UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 333-12305
SVB Financial Services, Inc.
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(Name of Small Business Issuer in Its Charter)
New Jersey 22-3438058
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
103 West End Avenue, Somerville, NJ 08876
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(Address of Principal Executive Offices) (Zip Code)
(908) 704-1188
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of Each Class Name of Each Exchange On Which Registered
------------------- -----------------------------------------
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock $2.09 par value
- --------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
<PAGE>
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
The issuers revenues for the most recent fiscal year was $13,236,000.
The aggregate market value of voting stock held by non affiliates of the
registrant as of March 17, 1999 was $14,348,300.
The number of shares of the registrants common stock as of March 17,
1999 was 2,773,424.
The following documents are incorporated by reference. The Annual
Report to security holders for the fiscal year ended December 31, 1998.
The proxy Statement for the annual meeting of security holders April
29, 1999.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
SVB Financial Services, Inc. (the "Company") is a New Jersey business
company and a bank holding company. The Company was incorporated on February 7,
1996 for the purpose of acquiring Somerset Valley Bank (the "Bank") and thereby
enabling the Bank to operate within a holding company structure. On May 30,
1996, the shareholders of the Bank approved the acquisition by the Company. On
September 3, 1996, the shares of the Company were exchanged for those of the
Bank. The Bank is the Company's only subsidiary.
The Bank is a New Jersey commercial bank and was granted a charter by
the New Jersey Department of Banking on February 21, 1990. The Bank opened for
business on December 20, 1991 at its Somerville facility after obtaining the
necessary capital in its initial offering and the approval of the Federal
Deposit Insurance Corporation (FDIC). At December 31, 1998, the Bank had total
assets of $185.2 million and is considered a small bank relative to other banks
in New Jersey. In 1996, the Bank opened its first full service branch office in
Hillsborough Township, New Jersey. During 1997, the Bank opened a full service
branch in Bridgewater Township, New Jersey. In 1998 a banking office staffed by
one part time person was opened at the Arbor Glen Retirement Community in
Bridgewater Township, New Jersey and a mini branch with a drive through on
Gaston Avenue in Somerville, New Jersey.
The Bank provides a wide range of commercial and consumer banking
services.
Deposit services include business and personal checking accounts,
interest-bearing NOW accounts, Money Market Deposit Accounts, Savings Accounts
and Certificates of Deposit. In order to compete with the larger banks for
deposit accounts, the Bank gives favorable terms (interest rates, minimum
balances, service charges, etc.). As of December 31, 1998, the Bank had $169.7
million in deposits and approximately 11,000 deposit accounts.
The Bank makes secured and unsecured loans to small and mid-sized
businesses and professionals in its market area. Because Somerville is the
county seat of Somerset County and home to Somerset Medical Center, the Bank is
uniquely positioned to provide loans and other services to the medical,
accounting and legal professionals. Bridgewater and Hillsborough Townships are
also areas of significant small and mid-size business activity. Small and medium
sized businesses and professionals make up the primary focus of the Bank's
lending efforts. It is also a preferred SBA lender and as such it originates SBA
loans and sells the government guaranteed portion in the secondary market while
retaining the servicing of such loans.
Secured and unsecured personal loans to finance the purchase of
consumer goods are also available. Through its relationship with nine local
automobile dealerships, the Bank indirectly finances automobile loans.
Residential and commercial mortgages are also provided by the Bank.
Residential mortgages are currently written by the Bank with a three or
five-year fixed rate which adjusts annually thereafter for the life of the loan
<PAGE>
which may be up to 30 years. The Bank is an approved Federal National Mortgage
Association (FNMA) lender for origination and servicing of mortgages. Long term
fixed rate mortgages are originated and sold in the secondary market with
servicing retained.
As of December 31, 1998, the Bank had approximately 3,100 loans of all
types totaling $121.5 million.
Other services provided by the Bank include wire transfers, safe
deposit boxes, money orders, travelers cheques, direct deposit of payroll and
social security checks, ACH origination and Visa/MasterCard processing. The Bank
has four ATM machines and the Bank is a member of the MAC network. The Bank
currently employs one licensed agents to sell annuities.
The Bank offers customers access to their accounts through a telephone
or personal computer. These products known as PC Plus and TelePlus also offer a
bill payment feature. A Debit Card is also offered allowing customers to access
funds anywhere MasterCard is accepted.
The Bank's data processing services are provided by Fiserv, which is
one of the leading data processing service providers to financial institutions
in the United States. As such, the Bank has access to many banking products and
services that are technologically competitive with other Banks. Not all of these
services, however, are economically feasible to the Bank at this time.
The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test the systems for the year 2000
compliance.
Market Area
The Bank's market area is primarily Somerset County which is located
midway between New York and Philadelphia. Somerset County is considered an
affluent suburban area with significant commercial and residential activity. A
number of large national firms such as ATT, Metropolitan Life and Johnson and
Johnson companies locate their offices in Somerset County. The county is
crisscrossed by five major highways including interstate Routes 78 and 287 and
U.S. Routes 22, 202 and 206, adding to its desirability as a commercial center.
A large regional shopping mall is located in Bridgewater Township with several
small shopping centers located throughout the county.
With the opening of the Aberdeen office, the Bank will have a branch in
Monmouth County. During 1998, the Board of Directors of the Bank redelineated
the Bank's market area to include Somerset, Middlesex, Monmouth, Mercer and
Morris counties.
<PAGE>
Competition
All phases of the Bank's business are highly competitive. As of June
30, 1998 (the latest date for which figures are available), Somerset County had
23 FDIC insured banks and saving banks with 95 offices. The Bank was ranked 9 of
23 in terms of total deposits, with 4% of the Somerset County market. Somerset
County has experienced significant merger activity in recent years. These
mergers have resulted in the closing of several branch locations throughout the
Bank's market area. A possibility exists that there will be competition for
acquisition of one or more of these branches. Such competition could come from
not only New Jersey financial institutions but, under recent amendments to New
Jersey banking statutes, also from out-of-state and foreign banks as well,
thereby increasing competition.
Management of the Bank believes that loans to small and mid-size
businesses and professionals are not always of primary importance to the larger
banking institutions, whereas they represent the main commercial loan business
of the Bank. The Bank can compete for this segment of the market because it
provides responsive personalized services, local decision-making and knowledge
of its customers and their businesses.
By virtue of their greater total capital, certain commercial banks have
substantially higher lending limits. These banks can also finance broad
advertising campaigns and with lower average overhead ratios can be very
competitive in pricing. Accordingly, there are certain borrowers that the Bank
will not be able to service and others who will be reached by the more extensive
advertising of larger competing banks.
Employees
At December 31, 1998, the Company employed 55 full time and 5 part time
employees. None of these employees are covered by a collective bargaining
agreement and the Company believes that its employees' relations are good. The
Company offers its employees health, life, dental benefits, as well as a 401(k)
Plan.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company presently owns no properties. The Bank leases its banking
facilities at 103 West End Avenue and its back-office facility at 117 West End
Avenue in Somerville from a partnership consisting of all but one of the members
of its Board of Directors and one non director. The lease for 103 West End
Avenue expires in July of 2001, but contains four five-year renewal options
allowing the Bank to extend the lease. The lease for 117 West End Avenue expires
in 2003. The Bank also leases property from the partnership described above
located at 48 North Middaugh Street, Somerville on a month-to-month basis for
additional parking for the Somerville Branch. The lease for 103 West End
Avenue, was reviewed by both the FDIC and the Department of Banking prior to the
Bank's opening to determine that the terms of the lease are comparable to those
the Bank would receive in an arms length transaction with an unaffiliated third
party. Neither the FDIC nor the Department of Banking objected to the terms of
the lease. The office space at 117 West End Avenue is also leased at such
comparable terms.
The Hillsborough office located at 649 Route 206, Belle Mead, New
Jersey, is leased from an unaffiliated partnership and the lease expires in 2004
with two five-year renewal options.
<PAGE>
The Bridgewater office located at 481 North Bridge Street, Bridgewater,
New Jersey, is leased from an unaffiliated partnership and the lease expires in
2027, with an initial five-year term lease with five five-year renewal options.
The Gaston Avenue office is located at 91 North Gaston Avenue,
Somerville, New Jersey. The Company owns the building and the land is leased
with a forty-two-month lease expiring in 2001 with one five-year renewal at the
landlord's option.
The Arbor Glen office located at 100 Monroe Street, Bridgewater, New
Jersey, has a lease with an original term of three years expiring in 2001, with
three five-year renewal options.
The Bank has leases for the following Bank sites which will open during
1999:
- The Manville office will be constructed on land at 40
North Main Street, Manville, New Jersey from an
unaffiliated third party. The lease expires in 2023.
- The Aberdeen office will be constructed on land at 231
State Highway 34, Matawan, New Jersey. The lease has an
initial term of ten years and five year options through
2033.
- The Bernard Township office at the Bernards Village
Center at the intersection of Allen and Hanson Roads in
Bernards Township, New Jersey, will be leased from an
unaffiliated third party. The initial term of the lease
is fifteen years with three five year renewal options.
ITEM 3. LEGAL PROCEEDINGS.
The Company is periodically a party to or otherwise involved in legal
proceedings arising in the normal course of business, such as claims to enforce
liens, claims involving the making and servicing of real property loans, and
other issues incident to the Company's business. There are no pending legal
proceedings to which the Company is a party nor has it been threatened with any
litigation. Management does not believe that there is any pending or threatened
proceeding against the Company which, if determined adversely, would have a
material effect on the business or financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted for a vote of the Registrant's shareholders
during the fourth quarter of 1998.
PART II
<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Prior to July 6, 1998, there was no established public trading for the
shares of the Company. On July 6, 1998, the common stock of the Company began
trading on the NASDAQ National Market System under the trading symbol SVBF.
Following are the high and low prices for the third and fourth quarters of 1998:
High Low
---- ---
Third Quarter $13.00 $9.000
Fourth Quarter $11.00 $8.875
There are approximately 431 holders of the Company's common stock.
The Company has never paid a dividend and there are no plans to pay
cash dividends at this time.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This information is incorporated by reference from the Company's 1998
Annual Report to Shareholders at pages 18-31 under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements and Independent Auditors Report thereon is incorporated by reference
from pages 3-17 of the 1998 Annual Report to Shareholders.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference from
pages 2-5 under the caption "Directors/Principal Shareholders/Executive Officers
and Director Committees" of the Company's Proxy Statement for its 1999 Annual
Meeting of Shareholders.
ITEM 10. EXECUTIVE COMPENSATION.
This information required by this item is incorporated by reference
from pages 5-6 under the caption "Executive Compensation" of the Company's Proxy
Statement for its 1999 Annual Meeting of Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from
pages 2-4 under the caption "Directors/Principal Shareholders/Executive
Officers" of the Company's Proxy Statement for its 1999 Annual Meeting of
Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information required by this item is incorporated by reference
from page 12 under the caption "Transactions with Related Persons" of the
Company's Proxy Statement for its 1999 Annual Meeting of Shareholders.
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM
8-K.
(a) Financial Statements and Financial Statement Schedules
The following documents are filed as part of this report:
1 Financial Statements of SVB Financial Services, Inc.
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - Years Ended
December 31, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income-Years Ended December 31, 1998
and 1997
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998 and 1997
Report of Independent Accountants
These statements are incorporated by reference to the Company's Annual
Report to Shareholders for the year ended December 31, 1998.
2 All schedules are omitted because either they are inapplicable
or not required, or because the information required therein
is included in the Consolidated Financial Statements and Notes
thereto.
3 Exhibits
Exhibit
Number Description
------ -----------
3(i) Certificate of Incorporation (1)
3(ii) By-Laws(1)
4.1 Specimen Stock Certificate (1)
4.2 Pages 3, 4, 5, 6, 7, 8, 9, 10 and 11 from the
Certificate of Incorporation of SVB Financial
Services, Inc. (1)
4.3 Pages 1, 2, 3, 9, 10, 11, 14 and 15 from the
By-Laws of SVB Financial Services, Inc. (1)
10.1 Employment Agreements (1)
10.2 SVB Financial Services, Inc. Nonstatutory Stock
Option Plan (2)
10.3 SVB Financial Services, Inc. Restated Incentive
Stock Option Plan (3)
13 Annual Report to Security-Holders
20 Proxy Statement for the 1999 Annual Meeting of
Shareholders
23 Consent of Independent Certified Public
Accountants
27 Financial Data Schedule
<PAGE>
(1) Incorporated by reference to the Company's
Registration Statement on SB-2. Registration Number
333-12305.
(2) Incorporated by reference to the Company's
Registration Statement on Form S-8. Registration
Number 333-66131
(3) Incorporated by reference to the Company's
Registration Statement on From S-8. Registration
Number 333-66165
<PAGE>
SVB FINANCIAL SERVICES, INC.
INDEX TO EXHIBITS
Exhibit Page
Number Description Number
------ ----------- ------
13 Annual Report to Security-Holders
20 Proxy Statement for the 1998 Annual Meeting of Shareholders
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
/s/Keith B. McCarthy
--------------------
Keith B. McCarthy
Principal Financial Officer and
Principal Accounting Officer
March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/John K. Kitchen
- ------------------- Director and Chairman of the Board March 31, 1999
John K. Kitchen
/s/Robert P. Corcoran President and Chief Executive Officer March 31, 1999
- ---------------------- and Director
Robert P. Corcoran
/s/Keith B. McCarthy Chief Financial Officer/Chief March 31, 1999
- -------------------- Accounting Officer
Keith B. McCarthy
/s/Bernard Bernstein Director March 31, 1999
- --------------------
Bernard Bernstein
Director March 31, 1999
- -------------------
Mark S. Gold, MD
/s/Raymond L. Hughes Director March 31, 1999
- --------------------
Raymond L. Hughes
Director March 31, 1999
- -----------------------
S. Tucker S. Johnson
/s/Willem Kooyker Director March 31, 1999
- -----------------
Willem Kooyker
/s/Frank Orlando Director March 31, 1999
- ----------------
Frank Orlando
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/Gilbert E. Pittenger Director March 31, 1999
- -----------------------
Gilbert E. Pittenger
/s/Frederick D. Quick Director March 31, 1999
- ---------------------
Frederick D. Quick
/s/Anthony J.Santye, Jr. Director March 31, 1999
- ------------------------
Anthony J. Santye, Jr.
/s/G. Robert Santye Director March 31, 1999
- -------------------
G. Robert Santye
Director March 31, 1999
- -------------------
Donald Sciaretta
/s/Herman C. Simonse Director March 31, 1999
- --------------------
Herman C. Simonse
Director March 31, 1999
- ----------------------
Donald R. Tourville
</TABLE>
Table of Contents
1: SELECTED CONSOLIDATED FINANCIAL INFORMATION
2: LETTER TO THE SHAREHOLDERS
3: CONSOLIDATED BALANCE SHEETS
4: CONSOLIDATED STATEMENTS OF INCOME
5: CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
6: CONSOLIDATED STATEMENTS OF CASH FLOW
7: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17: REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
18: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Selected Consolidated Financial Information
(in thousands except per share data) 1998 1997 1996 1995 1994
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest Income $ 12,466 $ 10,754 $ 8,383 $ 6,296 $ 4,396
Interest Expense 5,665 4,880 3,813 2,871 1,765
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 6,801 5,874 4,570 3,425 2,631
Provision for Possible Loan Losses 300 280 310 206 156
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Possible Loan Losses 6,501 5,594 4,260 3,219 2,475
Non-Interest Income 770 561 372 363 207
Non-Interest Expense 5,302 4,303 3,427 2,495 2,163
- ------------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 1,969 1,852 1,205 1,087 519
Income Tax Expense (Benefit) 766 749 485 424 (308)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,203 $ 1,103 $ 720 $ 663 $ 827
====================================================================================================================================
BALANCE SHEET DATA:
Total Assets $ 185,227 $ 148,550 $ 124,995 $ 88,744 $ 74,076
Federal Funds Sold and Other
Short Term Investments 11,290 188 7,213 5,170 3,626
Interest Bearing Time Deposits 4,090 - - - -
Securities Available For Sale 21,523 11,266 8,727 4,875 3,474
Securities Held To Maturity 15,052 22,102 13,989 14,581 18,091
Loans, Net 120,176 105,389 86,992 59,528 44,988
Deposits 169,714 133,930 112,521 79,680 67,054
Shareholders' Equity 14,365 13,096 11,910 8,703 6,819
====================================================================================================================================
PERFORMANCE RATIOS:
Return on Average Assets .75% .80% .67% .83% 1.30%
Return on Average Equity 8.82% 8.89% 8.07% 8.16% 13.50%
Net Interest Margin 4.46% 4.52% 4.51% 4.53% 4.38%
====================================================================================================================================
ASSET QUALITY:
Loans Past Due Over 90 Days $ 5 $ - $ 21 $ - $ -
Non-Accrual Loans 96 63 24 - -
Net Charge Offs 71 81 53 51 15
Allowance for Loan Losses To Total Loans 1.00% .92% .89% .88% .82%
====================================================================================================================================
PER SHARE DATA (1):
Earnings Per Share - Basic $ .44 $ .41 $ .31 $ .29 $ .40
Earnings Per Share - Diluted .42 .40 .30 .29 .40
Book Value 5.18 4.77 4.36 3.71 3.31
====================================================================================================================================
CAPITAL RATIOS:
Total Risked-Based Capital 11.14% 12.81% 13.40% 14.11% 14.03%
Tier I Risked-Based Capital 10.24% 11.89% 12.56% 13.29% 13.28%
Leverage Capital 8.54% 8.72% 9.58% 9.89% 9.21%
====================================================================================================================================
</TABLE>
<PAGE>
(1) Per share amounts have been retroactively restated for the 6 for 5 exchange
of shares resulting from the acquisition of Somerset Valley Bank by SVB
Financial Services, Inc. effective September 3, 1996, and a two-for-one stock
split effective April 16, 1998.
1
<PAGE>
Dear Shareholders,
It was only seven short years ago that Somerset Valley Bank opened its doors
for business in a Victorian style building on West End Avenue in Somerville, New
Jersey, with $5 million in capital. Today, as the wholly owned subsidiary of SVB
Financial Services, Inc., Somerset Valley Bank is poised to begin the 21st
century as a multi-branch bank with nearly $200 million in assets, capital of
over $14.3 million and double-digit growth rate in deposits and loans every year
since its inception.
A primary goal of the company is to continue the growth of the Bank by
increasing our market penetration through the expansion of our delivery systems
and adding to our product mix. In 1998, Somerset Valley Bank gained regulatory
approval to add three additional branch offices to our network. These offices
will be located in Manville and Bernards Township in Somerset County and
Aberdeen Township in northern Monmouth County. Our Manville office is expected
to open in the Spring of 1999, and the other offices in the fourth quarter of
1999. Since our last Report, our Hillsborough office has grown an additional
$10.9 million, ending the year at $29.1 million in deposits and our Bridgewater
office has added $10.0 million in deposits, reaching $16.6 million in less than
eighteen months. In February of 1998, we opened an on-site mini-branch in the
Arbor Glen Continuing Health Care Facility in Bridgewater and have reached close
to $3.0 million in deposits with a staff of one part-time employee and an ATM.
The continued success of our new branches, combined with a reputation for
providing excellent service and well designed business and consumer products,
has enabled the Bank to grow impressively. The total assets of the Bank grew
from $148,550,000 as of December 31, 1997 to $185,227,000 on December 31, 1998,
or an increase of 24.7%. Deposit growth was also impressive, increasing by 26.7%
from last year's total of $133,930,000 to $169,714,000 as of December 31, 1998.
Although quality growth has a tendency to suppress earnings in the short term
with additional occupancy and personnel costs, the Bank's net earnings rose to a
record high of $1.2 million or a 9% gain over last year's record earnings. Asset
quality remains strong with only $101,000 in nonperforming loans out of a net
portfolio of $120.2 million. The company's allowance for possible loan losses
ended the year at $1.2 million, or 1.0% of its total loans. The quality of our
assets remains the cornerstone in positioning the company for solid future
earnings growth.
In addition to geographic considerations, the company continues to seek out
possibilities in expanding to other lines of business in the financial and
insurance arenas. We are currently exploring the feasibility of forming an
affiliate company as a joint venture with a significant local provider of
insurance and investment products. It is our hope that this will enable us to
expand our existing relationship with our sizable base of small business clients
by offering additional, fee based products and services designed for their
needs. The Bank is also in the process of developing an interactive web site and
selecting a vendor through which we will provide Internet banking services to
businesses and individuals. As this technology further develops and finds its
market, we will be prepared to offer the most current and secure electronic
banking options to our customer base.
There are many challenges facing our company, both philosophical and
technological, and we are formulating plans to deal with this dynamic financial
industry landscape by developing strong partnerships with quality providers of
unique financial products and services.
<PAGE>
We have also devoted considerable time and effort to solving those problems
associated with the bank's electronic data processing applications during the
changeover to the year 2000. The Bank has a formal plan in place for
identifying, remediating, and testing all of our systems, both internal and
external, and has developed a contingency plan in the event of unforseen
processing glitches. We are proud to report, as is further detailed in this
document, that we finished the first two phases of this plan and the final phase
(validation of the contingency plan will be completed by June 30, 1999); our
operations staff is confident that a smooth transition will occur.
As always, of utmost importance to our directors, officers and staff is the
direct effect of our operations on shareholder value. In an action designed to
add liquidity to our stock and to allow our shareholders to easily determine the
marketability of their investment, a two-for-one stock split was declared on
April 16, 1998, and the stock was listed on the NASDAQ National Market on July
6, 1998. The stock opened at $8.875 per share, rose to $13.00 per share, and
closed year-end 1998 at $10.75 per share. Prior to our listing on NASDAQ, the
highest per share price was $7.50 (adjusted for the two-for-one split). The
volume of shares traded since the listing on NASDAQ was 176,589 shares and as of
year-end 1998, the market value had increased from a previous high of $7.50 to
the year-end close at $10.75, or an increase in market value of 43.3%.
We look forward to the significant challenges before us as technology and
legislative changes provide more opportunities for our company to offer new and
diverse financial products to our community and the support of our directors and
shareholders in meeting those challenges is greatly appreciated.
Very truly yours,
/s/John K. Kitchen /s/Robert P. Corcoran
- ------------------ ---------------------
John K. Kitchen Robert P. Corcoran
CHAIRMAN OF THE BOARD PRESIDENT AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Balance Sheets
AS OF DECEMBER 31, 1998 AND 1997
===========================================================================================================================
(in thousands) 1998 1997
===========================================================================================================================
<S> <C> <C>
ASSETS
Cash & Due from Banks $ 8,358 $ 5,795
Federal Funds Sold 10,325 -
Other Short Term Investments 965 188
- ---------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 19,648 5,983
- ---------------------------------------------------------------------------------------------------------------------------
Interest Bearing Time Deposits 4,090 -
Securities
Available for Sale, at Market Value 21,523 11,266
Held to Maturity, (Market Value $15,101 in 1998
and $22,143 in 1997) 15,052 22,102
- ---------------------------------------------------------------------------------------------------------------------------
Total Securities 36,575 33,368
- ---------------------------------------------------------------------------------------------------------------------------
Loans 121,474 106,470
Allowance for Possible Loan Losses (1,211) (982)
Unearned Income (87) (99)
- ---------------------------------------------------------------------------------------------------------------------------
Net Loans 120,176 105,389
- ---------------------------------------------------------------------------------------------------------------------------
Premises & Equipment, Net 2,303 1,734
Other Assets 2,435 2,076
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $ 185,227 $ 148,550
===========================================================================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Demand
Non-interest Bearing $ 27,897 $ 21,966
NOW Accounts 24,502 13,014
Savings 13,836 9,043
Money Market Accounts 20,226 16,227
Time
Greater than $100,000 14,088 12,880
Less than $100,000 69,165 60,800
- ---------------------------------------------------------------------------------------------------------------------------
Total Deposits 169,714 133,930
- ---------------------------------------------------------------------------------------------------------------------------
Federal Funds Purchased - 500
Obligation Under Capital Lease 438 444
Other Liabilities 710 580
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities 170,862 135,454
===========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Balance Sheets
AS OF DECEMBER 31, 1998 AND 1997
===========================================================================================================================
(in thousands) 1998 1997
===========================================================================================================================
<S> <C> <C>
SHAREHOLDERS' EQUITY
Common Stock, $2.09 Par Value: 20,000,000
Shares Authorized; 2,772,224 Shares in 1998 and
2,746,060 Shares in 1997 Issued and Outstanding 5,794 5,726
Additional Paid-in Capital 5,502 5,473
Retained Earnings 3,062 1,859
Accumulated Other Comprehensive Income 7 38
- ---------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 14,365 13,096
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 185,227 $ 148,550
===========================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Statements of Income
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
===========================================================================================================================
(in thousands except per share data) 1998 1997
===========================================================================================================================
<S> <C> <C>
INTEREST INCOME
Loans $ 10,210 $ 8,665
Securities Available for Sale 763 755
Securities Held to Maturity 966 991
Other Short Term Investments 67 54
Interest Bearing Time Deposits 69 -
Federal Funds Sold 391 289
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Income 12,466 10,754
===========================================================================================================================
INTEREST EXPENSE
Deposits 5,628 4,867
Obligation Under Capital Lease 37 13
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 5,665 4,880
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income 6,801 5,874
PROVISION FOR POSSIBLE LOAN LOSSES 300 280
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision For Possible Loan Losses 6,501 5,594
===========================================================================================================================
OTHER INCOME
Service Charges on Deposit Accounts 298 231
Gain on the Sale of Securities Available for Sale 4 1
Gain on the Sale of Loans 334 215
Other Income 134 114
- ---------------------------------------------------------------------------------------------------------------------------
Total Other Income 770 561
===========================================================================================================================
OTHER EXPENSE
Salaries and Employee Benefits 2,713 2,180
Occupancy Expense 652 477
Equipment Expense 378 306
Other Expenses 1,559 1,340
- ---------------------------------------------------------------------------------------------------------------------------
Total Other Expense 5,302 4,303
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 1,969 1,852
Provision for Income Taxes 766 749
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,203 $ 1,103
===========================================================================================================================
EARNINGS PER COMMON SHARE - BASIC (1) $ .44 $ .41
===========================================================================================================================
EARNINGS PER COMMON SHARE - DILUTED (1) $ .42 $ .40
===========================================================================================================================
</TABLE>
<PAGE>
(1) Adjusted for two-for-one stock split effective April 16, 1998.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
SVB FINANCIAL SERVICES, INC.
Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
(in thousands) STOCK CAPITAL EARNINGS INCOME EQUITY INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ 5,699 $ 5,447 $ 756 $ 8 $ 11,910
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of Common Stock 27 26 53
Net Income 1,103 1,103 $ 1,103
Accumulated Other Comprehensive
Income Net of Reclassification
Adjustments and Taxes - - - 30 30 30
- ------------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income $ 1,133
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 5,726 5,473 1,859 38 13,096
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of Common Stock, Net 54 43 97
Adjustment for Stock Split 14 (14) -
Net Income 1,203 1,203 1,203
Accumulated Other Comprehensive
Income Net of Reclassification
Adjustments and Taxes - - - (31) (31) (31)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income $ 1,172
====================================================================================================================================
BALANCE, DECEMBER 31, 1998 $ 5,794 $ 5,502 $ 3,062 $ 7 $ 14,365
====================================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
===========================================================================================================================
(in thousands) 1998 1997
===========================================================================================================================
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,203 $ 1,103
Adjustments to Reconcile Net Income to Net
Cash Provided By Operating Activities
Provision for Possible Loan Losses 300 280
Depreciation and Amortization 383 298
Accretion of Securities Discount (3) (27)
Gains on Sales of Securities
Available for Sale (4) (1)
Gains on the Sale of Loans (334) -
Increase in Other Assets (370) (302)
Increase in Other Liabilities 145 1
(Decrease)/Increase in Unearned Income (13) 20
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 1,307 1,372
===========================================================================================================================
INVESTING ACTIVITIES
Increase in Interest Bearing Time Deposits (4,090) -
Proceeds from Sales of Securities Available for Sale 2,504 1,502
Proceeds from Maturities of Securities
Available for Sale 6,633 4,747
Held to Maturity 15,797 11,112
Purchases of Securities
Available for Sale (19,464) (8,736)
Held to Maturity (8,717) (19,204)
Proceeds from the Sale of Loans 6,897 -
Increase in Loans (21,638) (18,697)
Proceeds from Sale of Other Real Estate - 305
Capital Expenditures (939) (508)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities (23,017) (29,479)
===========================================================================================================================
FINANCING ACTIVITIES
Net Increase in Demand Deposits 17,419 7,120
Net Increase in Savings Deposits 4,793 1,367
Net Increase in Money Market Deposits 3,999 517
Net Increase in Time Deposits 9,572 12,405
(Decrease)/Increase in Federal Funds Purchased (500) 500
(Decrease) in Obligation Under Capital Lease (5) -
Proceeds from the Issuance of Common Stock, Net 97 53
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 35,375 21,962
Increase (Decrease) in Cash and Cash Equivalents 13,665 (6,145)
Cash and Cash Equivalents, Beginning of Year 5,983 12,128
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 19,648 $ 5,983
===========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
===========================================================================================================================
(in thousands) 1998 1997
===========================================================================================================================
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Year for Interest $ 5,640 $ 4,761
- ---------------------------------------------------------------------------------------------------------------------------
Cash Paid During the Year for Federal Income Taxes $ 620 $ 738
- ---------------------------------------------------------------------------------------------------------------------------
Capital Expenditures Used for
Capital Lease Obligation $ - $ 444
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
<PAGE>
SVB FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
1: ORGANIZATION AND NATURE OF OPERATIONS
SVB Financial Services, Inc., (the "Company"), a bank holding company, was
incorporated on February 7, 1996 and owns 100 percent of the shares of Somerset
Valley Bank (the "Bank").
The Bank was granted a charter by the New Jersey Department of Banking and
commenced operations on December 20, 1991. The Bank is a full service community
bank and operates at locations in Somerville , Hillsborough, and Bridgewater,
New Jersey. During 1998, approval was received from banking regulatory
authorities to open branches in Aberdeen, Bernards Township and Manville, New
Jersey. The Bank's customers are predominately small and middle market
businesses and professionals. The Bank's market area is primarily Somerset
County. The Bank competes with other banking and financial institutions in their
primary market area, including financial institutions with resources
substantially greater than their own. Commercial banks, savings banks, savings
and loan associations, credit unions and money market funds actively compete for
deposits and for types of loans. Such institutions, as well as consumer finance
and insurance companies, may be considered competitors of the Bank with respect
to one or more of the services they render. In addition to being subject to
competition from other financial institutions, the Bank is subject to federal
and state laws and to regulations of certain federal agencies, and accordingly,
it is periodically examined by those regulatory agencies.
The consolidated financial statements include the accounts of the Bank. All
significant intercompany accounts and transactions have been eliminated in
consolidation and certain reclassifications are made when necessary to conform
the previous years' financial statements to the current year's presentation.
2: SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION: The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The principle estimate that is particularly susceptible to significant change
in the near term relates to the allowance for loan losses. The evaluation of the
adequacy of the allowance for loan losses includes an analysis of the individual
loans and overall risk characteristics and size of the different loan
portfolios, and takes into consideration current economic and market conditions,
the capability of specific borrowers to pay specific loan obligations, and
current loan collateral values. However, actual losses on specific loans, which
are also encompassed in the analysis, may vary from estimated losses. These
estimates are reviewed periodically, and as adjustments become necessary, they
are reflected in operations in the period in which they become known.
<PAGE>
SECURITIES: The Company accounts for securities in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." A portion of the Company's
securities are carried at cost adjusted for amortization of premiums and
accretion of discounts using the interest method. These securities are carried
at amortized cost because the Company has the ability and intent to hold the
securities to maturity. The remainder of the Company's securities are held for
indefinite periods of time which management intends to use as part of its
asset/liability strategy, or that may be sold in response to changes in interest
rates, changes in prepayment risk, increased capital requirements or other
similar factors, are classified as available for sale. These securities are
carried at market value with unrealized gains and losses excluded from earnings
and reported as Other Comprehensive Income in a separate component of
shareholders' equity, net of income taxes. The net effect of unrealized gains or
losses, caused by marking an available for sale portfolio to market, could cause
fluctuations in the level of shareholders' equity and equity-related financial
ratios as market interest rates cause the market value of fixed rate securities
to fluctuate. Realized gains and or losses on securities available for sale are
determined on a specific identification basis and are included in the
consolidated statements of income. The Company had no securities held for
trading purposes at December 31, 1998 and 1997.
In June 1998, the Financial Accounting Standards Board (FASB) issued 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.
LOANS: Loans, which management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
principal, adjusted for any charge-offs, the allowance for loan losses, and any
deferred fees or costs on originated loans. Loans are stated at the principal
amount outstanding. Net loans represent the principal loan amount outstanding
reduced by unearned income and allowance for loan losses.
The Company accounts for impaired loans under SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures." This
standard requires that a creditor measure impairment based on the present value
of expected future cash flows discounted at the loan's effective interest rate,
except that as a practical expedient, a creditor may measure impairment based on
a loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. Regardless of the measurement method, a creditor
must measure impairment based on the fair value of the collateral when the
creditor determines that foreclosure is probable.
<PAGE>
The Company accounts for its transfers and servicing financial assets in
accordance with SFAS No. 125, "Accounting for Transfer and Servicing of
Financial Assets and Extinguishments of Liabilities," as amended by SFAS No.
127, "Deferral of the Effective Date of Certain Provision of SFAS No. 125." This
standard provides accounting guidance on transfers of financial assets,
servicing of financial assets, and extinguishments of liabilities.
The Company periodically sells certain commercial loans to other
7
<PAGE>
SVB FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
financial institutions without recourse to the Company. The gains and losses are
recognized in an amount which approximates the present value of the difference
between the effective interest rate to the Company and the net yield to the
purchaser, excluding normal future loan servicing fees, when applicable, over
the estimated remaining lives of the loans sold.
Interest on loans is credited to operations primarily based upon the
principal amount outstanding. When management believes there is sufficient doubt
as to the ultimate collectability of interest on any loan, the accrual of
applicable interest is discontinued.
Loan origination fees and direct loan origination costs are deferred and are
recognized over the estimated life of the related loans as an adjustment of the
loan yield. The net loan origination fees recognized as yield adjustments are
reflected in total interest income in the consolidated statements of income, and
the unamortized balance of such net loan origination fees is reported in the
consolidated balance sheets as part of unearned income.
ALLOWANCE FOR POSSIBLE LOAN LOSSES: The Company's process for evaluating the
adequacy of the allowance for possible loan losses has three basic elements:
First, the identification of problem loans when they occur; second, the
establishment of appropriate allowance for possible loan losses once specific
problem loans are identified; and third, a methodology for establishing general
loan loss allowances. The identification of problem loans is achieved mainly
through review of specific major loans based on delinquency criteria, size of
loan and location and value of collateral property. Specific loss reserves are
established for identified problem loans based on reviews of current operating
financial information and fair value appraisals. A range of loss allowances is
estimated based upon consideration of past experience of originated loans by
loan type, year of origination, location of collateral property and
loan-to-value ratios. Based upon this process, consideration of the current
economic environment and other factors, management determines what it considers
to be an appropriate allowance for possible loan losses. Although Company's
management believes it has a sound basis for this estimation, actual write-offs
incurred in the future are highly dependent upon future events, including the
economy of the area in which the Company lends. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgment of information
available to them at the time of their examination.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed primarily on the straight-line method over the shorter of the estimated
useful lives of the assets or the term of the related lease.
INCOME TAXES: The Company accounts for income taxes under the liability method
specified by SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The principal types of
accounts, resulting in differences between assets and liabilities for financial
statements and tax return purposes, are the allowance for possible loan losses,
depreciation and accretion of securities discounts.
<PAGE>
EARNINGS PER SHARE: On December 15, 1997, the Company adopted the provisions of
SFAS No. 128, "Earnings per Share." SFAS No. 128 eliminates primary and fully
diluted earnings per share and requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common shareholders by the
weighted-average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock.
OTHER REAL ESTATE OWNED: Other real estate owned includes foreclosed real estate
which is carried at the lower of cost (lesser of carrying value of loan or fair
value at date of acquisition) or fair value less selling costs. Any write-down,
at or prior to the dates the real estate is considered foreclosed, is charged to
the allowance for loan losses. Subsequent write-downs are recorded in other
expenses, and expenses incurred in connection with holding such assets and any
gains or losses upon their sale are included in other income and expenses.
STOCK OPTIONS: The Company accounts for stock options under SFAS No. 123,
"Accounting for Stock-Based Compensation," which contains a fair value-based
method for valuing stock-based compensation that entities may use, which
measures compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, the standard permits entities to continue
accounting for employee stock options and similar instruments under Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB No. 25
are required to make pro forma disclosures of net income and earnings per share,
as if the fair-value based method of accounting defined in SFAS No. 123 has been
applied. The Company's stock option plans are accounted for under APB Opinion
No. 25.
ADVERTISING COSTS: The Company expenses advertising costs as incurred.
STATEMENT OF CASH FLOWS: For purposes of the consolidated statements of cash
flows, the Company considers cash, non-interest bearing amounts due from banks
and Federal funds sold and other short term investments to be cash equivalents.
Generally, Federal funds are sold for a 60 day period or less.
COMPREHENSIVE INCOME: On January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This standard requires entities presenting a
complete set of financial statements to include details of comprehensive income.
Comprehensive income consists of net income or loss for the current period and
income, expenses, gains, and losses that bypass the income statement and are
reported directly in a separate component of equity. These financial statements
have been reclassified to reflect the provisions of SFAS No. 130.
8
<PAGE>
SVB FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
The income tax effects allocated to comprehensive income at December 31, is as
follows:
<TABLE>
<CAPTION>
1998 1997
===================================================================================================================================
BEFORE TAX NET BEFORE TAX NET
TAX (EXPENSE) OF TAX TAX (EXPENSE) OF TAX
(in thousands) AMOUNT BENEFIT AMOUNT AMOUNT BENEFIT AMOUNT
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Unrealized Gains on Securities
Unrealized Holding Gains /
(Losses) Arising During Period $(52) $18 $(34) $45 $(16) $29
Less Reclassification
Adjustment for Gains/(Losses)
Realized in Net Income (4) 1 (3) (1) - (1)
- -----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income/
(Loss), Net $(48) $17 $(31) $46 $(16) $30
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEGMENT REPORTING: On January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a Company's operating
segments. Management has concluded that under current conditions, the Company
will report one business segment, community banking.
3: SECURITIES
Information relative to the Company's securities portfolio are as follows:
<TABLE>
<CAPTION>
===============================================================================================================================
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(in thousands) COST GAINS LOSSES MARKET VALUE
===============================================================================================================================
<S> <C> <C> <C> <C>
1998
AVAILABLE FOR SALE
U.S. Treasury Securities $ 3,511 $ 4 $ - $ 3,515
U.S. Government Agency Securities 9,261 13 31 9,243
Mortgage-Backed Securities 8,491 38 14 8,515
Equity Securities 250 - - 250
- -------------------------------------------------------------------------------------------------------------------------------
$ 21,513 $ 55 $ 45 $ 21,523
===============================================================================================================================
HELD TO MATURITY
U.S. Treasury Securities $ 2,001 $ 7 $ - $ 2,008
U.S. Government Agency Securities 10,235 40 1 10,274
Other Securities 2,002 - - 2,002
Mortgage-Backed Securities 814 4 1 817
- -------------------------------------------------------------------------------------------------------------------------------
$ 15,052 $ 51 $ 2 $ 15,101
===============================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1997
AVAILABLE FOR SALE
U.S. Treasury Securities $ 2,249 $ 1 $ - $ 2,250
U.S. Government Agency Securities 6,000 13 5 6,008
Mortgage-Backed Securities 2,960 55 7 3,008
- -------------------------------------------------------------------------------------------------------------------------------
$ 11,209 $ 69 $ 12 $ 11,266
===============================================================================================================================
HELD TO MATURITY
U.S. Treasury Securities $ 8,754 $ 16 $ - $ 8,770
U.S. Government Agency Securities 11,477 26 5 11,498
Mortgage-Backed Securities 1,871 6 2 1,875
- -------------------------------------------------------------------------------------------------------------------------------
$ 22,102 $ 48 $ 7 $ 22,143
===============================================================================================================================
</TABLE>
9
<PAGE>
SVB FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
There are no significant concentrations of securities (greater than 10% of
shareholders' equity) in any individual security issues.
The amortized cost and fair value of securities at December 31, 1998, by
contractual maturity, are shown in the following table for securities
to be held to maturity and available for sale. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
================================================================================
AMORTIZED FAIR
(in thousands) COST VALUE
================================================================================
<S> <C> <C>
AVAILABLE FOR SALE
Due in 1 year or less $ 4,511 $ 4,515
Due after 1 year through 5 years 8,261 8,243
Mortgage-Backed Securities 8,491 8,515
Equity Securities 250 250
- --------------------------------------------------------------------------------
$ 21,513 $ 21,523
================================================================================
HELD TO MATURITY
Due in 1 year or less $ 7,990 $ 7,996
Due after 1 year through 5 years 6,248 6,288
Mortgage-Backed Securities 814 817
- --------------------------------------------------------------------------------
$ 15,052 $ 15,101
================================================================================
</TABLE>
At December 31, 1998, securities having a book value of approximately
$1,369,000 were pledged to secure public deposits and for other purposes as
required by law.
<PAGE>
4: LOANS
The composition of outstanding loans is summarized as follows:
<TABLE>
<CAPTION>
================================================================================
(in thousands) 1998 1997
================================================================================
<S> <C> <C>
Secured by Real Estate:
Residential Mortgage $ 30,577 $ 33,249
Commercial Mortgage 42,703 29,793
Construction 6,256 4,852
Commercial & Industrial 22,308 20,889
Loans to Individuals
for Automobiles 10,298 12,177
Loans to Individuals 8,864 4,969
Other Loans 468 541
- --------------------------------------------------------------------------------
$ 121,474 $ 106,470
================================================================================
</TABLE>
There were no loans restructured during 1998 or 1997. There were $5,208 in
loans past due 90 days or more as to principal and interest and $95,860 in a
non-accrual status as of December 31, 1998. There were no loans past due 90 days
or more as to principal and interest and $62,632 on a non-accrual status as of
December 31, 1997.
A loan is considered to be impaired when it is probable that the Company will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. These loans consist primarily of non-accrual loans but may
include performing loans to the extent that situations arise which would reduce
the probability of collection in accordance with the contractual terms. As a
general rule, a loan that is in arrears in excess of 120 days will be charged
off unless circumstances exist that would make charge off unnecessary such as
the borrower is in the process of refinancing elsewhere or is liquidating
collateral within a short period of time.
As of December 31, 1998 there were $583,000 of loans deemed to be impaired, a
valuation reserve of $25,000 was recorded for these loans. As of December 31,
1997, no loans were deemed to be impaired. Interest payments received on
impaired loans will be recorded as interest income unless collection of the
remaining recorded investment is doubtful at which time payments received will
be recorded as reductions of principal.
The Company has no concentration of loans to borrowers engaged in similar
activities which exceeded 10% of total loans at December 31, 1998 and 1997. The
Company continues to pursue new lending opportunities while seeking to maintain
a portfolio that is diverse as to industry concentration, type and geographic
distribution. The Company's geographic lending area is primarily concentrated in
Somerset County, but also includes Middlesex, Hunterdon, Mercer, Morris and
Monmouth counties.
<PAGE>
Loans to executive officers are made in the ordinary course of business and
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with others. Loans to
executive officers totaled $36,000 at December 31, 1998 and $12,000 at December
31, 1997, all of which were current as to principal and interest. There are no
loans to Directors or their affiliated interests.
5: ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of the allowance for possible loan losses is as follows:
<TABLE>
<CAPTION>
================================================================================
(in thousands) 1998 1997
================================================================================
<S> <C> <C>
Balance at January 1, $ 982 $ 783
Provision Charged to Operations 300 280
Charge Offs (80) (86)
Recoveries 9 5
- --------------------------------------------------------------------------------
Balance at December 31, $1,211 $ 982
================================================================================
</TABLE>
6: PREMISES AND EQUIPMENT
Premises and equipment consists of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
================================================================================
ESTIMATED
(in thousands) USEFUL LIVES 1998 1997
================================================================================
<S> <C> <C> <C>
Construction in Progress $ 695 $ 210
Premises & Improvements 5-30 years 1,205 1,054
Furniture & Equipment 3-10 years 1,441 1,219
- --------------------------------------------------------------------------------
3,341 2,483
Less: Accumulated Depreciation
and Amortization (1,038) (749)
- --------------------------------------------------------------------------------
$ 2,303 $ 1,734
================================================================================
</TABLE>
Depreciation and amortization charged to operations was $383,000 and $298,000
for the years ended December 31, 1998 and 1997 respectively.
10
<PAGE>
SVB FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
7: DEPOSITS
At December 31, 1998, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
OVER THREE OVER ONE YEAR
THREE MONTHS OR MONTHS THROUGH THROUGH THREE OVER THREE
(in thousands) LESS TWELVE MONTHS YEARS YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$100,000 or more $10,300 $ 2,949 $ 739 $100 $14,088
Less than $100,000 28,343 32,103 7,804 915 69,165
</TABLE>
8: OTHER EXPENSES
The major components of other expenses are as follows:
<TABLE>
<CAPTION>
================================================================================
(in thousands) 1998 1997
================================================================================
<S> <C> <C>
Data Processing Services $ 285 $ 215
Marketing & Business Development 147 144
Stationery, Forms & Supplies 175 156
Insurance 85 88
Legal, Examination & Accounting 125 177
Postage & Telephone 131 105
FDIC Insurance Assessment 16 14
Other, Net 595 441
- --------------------------------------------------------------------------------
$ 1,559 $ 1,340
================================================================================
</TABLE>
9: COMMITMENTS AND CONTINGENCIES
Based on consultation with the Company's legal counsel, management is not aware
of any litigation that would have a material adverse effect on the consolidated
financial position of the Company. There are no proceedings pending other than
the ordinary routine litigation incident to the business of the Company and its
subsidiaries. In addition, no material proceedings are pending or are known to
be threatened or contemplated against the Company or its subsidiaries by
government authorities.
The Company leases its banking facilities under operating leases which expire
at various dates through 2004, but which contain certain renewal options. The
Somerville facilities are leased from a partnership consisting of all but one of
the Company's Directors. As of December 31, 1998, future minimum rental
payments, including the renewal options under these leases for the subsequent
five years are as follows (in thousands):
<PAGE>
<TABLE>
<CAPTION>
================================================================================
<S> <C>
1999 $ 591
================================================================================
2000 593
================================================================================
200 1602
================================================================================
2002 605
================================================================================
2003 607
================================================================================
TOTAL $ 2,998
================================================================================
</TABLE>
The above amounts represent minimum rentals not adjusted for possible future
increases due to escalation provisions and assumes that all option periods will
be exercised by the Company. Rent expenses aggregated $390,852 and $286,047 for
the years ended December 31, 1998 and 1997.
The Bank has not entered into any interest rate swaps, caps or floors and are
not party to any forward or future transactions. However, the Bank is party to
various other financial instruments which are not included in the financial
statements, but are required in the normal course of business to meet the
financing needs of its customers and to assist in managing its exposure to
changes in interest rates. Management does not expect any material losses from
these transactions, which include standby letters of credits and commitments to
extend credit.
The Company had outstanding commitments to extend credit of $27,177,000 and
$18,585,000 at December 31, 1998 and December 31, 1997, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since a portion of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation of the customer. There is no material difference between the
notional amount and estimated fair value of off-balance sheet unfunded loan
commitments as of December 31, 1998.
10: BENEFIT PLAN
The Company has a 401(k) Savings Plan covering substantially all employees.
Under the terms of the Plan, the Company matched 67% of an employee's
contribution in 1998 and 1997, up to 6.0% of the employee's salary. Employees
become fully vested in the Company's contribution after five years of service.
The Company contributed $57,000 and $44,000 to the Plan in 1998 and 1997,
respectively.
11
<PAGE>
SVB FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
11: INCOME TAXES
The components of the provision for income taxes in 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
================================================================================
(in thousands) 1998 1997
================================================================================
<S> <C> <C>
Current
Federal $ 744 $ 653
State 178 167
Deferred (156) (71)
- --------------------------------------------------------------------------------
$ 766 $ 749
================================================================================
</TABLE>
Deferred income taxes are provided for the differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities.
Cumulative temporary differences at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
================================================================================
(in thousands) 1998 1997
================================================================================
<S> <C> <C>
Start-up and Organization Costs $ (1) $ (1)
Depreciation 74 24
Accretion of Securities Discount ( 12) (12)
Allowance for Possible Loan Losses 498 318
- --------------------------------------------------------------------------------
Deferred Tax Asset, Included in
Other Assets $ 559 $ 329
- --------------------------------------------------------------------------------
</TABLE>
A reconciliation of income taxes calculated at the U.S. statutory rate of 34% to
the actual income tax provision is as follows:
<TABLE>
<CAPTION>
================================================================================
(in thousands) 1998 1997
================================================================================
<S> <C> <C>
Statutory Provision $ 669 $ 630
State Taxes on Income,
Net of Federal Tax Benefit 117 110
Other (20) 9
- --------------------------------------------------------------------------------
$ 766 $ 749
================================================================================
</TABLE>
<PAGE>
12: SHAREHOLDERS' EQUITY
On March 27, 1998, the Company declared a two-for-one split on its common stock
to shareholders of record as of April 16, 1998. Accordingly, earnings per share,
options and weighted average shares of common stock outstanding have been
restated to reflect the stock split.
================================================================================
13: STOCK OPTION PLANS
At December 31, 1998, the Company had two stock option plans.
On April 24, 1997, the Company's shareholders approved the 1997 Restated
Incentive Stock Option Plan (the "Plan"), a non-qualified stock option plan. The
Plan had the effect of restating the previously existing 1994 Stock Option Plan.
Under the Plan, the Board of Directors may grant options to officers to purchase
the Company's stock. Stock options are issued at prices equal to the market
price at the date of grant. The stock options have a vesting period of one year
from the date of issuance. Shares totaling 164,808 are reserved for issuance
under the Plan including 128,200 shares outstanding at December 31, 1998.
On April 24, 1997, the Company's shareholders also approved the 1997
Directors Stock Option Plan, a non-qualified stock option plan. Under the plan,
stock options are granted to Directors at the fair value at the date of grant.
The stock options have a vesting period of one year from the date of issuance.
Shares totaling 109,200 are reserved for issuance under the Plan, all of which
were outstanding at December 31, 1998.
Had compensation cost for the plan year been determined based on the fair
value of options at the grant dates consistent with the method of SFASNo. 123,
"Accounting for Stock-Based Compensation," the Company's net income and diluted
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
================================================================================
(in thousands except
per share data) 1998 1997
================================================================================
<S> <C> <C>
Net Income
As reported $1,203 $1,103
Pro forma 798 1,023
Basic earnings per share
As reported $.44 $.41
Pro forma $.29 $.37
Diluted earnings per share
As reported $.42 $.40
Pro forma $.28 $.36
================================================================================
</TABLE>
These pro forma amounts may not be representative of future disclosure because
they do not take into effect the pro forma compensation expense related to
grants before 1995.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model, with the following weighted average
assumptions used for grants in 1997; no dividend yield; expected volatility of
39.82%; risk-free interest rate of 5.85% and an expected life of five years.
12
<PAGE>
SVB FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
A summary of the status of the Company's option plans as of December 31 for
the years 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
1998 1997 (1)
===========================================================================================================================
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
===========================================================================================================================
<S> <C> <C> <C> <C>
Outstanding at beginning of year 262,600 $ 5.678 98,400 $ 4.165
Options granted - - 170,200 6.500
Options exercised 22,200 4.480 6,000 4.165
Options expired or canceled 3,000 6.500 - -
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 237,400 $ 5.780 262,600 $ 5.678
- ---------------------------------------------------------------------------------------------------------------------------
Options exercisable at year end 237,400 $ 5.780 92,400 $ 4.165
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $ - $ 2.860
===========================================================================================================================
</TABLE>
(1) Adjusted for two-for-one stock split effective April 16, 1998.
The following table summarizes information about non-qualified stock options at
December 31, 1998:
<TABLE>
<CAPTION>
===========================================================================================================================
OPTIONS OUTSTANDING ANDEXERCISABLE
===========================================================================================================================
RANGE OF OUTSTANDING AND WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE EXERCISABLE AT REMAINING CONTRACTUAL EXERCISE
PRICES 12/31/98 LIFE PRICE
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
$4.165 - $ 6.250 73,200 1.7 years $ 4.165
$6.500 - $10.000 164,200 3.9 years $ 6.500
237,400
</TABLE>
14: FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments,"
requires the disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate value.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced or liquidation sale. It is the Company's intent and general
practice to hold its financial instruments to maturity and not to engage in
trading activities. Therefore, significant estimations were used by the Company
for the purposes of this disclosure.
<PAGE>
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and methodologies in the absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity in
estimating financial instrument fair values.
Fair values have been determined by the Company using the best available data
and an estimation methodology suitable for each category of financial
instruments. The estimation methodology used, the estimated fair values, and the
recorded book balances at December 31, 1998 and 1997, are outlined below.
For short term investments, such as cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
<TABLE>
<CAPTION>
===========================================================================================================================
1998 1997
===========================================================================================================================
(in thousands) FAIR VALUE CARRYING VALUE FAIR VALUE CARRYING VALUE
===========================================================================================================================
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $19,648 $19,648 $5,983 $5,983
===========================================================================================================================
</TABLE>
For securities held in the Company's investment portfolio fair value was
determined by reference to quoted market prices as of December 31, 1998.
<TABLE>
<CAPTION>
===========================================================================================================================
1998 1997
===========================================================================================================================
(in thousands) FAIR VALUE CARRYING VALUE FAIR VALUE CARRYING VALUE
===========================================================================================================================
<S> <C> <C> <C> <C>
Available for Sale Securities $21,523 $21,513 $11,266 $11,209
Held to Maturity Securities 15,101 15,052 22,143 22,102
</TABLE>
13
<PAGE>
SVB FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
For long term assets and liabilities, such as loans and deposits, the
Company's policy is to hedge its interest rate exposure on deposits with earning
assets with matching maturities. Fair values of loans were estimated using the
percent value of future cash flows expected to be received. Loan rates currently
offered by the Company were used in determining the appropriate discount rate.
Deposits with stated maturities have been valued using a present value
discounted cash flow with a discount rate approximating current market for
similar maturities. Deposits with no stated maturities have a fair value equal
to the amount payable on demand.
<TABLE>
<CAPTION>
===========================================================================================================================
1998 1997
===========================================================================================================================
(in thousands) FAIR VALUE CARRYING VALUE FAIR VALUE CARRYING VALUE
===========================================================================================================================
<S> <C> <C> <C> <C>
Loans $126,830 $121,474 $107,896 $106,471
Deposits 170,871 169,714 134,205 133,930
</TABLE>
The fair values of Federal funds purchased totaling $0 and $500,000 are
estimated to approximate their recorded book balances at December 31, 1998 and
1997, respectively.
There was no material difference between the notational amount and the
estimated fair value of off-balance-sheet items, which totaled approximately
$27,177,000 and $18,585,000, at December 31, 1998 and 1997, respectively, and
primarily comprise unfunded loan commitments, which are generally priced at
market at the time of funding.
15: REGULATORY MATTERS
The Company and its subsidiary Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios, set forth in the
following tables, of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the
Company and its subsidiary Bank meets all capital adequacy requirements to which
they are subject.
As of December 31, 1998 the most recent notification from the Bank's
regulatory authority categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
<PAGE>
adequately capitalized the Bank must maintain minimum total risk-based; Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category. The Company and its subsidiary Bank's actual
capital amounts and ratios are presented in the table.
<TABLE>
<CAPTION>
===========================================================================================================================
SVB FINANCIAL SERVICES, INC. AND SOMERSET VALLEY BANK
TO BE ADEQUATELY TO BE WELL
ACTUAL CAPITALIZED CAPITALIZED
($ in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
SVB FINANCIAL SERVICES, INC.
As of December 31, 1998
Total Capital to Risk Weighted Assets $14,935 11.14% >$10,726 >8.00% - -
Tier I Capital to Risk Weighted Assets $13,724 10.24% >$ 5,363 >4.00% - -
Tier I Capital to Average Assets $13,724 8.54% >$ 6,455 >4.00% - -
============================================================================================================================
As of December 31, 1997
Total Capital to Risk Weighted Assets $13,678 12.81% >$ 8,542 >8.00% - -
Tier I Capital to Risk Weighted Assets $12,696 11.89% >$ 4,271 >4.00% - -
Tier I Capital to Average Assets $12,696 8.72% >$ 5,491 >4.00% - -
============================================================================================================================
SOMERSET VALLEY BANK
As of December 31, 1998
Total Capital to Risk Weighted Assets $14,189 10.61% >$10,698 >8.00% >$13,374 >10.00%
Tier I Capital to Risk Weighted Assets $12,978 9.70% >$ 5,349 >4.00% >$ 8,024 > 6.00%
Tier I Capital to Average Assets $12,978 8.04% >$ 6,455 >4.00% >$ 8,069 > 5.00%
============================================================================================================================
As of December 31, 1997
Total Capital to Risk Weighted Assets $13,019 12.20% >$ 8,541 >8.00% >$10,671 >10.00%
Tier I Capital to Risk Weighted Assets $12,037 11.28% >$ 4,270 >4.00% >$ 6,406 > 6.00%
Tier I Capital to Average Assets $12,037 8.25% >$ 5,489 >4.00% >$ 6,861 > 5.00%
</TABLE>
14
<PAGE>
SVB FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
16: CONDENSED FINANCIAL INFORMATION FOR
SVB FINANCIAL SERVICES, INC. (PARENT COMPANY) IS AS FOLLOWS:
<TABLE>
<CAPTION>
BALANCE SHEET (in thousands) DECEMBER 31, 1998 DECEMBER 31, 1997
=================================================================================================================================
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 436 $ 641
Other Assets 99 70
Investment in Subsidiary 13,580 12,385
Equity Securities 250 -
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 14,365 $ 13,096
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
SHAREHOLDERS' EQUITY
Common Stock $ 5,794 $ 5,726
Additional Paid-in Capital 5,502 5,473
Retained Earnings 3,062 1,859
Accumulated Other Comprehensive Income 7 38
- ---------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 14,365 13,096
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 14,365 $ 13,096
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED
STATEMENT OF INCOME (in thousands) DECEMBER 31, 1998 DECEMBER 31, 1997
=================================================================================================================================
<S> <C> <C>
OPERATING INCOME
Interest Income $ 18 $ 21
- ---------------------------------------------------------------------------------------------------------------------------------
Total Income 18 21
=================================================================================================================================
OPERATING EXPENSE
Other Expense 41 33
- ---------------------------------------------------------------------------------------------------------------------------------
Total Expense 41 33
- ---------------------------------------------------------------------------------------------------------------------------------
(Loss) Before Equity in Undistributed Income of Subsidiary (23) (12)
Equity in Undistributed Income of Subsidiary 1,226 1,115
=================================================================================================================================
NET INCOME $ 1,203 $ 1,103
=================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED
STATEMENT OF CASH FLOWS (in thousands) DECEMBER 31, 1998 DECEMBER 31, 1997
===================================================================================================================================
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,203 $ 1,103
Adjustments to Reconcile Net Income to Net Cash
Used In Operating Activities:
Equity in Undistributed Income of Subsidiary (1,226) (1,115)
Amortization of Organization Costs 14 14
Increase in Other Assets (43) (14)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Operating Activities (52) (12)
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------------------------
Purchase of Equity Securities (250) -
Purchase of Additional Common Stock in Subsidiary Bank - (26)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities (250) (26)
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from Stock Issuance, Net 97 5
- ----------------------------------------------------------------------------------------------------------------------------------
(Decrease)/ Increase in Cash and Cash Equivalents (205) 15
Cash and Cash Equivalents, Beginning of Year 641 626
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 436 $ 641
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
SVB FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
17: EARNINGS PER SHARE
The following table illustrates of the reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
<TABLE>
<CAPTION>
===================================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1998 WEIGHTED PER SHARE
(in thousands except per share data) INCOME AVERAGE SHARES AMOUNT
===================================================================================================================================
<S> <C> <C> <C>
EPS - BASIC
Income available to Common Shareholders $ 1,203 2,762 $ .44
Effect of Dilutive Securities
Stock Options - 82 (.02)
- -----------------------------------------------------------------------------------------------------------------------------------
EPS - DILUTED
Income available to Common Shareholders plus
assumed conversions $ 1,203 2,844 $ .42
<CAPTION>
===================================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1997(1) WEIGHTED PER SHARE
(in thousands except per share data) INCOME AVERAGE SHARES AMOUNT
===================================================================================================================================
<S> <C> <C> <C>
EPS - BASIC
Income available to Common Shareholders $ 1,103 2,740 $ .41
Effect of Dilutive Securities
Stock Options - 34 (.01)
- -----------------------------------------------------------------------------------------------------------------------------------
EPS - DILUTED
Income available to Common Shareholders plus
assumed conversions $ 1,103 2,774 $ .40
===================================================================================================================================
</TABLE>
Options to purchase 169,200 shares of common stock at $6.50 a share were
outstanding during 1997. They were not included in the computation of diluted
EPS because the options' exercise price was equal to the average market price of
the common shares for the year. The options, which expire on November 20, 2002,
were still outstanding at December 31, 1998.
(1) Adjusted for two-for-one stock split effective April 16, 1998.
<PAGE>
SVB FINANCIAL SERVICES, INC.
Report of Independent Public Accountants
[LETTERHEAD FOR GRANT THORNTON]
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
SVB Financial Services, Inc.
We have audited the accompanying consolidated balance sheets of SVB
Financial Services, Inc. and subisidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, changes in shareholders' equity
and comprehensive income and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SVB Financial
Services, INc. and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in a conformity with generally accepted accounting
principles.
/s/Grant Thornton LLP
- ---------------------
Grant Thornton LLP
Philadelphia, Pennsylvania
January 22, 1999
17
<PAGE>
SVB FINANCIAL SERVICES, INC.
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 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 of 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. RESULTS OF
OPERATIONS
Net income for the year ended December 31, 1998 was $1,203,000 an increase of
$100,000 or 9% from the previous year and represents the largest annual net
income in the Company's seven year history.
Growth in net interest income was the major reason for the net income
increase. Net interest income increased $927,000 or 16% as a result of the
growth in the Company's earning assets, especially its loan portfolio.
Non-interest income increased $209,000 or 37% in 1998. The majority of this
increase was due to gains on the sales of loans which improved by $119,000 over
the previous year. Service charges on deposit accounts also improved by $67,000
or 29%. 1998 was the first full year for the operation of the Bridgewater,
Gaston Avenue and Arbor Glen facilities. In addition, the Company increased its
lending and back-office staff in order to generate additional loan volumes. As a
result, non-interest expenses increased $999,000 or 23.0% and offset a large
portion of the revenue gains mentioned above.
A more detailed discussion of the major components of net income follows.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on the
Company's earning assets and the interest paid on its interest-bearing
liabilities. It is the Company's principal source of revenue.
The following table sets forth for the periods indicated the daily average
balances of certain balance sheet items, the interest earned on earning assets
and the average interest rate paid on interest bearing liabilities, net interest
income and the net interest margin. Net interest margin is defined as net
interest income divided by total average earning assets.
18
<PAGE>
SVB FINANCIAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
SUMMARY OF NET INTEREST INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997
- ------------------------------------------------------------------------------- -------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
($ in thousands) BALANCE RATE INTEREST BALANCE RATE INTEREST
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Federal Funds Sold $ 7,286 5.37% $ 391 $ 5,237 5.52% $ 289
Other Short Term Investments 1,393 4.81% 67 1,060 5.09% 54
Interest Bearing Time Deposits 1,227 5.62% 69 -- -- --
Securities Available for Sale 13,206 5.78% 763 12,381 6.10% 755
Securities Held to Maturity 15,786 6.12% 966 16,381 6.05% 991
- ------------------------------------------------------------------------------------------------------------------------
Total Securities 28,992 5.96% 1,729 28,762 6.07% 1,746
Loans 113,482 9.00% 10,210 95,039 9.12% 8,665
- ------------------------------------------------------------------------------------------------------------------------
Total Interest Earning Assets 152,380 8.18% 12,466 130,098 8.27% 10,754
Cash and Due from Banks 6,022 4,652
Allowance for Possible Loan Losses (1,074) (872)
Premises and Equipment 1,854 1,279
Other Real Estate Owned -- 227
Other Assets 2,198 1,900
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $ 161,380 $ 137,284
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings Deposits $ 10,992 3.17% $ 348 $ 8,231 3.11% $ 256
Money Market Deposit Accounts 18,288 3.38% 618 18,017 3.54% 637
NOW Accounts 14,684 2.61% 383 8,903 2.56% 228
Time Deposits 78,296 5.47% 4,279 68,428 5.47% 3,746
- -------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 122,260 4.60% 5,628 103,579 4.70% 4,867
Federal Funds Purchased 3 -- -- 3 -- --
Obligations Under Capital Lease 441 8.39% 37 152 8.55% 13
- ------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 122,704 4.62% 5,665 103,734 4.70% 4,880
Demand Deposits 24,416 20,584
Accrued Expenses and Other Liabilities 632 559
Cost to Fund Earning Assets 3.72% 3.75%
Shareholders' Equity 13,628 12,407
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 161,380 $ 137,284
- ------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 6,801 $ 5,874
- ------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 4.46% 4.52%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Non-accrual loans are included in the Average Loan Balances.
19
<PAGE>
SVB FINANCIAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following table presents the changes in net interest income attributable to
either a change in volume or a change in rate.
<TABLE>
<CAPTION>
===========================================================================================================================
YEARS ENDED DECEMBER 31,
1998 VS 1997
INCREASE (DECREASE) DUE TO CHANGES IN:
VOLUME RATE TOTAL
============================================================================================================================
<S> <C> <C> <C>
Increase (Decrease) in
Interest Income:
Federal Funds Sold $ 110 $ (8) $ 102
Other Short Term Investments 16 (3) 13
Interest Bearing Time Deposits 69 - 69
Securities Available for Sale 38 (30) 8
Securities Held to Maturity (37) 12 (25)
- ---------------------------------------------------------------------------------------------------------------------------
Total Securities 1 (18) (17)
Loans 1,658 (113) 1,545
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Income 1,854 (142) 1,712
- ---------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Savings Deposits 87 5 92
Money Market Deposit Accounts 10 (29) (19)
NOW Accounts 151 4 155
Time Deposits 539 (6) 533
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 787 (26) 761
Borrowed Funds 24 - 24
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 811 (26) 785
- ---------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ 1,043 $ (116) $ 927
</TABLE>
Net interest income increased $927,000 or 16% in 1998 as a result of a $22.3
million increase in average earning assets. The Company placed a major emphasis
on loan growth in 1998 and average loans accounted for $18.4 million or 83% of
the earning asset growth. Loan volume also accounted for approximately
$1,658,000 of the $1,712,000 increase in interest income.
Deposit growth was the funding source for the increase in earning assets.
Growth occurred in all major categories of deposits. Almost 53% of the growth
occurred in certificates of deposits while the remainder was spread over the
lower cost deposits such as demand, savings, money market and NOW deposits. The
change in deposit growth mix was a result of the improvement in the Company's
retail deposit base. Retail depositors are more likely users of savings, money
market and NOW accounts than are small businesses.
<PAGE>
The level of interest rates can also have a significant impact on net
interest income. During the second half of 1998, the Federal Reserve Bank
decreased the Federal Funds rate on two occasions from 5.25% to 4.75%, which had
the effect of lowering rates on many categories on both sides of the balance
sheet. In addition, intense competition for commercial loans has put downward
pressure on pricing for much of 1998. As a result, the yield on earning assets
declined from 8.27% in 1997 to
20
<PAGE>
SVB FINANCIAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
8.18% in 1998. Although the cost of interest bearing liabilities dropped eight
basis points to 4.62%, the overall cost of funding earning assets declined from
3.75% to 3.72% or only three basis points. This was due to the percentage of
non-interest bearing sources funding earning assets known as the "free funds
ratio" declining from 20.3% in 1997 to 19.5% in 1998.
The overall change in interest rates resulted in a decline in the net
interest margin from 4.52% to 4.46% and had a negative impact on net interest
income of approximately $116,000, as depicted in other table.
OTHER INCOME
A comparison of the major components of other income is included in the
following table:
<TABLE>
<CAPTION>
================================================================================
YEARS ENDED DECEMBER 31,
(in thousands) 1998 1997
================================================================================
<S> <C> <C>
Service Charges on
Deposit Accounts $ 298 $ 231
Gain on the Sale
of Securities 4 1
Gain on the Sale of Loans 334 215
Other Income 134 114
- --------------------------------------------------------------------------------
$ 770 $ 561
- --------------------------------------------------------------------------------
</TABLE>
Other income increased $209,000 or 37% during 1998 in comparison to 1997.
Service charges on deposit accounts increased $67,000 or 29% due to growth in
the number of both commercial and consumer checking accounts, which in turn
resulted in an increase in overdraft, account maintenance and wire transfer
fees. In addition, the rate charged for overdraft fees was increased in October
1998. The Company also charges non-bank customers for the use of its ATMs. These
fees represented $23,000 of the increase in service charges on deposit accounts.
Gains on the sale of loans were $334,000 in 1998 compared to $215,000 in
1997, an increase of $119,000 or 55%. The Company is a preferred SBA lender and
as such, originates SBA loans and sells the guaranteed portion in the secondary
market while retaining the servicing. SBA loans are not the primary focus of the
Company and consequently, sales of these loans can vary from period to period
depending upon the volume of SBA loans generated. The Company also sold variable
rate 1-4 family mortgage loans in 1998 resulting in a gain.
Other income increased $20,000 or 18% during 1998. A major portion of this
increase was related to the servicing of SBA loans as described above.
Additionally, late in the third quarter, the Company was approved by FNMA to
sell mortgage loans which resulted in $19,000 in application and processing fees
for the year.
21
<PAGE>
SVB FINANCIAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
OTHER EXPENSE
A comparison of the major components of other expense is included in the
following table:
<TABLE>
<CAPTION>
================================================================================
YEARS ENDED DECEMBER 31,
(in thousands) 1998 1997
================================================================================
<S> <C> <C>
Salaries and Employee
Benefits $ 2,713 $ 2,180
Occupancy Expense 652 477
Equipment Expense 378 306
Other Expenses 1,559 1,340
- --------------------------------------------------------------------------------
$ 5,302 $ 4,303
- --------------------------------------------------------------------------------
</TABLE>
Total other expense increased $999,000 or 23% in comparison to 1997. The Company
opened two new branch offices in the first quarter of 1998, one located on
Gaston Avenue in Somerville and the other located in the assisted living
facility Arbor Glen in Bridgewater. In addition, it was the first full year of
operation for the Bridgewater office. Expenses were impacted by additional
personnel, occupancy costs and other expenses related to the opening of new
branches.
Salaries and Benefits expense was up $533,000 or 24% from 1997 levels.
Because of the 25% growth in assets and the opening of the new offices, the
Company has had to hire additional personnel to better service its customer
base, especially in the area of lending as loan growth received major emphasis
from management in 1998. The number of employees grew to 65 at December 31, 1998
from 52 at December 31, 1997. The increase in employees combined with normal
salary increases, accounted for the variance from 1997.
Occupancy expense increased $175,000 or 37% from 1997 mainly as a result of
the increased rent from the two branches opened in 1998 and from costs related
to the opening of two additional branches in 1999, one to be located in Manville
and the other in Aberdeen. Equipment expenses increased $72,000 or 23% during
1997. In addition to equipping the new branches and employees, the Company has
made an attempt to remain current with technology and to make sure all upgrades
are in place for the Year 2000.
Other expenses increased $219,000 or 16%. Much of the increase was related to
the growth in assets experienced by the Company, which affected many areas,
especially data processing costs and outside services, which were up $70,000 and
$63,000, respectively. Advertising and business development expenses as well as
stationery and supplies included costs associated with the promotion of the new
branches as well as the introduction of new banking products - most notably the
"Select Checking" consumer checking account.
<PAGE>
SECURITIES PORTFOLIO
The Company's investment portfolio is made up of securities available for sale
and securities which it has the ability and the intent to hold to maturity. The
securities available for sale are to be used to fund increases in loan demand or
possible outflows of deposits. The securities held to maturity are to be matched
against maturing liabilities in order to attempt to maintain a balance in the
repricing of the Company's earning assets and interest bearing liabilities.
Maturing securities may also be used to fund increases in loan demand or allow
for the outflow of deposits with which they are matched.
22
<PAGE>
SVB FINANCIAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following table sets forth the amortized cost and estimated market values of
securities as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
=================================================================================================================================
1998 1997
AMORTIZED FAIR AMORTIZED FAIR
(in thousands) COST VALUE COST VALUE
==================================================================================================================================
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury Securities $ 3,511 $ 3,515 $ 2,249 $ 2,250
U.S. Government Agency Securities 9,261 9,243 6,000 6,008
Mortgage-Backed Securities 8,491 8,515 2,960 3,008
Equity Securities 250 250 - -
- ----------------------------------------------------------------------------------------------------------------------------------
$ 21,513 $ 21,523 $ 11,209 $ 11,266
- ----------------------------------------------------------------------------------------------------------------------------------
HELD TO MATURITY:
U.S. Treasury Securities $ 2,001 $ 2,008 $ 8,754 $ 8,770
U.S. Government Agency Securities 10,235 10,274 11,477 11,498
Other Securities 2,002 2,002 - -
Mortgage-Backed Securities 814 817 1,871 1,875
- ----------------------------------------------------------------------------------------------------------------------------------
$ 15,052 $ 15,101 $ 22,102 $ 22,143
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: With regard to mortgage-backed securities, the Company does not hold any
private issue CMOs. As of December 31, 1998, there was not one issuer where the
aggregate book value or aggregate market value exceeds ten percent of
shareholders' equity. The maturity distribution and weighted average yield of
the Company's securities portfolio as of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
=================================================================================================================================
DUE IN: DUE IN:
ONE YEAR AFTER ONE YEAR
($ in thousands) OR LESS THROUGH FIVE YEARS TOTAL
=================================================================================================================================
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury Securities
Market Value $ 3,515 - $ 3,515
Yield 5.22% - 5.22%
U.S. Government Agency Securities
Market Value 500 $ 8,743 9,243
Yield 5.28% 5.46% 5.45%
Mortgage-Backed Securities
Market Value $ 8,515 - - $ 8,515
Yield 5.79% - - 5.79%
Equity Securities
Market Value $ 250 $ 250
=================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Treasury Securities
Book Value $ 2,001 - $ 2,001
Yield 5.89% - 5.89%
U.S. Government Agency Securities
Book Value $ 3,987 $ 6,248 $ 10,235
Yield 5.05% 6.25% 5.78%
Mortgage-Backed Securities
Book Value $ 814 - - $ 814
Yield 5.68% - - 5.68%
Other Securities
Book Value $ 2,002 $ 2,002
Yield 5.24% 5.24%
=================================================================================================================================
</TABLE>
Note: Mortgage-backed securities are not included because expected maturities
will differ from contractual maturities. Borrowers may have the right to prepay
or call obligations with or without call or prepayment penalties. U.S.
Government Agency Securities which are callable before their stated maturity are
included in the table at their stated maturity. Equity securities are not
included because they do not have a maturity.
23
<PAGE>
SVB FINANCIAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
LOANS
The following table summarizes the Company's loan portfolio as of December
31, 1998 and 1997.
<TABLE>
<CAPTION>
================================================================================
(in thousands) 1998 1997
================================================================================
<S> <C> <C>
Secured by Real Estate:
Residential Mortgage $ 30,577 $ 33,249
Commercial Mortgage 42,703 29,793
Construction 6,256 4,852
Commercial & Industrial 22,308 20,889
Loans to Individuals for
Automobiles 10,298 12,177
Other Loans to Individuals 8,864 4,969
Other Loans 468 541
- --------------------------------------------------------------------------------
$121,474 $106,470
================================================================================
</TABLE>
Note: The Company's commercial loans are not concentrated within a single
industry or group of related industries. The Company had strong growth in the
loan portfolio in 1998. The loan portfolio increased by $15.0 million or 14% in
1998.
The Company targets small to medium sized businesses and professionals in its
lending market. With the ever changing composition of the banking marketplace,
the Company has tried to remain competitive in its pricing of loans, but will
not sacrifice loan quality to capture business. It is important to note that 29%
of the loans secured by residential real estate as of December 31, 1998, were
for commercial purposes. It is common for small business owners to secure
commercial loans with their personal businesses.
<PAGE>
The following table sets forth the Company's total loans by maturity and
interest rate sensitivity as of December 31, 1998:
<TABLE>
<CAPTION>
====================================================================================================================================
MATURITY AFTER
WITHIN 1 THROUGH AFTER
(in thousands) 1 YEAR 5 YEARS 5 YEARS TOTAL
====================================================================================================================================
<S> <C> <C> <C> <C>
Loans with fixed rates $ 13,857 $ 48,969 $ 5,095 $ 67,921
Loans with floating rates 22,402 10,343 20,808 53,553
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 36,259 $ 59,312 $ 25,903 $ 121,474
====================================================================================================================================
</TABLE>
24
<PAGE>
SVB FINANCIAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
ASSET QUALITY
Various degrees of credit risk are associated with substantially all
investing activities. The lending function, however, carries the greatest risk
of loss. Risk elements include loans past due, non-accrual loans, renegotiated
loans, other real estate owned and loan concentrations. The Company closely
monitors its loan portfolio to minimize the risk of delinquency and problem
credits. As a general rule a loan that is past due for principal or interest in
excess of ninety days is placed on a non-accrual basis unless circumstances
exist that would lead management to find that non-accrual is unnecessary (i.e.,
liquidation of collateral or the borrower has the ability to bring the loan
current as to principal and interest).
The Company's loan portfolio consists of commercial loans, commercial
mortgages, real estate construction loans, residential mortgage loans and
consumer loans.
The Company's commercial loans are primarily made to small businesses and
professionals in its market area with maturities between one and five years. The
majority of these loans are collateralized by real estate consisting of single
family homes or commercial properties, and/or the assets of the businesses and
further secured by personal guarantees. The Company primarily requires that
there be a loan to value ratio not exceeding 80% on these loans. The Company
also reviews borrowers' cash flows in analyzing loan applications. Risks
inherent in these loans include risks that a borrower's cash flow generated from
its business may not be sufficient to repay the loans, either because of general
economic conditions, downturns specific to the borrower's business or interest
rate changes which cause deterioration in a borrower's cash flow as well as
risks associated with the collateral securing the loans, such as possible
deterioration in value of the collateral or environmental contamination of the
collateral.
Commercial mortgages are made to small businesses and professionals in the
market area to purchase commercial real estate for use in their businesses. The
Company will generally not finance in excess of 75% of appraised value. In
reviewing a borrower's qualifications, the Company pays particular attention to
cash flow. In addition, the Company frequently requires personal guarantees.
Risk factors associated with these loans include general economic performance
which will affect vacancy rates for commercial properties and the ability of
businesses to maintain cash flows as well as the resale value which may be
yielded on a particular property.
The Company originates and retains residential mortgages loans. They are
generally written with a three, five or ten year fixed rate which adjusts
annually thereafter for the life of the loan, which may be up to 30 years. The
Company generally does not lend in excess of 80% of the appraised value. Risks
inherent in these loans include the employment stability and earnings potential
of the borrower as well as potential resale values associated with the
collateral securing these loans.
<PAGE>
The Company makes construction loans to individuals with expertise in the
industry or to owner occupied projects. The loans are generally on projects for
which a sale contract has been executed and for which permanent mortgage
financing is in place. The Company will generally lend up to 75% of the
appraised completed value of the project. Risks inherent with these loans
include performance of the general economy which will affect whether the sale of
the project actually closes despite its contracted status and the risk inherent
with whether the construction of a project will actually be completed and
completed within budget. Environmental factors may affect whether a project can
be completed. However, the Company does environmental due diligence prior to
closing. An environmental risk factor is the risk that a site may be
contaminated by toxic chemicals, oil, gasoline or like substance. In the event
that this occurs environmental audits must be performed to determine the extent
of the problem and cost of cleanup. Excessive cleanup costs may endanger the
completion of the project.
The Company makes consumer loans on an unsecured
basis as personal loans to finance various consumer goods. Automobile loans are
also made on a direct basis and through the Company's relationship with area car
dealers. Employment, income, credit rating, as well as the potential resale
values of automobiles, are the risk factors inherent in these loans.
The Company attempts to maintain an allowance for possible loan losses at a
sufficient level to provide for potential losses in the portfolio. Loan losses
are charged directly to the allowance as they occur and any recoveries are
credited to the allowance. The allowance for possible loan losses is increased
periodically through charges to earnings in the form of a provision for loan
losses.
Factors that influence management's judgment in determining the amount of the
provision for loan losses include an ongoing review of the overall quality of
the loan portfolio by the Company's credit analysts who have no lending
authority, management's continuing evaluation of loans and the assignment of a
specific risk rating to all non-consumer borrowing, an evaluation of prevailing
and anticipated economic conditions and their related effects on the existing
portfolio, loan classifications and evaluations as a result of periodic
examinations by Federal and State supervisory authorities and comments and
recommendations of the Company's independent public accountants as a result of
their annual audit of the financial statements. It is management's practice to
review the allowance on a monthly basis to determine the provision to be made.
25
<PAGE>
SVB FINANCIAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following table summarizes the composition of the Company's
non-performing assets as of the dates indicated:
<TABLE>
<CAPTION>
=================================================================================================================================
DECEMBER 31, 1998 1997
(in thousands)
=================================================================================================================================
<S> <C> <C>
Non-performing assets (1):
Non-accruing loans
Commercial and Construction $ 56 $ -
Real Estate - -
Installment 40 63
- --------------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans 96 63
Restructured loans - -
- --------------------------------------------------------------------------------------------------------------------------------
Total non-performing loans 96 63
- --------------------------------------------------------------------------------------------------------------------------------
Other real estate owned - -
- --------------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 96 $ 63
- --------------------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more (2) $ 5 $ -
- --------------------------------------------------------------------------------------------------------------------------------
Non-performing loans to total loans 0.08% 0.06%
Non-performing assets to total assets 0.05% 0.04%
Allowance for loan losses to non-performing loans 1,261.46% 1,558.73%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Non-performing assets excludes loans past due 90 days or more and still
accruing.
(2) Loans past due 90 days or more and still accruing.
As noted in the previous table, the Company's charge off history shows
relatively small percentages of net charge offs. The following table depicts an
approximate allocation of the allowance for loan losses as of the dated
indicated:
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
DECEMBER 31, 1998 1997
PERCENT OF PERCENT OF
($ in thousands) AMOUNT LOANS TO TOTAL AMOUNT LOANS TO TOTAL
===================================================================================================================================
<S> <C> <C> <C> <C>
Commercial and Construction $ 986 58.67% $ 728 64.37%
Real Estate 41 25.17% 47 21.69%
Installment 184 16.16% 207 13.94%
- -----------------------------------------------------------------------------------------------------------------------------------
$ 1,211 100.00% $ 982 100.00%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
DEPOSITS
Following is the average balances and rates paid on deposits for the periods
indicated:
<TABLE>
<CAPTION>
====================================================================================================================================
YEARS ENDED DECEMBER 31, 1998 1997
AVERAGE AVERAGE AVERAGE AVERAGE
($ in thousands) BALANCE RATE BALANCE RATE
====================================================================================================================================
<S> <C> <C>
Demand Deposits $ 24,416 - $ 20,584 -
Savings Deposits 10,992 3.17% 8,232 3.11%
Money Market Deposits Accounts 18,288 3.38% 18,017 3.53%
NOW Accounts 14,684 2.61% 8,903 2.56%
Time Deposits 78,296 5.47% 68,428 5.47%
- ------------------------------------------------------------------------------------------------------------------------------------
$ 146,676 3.84% $ 124,164 3.92%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Following is the maturity distribution of time certificates of deposit $100,000
and over at December 31, 1998:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Three months or less $ 10,300
Over three months through twelve months 2,949
Over 1 year through five years 839
- --------------------------------------------------------------------------------
$14,088
================================================================================
</TABLE>
26
<PAGE>
SVB FINANCIAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following table summarizes the activity in the allowance for possible loan
losses for the period indicated:
<TABLE>
<CAPTION>
==================================================================================================================================
YEARS ENDED DECEMBER 31,
==================================================================================================================================
(in thousands) 1998 1997
==================================================================================================================================
<S> <C> <C>
Balance, beginning of period $ 982 $ 783
Loans charged off
Commercial and Construction - (34)
Real Estate - -
Installment (80) (52)
- ----------------------------------------------------------------------------------------------------------------------------------
Total charge offs (80) (86)
- ----------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off
Commercial and Construction 8 -
Real Estate - -
Installment 1 5
- ----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 9 5
- ----------------------------------------------------------------------------------------------------------------------------------
Net Loans charged off (71) (81)
- ----------------------------------------------------------------------------------------------------------------------------------
Provision charged to expense 300 280
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 1,211 $ 982
- ----------------------------------------------------------------------------------------------------------------------------------
Net charge offs as a percentage of average loans 0.06% 0.09%
Allowance for loan losses to total loans 1.00% 0.92%
Allowance for loan losses to non-performing loans 1,261.46% 1,558.73%
</TABLE>
LIQUIDITY
The Company's liquidity needs arise principally to accommodate possible
deposit outflows and meet loan demand. The Company's liquidity is dependent on
the successful management of its assets and liabilities so as to meet these
needs of both its deposit and loan customers.
Liquidity, as represented by cash and cash equivalents, is a product of its
operating, investing, and financing activities.
During 1998, the Company generated $1,307,000 cash flow from operations. Net
cash used in investing activities was $23,017,000, most of which was in the form
of loans. Purchases of securities available for sale totaled $19,464,000, while
purchases of securities held to maturity totaled $8,717,000. These were funded
mostly by maturities available for sale and securities held to maturity of
$6,633,000 and $15,797,000, respectively. In addition to loans and investments,
the Company began investing in time deposits due from banks, during 1998 which
totaled $4,090,000 at year end.
<PAGE>
Funding for investment activities resulted from an increase in financing
activities of $35,375,000. Almost half of this came from the increase in demand
deposits of $17,419,000 most of which was in interest bearing demand deposits.
Savings, time deposits, and money market deposits also increased $4,793,000,
$3,999,000 and $9,572,000, respectively.
Cash and cash equivalents increased $13,665,000 in 1998.
The Company believes its liquidity position is sufficient to provide funds to
meet future loan demand or possible outflow of deposits.
27
<PAGE>
SVB FINANCIAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
ASSET AND LIABILITY MANAGEMENT
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
sensitive assets and liabilities consistent with the Bank's overall liquidity,
capital, growth and profitability goals.
Loans make up the largest portion of the Bank's assets. In making commercial
loans, the emphasis is placed on floating rate loans tied to the prime lending
rate. Fixed rate commercial loans are generally written so that the rates can be
adjusted within 3-5 years with payouts up to 20 years. Mortgage loans are
currently written to be adjusted annually after the first 3, 5 or 10 year term.
Home equity loans are tied to the prime lending rate although special promotions
may offer a fixed rate for periods of not greater than one year. Installment
loans are written at fixed rates from 3 to 5 years.
The Bank utilizes its securities to manage its liquidity and rate
sensitivity. Fixed rate securities are purchased for terms of less than 5 years.
Adjustable rate securities require an estimate average life at time of purchase
of 10 years or less. Callable securities are also purchased for terms of 5 years
or less with a call period of three months to 2 years. Fixed rate
mortgage-backed securities are also purchased with estimated average lives at
the time of purchase of not more than 5 years.
A significant portion of the Bank's assets have been funded with CDs
including jumbo CDs. Unlike other deposit products, such as, checking and
savings accounts, CDs carry a high degree of interest rate sensitivity and
therefore, their renewal will vary based on the competitiveness of the Bank's
interest rates. The Bank has attempted to price its CDs competitively.
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 December 31, 1998, 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
<PAGE>
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.
28
<PAGE>
SVB FINANCIAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTEREST RATE SENSITIVITY AT DECEMBER 31, 1998 (In thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
MATURITY OR REPRICING IN (2)
DUE IN BETWEEN NON-
90 DAYS 91 DAYS - AFTER INTEREST
OR LESS ONE YEAR ONE YEAR BEARING TOTAL
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
ASSETS:
Securities $ 27,793 $ 2,206 $ 6,576 $ - $ 36,575
Federal Funds Sold 10,325 - - - 10,325
Interest Bearing Time Deposits 199 3,491 400 - 4,090
Other Short Term Investments 965 - - - 965
Loans 44,573 15,801 61,004 96 121,474
Valuation Reserve(1) - - - (1,298) (1,298)
Non-interest Earning Assets - - - 13,096 13,096
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 83,855 $ 21,498 $ 67,980 $ 11,894 $ 185,227
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Money Market Accounts $ 20,226 $ - $ - $ - $ 20,226
NOW Accounts 24,502 - - - 24,502
Other Savings Deposits 13,836 - - - 13,836
Time CDs over $100,000 10,300 2,949 839 - 14,088
Other Time Deposits 28,343 32,103 8,719 - 69,165
Obligation Under Capital Lease - - 438 - 438
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 97,207 35,052 9,996 - 142,255
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest Bearing Liabilities - - - 27,897 27,897
Other Liabilities - - - 710 710
Stockholders' Equity - - - 14,365 14,365
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 97,207 $ 35,052 $ 9,996 $ 42,972 $ 185,227
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Gap $(13,352) $ (13,554) $ 57,984 $ 31,078
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative Gap $(13,352) $ (26,906) $ 31,078
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative Gap to Total Assets (7.21)% (14.53)% 16.78%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Valuation Reserves include allowance for loan losses and deferred loan fees.
(2) The following are the assumptions that were used to prepare the Gap
analysis:
<PAGE>
(A) Securities "available for sale" are placed in the first maturity bucket
since they can be sold at any time.
(B) Callable securities are spread
based on their actual maturity date.
(C) Loans are spread based on the earlier of their actual maturity date or
the date of their first potential rate adjustment.
(D) Money Market Accounts, NOW Accounts, and Other Savings Accounts are
subject to immediate withdrawal.
(E) Time deposits are spread based on their actual maturity date.
29
<PAGE>
SVB FINANCIAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The ALCO attempts to maintain the Company's cumulative gap ratios at +/-15% for
90 days or less, +/-20% for between 91 days to six months and +/-25% for six
months to one year.
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. Money Market deposits, for example, which have no
contractual maturity, are assigned a repricing interval of 90 days. Management
can influence the actual repricing of the deposits independent of the gap
assumption. Third, the gap analysis represents a one-day position and cannot
incorporate a changing mix of assets and labilities 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.
RETURN ON ASSETS AND RETURN ON EQUITY
The following table depicts returns on average assets and returns on average
equity for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
================================================================================
1998 1997
================================================================================
<S> <C> <C>
Return on Average Assets 0.75% 0.80%
Return on Average Equity 8.82% 8.89%
Average Equity to
Average Assets 8.44% 9.04%
================================================================================
</TABLE>
CAPITAL RESOURCES
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.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
================================================================================
1998 1997
================================================================================
<S> <C> <C>
Total Capital to
Risk Weighted Assets 11.14% 12.81%
Tier 1 Capital to
Risk Weighted Assets 10.24% 11.89%
Leverage Ratio 8.54% 8.72%
================================================================================
</TABLE>
It is the Company's intention to retain its earnings in order to provide
adequate capital to continue to support its growth. The Company has never paid a
dividend.
30
<PAGE>
SVB FINANCIAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
SUMMARY OF QUARTERLY RESULTS
The following summarizes the results of operations during 1998 on a quarterly
basis:
<TABLE>
<CAPTION>
====================================================================================================================================
For the Quarters Ended
====================================================================================================================================
(in thousands) March 31 June 30 September 30 December 31
====================================================================================================================================
<S> <C> <C> <C> <C>
Interest Income $ 2,916 $ 3,044 $ 3,183 $ 3,323
Interest Expense 1,328 1,379 1,426 1,532
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 1,588 1,665 1,757 1,791
Provision for Loan Losses 65 70 90 75
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 1,523 1,595 1,667 1,716
- ------------------------------------------------------------------------------------------------------------------------------------
Gain on the Sale of Loans 51 69 144 70
Gain on the Sale of Securites - - 4 -
Other Income 94 97 112 129
Other Expense 1,275 1,341 1,322 1,364
- ------------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 393 420 605 551
Income Taxes 159 170 238 199
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 234 $ 250 $ 367 $ 352
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
<PAGE>
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 mid 1999. Phase III
(Validation/Testing) is in progress and will be completed by June 30, 1999.
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 has completed testing of its systems. 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. At this writing Fiserv has substantially completed the
validation and testing of the major computer applications and is currently
testing application interfaces.
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 a questionnaire
regarding their Y2K effort.
31
<PAGE>
SVB Financial Services, Inc. and Somerset Valley Bank
BOARD OF DIRECTORS
John K. Kitchen
Chairman of the Board
G. Robert Santye
Vice Chairman of the Board
Bernard Bernstein
Robert P. Corcoran
Mark S. Gold, MD
Raymond L. Hughes
S. Tucker S. Johnson
Willem Kooyker
Frank Orlando
Gilbert E. Pittenger
Frederick D. Quick
Anthony J. Santye, Jr.
Donald Sciaretta
Herman C. Simonse
Donald R. Tourville
SOMERSET VALLEY BANK
FOUNDERS ADVISORY COUNCIL:
Richard Bradley
Maureen T. Kruse
Matthew Madlinger
John Majcher
Thomas C. Miller, Esq.
Harold T. Moscatiello
Edward Rego
Janak Sakaria, MD
Helga Schwartz, MD
Michael A. Sena
Albert DiFiore
Sandra L. Runyon
Frank Tourville
Donald Sweeney, MD
SOMERSET VALLEY BANK
HILLSBOROUGH ADVISORY COUNCIL:
Michael Avolio
Elaine DeMilia
Walter J. Dietz, III
Peter McGavisk
Daniel G. Marulli, DDS
John Mondoro
Dan Pullen, DDS
Harry Smith
Kevin Sweeney
Frank N. Yurasko, Esq.
<PAGE>
BANKING STAFF
OFFICERS:
Robert P. Corcoran
President and C.E.O.
Keith B. McCarthy
Chief Operating Officer
Arthur E. Brattlof
Executive Vice President,
Senior Loan Officer
Robert F. Cramer
Senior Vice President
Consumer Loans
Michael A. Novak
Senior Vice President
Commercial Loans
Jeffrey D. Mattison
Vice President
Commercial Loans
Kenneth A. Rastelli
Vice President
Commercial Loans
Kathy Ruggiero
Vice President
Branch Administration
Roger W. Russell
Vice President
Loan Administration
Karen L. Zaliwski
Vice President
Operations
Christopher Fenimore
Assistant Vice President
Consumer Loans
John P. Oliver
Assistant Vice President
Commercial Loans
Margaret O'Keeffe
Assistant Vice President and
Manager
Mary E. Rowe
Assistant Vice President
Accounting and Finance
<PAGE>
Mary Ann Soriano
Assistant Vice President
Bookkeeping
Marguerite Eppler
Secretary to the Board
Jeannette Capra
Assistant Treasurer
Christopher Seaman
Assistant Treasurer
Vimala Vimalavong
Assistant Treasurer
Kenneth S.B. Wade II
Assistant Treasurer
Jeanne G. Hagen
Human Resources Director
Suzanne B. Lennard
Assistant Secretary
GENERAL
COUNSEL:
Thomas C. Miller, Esq.
Miller, Robertson and Rodgers, P.C.
21 North Bridge Street
Somerville, NJ 08876
INDEPENDENT
PUBLIC
ACCOUNTANTS:
Grant Thornton LLP
2001 Market Street
Philadelphia, PA 19103-7080
TRANSFER AGENT:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
SOMERSET VALLEY BANK
Main Office
103 West End Avenue
Somerville, NJ 08876
Telephone: (908) 704-1188
Fax: (908) 685-2180
<PAGE>
HILLSBOROUGH OFFICE
649 Route 206
Hillsborough Centre
Belle Mead, NJ 08502
Telephone: (908) 281-4009
Fax: (908) 281-3042
BRIDGEWATER OFFICE
481 North Bridge Street
Bridgewater, NJ 08807
Telephone: (908) 725-0033
Fax: (908) 725-0110
GASTON AVENUE OFFICE
91 North Gaston Avenue
Somerville, NJ 08876
Telephone: (908) 575-7300
Fax: (908) 575-9395
ARBOR GLEN OFFICE
100 Monroe Street
Bridgewater, NJ 08807
Telephone: (908) 595-9700
Fax: (908) 526-3418
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated January 22, 1999, accompanying the
consolidated financial statements included in the 1998 Annual Report of SVB
Financial Services, Inc. on Form 10-KSB for the year ended December 31, 1998. We
hereby consent to the incorporation by reference of said reports in the
Registration Statement of SVB Financial Services, Inc. on Forms S-8 (File No.
333-66131, effective October 26, 1998 and File No. 333-66165, effective October
27, 1998).
/s/Grant Thornton LLP
---------------------
Grant Thornton LLP
Philadelphia, Pennsylvania
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,358
<INT-BEARING-DEPOSITS> 4,090
<FED-FUNDS-SOLD> 10,325
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,523
<INVESTMENTS-CARRYING> 15,052
<INVESTMENTS-MARKET> 15,101
<LOANS> 121,387
<ALLOWANCE> (1,211)
<TOTAL-ASSETS> 185,227
<DEPOSITS> 169,714
<SHORT-TERM> 0
<LIABILITIES-OTHER> 710
<LONG-TERM> 438
0
0
<COMMON> 5,794
<OTHER-SE> 8,571
<TOTAL-LIABILITIES-AND-EQUITY> 185,227
<INTEREST-LOAN> 10,210
<INTEREST-INVEST> 1,729
<INTEREST-OTHER> 527
<INTEREST-TOTAL> 12,466
<INTEREST-DEPOSIT> 5,628
<INTEREST-EXPENSE> 5,665
<INTEREST-INCOME-NET> 6,801
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 5,302
<INCOME-PRETAX> 1,969
<INCOME-PRE-EXTRAORDINARY> 1,203
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,203
<EPS-PRIMARY> .44
<EPS-DILUTED> .42
<YIELD-ACTUAL> 4.46
<LOANS-NON> 96
<LOANS-PAST> 5
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 583
<ALLOWANCE-OPEN> 982
<CHARGE-OFFS> (80)
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 1,211
<ALLOWANCE-DOMESTIC> 1,211
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
