes 238,526 190,156 566,970 515,174
---------- ---------- ---------- ----------
Net Income $ 366,688 $ 281,352 $ 850,589 $ 763,671
========== ========== ========== ==========
EARNINGS PER COMMON SHARES - Basic* $ 0.13 $ 0.10 $ 0.31 $ 0.28
========== ========== ========== ==========
EARNINGS PER COMMON SHARES - Diluted* $ 0.13 $ 0.10 $ 0.30 $ 0.28
========== ========== ========== ==========
</TABLE>
* Shares outstanding have been adjusted for the 2 for 1 stock split effective
April 16, 1998
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME For the Three Months Ended For the Nine Months Ended
For the Period Ended September 30 1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Net Income $366,688 $281,352 $850,589 $763,671
Other Comprehensive Income, Net of Tax
Unrealized Gains/(Losses) Arising in the Period 33,838 21,336 16,492 15,831
-------- -------- -------- --------
Comprehensive Income $400,526 $302,688 $867,081 $779,502
======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
STATEMENTS OF CASH FLOW
For the Period Ended September 30, 1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 850,589 $ 763,671
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Possible Loan Losses 225,000 215,000
Depreciation and Amortization 283,165 215,202
Amortization (Accretion) of Securities Premium/Discount 2,420 (14,871)
Gains on the Sale of Securities Available for Sale, Net (3,828) --
Gains on the Sale of Loans (263,728) (98,593)
(Increase) in Other Assets (103,176) (553,237)
Increase (Decrease) in Accrued Expenses and Other Liabilities 131,088 (53,618)
Increase in Unearned Income 2,170 9,461
------------ ------------
Net Cash Provided By Operating Activities 1,123,700 483,015
------------ ------------
INVESTING ACTIVITIES
Proceeds from Sale of Securities Available for Sale 2,503,828 0
Proceeds from Maturities of Securities
Available for Sale 5,324,274 2,149,985
Held to Maturity 12,887,589 8,424,262
Purchases of Securities
Available for Sale (8,282,200) (7,236,392)
Held to Maturity (2,747,969) (12,235,956)
Proceeds from the Sale of Loans 6,941,000 0
Increase in Loans (17,197,429) (8,319,889)
Decreases in Other Real Estate 0 304,700
Capital Expenditures (307,171) (785,358)
------------ ------------
Net Cash Used for Investing Activities (878,078) (17,698,648)
------------ ------------
FINANCING ACTIVITIES
Net Increase in Demand Deposits 8,376,373 4,906,401
Net Increase in Savings Deposits 3,376,452 1,517,713
Net Increase in Money Market Deposits 1,694,068 3,666,463
Net Increase in Time Deposits 9,802,692 8,532,956
(Decrease) Increase in Federal Funds Purchased (500,000) 445,000
(Decrease) in Obligation Under Capital Lease (4,080) 0
Proceeds from Issuance of Common Stock, Net 91,490 0
Increase in Common Stock from Non Acceptance of Exchange Offer 0 24,762
------------ ------------
Net Cash Provided by Financing Activities 22,836,995 19,093,295
------------ ------------
Increase in Cash and Cash Equivalents, Net 23,082,617 1,877,662
Cash and Cash Equivalents, Beginning of Year 5,982,926 12,128,176
------------ ------------
Cash and Cash Equivalents, End of Period $ 29,065,543 $ 14,005,838
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
STATEMENTS OF CASH FLOW
For the Period Ended September 30, 1998 1997
------------ ------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash Paid During the Year for Interest $ 4,132,509 $ 3,504,910
============ ============
Cash Paid During the Year for Federal Income Taxes $ 490,000 $ 577,562
============ ============
</TABLE>
<PAGE>
SVB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (UNAUDITED)
1. SVB Financial Services, Inc., (the "Company"), a bank holding company, was
incorporated on February 7, 1996 with authorized capital of 10,000,000 shares of
$4.17 par value common stock. On September 3, 1996, the Company acquired 100
percent of the shares of Somerset Valley Bank (the "Bank") by exchanging 6
shares of its Common Stock for each 5 shares of the Bank. This exchange has been
accounted for as a reorganization of entities under common control, similar to a
pooling of interests, which resulted in no changes to the underlying carrying
amounts of assets and liabilities. Effective April 16, 1998, the Company
declared a 2 for 1 stock split, resulting in a $2.09 par value common stock. All
financial statements have been restated to reflect this.
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, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998.
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, 1998 and December 31, 1997 the composition of
outstanding loans is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Secured by Real Estate:
Residential Mortgage $ 29,309,713 $ 33,248,717
Commercial Mortgage 41,136,080 29,793,163
Construction 5,035,259 4,851,720
Commercial and Industrial 22,073,011 20,889,305
Loans to Individuals 7,530,799 4,969,103
Loans to Individuals for Automobiles 11,319,407 12,177,339
Other Loans 525,188 541,327
------------ ------------
$116,929,457 $106,470,674
============ ============
</TABLE>
<PAGE>
There were no loans restructured during 1998 or 1997. Loans past due 90
days or more and still accruing totaled $422,514 at September 30, 1998 and $0 at
December 31, 1997. Loans in a non-accrual status totaled $195,507 at September
30, 1998 and $62,632 at December 31, 1997. During 1998, mortgage loans totalling
$6,677,272 were sold resulting in a gain of $105,685.
3. Allowance for Possible Loan Losses
The allowance for possible 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 possible loan losses is as follows:
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Balance January 1, $ 982,198 $ 783,366
Provision Charged to Operations 225,000 280,000
Charge Offs (69,524) (86,399)
Recoveries 8,149 5,231
----------- -----------
Balance End of Period $ 1,145,823 $ 982,198
=========== ===========
</TABLE>
4. New Accounting Pronouncement
On January 1, 1998, the Corporation adopted Statements of Financial
Accounting Standards (SFAS) No. 129, "Disclosure Information about Capital
Structure." SFAS No. 129 summarizes previously issued disclosure guidance
contained within APB Opinion No. 10 and No. 15, as well as SFAS No. 47. The
Corporation's current disclosures were not affected by the adoption of SFAS No.
129.
On January 1, 1998, the Corporation adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards to provide prominent
disclosure of comprehensive income items. Comprehensive income is the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. Prior period amounts have been
restated to conform to the provisions of SFAS No. 130. The adoption of SFAS 130
did not have a material impact on the Corporation's financial position or
results of operations.
On January 1, 1998, the Corporation adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131 requires
that public business enterprises report certain information about operating
segments in a complete set of financial statements of the enterprise and in
condensed financial statements of interim periods issued to shareholders. It
also requires the reporting of certain information about their product and
services, the geographic area in which they operate, and their major customers.
The adoption of SFAS No. 131 did not have an impact on the Corporation's
financial position or results of operations.
<PAGE>
The American Institute of Certified Public Accountants (AICPA)
executive committee has issued Statement of Position (SOP) 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use. The SOP
was issued to provide authoritative guidance on the subject of accounting for
the cost associated with the purchase or development of computer software. The
statement is effective for fiscal years beginning after December 15, 1998 for
costs incurred in those fiscal years for all projects, including projects in
progress when the SOP is adopted. The adoption of SOP 98-1 is not expected to
have a material impact on the Corporation's financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activity." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments imbedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge. The accounting for changes in the fair value of
derivative (gains and losses) depends on the intended use of the derivative and
resulting designation. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Earlier application is permitted
only as of the beginning of any fiscal quarter. The Company is currently
reviewing the provisions of SFAS No. 133.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 result 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.
With regard to the Year 2000 disclosure, these "forward-looking
statements" include, but are not limited to, estimates of capital expenditures,
costs of remediation and testing, the timetable for implementing the remediation
and testing phases of Year 2000 planning, the possible impact of third parties'
Year 2000 issues on the Company, management's assessment of contingencies and
possible scenarios in its Year 2000 planning. The "forward-looking statements"
in this report reflect what we currently anticipate will happen in each case.
What actually happens could differ materially from what we currently anticipate
will happen. We are not promising to make any public announcement when we think
"forward-looking statements" in this document are no longer accurate, whether as
a result of new information, what actually happens in the future or for any
other reason.
<PAGE>
Results of Operation
Net income for the first nine months of 1998 was $850,589, an increase
of $86,918 or 11% as compared to the same period in 1997. Earnings per
share-Basic were $.31 in 1998 as compared to $.28 in 1997*. Earnings per share -
Diluted were $.30 in 1998 and $.28 in 1997*.
*Based on the 2 for 1 stock split effective April 16, 1998.
A detailed discussion of the major components of net income follows:
Net Interest Income
Net interest income for the first nine months of 1998 was $5,009,890
compared to $4,287,207 in 1997, an increase of $722,683 or 17%.
Almost all of the increase can be attributed to an increase in average
earnings assets. Average earning assets for the first nine months of 1998 were
$147.6 million an increase of $20.4 million or 16% from the first nine months of
1997. Loans accounted for 90% of this increase as loans averaged $111.5 million
during the nine months. The increase in loan balances caused interest income to
increase $1.2 million. Partially offsetting this, the yield on loans decreased
from 9.11%, to a 9.04%, which caused interest income to decrease $45,390.
Overall, interest income increased $1.3 million. Almost all of this amount was
due to the increase in average balances. The yield on earning assets was 8.28%
for 1998 and 8.26% for 1997.
The overall cost of interest-bearing liabilities decreased four basis
points from 4.70% to 4.66%. Total interest bearing deposits increased $16.6
million during the nine months of 1998 to $118.2 million, of which time deposits
accounted for 52% of this increase. The increase in deposits caused interest
expense to increase $522,034. Overall, interest expense increased $557,946,
however, the cost of funding earning assets decreased from 3.76% in 1997 to
3.74% in 1998.
The net result of the change in net interest income for the first nine
months of 1998 versus the first nine months of 1997 was an increase of $722,683.
The net interest margin increased three basis points from a 4.51% to a 4.54%.
Provision for Loan Possible Losses
The provision for possible loan losses was $225,000 in the first nine
months of 1998 as compared to $215,000 in the first nine months of 1997. Total
gross loans experienced a net increase of $10.5 million since December 31, 1997.
Other Income
During the first nine months of 1998, other income increased $224,064
or 65% over the same period in 1997. Gains on the sale of loans accounted for
$165,135 of the increase. The Company is a preferred SBA lender and, as such, it
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.
The amounts can vary greatly from quarter to quarter and from year to year. In
addition, the Company sold $6.7 million in mortgage loans, as mentioned above,
which generated $105,685 in gains.
<PAGE>
Service charges on deposit accounts increased $43,382 or 26% from the
same period last year. The growth in the number of commercial and consumer
checking accounts resulted in increased overdraft, account maintenance and wire
transfer fees. Foreign transaction fees at the Company's ATM machines were
instituted in the latter half of 1997, which resulted in a $18,364 increase in
ATM fees over last year.
Other Expense
Other expenses for the nine months ended September 30, 1998 increased
$798,033 or 25% from the same period in 1997. Since July of 1997, the Company
has opened a branch office in Bridgewater Township, a branch on Gaston Avenue in
Somerville, and a branch in the Arbor Glen assisted living facility in
Bridgewater Township. Expenses were impacted by additional personnel, occupancy
costs, and other expenses related to the opening of the new branches.
Consequently, total assets have grown $27.6 million or 19% since September 30,
1997. Because of the growth in assets and in offices, the Company has also had
to hire additional lending and back-office personnel to better service its
customer base. These additions combined with normal salary increases caused
salary and benefits expense to increase $439,188 or 28% from last year. The
Company has also entered into a rental agreement for another potential branch
site in Aberdeen in Monmouth County and has begun construction for an additional
site in Manville in Somerset County. Rent on the newly opened locations and the
potential branch site locations coupled with depreciation on other facilities
resulted in a $127,331 or 37% increase in occupancy expenses. The Company has
also made an effort to remain current with technology and to provide computer
access for each employee. These equipment purchases as well as other purchases
of equipment for new employees and the additional branches increased equipment
expense $52,394 or 23% from last year. Other expenses increased from last year
$179,120 or 18%. Much of this increase was related to the growth of the Company
which affected many areas, but especially supplies, data processing costs, and
other outsourced services.
Financial Condition
September 30, 1998 compared to December 31, 1997
Total assets increased $23.8 million or 16% from December 31, 1997.
Total loans increased $10.5 million. Loans secured by real estate increased $7.6
million. Commercial mortgages increased $11.3 million. Residential mortgage
loans decreased $3.9 million. As mentioned above, residential mortgage loans of
$6.7 million were sold during the third quarter. Loans to individuals for
automobiles, declined by $.9 million. The current interest rates earned on these
loans in relation to competition has caused the Company to not be as aggressive
in generating new automobile loans.
Deposits increased $23.2 million or 17% during the first nine months.
All deposit categories increased with the largest increase of $9.5 million in
the time deposits less than $100,000 category.
Investment securities decreased $9.7 million. The current flat treasury
yield curve and anticipated loan growth has caused a shift from longer term
securities to short term investments.
Asset Quality
Loans past due 90 days or more and still accruing were $422,514 as of
September 30, 1998 and represented .36% of total loans. There were no loans past
due 90 days or more and still accruing as of December 31, 1997.
<PAGE>
Loans in a non-accrual status totaled $195,507 at September 30, 1998
and $62,632 at December 31, 1997 and represented .17% of total loans as of
September 30, 1998 and .06% as of December 31, 1997.
The Company had no other real estate owned at September 30, 1998.
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level
considered adequate to provide for potential loan losses. The level of the
allowance is based on management's evaluation of potential losses in the
portfolio, after consideration of risk characteristics of the loans and
prevailing and anticipated economic conditions. The allowance is increased by
provisions charged to expense and reduced by charge-offs, net of recoveries.
At September 30, 1998, the allowance for loans losses was $1,145,823
and represented .98% of total loans and 185% of non-performing loans compared to
an allowance for loan losses at December 31, 1997 of $982,198 or .92% of total
loans and 1,568% of non-performing loans at December 31, 1997.
Charge-offs for the first nine months of 1998 totaled $69,524 compared
to $86,399 for the year ended December 31, 1997.
Capital Resources
Total Shareholders' Equity was $14,054,101 at September 30, 1998
compared to $13,095,530 at December 31, 1997.
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,
1998 1997
------------- ------------
Tier I Capital to Risk Weighted Assets 10.17% 11.89%
Total Capital to Risk Weighted Assets 11.09% 12.81%
Leverage Ratio 7.92% 8.72%
Liquidity
Cash and cash equivalents totaled $29.1 million at September 30, 1998
an increase of $23.1 million, since December 31, 1997.
The increase in Cash and Cash Equivalents was primarily attributable to
an increase in deposits which contributed to an increase in cash provided by
financing activities of $23.2 million. Time deposits experienced the largest
increase for the nine month period of $9.8 million.
Investing activities for the nine months included proceeds from the
sale of both loans and securities which were $6.9 million and $2.5 million,
respectively, and net cash provided from security transactions of $7.2 million.
These funds generated were more than offset by an increase in loans which
resulted in net cash used for investing activities of $17.2 million.
<PAGE>
Year 2000 Disclosure
The Year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format as opposed to four digits to indicate the year. Such computer
systems will be unable to interpret dates beyond the Year 1999, which cause a
system failure or other computer errors, leading to the disruptions in
operations.
In 1997 the company formed a Year 2000 Committee to develop a plan to
address the issue. The first phase of the plan called for identifying all date
reliant hardware, including computers, check encoders, vaults, A/C & Heating
systems, lighting systems, etc. and computer software by performing an inventory
and contacting all vendors for information regarding the Y2K compliance of their
products. The second phase of the plan called for the replacement or upgrade of
non-compliant hardware or software to Y2K compliant status. The third phase
called for the testing of mission critical hardware and software to ascertain
Y2K compliance. In addition, contingency plans are being written to allow the
continuation of operations in case of system failures.
Phase I (Inventory/Assessment) has been completed. Phase II
(Renovation/Implementation) has been completed except for the replacement of
check encoder hardware which will take place in early 1999. Phase III
(Validation/Testing) is in progress and will be completed by December 31, 1998.
Most of the Company's major computer applications (loans, deposits,
general ledger, etc.) are outsourced to Fiserv, one of the largest bank data
processing servicers in the country. Fiserv has a Year 2000 Plan, is performing
testing on all mission critical systems and interfaces, and has developed its
own contingency plans. Fiserv will complete testing of its systems by December
1998. We have been provided access to all its documentation and test results. In
addition, a third party auditor has been hired by Fiserv's clients to review
Fiserv's Y2K plan and provide status reports.
The Company expects to spend $200,000 for equipment upgrades and
$30,000 for direct expense items to cover additional Y2K charges.
The Company has also made several mailings to its retail and commercial
customers to apprise them of the Y2K problem. Y2K risk assessment has been made
a part of the Bank's commercial loan underwriting procedures. The commercial
portfolio has been reviewed and a Y2K risk assessment made of customers. These
customers have been contacted and asked to complete an questionnaire regarding
their Y2K effort.
ITEM 3 - MARKET RISK
The Company's market risk is primarily its exposure to interest rate
risk. Interest rate risk is the effect that changes in interest rates have in
future earnings. The principal objective in managing interest rate risk is to
maximize net interest income within the acceptable levels of risk that have been
previously established by policy.
Please refer to pages 29-31 "Interest Rate Sensitivity Analysis" and
"Change in Interests" in the 1997 Annual Report. There has been no material
changes in market risk since the date of that report.
<PAGE>
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 5 - Other Information
On July 6, 1998, the common stock of the Company began trading
on the Nasdaq National Market, under the trading symbol SVBF. On
September 30, 1998, the closing bid of the Company's common stock was
$9.18 per share.
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
3(i) Articles of Incorporation
Certificate of Incorporation of the Company is incorporated by
reference to the Company's Registration Statement on Form SB-2
File Number 333-12305 Amendment No. 2, Filed
November 4, 1996.
3(ii) Bylaws
Bylaws of the Company are incorporated by reference to the
Company's Registration Statement on Form SB-2 File No.
333-12305 Amendment No. 2, Filed November 4, 1996.
(b) Form 8-K
There has been no Form 8-K filed during the third quarter of
1998.
(27) Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SVB FINANCIAL SERVICES, INC.
(Registrant)
Dated: November 13, 1998 By: /s/Keith B. McCarthy
--------------------
Keith B. McCarthy
Executive Vice President
Chief Accounting Officer
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