ITEM 1. 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, 1997, the Bank had total assets of $148.5 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 and a mini branch with a drive through on Gaston Avenue in Somerville. The Bank also received approval to put a mini branch facility in the Arbor Glen Retirement Community in Bridgewater Township.
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, 1997, the Bank had $133.9 million in deposits and approximately 9,800 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 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, 1997, the Bank had approximately 2,700 loans of all types totaling $105.3 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 two ATM machines and the Bank is a member of the MAC network. The Bank currently employs three licensed agents to sell annuities.
During 1997, the Bank began offering 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 aware of the issues associated with the programming code in existing computer systems as the millennium (year 2000) approaches. The "year 2000" problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail.
The Company is utilizing both internal and external resources to identify, correct or reprogram, and test the systems for the year 2000 compliance. It is anticipated that all reprogramming efforts will be complete by December 31, 1998, allowing adequate time for testing. To date, confirmations have been received from the Company's primary processing vendors that plans are being developed to address processing of transactions in the year 2000. Management has not yet assessed the year 2000 compliance expense and related potential effect on the Company's earnings.
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.
Although the Bank serves primarily Somerset County, it also draws business from the counties of Hunterdon, Middlesex, Union, Mercer, Morris and Monmouth.
Competition All phases of the Bank's business are highly competitive. As of June 30, 1997 (the latest date for which figures are available), Somerset County had 23 banks and saving banks with 99 offices. In just 5 1/2 years and having only two locations, the Bank was ranked 10 of 23 in terms of total deposits. Somerset
County has experienced significant merger activity in recent years. These mergers will result 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 existing 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.
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, 1997, the Company employed 49 full time and 3 part time employees. None of these employees is 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.
ITEM 2. PROPERTIES.
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 possible future expansion. 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.
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.
ITEM 3.
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.
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 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the shares of common stock of the Company. The shares are neither listed on any exchange nor quoted on the NASDAQ system. During the fourth quarter of 1996, the Company offered for sale 200,000 shares of common stock at a price of $13.00 per share. All of the shares were sold.
Prior to the acquisition of the Bank by the Company, on an exchange basis of six shares for five, there were a limited number of privately negotiated transfers of the Bank's stock, the price of which was not always made known to management. In those instances where the price was disclosed, the consideration was $10.00 per share.
There are approximately 481 shareholders of the Company's common stock as of December 31, 1997.
The Company has never paid a dividend and there are no plans to pay cash dividends at this time.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
This information is incorporated by reference from the Company's 1997 Annual Report to Shareholders at page 1 under the caption "Selected Consolidated Financial Information."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This information is incorporated by reference from the Company's 1997 Annual Report to Shareholders at pages 18-31 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 8.
ITEM 8. 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 3-16 of the 1997 Annual Report to Shareholders.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference from page 5-13 under the caption "Directors/Principal Shareholders/Executive Officers and Director Committees" of the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
This information required by this item is incorporated by reference from page 5-6 under the caption "Executive Compensation" of the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from page 2-4 under the caption "Directors/Principal Shareholders/Executive Officers" of the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information required by this item is incorporated by reference from page 13 under the caption "Transactions with Related Persons" of the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
PART IV
ITEM 14.
ITEM 14. 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, 1997 and 1996
Consolidated Statements of Income - Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity - Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995
Reports of Independent Accountants
These statements are incorporated by reference to the Company's Annual Report to Shareholders for the year ended December 31, 1997.
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 10.3 SVB Financial Services, Inc. Restated Incentive Stock Option Plan 13 Annual Report to Security-Holders 20 Proxy Statement for the 1998 Annual Meeting of Shareholders 27 Financial Data Schedule
(1) Incorporated by reference to the Company's Registration Statement on SB-2. Registration Number 333-12305.
SVB FINANCIAL SERVICES, INC. INDEX TO EXHIBITS
Exhibit Number Description - ------ -----------
13 Annual Report to Security-Holders
20 Proxy Statement for the 1998 Annual Meeting of Shareholders
27 Financial Data Schedule
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 26, 1998