SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File Number 333-12305
SVB Financial Services, Inc.
(Exact name of registrant as specified in its charter)
New Jersey 22-3438058
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification Number)
103 West End Avenue, Somerville, NJ 08876
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (908) 704-1188
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $4.17 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of December 31, 1996, was $17,764,799.
The number of shares of the Registrant's Common Stock, no par value,
outstanding as of December 31, 1996, was 1,366,523.
<PAGE>
PART I
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, 1996, the Bank had total
assets of $125.0 million and is considered a small bank relative to other banks
in New Jersey. On February 6, 1996, the Bank opened its first branch office in
Hillsborough Township, New Jersey. The Hillsborough office is a full service
branch with drive-through banking and an ATM.
The Bank received approval from the Township of Bridgewater to
construct a branch office on North Bridge Street, Bridgewater, New Jersey,
adjacent to the Post Office. Approvals have also been received from the FDIC and
the New Jersey Department of Banking for this branch office. The Bridgewater
office will be a full service branch with drive-through banking and an ATM. The
anticipated opening is July 1997. North Bridge Street is a major thoroughfare in
Bridgewater Township and provides access to Routes 22 and 202/206 as well as the
Bridgewater Commons Mall. There is significant residential development along the
length of the road.
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, 1996, the Bank had $112.5
million in deposits and approximately 7,900 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. 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.
<PAGE>
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. Long term fixed rate mortgages are provided through
a correspondent bank.
As of December 31, 1996, the Bank had approximately 2,300 loans of all
types totaling $86.9 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. A messenger service
is provided by the Bank for pick up of non-cash deposits for selected customers.
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.
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 contiguous counties of Hunterdon, Middlesex, Union and Mercer.
Competition
All phases of the Bank's business are highly competitive. As of June
30, 1996 (the latest date for which figures are available), Somerset County had
23 banks and saving banks with 98 offices. In just 4 1/2 years and having only
two locations, the Bank was ranked 13th of 23 in terms of total deposits.
Somerset County has experienced significant merger activity in the past two
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.
<PAGE>
By virtue of their greater total capital, certain commercial banks have
substantially higher lending limits. These banks can also finance broad
advertising campaigns. 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, 1996, the Company employed 38 full time and two 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. 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 Bank is currently leasing the land for the construction of the
Bridgewater office on North Bridge Street on a month-to-month basis from an
unaffiliated partnership. A long-term lease will be established when final
construction costs are determined.
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 1996.
<PAGE>
PART II
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 480 shareholders of the Company's common stock
as of December 31, 1996.
The Company has never paid a dividend and there are no plans to pay
cash dividends at this time.
ITEM 6. SELECTED FINANCIAL DATA.
This information is incorporated by reference from the Company's 1996
Annual Report to Shareholders at page 3 under the caption "Selected Consolidated
Financial Information."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This information is incorporated by reference from the Company's 1996
Annual Report to Shareholders at pages 18-30 under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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 6-17 of the 1996 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Arthur Andersen LLP was the Company and its subsidiary Bank's
independent public accountants from its inception in 1991 through the year ended
December 31, 1996. Effective March 27, 1997, the firm of Grant Thornton LLP has
been appointed as the Company's independent public accountants for 1997.
The report of Arthur Andersen LLP on the consolidated financial
statements of the Company as of and for the year ended December 31, 1996 did not
contain an adverse opinion or a disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope, or accounting principles.
The decision to change accountants was recommended by the Audit
Committee of the Board of Directors and approved by the Board of Directors.
<PAGE>
There were no disagreements with Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference from
page 2 under the caption "Directors/Principal Shareholders, Executive Officers"
of the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
This information required by this item is incorporated by reference
from page 6 under the caption "Executive Compensation" of the Company's Proxy
Statement for its 1997 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from
page 2 under the caption "Directors/Principal Shareholders/Executive Officers"
of the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information required by this item is incorporated by reference
from page 15 under the caption "Transactions with Related Persons" of the
Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.
PART IV
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, 1996 and 1995
Consolidated Statements of Income - Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity -
Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years Ended December
31, 1996, 1995 and 1994
Report of Independent Accountants
These statements are incorporated by reference to the Company's Annual
Report to Shareholders for the year ended December 31, 1996.
<PAGE>
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
16 Letter re change in certifying accountants
20 Proxy Statement for the 1997 Annual Meeting
of Shareholders
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(1) Incorporated by reference to the Company's Registration
Statement on Form SB-2.) Registration Number 333-12305.
<PAGE>
3 (b) A report on Form 8-K was filed on October 10, 1996 under
Item 5 "Other Events" concerning the acquisition of Somerset
Valley Bank by SVB Financial Services, Inc. The following
financial statements were filed:
Unaudited Consolidated Financial Statements of the Company
Consolidated Statement of Condition as of June 30, 1996
Consolidated Statements of Income for the Six Months Ended
June 30, 1996 and 1995
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1996 and 1995
Audited Consolidated Financial Statements of the Company
Consolidated Statements of Condition as of December 31, 1995
and 1994
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
<PAGE>
SVB FINANCIAL SERVICES, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
10.2 SVB Financial Services, Inc. Nonstatutory Stock Option Plan
10.3 SVB Financial Services, Inc. Incentive Stock Option Plan
13 Annual Report to Security-Holders
16 Letters re change in certifying accountants
20 Proxy Statement for 1997 Annual Meeting of Shareholders
23 Consent of Arthur Andersen LLP
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 27, 1997
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 27, 1997
John K. Kitchen
/s/Robert P. Corcoran
- ---------------------- President and Chief Executive Officer March 27, 1997
Robert P. Corcoran and Director
/s/Keith B. McCarthy
- -------------------- Chief Financial Officer/Chief March 27, 1997
Keith B. McCarthy Accounting Officer
/s/Bernard Bernstein
- -------------------- Director March 27, 1997
Bernard Bernstein
/s/Mark S. Gold
- --------------- Director March 27, 1997
Mark S. Gold, MD
- -------------------- Director March 27, 1997
Raymond L. Hughes
<PAGE>
- -------------------- Director March 27, 1997
S. Tucker S. Johnson
/s/Willem Kooyker
- ----------------- Director March 27, 1997
Willem Kooyker
/s/Frank Orlando
- ---------------- Director March 27, 1997
Frank Orlando
/s/Gilbert E. Pittenger
- ----------------------- Director March 27, 1997
Gilbert E. Pittenger
/s/Frederick D. Quick
- --------------------- Director March 27, 1997
Frederick D. Quick
/s/Anthony J.Santye, Jr.
- ------------------------ Director March 27, 1997
Anthony J. Santye, Jr.
/s/G. Robert Santye
- ------------------- Director March 27, 1997
G. Robert Santye
- ------------------- Director March 27, 1997
Donald Sciaretta
/s/Herman C. Simonse
- -------------------- Director March 27, 1997
Herman C. Simonse
/s/Donald R. Tourville
- ---------------------- Director March 27, 1997
Donald R. Tourville
</TABLE>
EXHIBIT 10.2
SVB FINANCIAL SERVICES, INC.
1997 RESTATED INCENTIVE STOCK OPTION PLAN
1. PURPOSES.
(a) Restated Plan. This 1997 Incentive Stock Option Plan
modifies and restates the 1994 Stock Option Plan adopted by the Board of
Directors of Somerset Valley Bank on March 31, 1994 and which was ratified by
the shareholders of the Bank on April 26, 1994. The 1994 Stock Option Plan was
assigned by Somerset Valley Bank to SVB Financial Services, Inc. by resolution
of the Boards of Directors of both corporations at meetings of the respective
Boards of Directors held on October 31, 1996. The Restated Incentive Stock
Option Plan restates the provisions of the 1994 Stock Option Plan as to
Incentive Stock Options only.
(b) Opportunity to Purchase Stock. The purpose of the Plan is
to provide a means by which selected Employees of the Company and its Affiliates
may be given an opportunity to purchase stock of the Company. The Company, by
means of the Plan, seeks to retain the services of persons who are now Employees
of the Company and its Affiliates, to secure and retain the services of new
Employees of the Company and its Affiliates, and to provide incentives for such
persons to exert maximum efforts for the success of the Company and its
Affiliates.
(c) Incentive Stock Options. The Company intends that the
Options issued under the Plan shall be Incentive Stock Options.
2. DEFINITIONS.
(a) "Affiliate" means any parent corporation or subsidiary corporation
of the Company, as those terms are defined in Sections 424(e) and (f)
respectively of the Code, whether such corporations are now or are hereafter
existing.
(b) "Board" means the Board of Directors of the Company.
(c) "Change of Control" means the occurrence, at any time after
December 31, 1996, of (i) a merger or consolidation of the Company with or into
another Person or the merger of another Person into the Company or the transfer
ownership of nay voting stock of the Company to any Person or "group" (as such
term is defined in Section 13 (d)(3) of the Securities and Exchange Act of 1934,
as amended (the "Exchange Act")), of Persons as a consequence of which those
Persons who held the voting stock of the Company immediately prior to such
merger, consolidation or transfer do not hold either directly or indirectly a
majority of the voting stock of the Company(or, if applicable, the surviving
company of such merger or consolidation) after the consummation of such merger,
consolidation or transfer; (ii) the sale of all or substantially all of the
assets of the Company to any Person or "group" of Persons (other than to an
entity which owns a majority or more of the Common Stock of the Company, a
subsidiary of the Company, or an entity whose equity interests are owned
directly or indirectly by the Company or by an entity which owns directly or
indirectly a majority or more of the Common Stock of the Company); or (iii) any
event or series of events (which event or series of events must include a proxy
fight or proxy solicitation with respect to the election of directors of the
<PAGE>
Company made in opposition to the nominees recommended by the Continuing
Directors) during any period of 12 consecutive months all or any portion of
which is after (i) the date set forth above, and (ii) the date the Company first
has securities registered under Section 12 of the Exchange Act, as a result of
which a majority of the Board of Directors of the Company consists of
individuals other than Continuing Directors.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the Board of Directors of the Company unless a
separate Committee has been appointed by the Board in accordance with Section
3(c) of the Plan.
(f) "Common Stock" means the common stock of SVB Financial Services,
Inc., a New Jersey corporation.
(g) "Company" means SVB Financial Services, Inc., a New Jersey
corporation.
(h) "Continuing Directors of the Company" means with respect to any period
of 12 consecutive months (i) any members of the Board of Directors of the
Company on the first day of such period, (ii) any member of the Board of
Directors of the Company elected after the first day of such period at any
annual meeting of the shareholders who were nominated by the Board of Directors
or a committee thereof, if a majority of the members of the Board of Directors
or such Committee were Continuing Directors at the time of such nomination , and
(iii) any members of the Board of Directors of the Company elected to succeed
Continuing Directors of the Board of Directors or a committee thereof, if a
majority of the members of the Board of Directors or such committee were
Continuing Directors at the time of such election.
(i) "Continuous Status as an Employee" means the employment or
relationship as an employee is not interrupted or terminated with the Company or
any Affiliate. Continuous Status as an Employee shall not be considered
interrupted in the case of : (1) any sick leave, military leave, or any leave of
absence approved by the Committee; provided, however, that for purposes of the
Incentive Stock Options, any such leave is for a period of not more than ninety
(90) days or reemployment upon the expiration of such leave is guaranteed by
contract or statute; or (2) transfers between locations of the Company or
between the Company and its Affiliates or between the Company or its Affiliates
on the one hand and their successors, on the other hand.
(j) "Director" means a member of the Board.
(k) "Disability" means permanent and total disability as defined in
Section 22 (e) (3) of the Code.
(l) "Non-Employee Director" means a Director who is considered to be a
"non-employee director" in accordance with Section (b) (3) (i) of Rule 16b-3,
and any other applicable rules, regulations and interpretations of the
Securities and Exchange Commission.
(m) "Employee" means any person, including officers and Directors,
employed by the Company or any Affiliate. Neither service as a Director nor
payment of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
(n) "Exchange Act" means the Securities and Exchange Act of 1934, as
amended.
<PAGE>
(o) "Fair Market Value" means, as of the any date, the value of the
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the National
Market System of the National Association of Securities Dealers, Inc. Automated
Quotation (NASDAQ) System, the Fair Market Value of a share of Common Stock
shall be the Closing sales price for such stock on the date of determination
(or, if no such price is reported on such date, such price as reported on the
nearest preceding day) as quoted on such system or exchange (or exchange with
the greatest volume of trading in the Common Stock), as reported in The Wall
Street Journal or such other source as the Committee deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but
not on the National Market System thereof) or is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a share of Common Stock shall be the mean of the closing bid and
the asked prices for the Common Stock on the date of determination (or, if such
prices are not reported for such date, such prices as reported on the nearest
preceding date), as reported in the Wall Street Journal or such other source as
the Committee deems reliable;
(iii) If the Fair Market Value is not determined pursuant to
(i) or (ii) above, then the Fair Market Value shall be determined in good faith
by the Committee.
(p) "Incentive Stock Option" means an Option qualifying as an incentive
stock option within the meaning of Section 422 of the Code and the regulations
promulgated thereunder.
(q) "Nonstatutory Stock Option" means an Option not qualifying as an
Incentive Stock Option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(r) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "Option" means a stock option granted pursuant to the Plan.
(t) "Option Agreement" means a written agreement between the Company
and the Optionee evidencing the conditions of an individual Option grant. The
Option Agreement shall be subject to the terms and conditions of the Plan.
(u) "Optioned Shares" means with respect to any Option the Shares of
the Common Stock subject to the Option.
(v) "Optionee" means an Employee or Consultant who holds an outstanding
Option.
(w) "Person" means an individual or an entity.
(x) "Plan" the SVB Financial Services, Inc. 1997 Restated Incentive
Stock Option Plan.
(y) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3.
<PAGE>
(z) "Shares" shall mean a share of Common Stock, as adjusted in
accordance with Section 10.
3. ADMINISTRATION.
(a) Committee. The Plan shall be administered by the Committee.
(b) Powers. The Committee shall have the power, subject to, and within
the limitations of, the express provisions of the Plan to:
(i) grant Options;
(ii) determine, in accordance with Section 6 of the Plan, the
Fair Market Value per Share of the Common Stock;
(iii) determine, in accordance with Section 6, the exercise
price per Share at which Options may be exercised;
(iv) determine the Employees to whom, and the time or times at
which, Options shall be granted, the number of shares of Optioned Stock subject
to each Option and the vesting schedule of such Options;
(v) determine the terms and provisions of each Option granted
(which need not be identical) and the forms of Option Agreements and, with the
consent of the Optionee, and subject to Section 11, to modify or amend any
outstanding Option;
(vi) accelerate or defer (with the consent of the Optionee)
the date of any outstanding Option;
(vii) authorize any person to execute on behalf of the Company
any instrument required to effectuate the grant of an Option previously granted
by the Committee;
(viii) amend the Plan as provided in Section 11;
(ix) construe and interpret the Plan and Options granted under
it, and to establish, amend and revoke rules and regulations for the
administration of the Plan, subject to Section 11; including correcting any
defect, omission or inconsistency in the Plan or in any Option Agreement, in any
manner and to the extent it shall deem necessary or expedient to make the Plan
Fully effective;
(x) authorize the sale of shares of the Company's Common Stock
in connection with the exercise
of the Options;
(xi) effect, at any time and from time to time, with the
consent of the affected Optionee, the cancellation of any or all outstanding
Options and grant in substitution thereof new Options relating to the same or
different numbers of Shares, but having an exercise price per share consistent
with Section 6(b) at the date of the new Option grant; and
(xii) make all other determination deemed necessary or
advisable for the administration of the Plan.
<PAGE>
(c) Committee. The Board may appoint a committee composed of not fewer
than two (2) members of the Board to serve in its place with respect to the
Plan. All of the members of such Committee shall be Disinterested Persons, if
required under Section 3 (d). From time to time, the Board may increase the size
of the Committee and appoint such additional members, remove members (with or
without cause) and substitute new members of the committee, fill vacancies,
(however caused) and remove members of the committee and thereafter directly
administer the Plan, all to the extent permitted by the rules governing plans
intended to qualify as a discretionary plan under Rule 16b-3.
(d) Exchange Act Registration. Any requirement that an administrator of
the Plan be a Disinterested Person shall not apply (i) prior to the date of the
first registration of an equity security of the Company under Section 12 of the
Exchange Act or (ii) if the Board or the Committee expressly declares that such
requirement shall not apply. Any Disinterested Person shall otherwise comply
with the requirements of Rule 16b-3.
4. SHARES SUBJECT TO PLAN.
(a) Number of Shares. Subject to the provisions of Section 10 relating
to adjustments upon changes in stock, the stock that may be sold pursuant to
Options is 82,404 shares of the Company's Common Stock, of which Options have
previously been issued to Employees for 50,400 shares of the Company's Common
Stock pursuant to the 1994 Stock Option Plan. If any Option shall for any reason
expire or otherwise terminate without having been exercised in full, the
Optioned Shares not purchased under such Option shall revert to and again become
available for issuance under the Plan unless the Plan shall have terminated;
provided, however, that Shares that have actually been issued under the Plan
shall not be returned to the Plan and shall not become available for future
issuance under the Plan.
(b) Stock Subject to Plan. The stock subject to the Plan may be
unissued shares or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Employees. Incentive Stock Options may be granted to Employees
only.
(b) 10% Holders. No person shall be eligible for the grant of an
Incentive Stock Option, if, at the time of the grant, such person owns (or is
deemed to own pursuant to Section 424(d) of the Code) stock possessing more than
ten (10%) of the total combined voting power of all classes of stock of the
Company or of any of its Affiliates unless the exercise price of the Option is
at least one hundred ten percent (110%) of the Fair Market Value of such stock
at the date of the grant and the Incentive Stock Option is not exercisable after
the expiration of five (5) years from the date of the grant.
(c) Directors. A Director shall only be eligible for the benefits of
this Plan if he or she is also an Employee, provided, however, a Director shall
in no event be eligible for the benefits of the Plan unless at the time
discretion is exercised in the selection of the Director as a person to whom
Options may be granted, or in the selection of the Director as a person to whom
Options may be granted, or in the determination of the number of Optioned Shares
which may be covered by Options granted to the Director: (i) the Committee
consists only of Non-Employee Directors; or, (ii) the Plan otherwise complies
with the requirements of Section 16b-3. This Section 5 (c) shall not apply prior
to the date of the first registration of an equity security of the Company under
Section 12 of the Exchange Act.
<PAGE>
(d) Other Limits on Incentive Stock Options. To the extent that the
aggregate Fair Market Value (determined at the time of the grant) of stock with
respect to which Incentive Stock Options are exercisable for the first time by
any Optionee during any calendar year under all plans of the Company and its
Affiliates exceeds One Hundred Thousand ($100,000) Dollars, the Options or
portions thereof that exceed such limit (according to the order in which they
were granted) shall be treated as Nonstatutory Stock Options.
6. OPTION PROVISIONS.
Each Option Agreement shall be in such form and contain such terms and
conditions as the Committee shall deem appropriate. In the event that any
provision of the Option Agreement and the Plan conflict, the provisions of the
Plan shall control. The provisions of separate Options need not be identical,
but each Option Agreement shall include (through incorporation of provisions
hereof by reference in the Option Agreement or otherwise) the substance of each
of the following provisions:
(a) Term. No Option shall be exercisable after the expiration of five
(5) years from the date it was granted and the term of each Option shall be
stated in the Option Agreement.
(b) Price. Subject to Section 5, the exercise price shall be not less
than one hundred percent (100%) of the Fair Market Value of the stock subject to
the Option on the date the Option is granted. The exercise price of each Stock
Option shall not be less than the par value of the Optioned Shares on the date
the Option was exercised.
(c) Consideration. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations at the time the Option is exercised, either in cash or check.
(d) Exercise. Subject to 9(f), an Option shall be deemed exercised when
written notice of such exercise has been given to the Company in accordance with
the terms of the Option Agreement by the person entitled to exercise the Option
and full payment for the Shares with respect to which the Option is exercised
has been received by the Company by cash or check. Each Optionee who exercises
an Option shall, upon notification of the amount due (if any) and prior to or
concurrent with delivery of the certificate representing the Shares, pay to the
Company by cash or check, amounts necessary to satisfy applicable federal, state
or local tax withholding requirements.
(e) Non-Transferability. An Incentive Stock Option shall not be
transferrable except by will or by laws of descent and distribution and shall be
exercisable during the lifetime of the Optionee only by such person.
(f) Vesting. The total number of shares of stock subject to an Option
may, but need not, be allocated in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of the installment periods, the option may become exercisable ("Vest") with
respect to some of all of the Shares allotted to that period and may be
exercised with respect to some or all of the Shares allotted to such period
and/or any prior period as to which the Option became vested but has not been
fully exercised. During the remainder of the term of the Option, (if its term
extends beyond the end of the installment period), the Option may be exercised
from time to time with respect to any Shares then remaining subject to the
Option. The provisions of the this subsection are subject to any Option
provisions governing minimum number of Shares as to which an Option may be
exercised. Options may not be exercised in fractional shares.
<PAGE>
(g) Securities Compliance. The Company may require any Optionee, or any
person to whom an Option is transferred under Section 6 (f), as a condition of
exercising such Option, (i) to give written assurances satisfactory to the
Company as to the Optionee's knowledge and experience in financial and business
matters and/or to employ a purchaser representative reasonably satisfactory to
the Company who is knowledgeable and experienced in financial and business
matters, and that he or she is capable of evaluating, alone, or together with
the purchaser representative, the merits and risks of exercising the Option;
(ii) to give written assurances satisfactory to the Company stating that such
person is acquiring the stock subject to the Option for such person's own
account and not with the present intention of selling or otherwise distributing
the stock; and (iii) to deliver such other documentation as may be necessary to
comply with federal and state securities laws. These requirements and any
assurances given pursuant to such requirements, shall be inoperative if (i) the
issuance of the Shares upon the exercise of the Option has been registered under
a then effective registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), and all applicable state securities laws, or
(ii) as to any such requirement, a determination is made by counsel for the
Company that such requirement need not be met in the circumstances under the
applicable securities laws. The Company may, upon advice of Counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary and appropriate in order to comply with applicable
securities laws, including but not limited to, legends restricting the transfer
of the stock, and may enter stop-transfer orders against the transfer of the
Shares of Common Stock issued upon the exercise of an Option. The Company has no
obligation to undertake registration of Options or the Shares of Common Stock
issued upon the exercise of an Option.
(h) Termination of Employment. In the event an Optionee's Continuous
Status an Employee terminates (other than by the Optionee's death or
disability), the Optionee may exercise his or her Option but only prior to the
(i) expiration of three (3) months after the date of such termination and (ii)
expiration of the term of the Option as set forth in the Option Agreement, and
only to the extent that the Optionee was entitled to exercise it at the date of
such termination. If, at the date of such termination, the Optionee is not
entitled to exercise his or her entire Option, the Shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If after termination, the Optionee does not fully
exercise his or her Option within the time specified in the Option Agreement,
the Option shall terminate and the Shares covered by the unexercised portion of
the such Plan shall revert to and again become available under the Plan.
(i) Disability of Optionee. In the event that an Optionee's Continuous
Status as an Employee terminates as a result of the Optionee's Disability, the
Optionee or his or her personal representative may exercise his or her Option,
but only within twelve (12) months from the date of such termination, and only
to the extent that the Optionee was entitled to exercise it on the date of such
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Agreement). If, at the date of such termination, the
Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to and again be
available under the Plan. If, after such termination, the Optionee does not
fully exercise his or her Option within the time period specified herein, the
Option shall terminate and the Shares covered by the unexercised portion of the
Option shall revert to and again become available under the Plan.
<PAGE>
(j) Death of Optionee. In the event of the death of an Optionee, the
Option may be exercised , at any time within twelve (12) months following the
date of death (or such longer or shorter time as may be specified in the Option
Agreement) but in no event later than the expiration date of the Option as set
forth in the Option agreement, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent that the Optionee was entitled to exercise the Option as of the date
of his or her death. If at the time of death, the Optionee was not entitled to
exercise his or her entire Option, then the Shares covered by the unexercisable
portion of the Option shall revert to and again become available under the Plan.
If, after death, the Optionee's estate or a person who acquired the right to
exercise the Option, does not fully exercise the Option within the time period
specified herein, then the Shares covered by the unexercised portion of the
Option shall revert to and again become available under the Plan.
7. COVENANTS OF THE COMPANY.
(a) Reserves. During the term of the Options, the Company shall keep
available at all times and shall reserve the number of shares required to
satisfy such Options upon exercise.
(b) Regulatory Approvals. The Company shall seek and obtain from each
regulatory commission or agency having jurisdiction over the Plan such authority
as may be required to issue and sell Shares upon exercise of the Options;
provided, however, that this undertaking shall not require the Company to
register under the Securities Act either the Plan or any Option or any Shares
issued or issuable pursuant to such Options. If, after reasonable efforts, the
Company is unable to obtain from such regulatory commission or agency the
authority that counsel for the Company deems necessary for the lawful issuance
and sale of the Shares under the Plan, the Company shall be relieved from any
liability for failure to issue or sell Shares upon exercise of such Options
unless and until authority is obtained.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of the stock pursuant to Options shall
constitute general funds of the Company.
9. MISCELLANEOUS.
(a) Acceleration of Vesting. The committee shall have the power to
accelerate the time at which an Option may first be exercised or the time during
which an Option or any part thereof will Vest pursuant to Section 6 (g),
notwithstanding the provisions in the Option Agreement stating the time at which
it may first be exercised or the time during which it will Vest.
(b) No Rights as Shareholder. Neither an Optionee nor any person to
whom an Option is transferred under Section 6(f) shall be deemed to be the
holder of or to have any of the rights of a holder with respect to, any Shares
subject to such Option including, but not limited to, rights to vote or to
receive dividends unless and until such person has satisfied all requirements
for the exercise of the Option according to its terms, the certificates
evidencing such Shares have been issued and such person has become the record
owner of such Shares.
<PAGE>
(c) No Right To Continue as Employee. Nothing in the Plan or any
instrument executed or Option granted pursuant thereto shall confer upon any
Employee, or Optionee any right to continue in the employ of the Company, or any
Affiliate or shall affect the right of the Company or any Affiliate to terminate
the employment or the relationship of any Employee or Optionee with or without
cause.
(d) Date of Grant. Once shareholder approval of the Plan has been
obtained, the date of grant of an Option shall, for all purposes, be the date on
which the Committee makes the determination granting such Option. Notice of the
determination shall be given to each Optionee within a reasonable time after the
date of such grant. The Code may cause the grant date to be recognized as the
date of the grant even though shareholder approval has not been obtained.
(e) Rule 16b-3. With respect to persons subject to Section 16 of the
Exchange Act, transactions under the Plan are intended to comply with all
applicable conditions of Rule 16b-3 and with respect to such persons all
transactions shall be subject to such conditions regardless of whether they are
expressly set forth in the Plan or the Option Agreement. To the extent any
provision of the Plan or action by the Committee fails to comply, it shall not
apply to such persons or their transactions and shall be deemed null and void,
to the extent permitted by law and deemed advisable by the Committee.
(f) Conditions Upon Exercise of Options. Notwithstanding any other
provisions, Shares shall not be issued and Options shall not be exercised unless
the exercise of such Option and the Issuance and delivery of such Shares
pursuant thereto shall comply with all relevant provisions of law, including
without limitation, the Securities Act of 1933, as amended, applicable state
securities laws, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange (including NASDAQ) upon
which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(g) Grants Exceeding Allotted Shares. If the Optioned Shares exceed, as
of the date of the grant, the number of shares that may be issued under the Plan
without additional shareholder approval, such Option shall be void with respect
to such excess Shares, unless shareholder approval of an amendment to the Plan
sufficiently increasing the number of Shares subject to the Plan is timely
obtained in accordance with Section 11 of the Plan.
(h) Notice. Any written notice to the Company required by any of the
provisions of the Plan shall be addressed to the Secretary of the Company and
shall be effective when it is received. Any written notice to Optionee required
by the Plan shall be addressed to the Optionee at the address on file for the
Optionee with the Company and shall become effective 3 days after it is mailed
by certified mail, postage prepaid to such address or at the time of delivery if
delivered sooner by messenger or overnight delivery service.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the maximum number of Shares of Common Stock
subject to the Plan, the number of shares of Common Stock covered by each
outstanding Option and the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no Option has yet been
granted or have been returned to the plan upon cancellation or expiration of an
option, as well as the price per share of Common Stock shall be proportionally
<PAGE>
adjusted for any increase or decrease in the number of issued shares of the
Common Stock, resulting from a stock split, stock dividend, combination or
reclassification of shares of Common Stock effected without consideration by the
Company; provided, however that the conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Committee, whose
determination in that respect shall be final, binding and conclusive. Except as
expressly provided herein, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or exercise price of Optioned Shares.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, each outstanding Option will
terminate immediately prior to the consummation of such proposed action, unless
otherwise provided by the Committee. The Committee may, in the exercise of its
sole discretion in such instances, declare that any Option shall terminate as of
a date fixed by the Committee and give each Optionee the right to exercise his
or her Option as to all or any part of the Optioned Shares, including Shares as
to which the Option would not otherwise be exercisable.
(c) Merger or Asset Sale. Subject to Section 10 (b), in the event of a
proposed sale of all or substantially all of the assets of the Company, or the
merger, restructure, reorganization or consolidation of the Company with or into
another entity or entities in which the shareholders of the Company receive cash
or securities of another issuer, or any combination thereof, in exchange for
their shares of Common Stock, each outstanding Option shall be assumed or an
equivalent option shall be substituted by such successor entity or an Affiliate
of such successor entity, unless the Committee determines, in the exercise of
its sole discretion and in lieu of such assumption or substitution, that the
Optionee shall have the right to exercise the Option as to all Optioned Shares,
including Shares as to which the Option would not otherwise be vested. If the
Committee makes an Option fully exercisable in lieu of assumption or
substitution in the event of a merger, restructure, reorganization,
consolidation or sale of assets, the Committee shall notify the Optionee that
the Option shall be fully exercisable for a period of thirty (30) days from the
notice, and the Option will terminate upon the expiration of such period. For
the purposes of this Section, the Option shall be considered to be assumed if
following the merger, restructure, reorganization, consolidation or sale of
assets, the Option confers the right to purchase, for each Optioned Share
immediately prior to the merger, restructure, reorganization, consolidation or
sale of assets, the consideration (whether in stock, cash,or other securities or
property) received in the merger or sale of asset by holders of Common Stock for
each share of Common Stock for each share of Common Stock held on the effective
date of the consummation of the transaction (and if holders were offered a
choice of consideration, the type of consideration, the type of Common Stock);
provided, however, that if such consideration received in the solely common
equity of the successor entity or its Affiliates, the Committee may, with the
consent of the successor entity the Optionee, provide for the consideration to
be received upon the exercise of the Option, for each Optioned Share, to be
solely Common Stock of the successor entity or its Affiliates equal Common Stock
in the merger, restructure, reorganization, consolidation or sale of assets.
(d) Change of Control. Notwithstanding anything to the contrary, the
Committee may grant options which provide for the acceleration of the vesting of
shares subject to an Option upon a Change of Control. Such provisions shall be
set forth in the Option Agreement.
<PAGE>
11. AMENDMENT OF THE PLAN.
(a) Amendments by the Committee. The Committee at any time, from time
to time, may amend the Plan, provided, however, that if required by Rule 16b-3,
no amendment shall be made more than once every six months, other than to
comport with the changes in the Code, ERISA or the rules and regulations
promulgated thereunder.
(b) Compliance with the Code and Rule 16b-3. It is expressly
contemplated that the Committee may amend the Plan in any respect the Committee
deems necessary or advisable to bring the Plan and the Options granted hereunder
into compliance with the Code and Rule 16b-3.
(c) Shareholder Approval. Notwithstanding anything to the contrary, the
Company shall obtain shareholder approval of any Plan amendment to the extent
necessary or desirable to comply with Rule 16b-3 or with the Code (or any
successor rule or statute or other applicable law, rule or regulation, including
the requirements o any exchange or quotation system on which the Common Stock is
listed or quoted). Such shareholder approval, f required shall be obtained in
such manner and to such degree as is required by the applicable law, rule or
regulation.
(d) Rights and Obligations Granted Prior to Amendments. Rights and
obligations under any Option granted before amendment of the Plan shall not be
altered or impaired by any amendment of the Plan unless (i) the Company requests
the consent of the Optionee or his or her successor and (ii) such person
consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) Termination Date. The Committee may suspend or terminate the Plan
at any time. Unless sooner terminated, the Plan shall terminate within ten (10)
years of the date the Plan is adopted by, the Board of Directors or approved by
shareholders of the Company which ever date is earlier. No Options may be
granted under the Plan while it is suspended or after it is terminated.
(b) Alteration of Existing Rights. Rights and obligations under any
Option granted while the Plan is in effect shall not be altered or impaired by
the suspension or termination of the Plan except with the consent of the
Optionee or his or her successor.
13. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no
Options granted under the Plan shall be exercised unless and until the Plan has
been approved by the shareholders of the Company. Continuance of the Plan shall
be subject to the approval of the shareholders within 12 month from the date of
the Plan or the Board.
EXHIBIT 10.3
SVB FINANCIAL SERVICES, INC.
1997 DIRECTORS STOCK OPTION PLAN
1. PURPOSES.
(a) Opportunity to Purchase Stock. The purpose of the Plan is
to provide a means by which Directors of the Company and its Affiliates may be
given an opportunity to purchase stock of the Company. The Company, by means of
the Plan, seeks to retain the services of persons who are now Non-Employee
Directors of the Company and its Affiliates, and to provide incentives for such
persons to exert maximum efforts for the success of the Company and its
Affiliates.
(b) Nonstatutory Stock Options. The Company intends that the
Options issued under the Plan shall be Nonstatutory Stock Options.
2. DEFINITIONS.
(a) "Affiliate" means any parent corporation or subsidiary corporation
of the Company, as those terms are defined in Sections 424(e) and (f)
respectively of the Code, whether such corporations are now or are hereafter
existing.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Board of Directors of the Company unless a
separate Committee has been appointed by the Board in accordance with Section
3(c) of the Plan.
(e) "Common Stock" means the common stock of SVB Financial Services,
Inc., a New Jersey corporation.
(f) "Company" means SVB Financial Services, Inc., a corporation of the
State of New Jersey.
(g) "Continuous Status as a Director" means the relationship as member
of the Board of Directors is not interrupted or terminated with the Company or
any Affiliate. Continuous Status as a Director shall not be considered
interrupted in the case of : (1) any sick leave, military leave, or any leave of
absence approved by the Committee.
(h) "Director" means a member of the Board and includes Directors who
are officers and Employees of the Company or its Affiliates and Directors that
are neither Employees or Officers of the Company or any of its Affiliates.
(i) "Disability" means permanent and total disability as defined in
Section 22 (e) (3) of the Code.
(j) "Non-Employee Director" means a Director who is considered to be a
"non-employee director" in accordance with Section (b) (3) (i) of Rule 16b-3,
and any other applicable rules, regulations and interpretations of the
Securities and Exchange Commission.
<PAGE>
(k) "Employee" means any person, including officers and Directors,
employed by the Company or any Affiliate. Neither service as a Director nor
payment of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
(l) "Exchange Act" means the Securities and Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of the any date, the value of the
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the National
Market System of the National Association of Securities Dealers, Inc. Automated
Quotation (NASDAQ) System, the Fair Market Value of a Share of Common Stock
shall be the Closing sales price for such stock on the date of determination
(or, if no such price is reported on such date, such price as reported on the
nearest preceding day) as quoted on such system or exchange (or exchange with
the greatest volume of trading in the Common Stock), as reported in The Wall
Street Journal or such other source as the Committee deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but
not on the National Market System thereof) or is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean of the closing bid and
the asked prices for the Common Stock on the date of determination (or, if such
prices are not reported for such date, such prices as reported on the nearest
preceding date), as reported in the Wall Street Journal or such other source as
the Committee deems reliable;
(iii) If the Fair Market Value is not determined pursuant to
(i) or (ii) above, then the Fair Market Value shall be determined in good faith
by the Committee.
(n) "Non-Statutory Stock Option" means an Option not qualifying as an
Incentive Stock Option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "Option" means a stock option granted pursuant to the Plan.
(q) "Option Agreement" means a written agreement between the Company
and the Optionee evidencing the conditions of an individual Option grant. The
Option Agreement shall be subject to the terms and conditions of the Plan.
(r) "Optioned Shares" means with respect to any Option the Shares of
the Common Stock subject to the Option.
(s) "Optionee" means a Director who holds an outstanding Option.
(t) "Person" means an individual or an entity.
(u) "Plan" the SVB Financial Services, Inc. 1997 Directors Stock Option
Plan.
<PAGE>
(v) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3.
(w) "Shares" shall mean a Share of Common Stock, as adjusted in
accordance with Section 10.
3. ADMINISTRATION.
(a) Committee. The Plan shall be administered by the Committee.
(b) Powers. The Committee shall have the power, subject to, and within
the limitations of, the express provisions of the Plan to:
(i) determine, in accordance with Section 6 of the Plan, the
Fair Market Value per Share of the Common Stock;
(ii) determine the terms, provisions, and the forms of Option
Agreements and, with the consent of the Optionee, and subject to Section 11, to
modify or amend any outstanding Option;
(iii) accelerate or defer (with the consent of the Optionee)
the date of any outstanding Option;
(iv) authorize any person to execute on behalf of the Company
any instrument required to effectuate the grant of an Option;
(v) construe and interpret the Plan and Options granted under
it, and to establish, amend and revoke rules and regulations for the
administration of the Plan, subject to Section 11; including correcting any
defect, omission or inconsistency in the Plan or in any Option Agreement, in any
manner and to the extent it shall deem necessary or expedient to make the Plan
Fully effective;
(vi) effect, at any time and from time to time, with the
consent of the affected Optionee, the cancellation of any or all outstanding
Options and grant in substitution thereof new Options relating to the same
numbers of Shares, but having an exercise price per Share consistent with
Section 6(b) at the date of the new Option grant; and
(vii) make all other determination deemed necessary or
advisable for the administration of the Plan.
(c) Committee. The Board may appoint a committee composed of not fewer
than two (2) members of the Board to serve in its place with respect to the
Plan. All of the members of such Committee shall be Non- Employee Directors, if
required under Section 3(d). From time to time, the Board may increase the size
of the Committee and appoint such additional members, remove members (with or
without cause) and substitute new members of the committee, fill vacancies,
(however caused) and remove members of the committee and thereafter directly
administer the Plan, all to the extent permitted by the rules governing plans
intended to qualify as a discretionary plan under Rule 16b-3.
(d) Exchange Act Registration. Any requirement that an administrator of
the Plan be a Non-Employee Director shall not apply (i) prior to the date of the
first registration of an equity security of the Company under Section 12 of the
Exchange Act or (ii) if the Board or the Committee expressly declares that such
requirement shall not apply. Any Non-Employee Director shall otherwise comply
with the requirements of Rule 16b-3.
<PAGE>
4. GRANT OF OPTIONS AND SHARES SUBJECT TO PLAN.
(a) Upon the Effective Date of the Plan as set forth in Section 13
hereof, each Non-Employee Director as of December 31, 1996 shall be granted an
Option to purchase 3,900 Shares of the Common Stock at Fair Market Value on said
Effective Date.
(b) Number of Shares. Subject to the provisions of Section 10 relating
to adjustments upon changes in stock, the stock that may be sold pursuant to
Options is 54,600 Shares of the Company's Common Stock. If any Option shall for
any reason expire or otherwise terminate without having been exercised in full,
the Optioned Shares not purchased under such Option shall not become available
for future issuance under the Plan.
(c) Stock Subject to Plan. The stock subject to the Plan may be
unissued shares or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Directors Eligible. Nonstatutory Stock Options shall be granted to
each of the Non-Employee Directors upon the Effective Date of the Plan as set
forth in Section 13 hereof immediately following adoption of the Plan by the
Board and approval thereof by the stockholders as provided in Section 13
hereafter.
(b) Directors. A Director shall be eligible for the benefits of the
Plan only if he/she is a Non-Employee Director.
6. OPTION PROVISIONS.
Each Option Agreement shall be in such form and contain such terms and
conditions as the Committee shall deem appropriate. In the event that any
provision of the Option Agreement and the Plan conflict, the provisions of the
Plan shall control. The provisions of separate Options need not be identical,
but each Option Agreement shall include (through incorporation of provisions
hereof by reference in the Option Agreement or otherwise) the substance of each
of the following provisions:
(a) Term. No Option shall be exercisable after the expiration of five
(5) years from the date it was granted and the term of each Option shall be
stated in the Option Agreement.
(b) Price. The exercise price shall be not less than one hundred
percent (100%) of the Fair Market Value of the stock subject to the Option on
the date the Option is granted. The exercise price of each Stock Option shall
not be less than the par value of the Optioned Shares on the date the Option was
exercised.
(c) Consideration. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations at the time the Option is exercised, either in cash or check.
(d) Exercise. Subject to 9(f), an Option shall be deemed exercised when
written notice of such exercise has been given to the Company in accordance with
the terms of the Option Agreement by the person entitled to exercise the Option
and full payment for the Shares with respect to which the Option is exercised
<PAGE>
has been received by the Company by cash or check. Each Optionee who exercises
an Option shall, upon notification of the amount due (if any) and prior to or
concurrent with delivery of the certificate representing the Shares, pay to the
Company by cash or check, amounts necessary to satisfy applicable federal, state
or local tax withholding requirements.
(e) Non-Transferability. A Directors Stock Option shall not be
transferrable except: (i) by will or by laws of descent and distribution or
pursuant to a qualified domestic relations order, as defined by the Code or
Title I of the Employee Retirement Income Act, as amended ("ERISA), or the rules
thereunder (a "QDRO") and shall be exercisable during the lifetime of the
Optionee only by such person or any transferee pursuant to a QDRO; or (ii)
without payment of consideration, to immediate family members (i.e. spouses,
children and grandchildren) of the Optionee or to a trust for the benefit of
such family members, or partnership whose only partners are such family members.
(f) Securities Compliance. The Company may require any Optionee, or any
person to whom an Option is transferred under Section 6 (f), as a condition of
exercising such Option, (i) to give written assurances satisfactory to the
Compnay as to the Optionee's knowledge and experience in financial and business
matters and/or to employ a purchaser representative reasonably satisfactory to
the Company who is knowledgeable and experienced in financial and business
matters, and that he or she is capable of evaluating, alone, or together with
the purchaser representative, the merits and risks of exercising the Option;
(ii) to give written assurances satisfactory to the Company stating that such
person is acquiring the stock subject to the Option for such person's own
account and not with the present intention of selling or otherwise distributing
the stock; and (iii) to deliver such other documentation as may be necessary to
comply with federal and state securities laws. These requirements and any
assurances given pursuant to such requirements, shall be inoperative if (i) the
issuance of the Shares upon the exercise of the Option has been registered under
a then effective registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), and all applicable state securities laws, or
(ii) as to any such requirement, a determination is made by counsel for the
Company that such requirement need not be met in the circumstances under the
applicable securities laws. The Company may, upon advice of Counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary and appropriate in order to comply with applicable
securities laws, including but not limited to, legends restricting the transfer
of the stock, and may enter stop-transfer orders against the transfer of the
Shares of Common Stock issued upon the exercise of an Option. The Company has no
obligation to undertake registration of Options or the Shares of Common Stock
issued upon the exercise of an Option.
(g) Termination of Service. In the event an Optionee's Continuous
Status a Director terminates (other than by the Optionee's death or disability),
the Optionee may exercise his or her Option but only prior to the (i) expiration
of three (3) months after the date of such termination and (ii) expiration of
the term of the Option as set forth in the Option Agreement, and only to the
extent that the Optionee was entitled to exercise it at the date of such
termination. If after termination, the Optionee does not fully exercise his or
her Option within the time specified in the Option Agreement, the Option shall
terminate.
<PAGE>
(h) Disability of Optionee. In the event that an Optionee's Continuous
Status as a Director terminates as a result of the Optionee's Disability, the
Optionee or his or her personal representative may exercise his or her Option,
but only within twelve (12) months from the date of such termination, and only
to the extent that the Optionee was entitled to exercise it on the date of such
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Agreement). If, after such termination, the Optionee
does not fully exercise his or her Option within the time period specified
herein, then the Option shall terminate.
(i) Death of Optionee. In the event of the death of an Optionee, the
Option may be exercised , at any time within twelve (12) months following the
date of death (or such longer or shorter time as may be specified in the Option
Agreement) but in no event later than the expiration date of the Option as set
forth in the Option agreement, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent that the Optionee was entitled to exercise the Option as of the date
of his or her death. If, after death, the Optionee's estate or a person who
acquired the right to exercise the Option, does not fully exercise the Option
within the time period specified herein, then the Option shall terminate.
7. COVENANTS OF THE COMPANY.
(a) Reserves. During the term of the Options, the Company shall keep
available at all times and shall reserve the number of Shares required to
satisfy such Options upon exercise.
(b) Regulatory Approvals. The Company shall seek and obtain from each
regulatory commission or agency having jurisdiction over the Plan such authority
as may be required to issue and sell Shares upon exercise of the Options;
provided, however, that this undertaking shall not require the Company to
register under the Securities Act either the Plan or any Option or any Shares
issued or issuable pursuant to such Options. If, after reasonable efforts, the
Company is unable to obtain from such regulatory commission or agency the
authority that counsel for the Company deems necessary for the lawful issuance
and sale of the Shares under the Plan, the Company shall be relieved from any
liability for failure to issue or sell Shares upon exercise of such Options
unless and until authority is obtained.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of the stock pursuant to Options shall
constitute general funds of the Company.
9. MISCELLANEOUS.
(a) No Rights as Shareholder. Neither an Optionee nor any person to
whom an Option is transferred under Section 6(f) shall be deemed to be the
holder of or to have any of the rights of a holder with respect to, any Shares
subject to such Option including, but not limited to, rights to vote or to
receive dividends unless and until such person has satisfied all requirements
for the exercise of the Option according to its terms, the certificates
evidencing such Shares have been issued and such person has become the record
owner of such Shares.
<PAGE>
(b) No Right To Continue as Director. Nothing in the Plan or any
instrument executed or Option granted pursuant thereto shall confer upon any
Director or Optionee any right to continue in the employ of the Company, or any
Affiliate, or to continue to serve as a member of the Board of Directors of the
Company or any Affiliate or shall affect the right of the Company or any
Affiliate to terminate the employment or the relationship of any Director,
Employee, Officer or Optionee with or without cause.
(c) Date of Grant. Once Shareholder approval of the Plan has been
obtained, the date of grant of an Option shall, for all purposes, be the date on
which the Shareholder approval of the Plan was obtained. Notice shall be given
to each Optionee within a reasonable time after the date of such grant.
(d) Rule 16b-3. With respect to persons subject to Section 16 of the
Exchange Act, transactions under the Plan are intended to comply with all
applicable conditions of Rule 16b-3 and with respect to such persons all
transactions shall be subject to such conditions regardless of whether they are
expressly set forth in the Plan or the Option Agreement. To the extent any
provision of the Plan or action by the Committee fails to comply, it shall not
apply to such persons or their transactions and shall be deemed null and void,
to the extent permitted by law and deemed advisable by the Committee.
(e) Conditions Upon Exercise of Options. Notwithstanding any other
provisions, Shares shall not be issued and Options shall not be exercised unless
the exercise of such Option and the Issuance and delivery of such Shares
pursuant thereto shall comply with all relevant provisions of law, including
without limitation, the Securities Act of 1933, as amended, applicable state
securities laws, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange (including NASDAQ) upon
which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(f) Notice. Any written notice to the Company required by any of the
provisions of the Plan shall be addressed to the Secretary of the Company and
shall be effective when it is received. Any written notice to Optionee required
by the Plan shall be addressed to the Optionee at the address on file for the
Optionee with the Company and shall become effective 3 days after it is mailed
by certified mail, postage prepaid to such address or at the time of delivery if
delivered sooner by messenger or overnight delivery service.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
(a) Changes in Capitalization. Subject to any required action by the
Shareholders of the Company, the maximum number of Shares of Common Stock
subject to the Plan, the number of Shares of Common Stock covered by each
outstanding Option and the number of Shares of Common Stock that have been
authorized for issuance under the Plan but have been returned to the plan upon
cancellation or expiration of an option, as well as the price per Share of
Common Stock shall be proportionally adjusted for any increase or decrease in
the number of issued Shares of the Common Stock, resulting from a stock split,
stock dividend, combination or reclassification of Shares of Common Stock
effected without consideration by the Compnay; provided, however that the
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Committee, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of Shares of stock of any class, or securities convertible into Shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or exercise price of Optioned Shares.
<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, each outstanding Option will
terminate immediately prior to the consummation of such proposed action, unless
otherwise provided by the Committee. The Committee may, in the exercise of its
sole discretion in such instances, declare that any Option shall terminate as of
a date fixed by the Committee and give each Optionee the right to exercise his
or her Option as to all or any part of the Optioned Shares, including Shares as
to which the Option would not otherwise be exercisable.
(c) Merger or Asset Sale. Subject to Section 10 (b), in the event of a
proposed sale of all or substantially all of the assets of the Company, or the
merger, restructure, reorganization or consolidation of the Company with or into
another entity or entities in which the Shareholders of the Company receive cash
or securities of another issuer, or any combination thereof, in exchange for
their Shares of Common Stock, each outstanding Option shall be assumed or an
equivalent option shall be substituted by such successor entity or an Affiliate
of such successor entity, unless the Committee determines, in the exercise of
its sole discretion and in lieu of such assumption or substitution, that the
Optionee shall have the right to exercise the Option as to all Optioned Shares,
including Shares as to which the Option would not otherwise be vested. If the
Committee makes an Option fully exercisable in lieu of assumption or
substitution in the event of a merger, restructure, reorganization,
consolidation or sale of assets, the Committee shall notify the Optionee that
the Option shall be fully exercisable for a period of thirty (30) days from the
notice, and the Option will terminate upon the expiration of such period. For
the purposes of this Section, the Option shall be considered to be assumed if
following the merger, restructure, reorganization, consolidation or sale of
assets, the Option confers the right to purchase, for each Optioned Share
immediately prior to the merger, restructure, reorganization, consolidation or
sale of assets, the consideration (whether in stock, cash,or other securities or
property) received in the merger or sale of asset by holders of Common Stock for
each Share of Common Stock for each Share of Common Stock held on the effective
date of the consummation of the transaction (and if holders were offered a
choice of consideration, the type of consideration, the type of Common Stock);
provided, however, that if such consideration received in the solely common
equity of the successor entity or its Affiliates, the Committee may, with the
consent of the successor entity the Optionee, provide for the consideration to
be received upon the exercise of the Option, for each Optioned Share, to be
solely Common Stock of the successor entity or its Affiliates equal Common Stock
in the merger, restructure, reorganization, consolidation or sale of assets.
11. AMENDMENT OF THE PLAN.
(a) Amendments by the Committee. The Committee at any time, from time
to time, may amend the Plan, provided, however, that if required by Rule 16b-3,
no amendment shall be made more than once every six months, other than to
comport with the changes in the Code, ERISA or the rules and regulations
promulgated thereunder.
(b) Compliance with the Code and Rule 16b-3. It is expressly
contemplated that the Committee may amend the Plan in any respect the Committee
deems necessary or advisable to bring the Plan and the Options granted hereunder
into compliance with the Code and Rule 16b-3.
<PAGE>
(c) Shareholder Approval. Notwithstanding anything to the contrary, the
Company shall obtain Shareholder approval of any Plan amendment to the extent
necessary or desirable to comply with Rule 16b-3 or with the Code (or any
successor rule or statute or other applicable law, rule or regulation, including
the requirements o any exchange or quotation system on which the Common Stock
may be listed or quoted). Such Shareholder approval, if required, shall be
obtained in such manner and to such degree as is required by the applicable law,
rule or regulation.
(d) Rights and Obligations Granted Prior to Amendments. Rights and
obligations under any Option granted before amendment of the Plan shall not be
altered or impaired by any amendment of the Plan unless (i) the Company requests
the consent of the Optionee or his or her successor and (ii) such person
consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) Termination Date. The Committee may suspend or terminate the Plan
at any time. Unless sooner terminated, the Plan shall terminate within ten (10)
years of the date the Plan is adopted by, the Board of Directors or approved by
Shareholders of the Company which ever date is earlier. No Options may be
granted under the Plan while it is suspended or after it is terminated.
(b) Alteration of Existing Rights. Rights and obligations under any
Option granted while the Plan is in effect shall not be altered or impaired by
the suspension or termination of the Plan except with the consent of the
Optionee or his or her successor.
13. EFFECTIVE DATE OF PLAN AND GRANT OF OPTIONS.
The Plan and the Options granted hereunder shall become effective as of
the date of approval of the Plan in compliance with Section 14 of the Act by the
affirmative votes of the holders of a majority of the Common Stock present, or
represented, and entitled to vote at the 1997 Annual meeting of the Shareholders
duly held in accordance with the applicable laws of the State of New Jersey.
1996 ANNUAL REPORT
SVB FINANCIAL SERVICES, INC.
<PAGE>
Table of Contents
LETTER TO THE SHAREHOLDERS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOW
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Selected Consolidated Financial Information
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 1994, 1993 and 1992
1996 1995 1994 1993 1992
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income $ 8,382,903 $ 6,296,011 $ 4,396,324 $ 2,703,788 $ 1,262,247
Interest expense 3,813,161 2,870,884 1,765,907 1,092,806 685,482
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 4,569,742 3,425,127 2,630,417 1,610,982 576,765
Provision for possible loan losses 309,500 206,000 156,000 130,000 107,000
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses 4,260,242 3,219,127 2,474,417 1,480,982 469,765
Non-interest income 371,615 362,820 207,642 192,083 87,641
Non-interest expense 3,426,609 2,495,340 2,162,657 1,741,896 1,441,567
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,205,248 1,086,607 519,402 (68,831) (884,161)
Income tax expense (benefit) 485,163 423,390 (307,752) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 720,085 $ 663,217 $ 827,154 $ (68,831) $ (884,161)
===========================================================================================================================
BALANCE SHEET DATA:
Total Assets $ 124,995,467 $ 88,743,914 $ 74,075,685 $ 52,660,542 $ 33,439,249
Federal funds sold and other
short term investments 7,213,478 5,170,063 3,625,661 2,914,280 4,582,910
Securities available for sale 8,726,878 4,874,738 3,473,951 5,329,917 --
Securities held to maturity 13,989,481 14,580,823 18,091,163 6,410,724 8,085,218
Loans, net 86,992,283 59,528,167 44,988,469 35,015,352 17,891,230
Deposits 112,521,390 79,679,792 67,053,817 46,604,614 29,810,861
Shareholders' Equity 11,909,659 8,703,176 6,819,399 5,989,086 3,554,968
===========================================================================================================================
PERFORMANCE RATIOS:
Return on average assets .67% .83% 1.30% (.16%) (4.07%)
Return on average equity 8.07% 8.16% 13.50% (1.35%) (22.50%)
Net interest margin 4.51% 4.53% 4.38% 4.07% 2.90%
===========================================================================================================================
ASSET QUALITY:
Loans past due over 90 days $ 20,600 $ -- $ -- $ 5,985 $ --
Non-accrual loans 24,384 -- -- -- --
Net charge offs 57,592 51,043 14,973 5,965 --
Allowance for loan losses to total loans .89% .88% .82% .65% .59%
===========================================================================================================================
PER SHARE DATA (1):
Net income $ .61 $ .58 $ .80 $ (.08) $ (1.23)
Book value 8.72 7.42 6.61 5.83 4.93
Weighted average shares outstanding 1,178,100 1,152,408 1,029,048 927,233 722,046
===========================================================================================================================
CAPITAL RATIOS:
Total risked-based capital 13.40% 14.11% 14.03% 15.99% 13.87%
Tier I risked-based capital 12.56% 13.29% 13.28% 15.39% 13.45%
Leverage capital 9.58% 9.89% 9.21% 11.19% 10.22%
===========================================================================================================================
<PAGE>
(1) Retroactively restated for the 6 for 5 exchange of shares resulting from the
acquisition of Somerset Valley Bank by SVB Financial Services,Inc.
</TABLE>
<PAGE>
Dear Shareholder,
In addition to celebrating the fifth anniversary of the opening of Somerset
Valley Bank, a number of other significant events took place since our last
report. The Bank opened its first branch office at Hillsborough Centre in Belle
Mead, and in less than ten months reached over $10 million in new deposits and
added more than 1,093 new customers. A second branch, to be located on North
Bridge Street in Bridgewater Township, was approved by our regulators and
township officials and site work was begun prior to year end. We anticipate that
this branch will be in operation by the second quarter of 1997.
In 1996, SVB Financial Services, Inc., a single bank holding company was
formed and assumed ownership of Somerset Valley Bank through an exchange of
stock, offering six shares of holding company stock for every five shares
surrendered by bank shareholders. Shortly afterward, SVB Financial Services,
Inc., successfully completed a stock offering of 200,000 shares at $13.00 per
share, adding an additional $2.6 million to the Company's capital. The stock
offering was met with extreme enthusiasm and was actually over-subscribed, with
many subscription agreements being returned to potential subscribers. The quick
and successful completion of this offering underscores the positive perception
of the Company by its community and existing shareholders and also clearly
demonstrates the liquidity and outside demand for our stock. The $13 per share
selling price represents a significant premium over book value further enhancing
the value of your investment.
Aside from the above mentioned structural and strategic accomplishments,
the Company's wholly owned subsidiary, Somerset Valley Bank, recorded impressive
levels of growth and profitability in 1996. The Company's total assets grew from
$88.7 million at year end 1995 to $124.9 million on December 31, 1996, an
increase of 41%. The addition of our new branch at Hillsborough Centre, along
with a concerted marketing effort through officer contact and media advertising,
pushed our deposits from $79.6 million in 1995 to $112.5 million, or an annual
increase of 41%. Our loan portfolios more than matched those accomplishments,
growing by $27.7 million, or 46%, ending 1996 at $87.9 million up from $60.1
million the previous year.
Despite the increase in employees and occupancy costs related to opening
the new branch and relocating and expanding our back-office operations, the
Company increased its net income in 1996 to $720,085 as compared to the previous
years' earnings of $663,217. The above mentioned growth figures including
significant earnings growth in the fourth quarter of 1996, provide the basis for
a very optimistic outlook for performance in 1997.
Strategically, Somerset Valley Bank is well positioned to take advantage of
potential new opportunities that may become available through legislative
changes favorable to the banking community with our newly formed holding
company, and our strong capital position will allow us to grow the Bank in
accordance with our long-term goals. Additional branching opportunities are
being explored and significant changes and enhancements to our delivery system
are currently being developed. This year we will offer a deposit product that
will feature telephone banking, including an inquiry, balance transfer, and bill
paying mechanism, along with a nationwide debit card program in partnership with
a major electronic card processing firm. This product will allow our customers
to enjoy the convenience of home banking and the availability of accessing their
deposit accounts at Somerset Valley Bank from almost anywhere in the country
and, in many instances, the world. We are also exploring possibilities for
Internet capabilities and other technological advances in banking products as
they evolve and become more readily accepted and required by our customer base.
<PAGE>
Although technology continues to alter the way many of us may choose to do
our banking, customer service is still the overriding factor in the success of
our Company. Our philosophy in this regard remains steadfast and, regardless of
where technology and expansion take us, we must continue to differentiate
ourselves as a community bank, supporting those individuals and businesses
within our community.
This philosophy is real and it represents how we conduct our business. It
has taken us in five short years from a newly chartered, single branch bank to a
viable, profitable multi-branch bank holding company that has become a
significant provider of financial services within its community. With the
continuous support and commitment of our Board of Directors and shareholders,
the next five years will allow us to continue on this path of success and
provide our shareholders with a truly rewarding investment.
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
[GRAPHIC-PHOTOS OF ABOVE NAMED INDIVIDUALS]
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Balance Sheets
AS OF DECEMBER 31, 1996 AND 1995
1996 1995
===========================================================================================================================
<S> <C> <C>
ASSETS
Cash & Due from Banks $ 4,914,698 $ 2,814,877
Federal Funds Sold 5,450,000 4,575,000
Other Short Term Investments 1,763,478 595,063
===========================================================================================================================
Total Cash and Cash Equivalents 12,128,176 7,984,940
===========================================================================================================================
Securities (Notes 2 and 3)
Available for Sale, at Market Value 8,726,878 4,874,738
Held to Maturity, (Market Value $13,998,228 in 1996
and $14,649,141 in 1995) 13,989,481 14,580,823
===========================================================================================================================
Total Securities 22,716,359 19,455,561
===========================================================================================================================
Loans (Notes 2, 4 and 5) 87,855,063 60,144,428
Allowance for Possible Loan Losses (783,366) (527,019)
Unearned Income (79,414) (89,242)
===========================================================================================================================
Net Loans 86,992,283 59,528,167
===========================================================================================================================
Premises & Equipment, Net (Notes 2 and 6) 1,066,109 716,215
Other Real Estate 304,700 --
Other Assets 1,787,840 1,059,031
===========================================================================================================================
Total Assets $ 124,995,467 $ 88,743,914
===========================================================================================================================
<PAGE>
SVB FINANCIAL SERVICES, INC.
Consolidated Balance Sheets
AS OF DECEMBER 31, 1996 AND 1995
1996 1995
===========================================================================================================================
<S> <C> <C>
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Demand
Non-interest Bearing $ 21,420,923 $ 12,829,836
NOW Accounts 6,439,160 5,875,285
Savings 7,675,671 5,700,503
Money Market Accounts 15,710,515 9,315,378
Time
Greater than $100,000 6,211,335 5,202,055
Less than $100,000 55,063,786 40,756,735
===========================================================================================================================
Total Deposits 112,521,390 79,679,792
===========================================================================================================================
Accrued Expenses & Other Liabilities 564,418 360,946
===========================================================================================================================
Total Liabilities 113,085,808 80,040,738
===========================================================================================================================
Commitments and Contingencies (Note 8)
===========================================================================================================================
SHAREHOLDERS' EQUITY (Notes 2, 11 and 13)
Common Stock, $4.17 Par Value: 10,000,000
Shares Authorized; 1,366,523 Shares in 1996 and
1,173,432 Shares in 1995 Issued and Outstanding 5,698,401 4,893,211
Additional Paid-in Capital 5,447,009 3,764,511
Retained Earnings 756,135 36,050
Unrealized Gain on Securities Available for Sale,
Net of Income Taxes 8,114 9,404
- ---------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 11,909,659 8,703,176
===========================================================================================================================
Total Liabilities and Shareholders' Equity $ 124,995,467 $ 88,743,914
===========================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Statements of Income
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
INTEREST INCOME (Note 2)
Interest on Loans $ 6,827,602 $ 4,850,687 $ 3,508,379
Interest on Securities Available for Sale 350,166 205,413 189,260
Interest on Securities Held to Maturity 918,011 1,013,811 558,076
Interest on Other Short Term Investments 46,757 14,798 32,746
Interest on Federal Funds Sold 240,367 211,302 107,863
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Income 8,382,903 6,296,011 4,396,324
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits 3,813,161 2,870,715 1,765,501
Interest on Federal Funds Purchased -- 169 406
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 3,813,161 2,870,884 1,765,907
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income 4,569,742 3,425,127 2,630,417
PROVISION FOR POSSIBLE LOAN LOSSES (Notes 2 and 5) 309,500 206,000 156,000
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision For Possible Loan Losses 4,260,242 3,219,127 2,474,417
- ---------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service Charges on Deposit Accounts 171,130 120,411 108,060
(Loss)/Gain on the Sale of Securities Available for Sale (2,117) 2,336 --
Gain on the Sale of Loans 131,966 181,599 59,358
Other Income 70,636 58,474 40,224
- ---------------------------------------------------------------------------------------------------------------------------
Total Other Income 371,615 362,820 207,642
- ---------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE
Salaries and Employee Benefits 1,781,085 1,269,371 1,055,231
Occupancy Expense 400,770 240,049 221,109
Equipment Expense 246,190 174,985 152,552
Other Expenses (Note 7) 998,564 810,935 733,765
- ---------------------------------------------------------------------------------------------------------------------------
Total Other Expense 3,426,609 2,495,340 2,162,657
- ---------------------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Statements of Income
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
Net Income Before Provision (Benefit)
for Income Taxes 1,205,248 1,086,607 519,402
- ---------------------------------------------------------------------------------------------------------------------------
Provision (Benefit) for Income Taxes (Notes 2 and 10) 485,163 423,390 (307,752)
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 720,085 $ 663,217 $ 827,154
===========================================================================================================================
NET INCOME PER SHARE $ .61 $ .58 $ .80
===========================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING (Note 2) 1,178,100 1,152,408 1,029,048
===========================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Statements of Changes in Shareholders' Equity FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
UNREALIZED
ADDITIONAL RETAINED GAIN (LOSS) TOTAL
COMMON PAID-IN EARNINGS ON SECURITIES SHAREHOLDERS'
STOCK CAPITAL (DEFICIT) AVAILABLE FOR SALE EQUITY
===========================================================================================================================
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $ 4,287,552 $ 3,163,010 $ (1,454,321) $ (7,155) $ 5,989,086
===========================================================================================================================
Exercise of Warrants 17,014 16,986 -- -- 34,000
Net Income - 1994 -- -- 827,154 -- 827,154
Change in Unrealized Gain (Loss)
on Securities Available for Sale -- -- -- (30,841) (30,841)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 4,304,566 3,179,996 (627,167) (37,996) 6,819,399
===========================================================================================================================
Exercise of Warrants 588,645 584,515 -- -- 1,173,160
Net Income - 1995 -- -- 663,217 -- 663,217
Change in Unrealized Gain (Loss)
on Securities Available for Sale -- -- -- 47,400 47,400
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 4,893,211 3,764,511 36,050 9,404 8,703,176
===========================================================================================================================
Issuance of Common Stock,
Net of Related Issuance Costs 834,000 1,711,266 -- -- 2,545,266
Exercise of Stock Options 5,004 4,996 -- -- 10,000
Non Participants in Exchange Offer (33,787) (33,733) -- -- (67,520)
Fractional Shares on Exchange (27) (31) -- -- (58)
Net Income - 1996 -- -- 720,085 -- 720,085
Change in Unrealized Gain (Loss)
on Securities Available for Sale -- -- -- (1,290) (1,290)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ 5,698,401 $ 5,447,009 $ 756,135 $ 8,114 $ 11,909,659
===========================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flow
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 720,085 $ 663,217 $ 827,154
Adjustments to Reconcile Net Income to Net
Cash Provided By Operating Activities
Provision for Possible Loan Losses 309,500 206,000 156,000
Depreciation and Amortization 208,228 170,619 150,205
(Accretion) of Securities Premium/Discount (50,581) (208,496) (116,405)
Losses/(Gains) on Sales of Securities Available for Sale, Net 2,117 (2,336) --
(Increase) in Other Assets (728,809) (92,653) (681,807)
Increase in Accrued Expenses
and Other Liabilities 204,356 153,414 253,283
(Decrease)/Increase in Unearned Income (9,828) (14,414) 12,823
===========================================================================================================================
Net Cash Provided By Operating Activities 655,068 875,351 601,253
===========================================================================================================================
INVESTING ACTIVITIES
Proceeds from Sales of Securities Available for Sale 1,994,043 490,909 --
Proceeds from Maturities of Securities
Available for Sale 4,333,967 2,501,243 2,028,129
Held to Maturity 8,717,552 27,278,825 12,051,718
Purchases of Securities
Available for Sale (10,142,305) (3,233,692) (243,083)
Held to Maturity (8,117,765) (24,643,976) (23,592,446)
Increase in Loans (27,763,788) (14,731,285) (10,141,940)
Capital Expenditures (862,822) (394,874) (75,682)
===========================================================================================================================
Net Cash Used for Investing Activities (31,841,118) (12,732,850) (19,973,304)
===========================================================================================================================
FINANCING ACTIVITIES
Net Increase in Demand Deposits 9,154,962 2,465,193 4,404,103
Net Increase (Decrease) in Savings Deposits 1,975,168 (1,257,739) (1,418,946)
Net Increase in Money Market Deposits 6,395,137 1,343,585 629,857
Net Increase in Time Deposits 15,316,331 10,074,936 16,834,189
Proceeds from the Issuance of Common Stock, Net 2,555,208 1,173,160 34,000
(Decrease) in Common Stock from Non Acceptance of Exchange Offer (67,520) -- --
===========================================================================================================================
Net Cash Provided by Financing Activities 35,329,286 13,799,135 20,483,203
===========================================================================================================================
Increase in Cash and Cash Equivalents, Net 4,143,236 1,941,636 1,111,152
Cash and Cash Equivalents, Beginning of Year 7,984,940 6,043,304 4,932,152
===========================================================================================================================
Cash and Cash Equivalents, End of Year $ 12,128,176 $ 7,984,940 $ 6,043,304
===========================================================================================================================
<PAGE>
<CAPTION>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flow
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Year for Interest $ 2,685,545 $ 2,914,732 $ 1,710,083
===========================================================================================================================
Cash Paid During the Year for Federal Income Taxes $ 325,000 $ 225,000 $ 5,675
===========================================================================================================================
Transfer of Loans to Other Real Estate $ 304,700 $ -- $ --
===========================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
<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 with authorized capital of 10,000,000 shares of
$4.17 par value common stock. On September 3, 1996, the Company acquired 100
percent of the shares of Somerset Valley Bank (the "Bank") by exchanging six
shares of its common stock for each five shares of the Bank. This exchange of
shares has been accounted for as a reorganization of entities under common
control, similar to a pooling of interests, which resulted in no changes to the
underlying carrying amounts of assets and liabilities.
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 and Hillsborough, 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 consolidated financial statements include the accounts of the Bank. All
significant intercompany accounts and transactions have been eliminated.
2: SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
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. 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. Unrealized
gains and losses, net of tax effect, are reflected as a component of
shareholders' equity. Realized gains and or losses on securities available for
sale are determined on a specific identification basis.
The Company had no securities held for trading purposes at December 31, 1996 and
1995.
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
<PAGE>
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.
SALE OF LOANS: The Company periodically sells certain commercial loans to other
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.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depre-ciation and amortization are
computed primarily on the straight-line method over the shorter of the estimated
useful lives of the assets (three to ten years) or the term of the related
lease.
INTEREST ON LOANS: 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 are
deferred and are recognized over the estimated life of the related loans as an
adjustment of the loan yield, and are included in interest on loans in the
accompanying statements of income.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand,
non-interest bearing amounts due from banks, Federal funds sold and other
short-term investments. Generally, Federal funds are sold for a 60-day period or
less.
INCOME TAXES: Deferred income taxes are recognized for tax consequences of
"temporary differences" by applying enacted statutory tax rates to differences
between the financial reporting and the tax basis of existing assets and
liabilities.
NET INCOME PER SHARE: Net income per share is computed by dividing net income by
the weighted average shares outstanding each year, adjusted for common stock
equivalents, if dilutive, and the effect on prior periods of the six for five
exchange offer (see Note 1).
NEW FINANCIAL ACCOUNTING STANDARDS: The Financial Accounting Standards Boards
(FASB) issued SFAS No. 121, "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed Of," in March 1995. This statement is
effective for the year ended December 31, 1996. Statement No. 121 requires the
long-lived assets to be held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The Company has evaluated the impact of
Statement No. 121 on its financial statements and determined that it is not
material.
<PAGE>
SFAS No. 122, "Accounting for Mortgage Servicing Rights" was issued in May 1995
and amends SFAS No. 65 "Accounting for Certain Mortgage Banking Activities."
This statement is effective for 1996 and requires the recognition of a separate
asset for the rights to service mortgage loans for others. The Company does not
service mortgage loans for others and will therefore not be impacted by this
statement.
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in October
1995 and must be adopted by the Company effective January 1, 1996. SFAS No. 123,
requires entities that have employee stock option plans to estimate the value of
grants awarded to employees and disclose, in a pro forma footnote, the impact on
the entities' income per share as if the estimated option value were expensed
over the vesting period of the grants. Adoption of the disclosure requirements
of this new accounting standard will not have an impact on the Company's results
of operations or financial condition.
<PAGE>
3: SECURITIES
Information relative to the Company's securities portfolio at December 31, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
===========================================================================================================================
<S> <C> <C> <C> <C>
1996
AVAILABLE FOR SALE
U.S. Treasury Securities $ 2,748,885 $ 3,956 $ (141) $ 2,752,700
U.S. Government Agency Securities 4,244,256 12,452 (15,845) 4,240,863
Mortgage-Backed Securities 1,721,442 11,873 -- 1,733,315
===========================================================================================================================
$ 8,714,583 $ 28,281 $ (15,986) $ 8,726,878
===========================================================================================================================
HELD TO MATURITY
U.S. Treasury Securities $ 6,249,421 $ 14,870 $ (228) $ 6,264,063
U.S. Government Agency Securities 5,738,111 11,165 (14,080) 5,735,196
Other Securities 498,248 3,939 -- 502,187
Mortgage-Backed Securities 1,503,701 2,548 (9,467) 1,496,782
===========================================================================================================================
$ 13,989,481 $ 32,522 $ (23,775) $ 13,998,228
===========================================================================================================================
1995
AVAILABLE FOR SALE
U.S. Treasury Securities $ 3,543,131 $ 12,088 -- $ 3,555,219
U.S. Government Agency Securities 791,688 -- (350) 791,338
Mortgage-Backed Securities 525,452 2,729 -- 528,181
===========================================================================================================================
$ 4,860,271 $ 14,817 $ (350) $ 4,874,738
===========================================================================================================================
HELD TO MATURITY
U.S. Treasury Securities $ 6,263,561 $ 50,008 $ (3,412) $ 6,310,157
U.S. Government Agency Securities 6,094,722 37,156 (5,265) 6,126,613
Other Securities 496,147 10,728 -- 506,875
Mortgage-Backed Securities 1,726,393 -- (20,897) 1,705,496
===========================================================================================================================
$ 14,580,823 $ 97,892 $ (29,574) $ 14,649,141
===========================================================================================================================
</TABLE>
<PAGE>
The amortized cost and estimated value of securities at December 31, 1996, 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 ESTIMATED
COST MARKET VALUE
================================================================================
<S> <C> <C>
AVAILABLE FOR SALE
Due in 1 year or less $ 2,748,885 $ 2,752,700
Due after 1 year through 5 years 4,244,256 4,240,863
Mortgage-Backed Securities 1,721,442 1,733,315
================================================================================
$ 8,714,583 $ 8,726,878
================================================================================
HELD TO MATURITY
Due in 1 year or less $ 7,241,660 $ 7,263,006
Due after 1 year through 5 years 5,244,120 5,238,440
Mortgage-Backed Securities 1,503,701 1,496,782
================================================================================
$ 13,989,481 $ 13,998,228
================================================================================
</TABLE>
At December 31, 1996, securities having a book value of approximately $1,293,068
were pledged to secure public deposits and for other purposes as required by
law.
<PAGE>
4: LOANS
At December 31, 1996 and 1995, the composition of outstanding loans is
summarized as follows:
<TABLE>
<CAPTION>
================================================================================
1996 1995
================================================================================
<S> <C> <C>
Secured by Real Estate:
Residential Mortgage $ 28,023,269 $ 21,466,489
Commercial Mortgage 23,690,659 15,700,266
Construction 2,289,233 2,812,000
Commercial & Industrial 17,135,417 12,554,205
Loans to Individuals
for Automobiles 13,260,060 5,425,201
Loans to Individuals 3,456,425 2,186,267
================================================================================
$ 87,855,063 $ 60,144,428
================================================================================
</TABLE>
There were no loans restructured during 1996 or 1995. There were $20,600 in
loans past due 90 days or more as to principal or interest and $24,384 on a
non-accrual status as of December 31, 1996. There were no loans past due 90 days
or more or on a non-accrual status as of December 31, 1995. Loans to executive
officers totaled $146,517 at December 31, 1996 and $147,984 at December 31,
1995, all of which were current as to principal and interest. There are no loans
to Directors or their affiliated interests.
Effective January 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment
of a Loan" SFAS No. 114 and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures," SFAS No. 114 requires
that certain impaired loans be measured based on the present value of expected
future cash flows discounted at the loans original effective interest rate. As a
practical expedient, impairment may be measured based on the loans observable
market price or the fair value of the collateral if the loan is collateral
dependent. When the measure of the impaired loan is less than the recorded
investment in the loan, the impairment is recorded through a valuation
allowance. This statement is not applicable to large groups of smaller
homogeneous loans, such as residential mortgage loans and consumer loans, which
are collectively evaluated for impairment.
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.
The Company had previously measured the allowance for possible loan losses using
methods similar to those prescribed in SFAS No. 114. As a result of adopting
these statements, no additional allowance for possible loan losses was required
and there is no impact on the comparability of years prior to 1995.
<PAGE>
As of December 31, 1996, the Company had $183,911 in loans which were deemed to
be impaired. A valuation reserve of $19,577 was recorded for these loans. There
were no loans deemed to be impaired as of December 31, 1995.
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.
5: ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is based on estimates and ultimate losses
may vary from the current estimates. These estimates are reviewed periodically,
and as adjustments become necessary, they are reflected in operations in the
period in which they become known. An analysis of the allowance for possible
loan losses is as follows:
<TABLE>
<CAPTION>
================================================================================
1996 1995 1994
================================================================================
<S> <C> <C> <C>
Balance at January 1, $ 527,019 $ 372,062 $ 231,035
Provision Charged to
Operations 309,500 206,000 156,000
Charge Offs (57,593) (51,043) (15,846)
Recoveries 4,440 -- 873
================================================================================
Balance at December 31, $ 783,366 $ 527,019 $ 372,062
================================================================================
</TABLE>
6: PREMISES AND EQUIPMENT
Premises and equipment consists of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
================================================================================
1996 1995
================================================================================
<S> <C> <C>
Construction in Progress$ $ 63,079 $ 227,451
Premises & Improvements 491,355 187,322
Furniture & Equipment 1,101,924 700,548
- --------------------------------------------------------------------------------
1,656,358 1,115,321
Less: Accumulated Depreciation( 590,249) (399,106)
================================================================================
$ 1,066,109 $ 716,215
================================================================================
</TABLE>
<PAGE>
7: OTHER EXPENSE
The major components of other expenses are as follows:
<TABLE>
<CAPTION>
================================================================================
1996 1995 1994
================================================================================
<S> <C> <C> <C>
Data Processing Services $ 163,691 $ 131,038 $ 111,272
Marketing & Business
Development 129,915 94,597 73,682
Stationery, Forms & Supplies 121,470 80,453 62,144
Insurance 75,508 62,773 65,539
Amortization of
Organizational Costs 43,452 41,340 41,340
Legal, Examination &
Accounting 106,062 83,847 90,857
FDIC Insurance Assessment 2,000 74,332 110,153
Other, Net 356,466 242,555 178,778
================================================================================
$ 998,564 $ 810,935 $ 733,765
</TABLE>
<PAGE>
8: COMMITMENTS AND CONTINGENCIES
================================================================================
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 and one non-director shareholder. As of December 31,
1996, future minimum rental payments, including the renewal options under these
leases for the subsequent five years are as follows:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
1997 $283,048
- --------------------------------------------------------------------------------
1998 $291,016
- --------------------------------------------------------------------------------
1999 $293,064
- --------------------------------------------------------------------------------
2000 $295,118
================================================================================
2001 $297,258
================================================================================
</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 $244,413, $153,618, and
$139,808 for the years ended December 31, 1996, 1995 and 1994 respectively.
The Company had outstanding commitments to extend credit of $11,809,000 at
December 31, 1996 and $9,177,000 at December 31, 1995. 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, 1996.
9: BENEFIT PLAN
The Company has a 40l(k) Savings Plan covering substantially all employees.
Under the terms of the Plan, the Company will match 50% of an employee's
contribution, up to 6% of the employee's salary. Employees become fully vested
in the Company's contribution after five years of service. The Company
contributed $25,495, $19,159 and $12,700 to the Plan in 1996, 1995 and 1994,
respectively.
<PAGE>
10: INCOME TAXES
The components of the provision (benefit) for income taxes in 1996, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
================================================================================
1996 1995 1994
================================================================================
<S> <C> <C> <C>
Federal:
Current $ 440,740 $ 239,708 $ 18,170
Deferred (64,396) 122,338 (325,922)
State 108,819 61,344 --
================================================================================
$ 485,163 $ 423,390 $(307,752)
================================================================================
</TABLE>
Deferred income taxes are provided for the financial differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. Cumulative temporary differences at December 31, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
================================================================================
1996 1995
================================================================================
<S> <C> <C>
Start-up and Organization Costs $ (4,575) $ 27,309
Depreciation 4,296 2,219
Accretion of Securities Discount (2,893) (5,708)
Allowance for Possible Loan Losses 259,237 179,774
================================================================================
Deferred Tax Asset, Net $ 256,065 $ 203,594
================================================================================
</TABLE>
A reconciliation of income taxes calculated at the U.S. statutory rate of 34% to
the actual income tax provision (benefit) is as follows:
<TABLE>
<CAPTION>
================================================================================
1996 1995 1994
================================================================================
<S> <C> <C> <C>
Statutory Provision $ 409,784 $ 369,446 $ 176,596
State Taxes on Income,
net of Federal Tax Benefit 72,009 61,344 --
Reversal of
Valuation Allowance
on Deferred Tax Asset -- -- (473,453)
Other 3,370 (7,400) (10,895)
================================================================================
$ 485,163 $ 423,390 $(307,752)
================================================================================
</TABLE>
<PAGE>
During 1994, the Company recognized the benefit of a deferred tax asset from net
operating loss forwards that had been established in prior years. Since the
Company achieved profitability in 1994 and projected continued net earnings
growth, the Company had reversed its valuation allowance for its net operating
loss carryforward.
11: STOCK OPTION PLAN
On April 26, 1994, the Company's Directors approved a qualified stock option
plan for certain members of management. 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 49,200 are reserved for issuance under the plan as of December 31,
1996.
Transactions under the plan are summarized as follows:
<TABLE>
<CAPTION>
================================================================================
EXERCISE
NUMBER PRICE
OF SHARES PER SHARE
================================================================================
<S> <C> <C>
Outstanding,
December 31, 1994 and 1995 24,000 $ 8.33
Options granted 26,400 8.33
Options exercised 1,200 8.33
Options expired -- --
Outstanding, December 31, 1996 49,200 $ 8.33
================================================================================
</TABLE>
The outstanding options that were granted prior to January 1, 1995 were fully
exercisable at December 31, 1996 and have a remaining contractual life of three
years. The options granted during 1996 were not exercisable as of December 31,
1996 and have a remaining contractual life of four years.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for the plan. Accordingly, no compensation cost
has been recognized for the stock option plan. Had compensation cost for the
Company's stock-based compensation plan been determined based on the fair value
at the grant dates for awards under those plans consistent with the method
prescribed by FASB Statement 123, the Company's net income and income per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
================================================================================
1996
================================================================================
<S> <C>
Net Income
As reported $ 720,085
Pro forma 660,685
Net Income per share
As reported $ .61
Pro forma .56
================================================================================
</TABLE>
<PAGE>
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 1996, respectively; expected volatility of
39.77%; risk-free
interest rate of 6.35%; no dividend yield; and expected lives of five years.
12: ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards 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.
Estimated fair values have been determined by the Company using the best
available data and estimation method-ology suitable for each category of
financial instruments is as follows:
For short term investments, such as cash and cash equivalents and short term
deposits, the carrying amount is a reasonable estimate of fair value.
<TABLE>
<CAPTION>
===============================================================================
FAIR VALUE BOOK VALUE
===============================================================================
<S> <C> <C>
Cash and Cash Equivalents $ 12,128,176 $ 12,128,176
===============================================================================
</TABLE>
For securities held in the Company's investment portfolio fair value was
determined by reference to quoted market prices as of December 31, 1996.
<TABLE>
<CAPTION>
================================================================================
FAIR VALUE BOOK VALUE
================================================================================
<S> <C> <C>
Available for Sale Securities $ 8,726,878 $ 8,726,878
================================================================================
Held to Maturity Securities $ 13,998,228 $ 13,989,481
================================================================================
</TABLE>
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 an estimated fair value equal to the
amount payable on demand.
<PAGE>
<TABLE>
<CAPTION>
================================================================================
FAIR VALUE BOOK VALUE
================================================================================
<S> <C> <C>
Loans $ 88,766,000 $ 87,855,063
================================================================================
Deposits $ 112,669,000 $ 112,521,390
================================================================================
</TABLE>
13: 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, 1996, that the
Company and its subsidiary Bank meets all capital adequacy requirements to which
they are subject.
As of December 31, 1996 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 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.
<PAGE>
The Company and its subsidiary Bank's actual capital amounts and ratios are also
presented in the following tables.
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC. AND SOMERSET VALLEY BANK TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- -------------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996
Total Capital to Risk Weighted Assets $ 12,525,569 13.40% $ 7,479,328 8.00% $ 9,349,159 10.00%
- -------------------------------------------------------------------------------------------------------------------------
Tier I Capital to Risk Weighted Assets $ 11,742,203 12.56% $ 3,736,664 4.00% $ 5,609,496 6.00%
Tier I Capital to Average Assets $ 11,742,203 9.58% $ 4,903,999 4.00% $ 6,129,999 5.00%
=========================================================================================================================
AS OF DECEMBER 31, 1995
Total Capital to Risk Weighted Assets $ 9,064,357 14.11% $ 5,139,609 8.00% $ 6,424,512 10.00%
Tier I Capital to Risk Weighted Assets $ 8,537,338 13.29% $ 2,569,805 4.00% $ 3,854,707 6.00%
Tier I Capital to Average Assets $ 8,537,338 9.89% $ 3,453,977 4.00% $ 4,317,471 5.00%
=========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOMERSET VALLEY BANK ONLY TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
===========================================================================================================================
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996
Total Capital to Risk Weighted Assets $ 11,830,863 12.66% $ 7,473,838 8.00% $ 9,342,298 10.00%
- ---------------------------------------------------------------------------------------------------------------------------
Tier I Capital to Risk Weighted Assets $ 11,047,497 11.83% $ 3,736,919 4.00% $ 5,605,379 6.00%
Tier I Capital to Average Assets $ 11,047,497 9.01% $ 4,901,829 4.00% $ 6,127,287 5.00%
==========================================================================================================================
AS OF DECEMBER 31, 1995
Total Capital to Risk Weighted Assets $ 9,064,357 14.11% $ 5,139,609 8.00% $ 6,424,512 10.00%
Tier I Capital to Risk Weighted Assets $ 8,537,338 13.29% $ 2,569,805 4.00% $ 3,854,707 6.00%
Tier I Capital to Average Assets $ 8,537,338 9.89% $ 3,453,977 4.00% $ 4,317,471 5.00%
===========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
14: CONDENSED FINANCIAL STATEMENTS OF SVB FINANCIAL SERVICES, INC. (PARENT COMPANY ONLY):
===========================================================================================================================
BALANCE SHEET DECEMBER 31, 1996
===========================================================================================================================
<S> <C>
ASSETS
Cash and Due From Banks $ 626,091
Other Assets 68,615
Investment in Subsidiary (Equity Method 11,214,953
===========================================================================================================================
Total Assets $ 11,909,659
===========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' Equity
Common Stoc $ 5,694,077
Capital Paid-in Excess of Par Value 5,451,333
Retained Earnings 756,135
Net Unrealized Holding Gains on Securities Available for Sale, Net of Tax 8,114
- ---------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 11,909,659
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 11,909,659
===========================================================================================================================
STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1996
===========================================================================================================================
OPERATING INCOME
Dividends from Bank Subsidiary $ 150,000
Interest Income 3,187
- ---------------------------------------------------------------------------------------------------------------------------
Total Income 153,187
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE
Other Expense 3,747
- ---------------------------------------------------------------------------------------------------------------------------
Total Expense 3,747
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Income of Subsidiary 149,440
Equity in Undistributed Income of Subsidiary 570,645
===========================================================================================================================
NET INCOME$ 720,085
===========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWSYEAR ENDED DECEMBER 31, 1996
===========================================================================================================================
<S> <C>
OPERATING ACTIVITIES
Net Income $ 720,085
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Equity in Undistributed Income of Subsidiary(570,645)
(Increase) in Other Assets(68,615)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 80,825
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of Additional Common Stock in Subsidiary Bank (2,000,000)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from Stock Issuance, Net 2,545,266
- ---------------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents, Net 626,091
Cash and Cash Equivalents, Beginning of Year--
===========================================================================================================================
Cash and Cash Equivalents, End of Year $ 626,091
</TABLE>
<PAGE>
SVB FINANCIAL SERVICES, INC.
===============================================================================
Report of Independent Public Accountants
[GRAPHIC -- ARTHUR ANDERSEN LOGO]
To the Shareholders and Board of Directors of SVB Financial Services, Inc.:
We have audited the accompanying consolidated balance sheets of SVB
Financial Services, Inc. (a New Jersey corporation) and subsidiary as of
December 31, 1996 and 1995 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. 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.
ln our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SVB Financial Services, Inc.
and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP
- ----------------------
Arthur Andersen LLP
Princeton, New Jersey
January 22, 1997
<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 that are reasonably
likely to have a material effect on the Company's liquidity, capital resources
or results of operations. RESULTS OF OPERATIONS: The Company completed its fifth
full year of operations in 1996. Net income for the year ended December 31, 1996
was $720,085 an increase of $56,868 or 8.6% from 1995. The primary reason for
the increase in net income was an increase in net interest income of $1,144,615
or 33% resulting from the significant growth in earning assets the Company
experienced in 1996.
Total assets of the Company grew $36,251,553 or 41%. The strong demand for loans
caused total loans to account for much of the increase as loans showed growth of
$27,710,635 or 46%.
Although the growth in net interest income was significant, so was the growth in
non-interest expenses. Non-interest expenses increased $931,269 or 37% in 1996.
The Company opened its first branch office in the first quarter of 1996 which
created additional personnel, occupancy and marketing expenses. Additional
expenses were also realized in the relocation of the back-office operations to
Hillsborough, as well as the overall increases in transaction volume resulting
from the growth of the Company.
It is important to note that quarterly income continued to improve after the
opening of the Hillsborough office. Net income by quarter for 1996 was as
follows:
<TABLE>
<CAPTION>
================================================================================
THREE MONTH NET
PERIODS ENDEDINCOME
================================================================================
<S> <C>
March 31, 1996 $ 78,061
June 30, 1996 170,262
September 30, 1996 183,217
December 31, 1996 288,545
================================================================================
</TABLE>
Net income for 1995 was $663,217 compared to $827,154 in 1994. It is important
to note that during 1994 the Company recognized a one-time tax benefit of
$307,752 related to the reversal of a valuation allowance applicable to the
Bank's deferred tax accounts, related to net operating loss carry forwards. In
comparison, the Company was fully taxable in 1995. Pretax income for 1995
increased over 1994 by $567,205 or 109%.
A 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.
<PAGE>
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 earning assets.
<TABLE>
<CAPTION>
SUMMARY OF NET INTEREST INCOME
YEAR ENDED DECEMBER 31,
===============================================================================================
1996
===============================================================================================
AVERAGE AVERAGE
BALANCE RATE INTEREST
===============================================================================================
<S> <C> <C> <C>
ASSETS
Federal Funds Sold $ 4,504,304 5.34% $ 240,367
Securities Purchased Under Agreement to Resell -- -- --
Other Short Term Investments 936,242 4.99% 46,757
Securities Available for Sale 5,912,478 5.92% 350,166
Securities Held to Maturity 15,237,370 6.02% 918,011
- -------------------------------------------------------------------------------------------------
Total Securities 21,149,848 6.00% 1,268,177
Loans 74,648,772 9.15% 6,827,602
- -------------------------------------------------------------------------------------------------
Total Interest Earning Assets 101,239,166 8.28% 8,382,903
Cash and Due from Banks 4,057,475
Allowance for Possible Loan Losses (640,572)
Premises and Equipment 813,007
Other Real Estate Owned 48,286
Other Assets 1,673,570
=================================================================================================
Total Assets $ 107,190,932
=================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Savings Deposits $ 6,977,173 3.13% $ 218,201
Money Market Deposit Accounts 11,940,716 3.26% 388,814
NOW Accounts 6,042,628 2.46% 148,712
Time Deposits 56,700,027 5.39% 3,057,434
- -------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 81,660,544 4.67% 3,813,161
Borrowed Funds -- -- --
- -------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 81,660,544 4.67% 3,813,161
Demand Deposits 16,027,197
Accrued Expenses and Other Liabilities 606,068
Shareholders' Equity 8,897,123
- -------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 107,190,932
=================================================================================================
Net Interest Income $ 4,569,742
=================================================================================================
Net Interest Margin 4.51%
<PAGE>
<CAPTION>
YEAR ENDED DECEMBER 31,
====================================================================================================================================
1995 1994
====================================================================================================================================
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE INTEREST BALANCE RATE INTEREST
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal Funds Sold $ 3,592,027 5.88% $ 211,302 $ 2,519,589 4.28% $ 107,863
Securities Purchased Under Agreement to Resell -- -- -- 441,563 4.10% 18,122
Other Short Term Investments 283,389 5.22% 14,798 393,133 3.72% 14,624
Securities Available for Sale 3,615,515 5.68% 205,413 4,707,132 4.02% 189,260
Securities Held to Maturity 17,146,453 5.91% 1,013,811 11,864,436 4.70% 558,076
- ------------------------------------------------------------------------------------------------------------------------------------
Total Securities 20,761,968 5.87% 1,219,224 16,571,568 4.51% 747,336
Loans 51,047,241 9.50% 4,850,688 40,141,035 8.74% 3,508,379
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Earning Assets 75,684,625 8.32% 6,296,012 60,066,888 7.32% 4,396,324
Cash and Due from Banks 3,134,843 2,558,955
Allowance for Possible Loan Losses (451,397) (294,854)
Premises and Equipment 490,206 475,411
Other Real Estate Owned -- --
Other Assets 1,033,880 540,111
====================================================================================================================================
Total Assets $ 79,892,157 $ 63,346,511
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Savings Deposits $ 5,942,451 3.27% $ 194,043 $ 7,611,311 3.31% $ 251,573
Money Market Deposit Accounts 8,366,762 3.54% 296,300 8,619,199 3.12% 268,781
NOW Accounts 4,417,143 2.31% 102,187 4,445,435 2.35% 104,581
Time Deposits 41,703,884 5.46% 2,278,185 27,492,118 4.15% 1,140,566
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 60,430,240 4.75% 2,870,715 48,168,063 3.67% 1,765,501
Borrowed Funds 2,740 6.20% 170 8,219 4.94% 406
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 60,432,980 4.75% 2,870,885 48,176,282 3.67% 1,765,907
Demand Deposits 10,838,744 8,901,103
Accrued Expenses and Other Liabilities 492,190 156,264
Shareholders' Equity 8,128,243 6,112,862
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 79,892,157 $ 63,346,511
====================================================================================================================================
Net Interest Income $ 3,425,127 $ 2,630,417
===================================================================================================================================
Net Interest Margin 4.53% 4.38%
===================================================================================================================================
</TABLE>
<PAGE>
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, YEARS ENDED DECEMBER 31,
1996 VS 1995 1995 VS 1994
INCREASE (DECREASE) DUE TO CHANGES IN: INCREASE (DECREASE) DUE TO CHANGES IN:
VOLUME RATE TOTAL VOLUME RATE TOTAL
========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Interest Income:
Federal Funds Sold $ 45,811 $ (16,746) $ 29,065 $ 55,052 $ 48,387 $ 103,439
Securities Purchased
Under Agreement to Resell -- -- -- (18,122) -- (18,122)
Other Short Term Investments 32,576 (617) 31,959 (390) 564 174
Securities Available for Sale 135,691 9,062 144,753 (20,681) 36,834 16,153
Securities Held to Maturity (115,456) 19,656 (95,800) 288,937 166,798 455,735
- ------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 20,235 28,718 48,953 268,256 203,632 471,888
Loans 2,151,257 (174,342) 1,976,915 1,016,147 326,161 1,342,308
- ------------------------------------------------------------------------------------------------------------------------
Total Interest Income 2,249,879 (162,987) 2,086,892 1,320,943 578,744 1,899,687
- ------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Savings Deposits 31,902 (7,744) 24,158 (54,529) (3,002) (57,531)
Money Market Deposit Accounts 114,007 (21,493) 92,514 (7,578) 35,097 27,519
NOW Accounts 39,649 6,876 46,525 (663) (1,731) (2,394)
Time Deposits 808,244 (28,995) 779,249 705,403 432,216 1,137,619
- ------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 993,802 (51,356) 942,446 642,633 462,580 1,105,213
Borrowed Funds (169) -- (169) (383) 147 (236)
- ------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 993,633 (51,356) 942,277 642,250 462,727 1,104,977
- ------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ 1,256,246 $ (111,631) $ 1,144,615 $ 678,693 $ 116,017 $ 794,710
========================================================================================================================
</TABLE>
<PAGE>
1996 vs. 1995
================================================================================
Net interest income was $4,569,742 for 1996 compared to $3,425,127 for 1995, an
increase of $1,144,615. Most of the in-crease was attributable to the growth in
average earning assets which were $101.2 million in 1996 and $75.7 million in
1995. Almost all of this increase occurred in loans. The Company experienced
significant loan growth including commercial, consumer and mortgage loans. Total
loans averaged $74.6 million in 1996 compared to $51.0 million in 1995, an
increase of $23.6 million or 46%. The increase in loan volume accounted for
$2,151,257 of the increase in interest income. However, this was partially
offset by a decline of $174,342 in interest income due to a drop in the yield on
loans of 35 basis points. This drop was attributable to a change in market rates
compared to 1995 coupled with a change in the mix of the loan portfolio as the
Com-pany increased its outstanding auto loans through its dealer network. The
net increase in interest income compared to 1995 was $2,086,892.
Supporting the Company's earning assets were its interest bearing deposits and
non-interest bearing sources of funds such as capital and demand deposits.
Interest bearing deposits were $81.7 million in 1996 compared to $60.4 million
in 1995. Increases were found in all deposit types. The cost of interest bearing
liabilities decreased 8 basis points as compared to 1995. Demand deposits
increased $5.2 million to $16.0 million but its affect on the overall cost of
funds did not offset the decline in the yield on earning assets. Consequently,
the net interest margin declined 2 basis points to 4.51%. It is management's
goal to manage its interest rate risk in order to maintain as stable a net
interest margin as possible.
The decline in the net interest margin resulted in a reduction in net interest
income of approximately $111,631. This reduction was offset by an increase in
net interest income due to an increase in volume, leaving a net increase of
$1,144,615.
1995 vs. 1994
Net interest income increased by $794,710 in 1995 as compared to 1994. Most of
this increase was attributable to the growth in the volume of the Company's
earning assets. The average daily balance in earning assets increased by
$15,617,737 or 26% from the 1994 average. Almost 70% of this increase took the
form of loans as the Company continued to experience strong loan demand in 1995
in both the commercial and consumer portfolios. The loans to deposits ratio, a
measure of the percentage of deposits that the Company invests in loans, which
generally provide a higher return than investments and federal funds sold,
increased from 70.3% in 1994 to 71.6% in 1995. The growth in volume as well as
the improvement of the mix in earning assets provided $1,320,943 of the
$1,899,687 increase in interest income. The remainder was provided by a 100
basis point increase in the yield on earning assets. Interest rates in general
increased substantially during much of 1994. They remained fairly stable through
1995 before declining slightly in the second half of the year.
Average interest bearing deposits for 1995 increased $12,262,177 or 25%
from 1994. Most of this increase was in the form of time deposits as the Company
continued to aggressively price its certificates of deposits in order to attract
new customers. The overall cost of interest bearing liabilities increased 108
basis points from 3.67% to 4.75% due to the 1994 increases in interest rates
mentioned above. Offsetting this increased cost was a growth in the average
balance of non-interest sources of funds. Average demand deposits increased
$1,937,641 or 22% due to increases in commercial checking accounts. Average
<PAGE>
shareholders' equity increased $2,015,381 due mostly to the issuance of common
stock as a result of the exercise of stock warrants issued in the 1993 stock
offering, which expired on March 1, 1995.
The increases in non-interest sources of funds coupled with the growth in
the yield on earning assets contributed to the improvement in the Company's net
interest margin from 4.38% in 1994 to 4.53% in 1995. The improvement in the net
interest margin contributed $116,017 to the increase in net income while the
overall growth of the balance sheet contributed $678,693.
OTHER INCOME
A comparison of the major components of other income is included in the
following table:
<TABLE>
<CAPTION>
================================================================================
THE YEARS ENDED: 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Service Charges on
Deposit Accounts $ 171,130 $ 120,411 $ 108,060
(Loss) Gain on the
Sale of Securities (2,117) 2,336 --
Gain on the
Sale of Loans 131,966 181,599 59,358
Other Income 70,636 58,474 40,224
================================================================================
$ 371,615 $ 362,820 $ 207,642
================================================================================
</TABLE>
Other income increased $8,795 or 2% during 1996 in comparison with 1995. Service
charges on deposit accounts increased $50,719 or 42% due to growth in the number
of both commercial and consumer checking accounts and due to an increase in the
charge for overdrafts.
Other income increased $12,162 or 21% mainly due to servicing fees on SBA loans
sold. The Company is a preferred SBA lender and, as such, it originates SBA
loans and sells the government guaranteed portions in the secondary market while
retaining the servicing. SBA loans are not the primary focus of the Company's
loan business and these amounts can vary from year to year depending upon the
volume of SBA loans generated. Gains on the sale of loans are a result of the
Company's sales of SBA loans. These were $131,966 in 1996 compared to $181,599
in 1995, and consequently, this decline offsets part of the increases in other
income as mentioned above.
Other income increased $155,178 or 75% for the year ending December 31, 1995 as
compared with the same period in 1994. Most of the increase was due to gains on
the sale of SBA loans.
Service charges on deposit accounts increased $12,351 or 11% in 1995 compared to
1994 due mostly to increases in account maintenance and overdraft fees on
commercial checking accounts. These increases were a result of volume increases
since the Bank did not change its rate of service charges. In order to attract
and maintain commercial demand deposits, the Company's service charges are
competitive in comparison to other banks.
<PAGE>
The increase in other income of $18,250 was also almost entirely due to
servicing fees on the SBA loans sold as mentioned above.
OTHER EXPENSE
A comparison of the major components of other expense is included in the
following table:
<TABLE>
<CAPTION>
================================================================================
THE YEARS ENDED: 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Salaries and
Employee Benefits $ 1,781,085 $ 1,269,371 $ 1,055,231
Occupancy Expense 400,770 240,049 221,109
Equipment Expense 246,190 174,985 152,552
Other Expenses 998,564 810,935 733,765
================================================================================
$ 3,426,609 $ 2,495,340 $ 2,162,657
================================================================================
</TABLE>
Total other expenses increased $931,269 or 37% from 1995 to 1996. In February of
1996, the Company opened its first branch office at the Hillsborough Centre
Shopping Center. As of December 31, 1996, total deposits were $10.2 million in
Hillsborough. Even though this was a good first year for the branch, the average
deposits were not sufficient to cover the initial opening expenses.
Salaries and Benefits expense accounted for $511,714 of the total increase. The
new branch employs five full time employees. In addition, during the latter part
of 1995 and 1996 the Company added additional staff especially in the lending
area and back-office operations, in order to properly service the Company's
growth in deposit and loan volume. As mentioned previously, deposits and loans
showed substantial increases in 1996 and the Company's total assets grew over
40%. Such growth necessitated additional employees.
Occupancy increased $160,721 or 67% and equipment increased $71,205 or 41%
mostly due to the opening of the new branch as well as equipment purchased for
the other new staff members. The operations area was moved to the second floor
of the Hillsborough office in July to accommodate the growth in volume and
staff. Consequently, moving expenses, additional rent and equipment needed also
contributed to an increase in these two areas.
Other expenses increased $187,624 or 23%. Over $43,000 of this increase was from
additional advertising and business development expenses related to the opening
of the Hillsborough office. The Company also had to advertise more aggressively
for deposits in order to fund increased loan demand. Outside services and data
processing increased $96,060 due to the growth of the Company and increased
transaction volume. Stationery and supplies increased $41,019 due to the
additional volume of transactions, additional staff, and increased costs. Fees
paid to Directors for Board and Committee meetings increased $21,950. Offsetting
some of the increases, FDIC insurance decreased $72,332.
<PAGE>
Total other expenses for the year ended December 31, 1995 increased $332,683 or
15% from the same period in 1994. As a relatively new organization, the Company
had shown significant growth in assets in its first four years of operation. As
a result, expenses have had to grow in order to support and service the
Company's asset growth.
Salaries and Benefits expense accounted for approximately half of all other
expenses. As mentioned previously, the growth of the Company during 1995 made it
necessary for the Company to add additional staff especially in the lending
department and back-office operations. The Company also paid performance bonuses
to most of its officers and employees. These factors caused salaries and
benefits expense to increase $214,140 or 20%. Most of the $18,940 increase in
occupancy expense was due to increased rental expense. The Company began leasing
additional space at its back-office facility at 117 West End Avenue and is also
leasing land on North Bridge Street in Bridgewater Township for the proposed
branch office.
The increase in equipment expense resulted from purchases of furniture and
computer equipment for the additional banking staff as well as increased costs
for equipment maintenance.
Other expenses increased $77,170 or 11% during 1995. Data processing costs
increased $19,766 due to the increase in transaction volume. Marketing and
Business development costs increased $20,915 as the Company became more
aggressive in advertising in both newspaper and radio. Stationery and supplies
increased $18,309, as the cost of paper and transaction volume increased.
Director's fees increased $23,100. Offsetting some of these increases was a
decline in FDIC insurance of $35,821, since the FDIC substantially lowered
premium rates in the second half of 1995. Legal, examination and accounting
expenses also showed a decline of $7,010.
INVESTMENT 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.
<PAGE>
The following table sets forth the amortized cost and estimated market values of
securities in the investment portfolios as of December 31, 1996 and 1995
<TABLE>
<CAPTION>
===========================================================================================================================
1996 1995
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST MARKET VALUE COST MARKET VALUE
===========================================================================================================================
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury Securities $ 2,748,885 $ 2,752,700 $ 3,543,131 $ 3,555,219
U.S. Government Agency Securities 4,244,256 4,240,863 791,688 791,338
Mortgage-Backed Securities 1,721,442 1,733,315 525,452 528,181
===========================================================================================================================
$ 8,714,583 $ 8,726,878 $ 4,860,271 $ 4,874,738
===========================================================================================================================
HELD TO MATURITY:
U.S. Treasury Securities $ 6,249,421 $ 6,264,063 $ 6,263,561 $ 6,310,157
U.S. Government Agency Securities 5,738,111 5,735,196 6,094,722 6,126,613
Other Securities 498,248 502,187 496,147 506,875
Mortgage-Backed Securities 1,503,701 1,496,782 1,726,393 1,705,496
===========================================================================================================================
$ 13,989,481 $ 13,998,228 $ 14,580,823 $ 14,649,141
===========================================================================================================================
</TABLE>
Note: With regard to mortgage-backed securities, the Company does not hold any
private issue CMOs. None of the mortgage-backed securities are classified as
"high risk" under FFIEC policy statement criteria. As of December 31, 1996,
there was not one issuer where the aggregate book value or aggregate market
value exceeds ten percent of shareholders' equity.
<PAGE>
The maturity distribution and weighted average yield of the Company's investment
portfolio as of December 31, 1996 is as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
DUE IN: DUE IN:
ONE YEAR AFTER ONE YEAR
OR LESS THROUGH FIVE YEARS TOTAL
===========================================================================================================================
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury Securities
Market Value $ 2,752,700 -- $ 2,752,700
Yield 5.69% -- 5.69%
U.S. Government Agency Securities
Market Value -- $ 4,240,863 $ 4,240,863
Yield -- 6.28% 6.28%
Mortgage-Backed Securities
Market Value $ 1,733,315 -- -- $ 1,733,315
Yield 6.21% -- -- 6.21%
===========================================================================================================================
HELD TO MATURITY:
U.S. Treasury Securities
Book Value $ 5,502,885 $ 746,536 $ 6,249,421
Yield 6.00% 5.73% 5.97%
U.S. Government Agency Securities
Book Value $ 1,240,527 $ 4,497,584 $ 5,738,111
Yield 6.14% 6.16% 6.16%
Other Securities
Book Value $ 498,248 -- $ 498,248
Yield 6.85% -- 6.85%
Mortgage-Backed Securities
Book Value $ 1,503,701 -- -- $ 1,503,701
Yield 6.05% -- -- 6.05%
===========================================================================================================================
</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.
<PAGE>
LOANS
The following table summarizes the Company's loan portfolio as of December 31,
1996 and 1995.
<TABLE>
<CAPTION>
================================================================================
1996 1995
================================================================================
<S> <C> <C>
Secured by Real Estate:
Residential Mortgage $ 28,023,269 $ 21,466,489
Commercial Mortgage 23,690,659 15,700,266
Construction 2,289,233 2,812,000
Commercial & Industrial 17,135,417 12,554,205
Loans to Individuals
for Automobiles 13,260,060 5,425,201
Other Loans to Individuals 3,456,425 2,186,267
================================================================================
$ 87,855,063 $ 60,144,428
================================================================================
</TABLE>
Note: The Company's commercial loans are not concentrated within a single
industry or group of related industries.
The Company experienced significant loan growth in 1995 and 1996. The loan
portfolio increased by $27.7 million or 46% in 1996 and $14.7 million or 32% in
1995. Since the Company began operations, its main emphasis with respect to
lending has been the small to medium sized businesses and professionals in its
market area. This market segment continues to make up the bulk of the Company's
lending. One of the reasons for the significant loan growth was the apparent
inability of the larger regional and out-of-state banks to adequately service
this segment of the market. It is important to note that in the table 35% of the
loans secured by residential real estate, as of December 31, 1996, were for
commercial purposes. It is common for small business owners to secure the
commercial loans with their personal residences.
During 1995, the Company began actively seeking relationships with local
automobile dealerships for the purpose of indirect financing of consumer
automobile loans. At December 31, 1996, the Company was performing such
financing for nine dealerships. Automobile loans increased $4.2 million in 1995
and $7.8 million during 1996. After declining in 1995, other loans to
individuals increased by $1.3 million in 1996.
<PAGE>
The following table sets forth the Company's total loans by maturity and
interest rate sensitivity as of December 31, 1996:
<TABLE>
<CAPTION>
===========================================================================================================================
MATURITY AFTER
WITHIN 1 THROUGH AFTER
1 YEAR 5 YEARS 5 YEARS TOTAL
===========================================================================================================================
<S> <C> <C> <C> <C>
Loans with fixed rates $ 10,219,211 $ 32,728,693 $ 986,349 $ 43,934,253
Loans with floating rates 14,884,065 10,695,633 18,341,112 43,920,810
===========================================================================================================================
Total $ 25,103,276 $ 43,424,326 $ 19,327,461 $ 87,855,063
===========================================================================================================================
</TABLE>
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 70% 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.
<PAGE>
The Company originates and retains residential mortgage loans. They are
generally written 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 Company
does not lend in excess of 80% of the appraised value. Risks inherent in these
loans include the employment stability and earning potential of the borrower as
well as potential resale values associated with the collateral security of these
loans.
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 does not finance the purchase of raw land but
will lend up to 70% 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 and the cost associated with its
completion. During a construction project, an environmental risk factor may
arise. 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.
<PAGE>
The following table summarizes the composition of the Company's non-performing
assets as of the dates indicated:
<TABLE>
<CAPTION>
===========================================================================================================================
DECEMBER 31, 1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
Non-performing assets (1):
Non-accrual loans
Commercial and Construction $ -- $ -- $ --
Real Estate -- -- --
Installment 24,384 -- --
Total non-accrual loans 24,384 -- --
Restructured loans -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total non-performing loans 24,384 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Other real estate owned 304,700 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 329,084 $ -- $ --
===========================================================================================================================
Loans past due 90 days or more (2) $ 20,600 $ -- $ --
Non-performing loans to total loans .03% N/A N/A
Non-performing assets to total assets .26% N/A N/A
Allowance for loan losses to non-performing loans 3,212.62% N/A N/A
===========================================================================================================================
(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.
</TABLE>
<PAGE>
The following table summarizes the activity in the allowance for possible loan
losses for the period indicated:
<TABLE>
<CAPTION>
===========================================================================================================================
YEARS ENDED DECEMBER 31, 1996 1995 1994
===========================================================================================================================
<S> <C>
Balance, beginning of period $ 527,019 $ 372,062 $ 231,035
Loans charged off
Commercial and Construction (2,035) (43,969 --
Real Estate (2,375) -- --
Installment (53,183) (7,074) (15,846)
- ---------------------------------------------------------------------------------------------------------------------------
Total charge offs (57,593) (51,043) (15,846)
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off
Commercial and Construction 619 -- --
Real Estate -- -- --
Installment 3,821 -- 873
- ---------------------------------------------------------------------------------------------------------------------------
Total recoveries 4,440 -- 873
- ---------------------------------------------------------------------------------------------------------------------------
Net Loans charged off (53,153) (51,043) (14,973)
- ---------------------------------------------------------------------------------------------------------------------------
Provision charged to expense 309,500 206,000 156,000
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 783,366 $ 527,019 $ 372,062
===========================================================================================================================
Net charge offs as a percentage of total loans .06% .08% .03%
Allowance for loan losses to total loans .89% .88% .81%
Allowance for loan losses to non-accrual loans 3,212.62% N/A N/A
</TABLE>
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 analyst, who has 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.
<PAGE>
The increases in the Company's provision for loan losses during the periods
indicated are primarily a result of increases in the outstanding loan balances
and not a deterioration of credit quality. As noted in the table, the Company
had no non-performing loans in either 1995 or 1994, and non-performing loans as
of December 31, 1996 totaled $24,384 or .03% of total loans. 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 dates indicated:
<TABLE>
<CAPTION>
===========================================================================================================================
DECEMBER 31, 1996 DECEMBER 31, 1995
===========================================================================================================================
PERCENT PERCENT
AMOUNT LOANS TO TOTAL AMOUNT LOANS TO TOTAL
===========================================================================================================================
<S> <C> <C> <C> <C>
Commercial and Construction $ 547,181 61.80% $ 434,775 61.26%
Real Estate 33,058 20.68% 33,547 26.37%
Installment 203,127 17.52% 58,697 12.37%
===========================================================================================================================
$ 783,366 100.00% $ 527,019 100.00%
===========================================================================================================================
</TABLE>
Note: The increase in the allowance for loan losses applicable to installment
loans was the result of an increase in the balance of automobile loans from $5.4
million at December 31, 1995 to $13.2 million at December 31, 1996.
INTEREST RATE SENSITIVITY
Management of interest rate sensitivity is an important element of both earnings
performance and maintaining sufficient liquidity. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that same time period.
A gap is positive when the amount of interest-earning assets maturing or
repricing exceeds the amount of interest-bearing liabilities maturing or
repricing within that same period and is negative when the amount of
interest-bearing liabilities maturing or repricing exceeds the amount of
interest-earning assets maturing or repricing within the same period.
Accordingly, during a period of rising interest rates, an institution with a
negative gap position would not be in as favorable a position, compared to an
institution with a positive gap, to invest in higher yielding assets. A negative
gap may result in the yield on an institution's interest-earning assets
increasing at a slower rate than the increase in an institution's cost of
interest-bearing liabilities than if it had a positive gap. During a period of
falling interest rates, an institution with a negative gap would experience a
repricing of its interest-earning assets at a slower rate than its
interest-bearing liabilities which, consequently, may result in its net interest
income growing at a faster rate than an institution with a positive gap
position.
<PAGE>
The Company's Asset/Liability Management Committee is composed of certain
officers of the Company (the "ALCO Committee") and controls asset/liability
management procedures. The purpose of the ALCO Committee is to review and
monitor the volume and mix of the interest sensitive assets and liabilities
consistent with the Company's overall liquidity, capital, growth and
profitability goals.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY AT DECEMBER 31, 1996 (In thousands)
===========================================================================================================================
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 $ 10,730 $ 5,238 $ 6,748 $ -- $ 22,716
Federal Funds Sold 5,450 -- -- -- 5,450
Loans 35,659 12,786 39,393 17 87,855
Valuation Reserve (1) -- -- -- (863) (863)
Non-interest Earning Assets -- -- -- 9,83 79,837
===========================================================================================================================
Total Assets $ 51,839 $ 18,024 $ 46,141 $ 8,991 $ 124,995
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Money Market accounts $ 15,711 $ -- $ -- $ -- $ 15,710
NOW accounts 6,439 -- -- -- 6,439
Other Savings Deposits 7,675 -- -- -- 7,675
Time CDs over $100,000 3,415 1,875 921 -- 6,211
Other Time Deposits 17,379 28,899 8,786 -- 55,065
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities $ 50,619 $ 30,774 $ 9,707 $ -- $ 91,100
- ---------------------------------------------------------------------------------------------------------------------------
Non-interest Bearing Liabilities $ -- $ -- $ -- $ 21,421 $ 21,421
Other Liabilities -- -- -- 564 564
Stockholders' Equity -- -- -- 11,910 11,910
===========================================================================================================================
Total Liabilities and Stockholders' Equity $ 50,619 $ 30,774 $ 9,707 $ 33,895 $ 124,995
===========================================================================================================================
Interest Rate Sensitivity Gap $ 1,220 $ (12,750) $ 36,434 $ (24,904)
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative Gap $ 1,220 $ (11,530) $ 24,904
===========================================================================================================================
Cumulative Gap to Total Assets .98% (9.22%) 19.92%
===========================================================================================================================
<PAGE>
(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:
(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.
</TABLE>
It is management's policy to maintain the Company's cumulative gap ratios at
+/-10% for 90 days or less, +/-20% for between 91 days and 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 liabilities over time as interest rates change. Volatility in
interest rates can also result in disintermediation, which is the flow of funds
away from financial institutions into direct investments, such as U. S.
Government and corporate securities and other investment vehicles, including
mutual funds, which, because of the absence of federal insurance premiums and
reserve requirements, generally pay higher rates of return than financial
institutions.
DEPOSITS
Following is the average balances and rates paid on deposits for the periods
indicated:
<TABLE>
<CAPTION>
===========================================================================================================================
YEARS ENDED YEARS ENDED YEARS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
===========================================================================================================================
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 16,027,197 -- $ 10,838,744 -- $ 8,901,103 --
Savings Deposits 6,977,173 3.13% 5,942,451 3.27% 7,611,311 3.31%
Money Market Deposits Accounts 11,940,716 3.26% 8,366,762 3.54% 8,619,199 3.12%
NOW Accounts 6,042,628 2.46% 4,417,143 2.31% 4,445,435 2.35%
Time Deposits 56,700,027 5.39% 41,703,884 5.46% 27,492,118 4.15%
===========================================================================================================================
$ 97,687,741 3.90% $ 71,268,984 4.03% $57,069,166 3.09%
</TABLE>
<PAGE>
Following is the maturity distribution of time certificates of deposit $100,000
and over at December 31, 1996:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Three months or less $ 3,415,000
Over three months through twelve months 1,875,000
Over 1 year through five years 921,000
================================================================================
$ 6,211,000
================================================================================
</TABLE>
LIQUIDITY
The Company's liquidity is dependent on the successful management of its assets
and liabilities so as to meet the needs of both its deposit and credit
customers. The Company's liquidity needs arise principally to accommodate
possible deposit outflows and meet loan demand.
The Company's liquidity represented by cash and cash equivalents is a
product of its operating, investing and financing activities.
During 1996, the Company generated cash flow from operations of $655,068.
This was less than the $875,351 generated in 1995 primarily due to an increase
in other assets of $728,809.
Net cash used in investing activities was $31,841,118. Most of this amount
was represented by the increase in loans of $27,763,788. Proceeds from the sales
and maturities of securities totaled $15,045,562 all of which was used to
purchase securities. Such purchases totaled $18,260,070.
The increases in loans were funded by net cash provided by financing
activities which totaled $35,329,286. Deposits, most notably time and demand
deposits accounted for most of the amount. The Company issued common stock in
the fourth quarter of 1996 which provided $2,555,208.
There was an increase in cash and cash equivalents of $4,143,236 during the
period. In addition to cash and cash equivalents, the Company's primary
liquidity includes securities available for sale and securities held to maturity
that mature in one year or less, which totaled $28,096,714 inclusive of cash and
cash equivalents at December 31, 1996 and represent 22.0% of total assets. The
Company believes its liquidity position is sufficient to provide funds to meet
future loan demand or the possible outflow of deposits.
<PAGE>
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, 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Return on Average Assets .67% .83% 1.30%
Return on Average Equity 8.07% 8.16% 13.50%
Average Equity to Average Assets 8.30% 10.17% 9.65%
================================================================================
</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:
<TABLE>
<CAPTION>
================================================================================
YEARS ENDED DECEMBER 31, 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Total Capital to Risk
Weighted Assets 13.40% 14.11% 14.03%
Tier I Capital to Risk
Weighted Assets 12.56% 13.29% 13.28%
Leverage Ratio 9.58% 9.89% 9.21%
================================================================================
</TABLE>
It is the Company's intentions to retain its earnings in order to provide
adequate capital to continue to support its growth. The Company has never paid a
dividend.
<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
John Mondoro
Daniel Pullen, DDS
Harry Smith
Kevin Sweeney
Frank N. Yurasko, Esq.
<PAGE>
Somerset Valley Bank 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
Vice President
Consumer Loans
Allison S. Fischer
Vice President
Bank Manager
Michael A. Novak
Vice President
Commercial Loans
Roger W. Russell
Vice President
Loan Administration
Karen L. Zaliwski
Vice President
Operations
Rene Miranda
Assistant Vice President
W. Gay Pfahler
Assistant Vice President
Mary E. Rowe
Assistant Vice President
Mary Ann Soriano
Assistant Vice President
Marguerite Eppler
Secretary to the Board
Suzanne B. Lennard
Assistant Secretary,
Assistant Manager
Jeannette Capra
Assistant Treasurer
<PAGE>
Christopher Fenimore
Assistant Treasurer
Christopher Seaman
Assistant Treasurer,
Assistant Manager
EMPLOYEES:
Elizabeth Balunis Margaret Biello Roselyn Bonge Michelle Callahan Leo Delaney
Joan Diemer Sharon Eckel Lisa Giacomarra Andrew Gruszka Nicole Hunt Mary
Langmead Lillian Lazorchak Suzanne Long Lois Lott Kelly McGovern Kelly Moravasik
Margaret O'Keeffe Bedzaida Rodriguez Scott Ronca Lorenzo Santiago Rosemary
Tucillo Diana Valko Vimala Vimalavong Brian Zunski
<PAGE>
SVB FINANCIAL SERVICES, INC.
SOMERSET VALLEY BANK
103 WEST END AVENUE
SOMERVILLE, NJ 08876
TEL: 908-704-1188
FAX: 908-685-2180
SOMERSET VALLEY BANK
649 ROUTE 206
HILLSBOROUGH CENTRE
BELLE MEAD, NJ 08502
TEL: 908-281-4009
FAX: 908-281-3042
OPENING SPRING 1997
SOMERSET VALLEY BANK
BRIDGEWATER OFFICE
481 NORTH BRIDGE STREET
BRIDGEWATER, NJ 08807
GENERAL COUNSEL:
Thomas C. Miller, Esq.
Welaj, Miller and Robertson
21 North Bridge Street
Somerville, NJ 08876
INDEPENDENT
PUBLIC ACCOUNTANTS:
Arthur Andersen LLP
Princeton, NJ 08540
TRANSFER AGENT:
Registrar and
Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(ARTHUR ANDERSEN LETTERHEAD)
March 27, 1997 Arthur Andersen LLP
Securities and Exchange Commission 101 Eisenhower Parkway
Mail Stop 9-5 Roseland, NJ 07068-1099
450 Fifth Street, N.W. 201-403-6100
Washington, D.C. 20549
Dear Sirs/Madams:
We have read the statements made by SVB Financial Services, Inc., which we
understand will be filed with the Commission on March 31, 1997, pursuant to Item
9 of Form 10-K. We agree with the statements concerning our firm in such Form
10-K.
Very truly yours,
ARTHUR ANDERSEN LLP
PB
Copy to:
Mr. Keith B. McCarthy
Executive Vice President
SVB Financial Services, Inc.
103 West End Avenue
Somerville, New Jersey 08876
SVB FINANCIAL SERVICES, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON THURSDAY, APRIL 24, 1997
5:30 P.M.
Notice is hereby given that the Annual Meeting of Shareholders of SVB
Financial Services, Inc. will be held at the Raritan Valley Country Club, Route
28, Somerville, New Jersey 08876, on Thursday, April 24, 1997 at 5:30 P.M., for
the following purposes:
1. Election of fifteen (15) Directors for the terms as set forth in
the accompanying Proxy Statement.
2. Approval of the SVB Financial Services, Inc. 1997 Restated
Incentive Stock Option Plan as more fully described as Exhibit
"A" of the Proxy Statement.
3. Approval of the SVB Financial Services, Inc. 1997 Directors Stock
Option Plan as more fully described as Exhibit "B" of the Proxy
Statement.
4. Transaction of such other business as may properly come before
the meeting or any adjournment thereof.
Only those shareholders of record of SVB Financial Services, Inc. at
the close of business on March 21, 1997, shall be entitled to
notice of, and to vote at, the meeting. Each share of stock is
entitled to one vote.
By order of the Board of Directors
Marguerite Eppler
Secretary
Somerville, New Jersey
March 27, 1997
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON
WE ASK THAT YOU RETURN YOUR COMPLETED PROXY AS SOON AS POSSIBLE USING THE
ENVELOPE PROVIDED AND IN ANY CASE NO LATER THAN 3:00 P.M. ON APRIL 23, 1997.
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO INSURE A QUORUM. A SELF- ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES.
<PAGE>
SVB FINANCIAL SERVICES, INC.
103 West End Avenue
P.O. Box 931
Somerville, New Jersey 08876
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS - APRIL 24, 1997
This Proxy Statement is furnished to shareholders of SVB Financial
Services, Inc. (the "Company") in connection with the solicitation of proxies by
the Board of Directors of the Company for the Annual Meeting of Shareholders to
be held at 5:30 P.M. on Thursday, April 24, 1997 and all adjournments thereof.
This Proxy Statement and accompanying materials are being mailed to shareholders
on or about March 27, 1997.
The close of business March 21, 1997, has been fixed as the record date
for the determination of shareholders entitled to notice of, and to vote at, the
meeting. As of the record date there were issued and outstanding 1,369,655
shares of Common Stock, with a par value of $4.17 per share (the "Common
Stock").
The Company owns 100% of Somerset Valley Bank (the "Bank"). At this
time the Company's investment in the Bank accounts for virtually all of its
assets and source of income. Accordingly, to avoid misleading or incomplete
information, portions of the following material discuss the Bank.
Holders of a majority of the outstanding shares of Common Stock present
in person or by proxy will constitute a quorum for the purpose of transacting
business at the annual meeting. ALL SHAREHOLDERS ARE URGED TO VOTE AND SIGN THE
ENCLOSED PROXY AND RETURN IT PROMPTLY TO THE TRANSFER AGENT IN THE ENCLOSED
RETURN ENVELOPE.
When properly executed, a proxy will be voted in the manner directed by
the shareholder. However, if no contrary specification is made, it will be voted
FOR all of the Directors and the proposals listed in this Proxy Statement.
A proxy may be revoked at any time before it is exercised by written
notice to the Secretary of the Company, 103 West End Avenue, Somerville, New
Jersey 08876, bearing a date later than the proxy. The presence at the meeting
of any shareholder who submitted a proxy shall not revoke such proxy unless such
shareholder shall file written notice of revocation with the Secretary of the
Company prior to the voting of the Proxy. All properly executed proxies which
are received by the Secretary and are not revoked will be voted. Where no
instructions are indicated, properly executed proxies will be voted "FOR" the
Directors and the proposals set forth below.
THIS SOLICITATION IS MADE BY THE MANAGEMENT OF THE COMPANY and the cost
thereof shall be borne by the Company. Proxies may be solicited by mail, in
person or by telephone or facsimile by directors, officers or employees of the
Company and its subsidiary, Somerset Valley Bank. Such persons will receive no
additional compensation for their solicitation activities and will be reimbursed
only for their actual expenses in connection therewith. The Company will, upon
request, reimburse custodians, nominees, and fiduciaries for reasonable expenses
in forwarding materials to the proper shareholders.
<PAGE>
Voting Rights
Each share of Common Stock is entitled to one vote (non cumulative) on
all matters presented for shareholder vote. Abstentions and broker non-votes are
counted for the purposes of determining the presence or absence of a quorum for
the transaction of business. Abstentions are counted separately and are not
considered as either a vote "FOR" or "AGAINST" in tabulations of votes cast on
proposals by the shareholders. Broker non-votes are not counted at all for
purposes of determining whether a proposal has been approved.
Under New Jersey law and the Company's By-Laws a majority of the votes
cast at a meeting at which a quorum to transact business is present shall decide
the election of Directors and the proposals relating to Stock Option Plans set
forth in this Proxy Statement.
Directors/Principal Shareholders/Executive Officers
In accordance with the By-Laws of the Company, its Board of Directors
shall, from time to time, fix the exact number of directors, up to 25. The
number is presently fixed at 15. All named below, except as noted, are presently
members of the Board and have served since the Company's incorporation except
Dr. Gold who was appointed in July, 1996. They have all been members of the
Board of the Bank since 1990 with the exception of Mr. Bernstein, who has been a
member since 1991 and Dr. Gold who was one of the original Board Members and
Incorporators of the Bank and was reappointed to the Board in August, 1996.
The Company's Certificate of Incorporation provides that the Board of
Directors be classified and divided into three classes, as nearly equal in
number as possible. The 1997 Annual Meeting of Shareholders is the first such
meeting since the Company was incorporated. In the election of Directors at this
First Annual Meeting, the term of office of the first class shall expire at the
next Annual Meeting of Shareholders, the term of office of the second class
shall expire at the 1999 Annual Meeting of Shareholders and the term of the
third class shall expire at the 2000 Annual Meeting of Shareholders. After 1997,
at each Annual Meeting of Shareholders, Directors (equal in number to the class
whose term expires at the time of such meeting) shall be elected to hold office
until the third succeeding Annual Meeting of Shareholders.
Each Director no matter when elected will hold office until his/her
successor is elected and qualified, or until their earlier resignation or
removal.
The following table presents the name, age and address of each nominee
for Director and the Executive Officers, the class to which each nominee for
Director is assigned, the number of shares and the percentage of the outstanding
shares of common stock of the Bank beneficially owned, directly or indirectly,
by each of them as of March 21, 1997. There is no one other than the persons
listed below who owns beneficially 5% or more of the outstanding common stock.
<PAGE>
<TABLE>
<CAPTION>
Shares % of
Name & Address Beneficially Total
Title Age Principal Occupation Owned Outstanding
- ----- --- -------------------- ----- -----------
<S> <C> <C> <C> <C>
Directors Nominated to Serve
Until the 1998 Annual Meeting:
Bernard Bernstein 59 President & CEO, 50,662 3.70
Director Mid-State Lumber Corp.,
200 Industrial Parkway a wholesale lumber
Branchburg, NJ 08876 distributor
Robert P. Corcoran 56 President & CEO 6,000(1) .44
President, CEO & Director Somerset Valley Bank
12 Harvest Court SVB Financial Services, Inc.
Flemington, NJ 08822
Mark S. Gold, MD 47 Author & Professor 81,886(2) 5.98
Director University of Florida
2002 San Marco Blvd.
Suite 300
Jacksonville, FL 32207
Raymond L. Hughes 65 President of N.J. Risk 31,090(3) 2.27
Director Managers & Consultants
20 West End Avenue
Somerville, NJ 08876
S. Tucker S. Johnson 31 Farmer 19,860 1.45
Director
P.O. Box 675
Oldwick, NJ 08858
Directors Nominated to Serve
Until the 1999 Annual Meeting:
Willem Kooyker 54 Chairman of Tricon Holding 129,218(4) 9.43
Director LTD, an international
2 Worlds Drive commodities firm
Somerset, NJ 08875
Frank Orlando 63 Retired 57,960(5) 4.23
Director
786 Princeton Avenue
Brick, NJ 08724
Gilbert E. Pittenger 72 Retired 33,092(6) 2.42
Director
RD #1, Box 91
New Ringgold, PA 17960
Frederick D. Quick 65 President of Hesco 88,800(7) 6.48
Director Electric Supply Co., Inc.,
924 River Road a lighting and electrical
Neshanic Station, NJ 08853 supply firm
<PAGE>
Donald Sciaretta 41 President of Claremont 30,300 2.21
Director Construction Group, Inc.
P.O. Box 808
Far Hills, NJ 07931
Directors nominated to serve
until the 2000 Annual Meeting:
John K. Kitchen 53 President of Title Central 25,339(8) 1.85
Chairman of Board & Director Agency, a title insurance
P.O. Box 421 firm
Somerville, NJ 08876
Anthony J. Santye, Jr. 46 Managing Partner of A.J. 18,480(9)(10) 1.35
Director Santye and Co., an
36 East Main Street accounting and consulting
Somerville, NJ 08876 firm
G. Robert Santye 43 Director of Real Estate and 11,520(9)(11) .84
Vice Chairman & Director Business Valuation Services
36 East Main Street for A.J. Santye and Co.
Somerville, NJ 08876
Herman C. Simonse 65 Executive Vice President of 17,600 1.28
Director Belle Mead Development
93 Douglass Avenue Corporation
Bernardsville, NJ 07924
Donald R. Tourville 60 Chairman and CEO of Zeus 66,176 4.83
Director Scientific, Inc., a manu-
P.O. Box 38 facturer of diagnostic
Raritan, NJ 08869 test kits
Executive Officers:
Keith B. McCarthy 39 Chief Operating 3,600(12) .26
Executive Vice President & Officer of the Bank
Treasurer Executive Vice President &
501 Red School Lane Treasurer of the Company
Phillipsburg, NJ 08865
Arthur E. Brattlof 53 Executive Vice President & 1,497(13) .11
9 Steeple Chase Court Chief Lending Officer
Bedminster, NJ 07921 of the Bank
Total Directors and Executive Officers as a Group 49.13
1) Includes 720 shares in the name of his son, a minor. He also has options
to purchase 10,800 shares at $8.33 which expire in August 1999 and 4,800
shares at $8.33 which expire in April 2001.
2) Includes 2,880 shares owned by his wife as custodian for his children.
3) Includes 2,400 shares owned by Hughes-Plumer Pension Fund and 13,440 by
Hughes-Plumer Profit Sharing Plan.
4) Includes 48,000 shares held in trusts for his three children.
<PAGE>
5) Includes 32,400 shares held by Eight Mountain Trail, Inc. Employees
Profit Sharing Plan.
6) Includes 1,920 shares owned by Effective Controls, Inc. and 6,452 shares
held in Trusts for the benefit of his grandchildren.
7) Includes 15,000 shares owned by Hesco Electric Supply Company, Inc.
8) Includes 1,680 shares held by his wife as custodian for his children and
259 shares held by his daughter, a minor.
9) Anthony J. Santye, Jr. and G. Robert Santye are brothers.
10) Includes 9,552 shares held by A.J. Santye Co., PA, Profit Sharing Plan,
1,680 shares held by his wife and 2,160 shares held by his wife for the
benefit of his children.
11) Includes 3,120 shares held by his wife.
12) In addition, Mr. McCarthy has options to purchase 12,000 shares at $8.33
which expire August 1999 and 4,800 shares at $8.33 which expire April
2001.
13) In addition, Mr. Brattlof has options to purchase 6,240 shares at $8.33
which expire April 2001.
</TABLE>
Director Committees
All of the Board of Directors of the Company also serve on the Board of
Directors of the Bank. The Company has only had business activities since
September 3, 1996 and its Board has not yet established any committees.
There are six committees of the Board of Directors of the Bank.
The Executive Committee is composed of Messrs. Corcoran, Kitchen,
Kooyker, Pittenger, Quick, G.R. Santye and Tourville. The Committee reviews and
approves the Bank's budget and establishes the Bank's long range and strategic
plans.
The Loan Committee, composed of Messrs. Bernstein, Hughes, A.J. Santye,
Jr., Sciaretta, Simonse, Tourville, Kitchen and Corcoran, reviews and approves
loans within certain predetermined parameters, monitors the quality of the
portfolio and insures that credit/rate risks and the mix of loans are consistent
with the Bank's loan and asset/liability management policies.
The Real Estate Committee, composed of Messrs. Hughes, Sciaretta,
Simonse, and G.R. Santye, reviews appraisals for real estate mortgages and
construction loans and advises the Loan Committee and the Board with respect to
real estate lending.
The Audit Committee, composed of Messrs. Hughes, Johnson, Quick, A.J.
Santye, Jr. and Simonse, formulates the Bank's audit policy, chooses the
Company's accounting firm and reviews audits conducted by the Company's internal
and external auditors.
<PAGE>
The Investment Committee, composed of Messrs. Bernstein, Kooyker,
Johnson, Orlando and Pittenger, periodically reviews the Bank's investment
portfolio for adherence to bank policy and approves its investment strategy.
The Compensation Committee is composed of Messrs. Bernstein, Johnson,
Kitchen, Kooyker, Quick, Orlando and A.J. Santye, Jr. The Committee approves
compensation and bonuses for the Bank's Officers.
Messrs. Corcoran and Kitchen are ex-officio members of all the Bank's
committees. Mr. McCarthy, is a non-director, non-voting member of the Executive
and Investment Committees. Mr. Brattlof, Senior Vice President, is a
non-director voting member of the Loan Committee.
During 1996, the Board of Directors held 12 meetings, the Executive
Committee 2 meetings, the Loan Committee 13 meetings, the Audit Committee 2
meetings, the Investment Committee 3 meetings, the Compensation Committee 2
meetings, and the Real Estate Committee 9 meetings. In addition, there is
significant communication between the Board of Directors and the Company which
occurs apart from the regularly scheduled Board and Committee meetings and as a
result, the Bank does not regard attendance at meetings to be the primary
criterion to evaluate the contribution made by a Director. During 1996, all
Directors attended at least 75% of the total Board and Committee meetings with
the exception of Messrs. Hughes and Kooyker. Attendance percentages for the Loan
Committee are not included in these percentages. Because of the frequency of
Loan Committee meetings, only three Director Loan Committee members are required
to conduct committee meetings as set forth in the Bank's policy.
Executive Compensation
The following table summarizes all compensation earned in the past
three complete fiscal years for services performed in all capacities for the
Company and the Bank with respect to the Executive Officers. The compensation
noted in the table has been paid by the Bank. No compensation has been paid by
the Company:
<TABLE>
<CAPTION>
All
Name and Year Annual Compensation Other
Position Salary Bonus Compensation
<S> <C> <C> <C> <C>
Robert P. Corcoran 1996 $130,000 $20,573(1) $8,468(3)
President & CEO of 1995 125,000 31,250 9,089(3)
the Company and the Bank 1994 115,000 5,750 2,415(2)
Keith B. McCarthy 1996 97,650 12,202(1) 2,592(2)
Treasurer of the Company 1995 93,000 13,350 2,672(2)
Chief Operating Officer of 1994 85,000 4,250 1,784(2)
the Bank
Arthur E. Brattlof 1996 82,000 10,246(1) 2,176(2)
Executive Vice President 1995 78,000 11,700 2,271(2)
of the Bank 1994 73,000 3,660 1,537(2)
<PAGE>
1) The Bonus for 1996 is based 75% on a comparison of the Company's
results for 1996 in comparison with certain predetermined financial
goals, this portion is the amount stated in the table. The remaining
25% is based on a comparison of the Bank's results with a group of 10
similar banks as chosen by the Compensation Committee of the Board.
Since the results of the peer group are not available at this time this
amount has neither been determined nor paid.
2) Represents matching amounts contributed by the Bank to the 401(k) Plan.
3) Includes matching contributions to the 401(k) Plan of $3,450 in 1996
and $3,706 in 1995, Director fees of $3,000 in 1996 and $1,800 in 1995
and term life insurance premiums paid by the Company of $2,017 in 1996
and $3,538 in 1995.
</TABLE>
The Bank also maintains various medical, life and disability benefit
plans covering all its full-time employees. The Bank also provides automobiles
to the three executive officers mentioned in the table above and one other
officer of the Bank. Such officers have some personal use of those vehicles such
as commuting to and from the Bank.
Bonus Plan
During 1996, the Compensation Committee of the Board of Directors has
approved a bonus plan for the three executive officers listed in the table
above. Under the terms of the plan, cash bonuses will be paid to the executive
officers based upon a formula that includes the Company achieving certain
predetermined financial goals, the officers achieving certain predetermined
personal objectives and the performance of the Bank in comparison to the results
of a group of 10 similar banks as chosen by the Committee.
Bonuses were paid to other employees of the Company, who were employed
by the Company for the entire year based on the achievement of certain
predetermined financial goals.
1994 Stock Option Plan
During 1994, the Shareholders of the Bank approved the 1994 Somerset
Valley Bank Stock Option Plan (the "Plan"). The Plan was intended to enable the
Bank to attract and retain capable officers and key employees and to provide
them with incentives to promote the best interest of the Bank by enabling and
encouraging them through the grant of incentive stock options and nonqualified
stock options (collectively, the "Options") to acquire Bank stock.
The Plan was administered by a Committee of the Board of Directors of
the Bank which was composed of at least three (3) members of the Board. No
member of the Committee was eligible to participate in the Plan for a period of
at least one (1) year prior to his or her election to serve on the Committee.
The persons eligible to participate in the Plan were officers and key
employees of the Bank and its subsidiaries who were designated by the Board of
Directors upon recommendation by the Committee.
Note: The share amounts and prices in the following have been adjusted
for the six for five exchange of the shares of the Company for those of the
Bank.
<PAGE>
During 1996 the Bank was acquired by the Company.
There were 51,409 shares of common stock available for the granting of
options under the Plan. During 1994, Messrs. Corcoran and McCarthy were granted
options to purchase 12,000 shares each at a price of $8.33 per share for a five
year period expiring August 1999. No options were granted during 1995. Mr.
Corcoran exercised 1,200 of these options during 1996.
During 1996, 26,400 options were granted under the plan to 12 officers
including the three executive officers named in the table above who received
15,840 or 61% of the options granted. The executive officers received the
following amounts: Mr. Corcoran 4,800 options, Mr. McCarthy 4,800 options and
Mr. Brattlof 6,240 options. All options were granted at $8.33 per share and
expire April 30, 2001.
On October 31, 1996, the Board of Directors of the Company agreed to
transfer and assume the stock option plan of the Bank.
<PAGE>
PROPOSAL TO APPROVE THE 1997 RESTATED INCENTIVE STOCK OPTION PLAN
In order to update the 1994 Stock Option Plan after its transfer to and
assumption by the Company, the 1997 Restated Incentive Stock Option Plan was
prepared and adopted, subject to Shareholder Approval, by the Board of Directors
on January 31, 1997. The purpose of the 1997 Restated Incentive Stock Option
Plan is to provide a means by which selected Employees of the Company and its
Affiliates may be given an opportunity to purchase stock of the Company. The
Company, by means of the Plan, seeks to retain the services of persons who are
now Employees of the Company or of its Affiliates, to secure and retain the
services of new Employees of the Company and of its Affiliates, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates.
The following is a summary of the proposed features of the 1997
Restated Incentive Stock Option Plan, which is qualified in its entirety by
reference to the 1997 Restated Incentive Stock Option Plan which is annexed
hereto as Exhibit A. As indicated in the text of the 1997 Restated Incentive
Stock Option Plan, any provision of the 1997 Restated Stock Option Plan which is
determined to be inconsistent with the applicable laws and regulations will be
deemed void.
Administration
The 1997 Restated Incentive Stock Option Plan may be administered by a
Committee appointed by the Board of Directors composed of not fewer than two (2)
members of the Board to serve in its place with respect to the Plan. All members
of such committee shall be Disinterested Persons, if required. Under the terms
of the 1997 Restated Incentive Stock Option Plan, the Committee has the
authority to (i) determine the employees who shall receive the grant of
Incentive Stock Options, the time or times at which, options shall be granted,
the number of shares of stock subject to each option and the vesting schedule of
such options (ii) determine the fair market value of the common stock of the
Company or of its Affiliates, (iii) determine the exercise price per share at
which options may be exercised, (iv) determine the terms and provisions of each
option granted and the forms of each option agreement, and subject to the
consent of the optionee, to modify and amend any outstanding option agreement,
(v) accelerate or defer (with the consent of the optionee) the date of any
outstanding option, to authorize any person to execute on behalf of the Company
any instrument required to effectuate the grant of an option previously granted
by the Committee, (vi) amend the 1997 Restated Stock Option Plan if required by
the Internal Revenue Code of 1986, as amended or by Rule 16b-3 of the Exchange
Act (vii) construe or interpret the 1997 Restated Stock Option plan, (viii)
authorize the sale of shares of Common Stock in connection with exercise of the
options, (ix) to effect, with the consent of the optionee, the cancellation of
any outstanding options and to grant in substitution thereof new options
relating to the same or different numbers of shares, (x) make all other
determinations deemed necessary or advisable for the administration of the plan.
Shares Reserved
Subject to adjustments for certain changes in the number of shares of
Common Stock, a total of 82,404 shares of the Company's Common Stock shall be
available for issuance under the 1997 Restated Stock Option Plan, of which
50,400 have previously been issued to employees pursuant to the 1994 Stock
Option Plan. Stock subject to the plan may be unissued shares or reacquired
<PAGE>
shares, bought on the market or otherwise. Incentive Stock Options may be
granted to eligible persons in such number and at such times as the Committee
may determine. However, to the extent that the aggregate Fair Market Value
(determined at the time of the grant) of stock with respect to which Incentive
Stock Options are exercisable for the first time by any optionee during any
calendar year under all plans of the Company and its affiliates exceed One
Hundred Thousand ($100,000) Dollars, the options or portions thereof that exceed
such limit shall be treated as Nonstatutory Options.
Eligibility
Options under the 1997 Restated Incentive Stock Option Plan may be
granted only to Employees of the Company or of its Affiliates. A Director shall
only be eligible for the benefits of the plan if he or she is also an Employee,
provided, however, a Director shall in no event be eligible for the benefits of
the plan unless at the time discretion is exercised in the selection of the
Director as a person to whom Options may be granted, or in the selection of the
Director as a person to whom Options may be granted, or in the determination of
the number of optioned shares which may be covered by options granted to the
Director: (i) the Committee consists only of Non-Employee Directors; or (ii) the
plan otherwise complies with the requirements of Section 16b-3 of the Exchange
Act. This provision does not apply prior to the date of the first registration
of an equity security of the Company under Section 12 of the Exchange Act.
No person shall be eligible for the grant of an Incentive Stock Option,
if, at the time of the grant, such person owns or is deemed to own pursuant to
Section 424 (d) of the Internal Revenue Code of 1986, as amended, stock
possessing more than ten (10%) of the total combined voting power of all classes
of stock of the Company or of any of its Affiliates, unless the exercise price
of the option is at least one hundred and ten percent (110%) of the Fair Market
Value (as defined in the 1997 Restated Incentive Stock Option Plan) of such
stock at the date of the grant and the Incentive stock option is not exercisable
after the expiration of five (5) years from the date of the grant.
Terms of Options
The exercise price shall not be less than one hundred percent (100%) of
the Fair Market Value (as defined in the 1997 Restated Incentive Stock Option
Plan) of the stock subject to the Option on the date the Option is granted
(except as noted under Eligibility with respect to owners of ten (10%) percent
of the total combined voting stock of the Company or of any of its affiliates.)
No Option shall be exercisable after the expiration of five (5) years from the
date it was granted and the term of the Option shall be stated in the Option
Agreement.
Generally, an Option shall be deemed exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option Agreement by the person entitled to exercise the Option and full payment
has been received by the Company. The purchase price of the stock acquired
pursuant to the Option shall be paid, at the time the Option is exercised, to
the extent permitted by the statutes and regulations at the time that the Option
is exercised, either in cash or check.
<PAGE>
In the event that an Optionee's Continuous Status as an Employee (as
defined in the 1997 Restated Incentive Stock Option Plan) terminates (other than
by death or disability), the Optionee may exercise his or her option but only
prior to (i) the expiration of three (3) months after the date of such
termination and (ii) expiration of the term of the Option as set forth in the
Option Agreement, and only to the extent that the Optionee was entitled to
exercise it as of the date of such termination.
In the event that an Optionee's Continuous Status as an Employee
terminates as a result of the Optionee's Disability, the Optionee or his or her
personal representative may exercise his or her Option, but only within twelve
(12) months from the date of such termination, and only within twelve (12)
months from the date of such termination, and only to the extent that such
Optionee was entitled to exercise it on the date of such termination (but in no
event later than the expiration of the term of the Option as set forth in the
Option Agreement).
In the event of the death of the Optionee, the Option may be exercised,
at any time within twelve (12) months of the death of the Optionee (or such
longer or shorter time as may be specified in the Option Agreement) but in no
event later than the expiration date of the Option as set forth in the Option
Agreement.
Nontransferability
An Incentive Stock Option shall not be transferrable except by will or
by the laws of descent and distribution and shall be exercisable during the
lifetime of the Optionee only by such person.
Amendment
The Committee at any time may amend the Plan, provided however, that if
required by Section 16b-3, no amendment shall be made more than once every six
(6) months, other than to comport with the changes in the Code, ERISA, or other
rules and regulation promulgated thereunder. It is contemplated that the
Committee may amend the Plan in any respect the Committee deems necessary or
advisable to bring the Plan and the Options granted thereunder into compliance
with the Code and Rule 16b-3.
The Company will obtain shareholder approval of any Plan amendment to
the extent necessary or desirable to comply with Rule 16b-3 or with the Code or
any successor rule or statute or other rule or regulation, including the
requirements of any exchange or quotation system on which the Common Stock is
listed or quoted). The rights and obligations under the Options granted before
the amendment of the Plan shall not be altered or impaired by the amendment of
the Plan unless consented to in writing by the Optionee.
Termination
The Committee may suspend or terminate the Plan at any time, however,
the rights and obligations under any obligation granted while the Plan is in
effect shall not be altered or impaired by the suspension or termination of the
Plan except with the consent of the Optionee. Unless sooner terminated, the Plan
shall terminate within ten (10) years of the date the Plan was adopted by the
Board of Directors or approved by the Shareholders whichever date is earlier.
<PAGE>
Adjustments upon Changes in Capitalization or Merger
Subject to any required action by the shareholders of the Company, the
number of shares of Common stock subject to the Plan and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Option has yet been granted or have been returned to the Plan upon
cancellation or expiration, as well as the price per share of Common Stock shall
be proportionally adjusted for any increase or decrease in the number of issued
shares of the Common Stock, resulting from a stock split, stock dividend,
combination or reclassification of shares of Common Stock effected without
consideration by the Company. Such adjustment shall be made by the Committee,
whose determination shall be final, binding and conclusive.
In the event of dissolution or liquidation of the Company, each
outstanding Option will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Committee. The Committee may,
in its sole discretion, declare that any Option shall terminate as of a date
fixed by the Committee and give each Optionee the right to exercise his or her
Option as to all or any part of the Optioned Shares, including the Shares as to
which the Option would not otherwise be exercisable.
In the event of a proposed sale of substantially all of the assets of
the Company, or the merger, restructure, reorganization or consolidation of the
Company with or into another entity or entities in which the shareholders of the
Company receive cash or securities of another issuer, or any combination
thereof, in exchange for their shares of Common Stock, each outstanding Option
shall be assumed or an equivalent option shall be substituted by such successor
entity or an Affiliate of such successor entity, unless the Committee
determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the Optionee shall have the right to exercise
the Option as to all Optioned Shares, including Shares as to which the Option
would not otherwise be vested. Notwithstanding anything to the contrary in the
Plan, the Committee may grant options which provide for acceleration of the
vesting of shares subject to an Option upon Change of Control as defined in the
Plan.
Certain Federal Income Tax Consequences
The following summary generally describes the principal Federal (and
not state and local) income tax consequences of options granted under the 1997
Restated Incentive Stock Option Plan. It is general in nature and is not
intended to cover all tax consequences that may apply to a particular
participant in the 1997 Restated Incentive Stock Option Plan to the Company. The
provisions of the Code and regulations thereunder relating to these matters are
complicated and their impact in any one case may depend upon the particular
circumstances. This discussion is based on the Code as currently in effect.
If an Incentive Stock Option is awarded to a participant in accordance
with the terms of the 1997 Restated Incentive Stock Option Plan, no income will
be recognized by such participant at the time of the grant.
Generally, on exercise of an Incentive Stock Option, the participant
will not recognize any income and the Company will not be entitled to a
deduction for tax purposes. However, the difference between the purchase price
and the Fair Market Value of the shares of Common Stock received on the date of
exercise will be treated as a positive adjustment in determining alternative
minimum taxable income, which may subject the participant to the alternative
minimum tax. Upon the disposition of shares acquired upon exercise of an
<PAGE>
Incentive Stock Option under the 1997 Incentive Stock Option Plan, the
participant will ordinarily recognize long-term or short term capital gain or
loss (depending on the applicable holding period). Generally, however, if the
participant disposes of shares of Common Stock acquired upon exercise of an
Incentive Stock Option within two years after the date of grant or within one
year after the date of exercise (a "disqualifying disposition"), the optionee
will recognize ordinary income, and the Company will be entitled to a deduction
for tax purposes, the amount of the excess of the Fair Market Value of the
shares on the date of exercise over the purchase price (or the gain on sale, if
less). Any excess of the amount realized by the optionee on the disqualifying
disposition over the Fair Market Value of the shares on the date of exercise of
the Incentive Stock Option will ordinarily constitute capital gain. In the case
of an optionee subject to the restrictions of Section 16(b), the relevant date
in measuring the optionee's ordinary income and the Company's tax deduction in
connection with any such disqualifying disposition will normally be the later of
(i) the date the six-month period after the date grant lapses and (ii) the date
of exercise of the Incentive Stock Option.
Shareholder Approval Required
Approval of the 1997 Incentive Stock Option Plan by the Shareholders is
required in order for Incentive Stock Options to qualify as "performance-based"
compensation under Section 162(m) of the Code, for Incentive Stock Options to
meet the requirements of Section 422 of the Code.
New Plan Benefits Table
The Company has not included a benefits table because the number of
Incentive Stock Options that will be awarded to Employees in the future pursuant
to the 1997 Restated Incentive Stock Option Plan cannot be
determined at this time. In addition, because no Incentive Stock Option will
have an exercise price of less than the Fair Market Value of the Common Stock at
the date of Shareholder Approval, these Incentive Stock Options have no value at
the present time.
The Board of Directors believes that the adoption of the 1997 Restated
Incentive Stock Option Plan is in the best interests of the shareholders. Among
other things, the 1997 Restated Incentive Stock Option Plan will tend to
encourage the retention of equity ownership in the Company by Employees, which
will tend to align the interest of such employees with the interests of
shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
APPROVAL OF THE 1997 INCENTIVE STOCK OPTION PLAN.
PROPOSAL TO APPROVE THE 1997 DIRECTORS STOCK OPTION PLAN
The 1997 Directors Stock Option Plan was adopted, subject to
Shareholder Approval, by the Board of Directors on January 31, 1997. The 1997
Directors Stock Option Plan is intended to promote the Company's interests by
establishing a mechanism to reward Directors based upon future increases in the
value of the Company's stock. This will help retain the services of persons who
are now Directors and provide incentives for them to exert maximum efforts for
the success of the Company and its affiliates.
<PAGE>
The following is a summary of the proposed features of the 1997
Directors Stock Option Plan, which is qualified in its entirety by reference to
the 1997 Directors Stock Option Plan which is annexed hereto as Exhibit B. As
indicated in the text of the 1997 Directors Stock Option Plan, any provision of
the 1997 Directors Stock Option Plan which is determined to be inconsistent with
the applicable laws and regulations will be deemed void.
Administration
The 1997 Directors Stock Option Plan may be administered by a Committee
appointed by the Board of Directors composed of not fewer than two (2) members
of the Board to serve in its place with respect to the Plan. No member of the
Committee may be an Employee or Officer of the Company or any Affiliate. Under
the terms of the 1997 Directors Stock Option Plan, the Committee has the
authority to (i) determine the fair market value of the common stock of the
Company or of its Affiliates, (ii) determine the terms and provisions of each
option granted and the forms of each option agreement, and subject to the
consent of the optionee, to modify and amend any outstanding option agreement,
(iii) accelerate or defer (with the consent of the optionee) the date of any
outstanding option, (iv) the Internal Revenue Code of 1986, as amended or (v)
construe or interpret the 1997 Directors Stock Option plan, (vi) authorize the
sale of shares of Common Stock in connection with exercise of the options, (vii)
to effect, with the consent of the optionee, the cancellation of any outstanding
options and to grant in substitution thereof new options relating to the same or
different numbers of shares, (viii) make all other determinations deemed
necessary or advisable for the administration of the plan.
Shares Reserved
Subject to adjustments for certain changes in the number of shares of
Common Stock, a total of 54,600 shares of the Company's Common Stock shall be
available for issuance under the 1997 Directors Stock Option Plan. Stock subject
to the Plan may be unissued shares or reacquired shares, bought on the market or
otherwise.
Eligibility and Grant of Options
Upon approval of the 1997 Directors Stock Option Plan each Non-Employee
member of the Company's Board of Directors as of December 31, 1996 will be
granted an option to purchase 3,900 shares of the Common Stock at 100% of the
Fair Market Value as of the date of Shareholder Approval. As of March 27, 1997,
the Fair Market Value of the Common Stock is $13.00 per share. A Director is not
eligible to participate if he/she is also an Officer or Employee. The only
person who is both a Director and an Officer is Mr. Robert Corcoran, the
President and Chief Executive Officer of the Company. Accordingly, as a group
all Directors who are not officers or employees will receive options to purchase
all 54,600 shares available under the 1997 Directors Stock Option Plan upon
approval by the Shareholders.
As there are 14 Directors eligible to participate under the 1997
Directors Stock Option Plan, upon Shareholder Approval all of the shares of
Common Stock available under the Plan will be subject to option.
Terms of Options
The exercise price shall not be less than one hundred percent (100%) of
the Fair Market Value (as defined in the 1997 Directors Stock Option Plan) of
the stock subject to the Option on the date the Option is granted. No Option
shall be exercisable after the expiration of five (5) years from the date it was
granted and the term of the Option shall be stated in the Option Agreement.
<PAGE>
Generally, an Option shall be deemed exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option Agreement by the person entitled to exercise the Option and full payment
has been received by the Company. The purchase price of the stock acquired
pursuant to the Option shall be paid, at the time the Option is exercised, to
the extent permitted by the statutes and regulations at the time that the Option
is exercised, either in cash or check.
In the event that an Optionee's Continuous Status as a Director (as
defined in the 1997 Directors Stock Option Plan) terminates (other than by death
or disability), the Optionee may exercise his or her option but only prior to
(i) the expiration of three (3) months after the date of such termination and
(ii) expiration of the term of the Option as set forth in the Option Agreement,
and only to the extent that the Optionee was entitled to exercise it as of the
date of such termination.
In the event that an Optionee's Continuous Status as a Director
terminates as a result of the Optionee's Disability, the Optionee or his or her
personal representative may exercise his or her Option, but only within twelve
(12) months from the date of such termination, and only to the extent that such
Optionee was entitled to exercise it on the date of such termination (but in no
event later than the expiration of the term of the Option as set forth in the
Option Agreement).
In the event of the death of the Optionee, the Option may be exercised,
at any time within twelve (12) months of the death of the Optionee (or such
longer or shorter time as may be specified in the Option Agreement) but in no
event later than the expiration date of the Option as set forth in the Option
Agreement.
Shareholder Approval
While Shareholder Approval of the 1997 Directors Stock Option Plan is
no longer required by Rule 16(b) under the Securities and Exchange Act of 1934
or by New Jersey law, such approval is required by the explicit terms of the
Plan. Should Shareholder Approval not be obtained the Plan will not take effect.
New Plan Benefit Table
The Company has not included a benefits table because no Director
Options are now outstanding and, since they will have exercise prices equal to
the Fair Market Value of the Common Stock as of the date of Shareholder
Approval, these options have no value at the present time.
Transferability
A Directors Stock Option shall not be transferrable except: (i) by will
or by laws of descent and distribution or pursuant to a qualified domestic
relations order, as defined by the Code or Title I of the Employee Retirement
Income Act, as amended ("ERISA"), or the rules thereunder (a "QDRO") and shall
be exercisable during the lifetime of the Optionee only by such person or any
transferee pursuant to a QDRO; or (ii) without payment of consideration, to
immediate family members (i.e. spouses, children and grandchildren) of the
Optionee or to a trust for the benefit of such family members, or partnership
whose only partners are such family members.
<PAGE>
Certain Federal Income Tax Consequences
The following summary generally describes the principal federal (and
not state and local) income tax consequences of options granted under the 1997
Directors Stock Option Plan. It is general in nature and is not intended to
cover all tax consequences that may apply to a particular participant in the
1997 Directors Stock Option Plan or to the Company. The provisions of the Code
and the regulations thereunder relating to these matters are complicated and
their impact in any one case may depend upon the particular circumstances. This
discussion is based on the Code as currently in effect.
If a Grant is awarded to a participant in accordance with the terms of
the 1997 Directors Stock Option Plan, no income will be recognized by such
participant at the time the Grant is awarded.
Generally, on exercise of a Nonqualified Stock Option, the amount by
which the Fair Market Value of the Common Stock on the date of exercise exceeds
the purchase price of such shares will be taxable to the participant as ordinary
income, and will be deductible for tax purposes by the Company, in the year in
which the participant recognizes the ordinary income. The disposition of shares
acquired upon exercise of a Nonqualified Stock Option ordinarily will result in
long-term or short-term capital gain or loss (depending on the applicable
holding period) in an amount equal to the difference between (i) the amount
realized on such disposition and (ii) the sum of (x) the purchase price and (y)
the amount of ordinary income recognized in connection with the exercise of the
Nonqualified Stock Option.
Section 16(b) of the Securities Exchange Act of 1934, as amended
("Section 16(b)"), generally requires officers, directors and ten percent
shareholders of the Company to disgorge profits from buying and selling the
Common Stock within a six month period. Generally, unless the participants in
the 1997 Directors Stock Option Plan elect otherwise, the relevant date for
measuring the amount of ordinary income to be recognized upon the exercise of a
Nonqualified Stock Option will be the later of (x) the date the six month period
following the date of the Grant lapses and (y) the date of exercise of the
Nonqualified Stock Option.
If a Nonqualified Stock Option is exercised through the use of Common
Stock previously owned by the participant, such exercise generally will not be
considered a taxable disposition of the previously owned shares and, thus, no
gain or loss will be recognized with respect to the shares used to exercise the
option.
The Company may be required to withhold tax on the amount of income
recognized by an optionee upon exercise of a Nonqualified Stock Option.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
APPROVAL OF THE 1997 DIRECTORS STOCK OPTION PLAN.
Certain Agreements
The Company has entered into employment agreements with Messrs.
Corcoran, McCarthy and Brattlof. The agreements provide for the payment of
bonuses as determined by the Compensation Committee of the Board of Directors,
see "Bonus Plan". The agreements provide for severance payments in the event the
officers are terminated without cause or resign with good reason. Such benefits
are equivalent to two times the base salary for Mr. Corcoran payable over 24
<PAGE>
months and one times the base salary for Messrs. McCarthy and Brattlof payable
over 12 months. In the event of a change of control all three officers would
receive a severance payment equal to two times base salary payable over 24
months plus an annual payment for two years equivalent to the average bonus paid
during the last three years of employment.
Director Compensation
No compensation was paid for Board of Directors meetings of the
Company.
During 1996, Directors of the Bank received compensation for service on
the Board of Directors of $250 per Board of Directors meeting attended and $100
for each committee meeting. John K. Kitchen as Chairman of the Board received
compensation of $6,000 in addition to his other per meeting fees.
During 1997, Directors of the Bank will receive $450 for Board of
Directors meetings attended and $100 for Committee meetings attended. Mr.
Kitchen with receive $24,000 as Chairman in addition to his other per meeting
fees.
Benefit Plans
The Bank maintains a 401(k) plan covering substantially all employees.
Under the terms of the plan, the Bank will match 50% of an employee's
contribution, up to 6% of the employee's salary. Employees become fully vested
in the Bank's contribution after five years of service. The Bank contributed
$25,495 to the plan in 1996.
Transactions with Related Persons
It is currently the policy of the Company and Bank not to extend credit
or make loans to any of its Directors or their affiliates.
A partnership made up of, among others, all but one of the Bank's
Directors owns and leases the premises to the Bank at 103 West End Avenue as
well as additional office space in the adjacent 117 West End Avenue. The lease
for 103 West End Avenue, which is the principal banking facility, 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
have received 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.
Independent Public Accountants
The Board of Directors has selected Grant Thornton to be the
independent public accountants for the Company for the fiscal year ending
December 31, 1997. A member of that firm will be present at the Annual Meeting
and available to respond to appropriate questions from the shareholders, and
make a statement if desired to do so.
Arthur Andersen LLP was the Company's and its subsidiary Bank's
independent public accountant from its inception in 1991 through the year ended
December 31, 1996. They will also have a member of their firm present and
available to respond to appropriate questions from the shareholders, and make a
statement if desired to do so.
<PAGE>
The report of Arthur Andersen LLP on the consolidated financial
statements of the Company as of and for the year ended December 31, 1996 did not
contain an adverse opinion or a disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope, or accounting principles.
The decision to change accountants was recommended by the Audit
Committee of the Board of Directors and approved by the Board of Directors.
There were no disagreements with Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
Financial and Other Information Incorporated by Reference
A copy of the Company's annual report is being sent to each shareholder
along with this proxy statement and is incorporated herein by reference. This
information should be read by shareholders in conjunction with this proxy
statement.
Proposals by Security Holders
Proposals by security holders intended to be presented at the 1998
Annual Meeting of Shareholders (which the Company currently intends to hold in
April of 1998) must be received by the Secretary of the Company by November 28,
1997 for inclusion in its Proxy Statement and form of Proxy relating to that
meeting. If the date of the next annual meeting is changed by more than 30
calendar days from such anticipated time fame, the Company shall, in a timely
manner, inform its stockholders of the change and the date by which proposals of
stockholders must be received. All such proposals should be directed to the
attention of the Secretary, SVB Financial Services, Inc., 103 West End Avenue,
Somerville, New Jersey 08876.
Other Matters Which May Properly Come Before the Meeting
The Board of Directors knows of no other business that will be
presented for consideration at the Annual Meeting other than that stated in the
Notice. Should any other matter properly come before the meeting and any
adjournment thereof, it is intended that proxies in the enclosed form will be
voted in respect thereof in accordance with the judgment of the person or
persons voting the proxies.
<PAGE>
EXHIBIT A
SVB FINANCIAL SERVICES, INC.
1997 RESTATED INCENTIVE STOCK OPTION PLAN
1. PURPOSES.
(a) Restated Plan. This 1997 Incentive Stock Option Plan
modifies and restates the 1994 Stock Option Plan adopted by the Board of
Directors of Somerset Valley Bank on March 31, 1994 and which was ratified by
the shareholders of the Bank on April 26, 1994. The 1994 Stock Option Plan was
assigned by Somerset Valley Bank to SVB Financial Services, Inc. by resolution
of the Boards of Directors of both corporations at meetings of the respective
Boards of Directors held on October 31, 1996. The Restated Incentive Stock
Option Plan restates the provisions of the 1994 Stock Option Plan as to
Incentive Stock Options only.
(b) Opportunity to Purchase Stock. The purpose of the Plan is
to provide a means by which selected Employees of the Company and its Affiliates
may be given an opportunity to purchase stock of the Company. The Company, by
means of the Plan, seeks to retain the services of persons who are now Employees
of the Company and its Affiliates, to secure and retain the services of new
Employees of the Company and its Affiliates, and to provide incentives for such
persons to exert maximum efforts for the success of the Company and its
Affiliates.
(c) Incentive Stock Options. The Company intends that the
Options issued under the Plan shall be Incentive Stock Options.
2. DEFINITIONS.
(a) "Affiliate" means any parent corporation or subsidiary corporation
of the Company, as those terms are defined in Sections 424(e) and (f)
respectively of the Code, whether such corporations are now or are hereafter
existing.
(b) "Board" means the Board of Directors of the Company.
(c) "Change of Control" means the occurrence, at any time after
December 31, 1996, of (i) a merger or consolidation of the Company with or into
another Person or the merger of another Person into the Company or the transfer
ownership of nay voting stock of the Company to any Person or "group" (as such
term is defined in Section 13 (d)(3) of the Securities and Exchange Act of 1934,
as amended (the "Exchange Act")), of Persons as a consequence of which those
Persons who held the voting stock of the Company immediately prior to such
merger, consolidation or transfer do not hold either directly or indirectly a
majority of the voting stock of the Company(or, if applicable, the surviving
company of such merger or consolidation) after the consummation of such merger,
consolidation or transfer; (ii) the sale of all or substantially all of the
assets of the Company to any Person or "group" of Persons (other than to an
entity which owns a majority or more of the Common Stock of the Company, a
subsidiary of the Company, or an entity whose equity interests are owned
directly or indirectly by the Company or by an entity which owns directly or
indirectly a majority or more of the Common Stock of the Company); or (iii) any
<PAGE>
event or series of events (which event or series of events must include a proxy
fight or proxy solicitation with respect to the election of directors of the
Company made in opposition to the nominees recommended by the Continuing
Directors) during any period of 12 consecutive months all or any portion of
which is after (i) the date set forth above, and (ii) the date the Company first
has securities registered under Section 12 of the Exchange Act, as a result of
which a majority of the Board of Directors of the Company consists of
individuals other than Continuing Directors.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the Board of Directors of the Company unless a
separate Committee has been appointed by the Board in accordance with Section
3(c) of the Plan.
(f) "Common Stock" means the common stock of SVB Financial Services,
Inc., a New Jersey corporation.
(g) "Company" means SVB Financial Services, Inc., a New Jersey
corporation.
(h) "Continuing Directors of the Company" means with respect to any
period of 12 consecutive months (i) any members of the Board of Directors of the
Company on the first day of such period, (ii) any member of the Board of
Directors of the Company elected after the first day of such period at any
annual meeting of the shareholders who were nominated by the Board of Directors
or a committee thereof, if a majority of the members of the Board of Directors
or such Committee were Continuing Directors at the time of such nomination , and
(iii) any members of the Board of Directors of the Company elected to succeed
Continuing Directors of the Board of Directors or a committee thereof, if a
majority of the members of the Board of Directors or such committee were
Continuing Directors at the time of such election.
(i) "Continuous Status as an Employee" means the employment or
relationship as an employee is not interrupted or terminated with the Company or
any Affiliate. Continuous Status as an Employee shall not be considered
interrupted in the case of : (1) any sick leave, military leave, or any leave of
absence approved by the Committee; provided, however, that for purposes of the
Incentive Stock Options, any such leave is for a period of not more than ninety
(90) days or reemployment upon the expiration of such leave is guaranteed by
contract or statute; or (2) transfers between locations of the Company or
between the Company and its Affiliates or between the Company or its Affiliates
on the one hand and their successors, on the other hand.
(j) "Director" means a member of the Board.
(k) "Disability" means permanent and total disability as defined in
Section 22 (e) (3) of the Code.
(l) "Non-Employee Director" means a Director who is considered to be a
"non-employee director" in accordance with Section (b) (3) (i) of Rule 16b-3,
and any other applicable rules, regulations and interpretations of the
Securities and Exchange Commission.
(m) "Employee" means any person, including officers and Directors,
employed by the Company or any Affiliate. Neither service as a Director nor
payment of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
<PAGE>
(n) "Exchange Act" means the Securities and Exchange Act of 1934, as
amended.
(o) "Fair Market Value" means, as of the any date, the value of the
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the National
Market System of the National Association of Securities Dealers, Inc. Automated
Quotation (NASDAQ) System, the Fair Market Value of a share of Common Stock
shall be the Closing sales price for such stock on the date of determination
(or, if no such price is reported on such date, such price as reported on the
nearest preceding day) as quoted on such system or exchange (or exchange with
the greatest volume of trading in the Common Stock), as reported in The Wall
Street Journal or such other source as the Committee deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but
not on the National Market System thereof) or is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a share of Common Stock shall be the mean of the closing bid and
the asked prices for the Common Stock on the date of determination (or, if such
prices are not reported for such date, such prices as reported on the nearest
preceding date), as reported in the Wall Street Journal or such other source as
the Committee deems reliable;
(iii) If the Fair Market Value is not determined pursuant to
(i) or (ii) above, then the Fair Market Value shall be determined in good faith
by the Committee.
(p) "Incentive Stock Option" means an Option qualifying as an incentive
stock option within the meaning of Section 422 of the Code and the regulations
promulgated thereunder.
(q) "Nonstatutory Stock Option" means an Option not qualifying as an
Incentive Stock Option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(r) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "Option" means a stock option granted pursuant to the Plan.
(t) "Option Agreement" means a written agreement between the Company
and the Optionee evidencing the conditions of an individual Option grant. The
Option Agreement shall be subject to the terms and conditions of the Plan.
(u) "Optioned Shares" means with respect to any Option the Shares of
the Common Stock subject to the Option.
(v) "Optionee" means an Employee or Consultant who holds an outstanding
Option.
(w) "Person" means an individual or an entity.
(x) "Plan" the SVB Financial Services, Inc. 1997 Restated Incentive
Stock Option Plan.
(y) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3.
<PAGE>
(z) "Shares" shall mean a share of Common Stock, as adjusted in
accordance with Section 10.
3. ADMINISTRATION.
(a) Committee. The Plan shall be administered by the Committee.
(b) Powers. The Committee shall have the power, subject to, and within
the limitations of, the express provisions of the Plan to:
(i) grant Options;
(ii) determine, in accordance with Section 6 of the Plan, the
Fair Market Value per Share of the Common Stock;
(iii) determine, in accordance with Section 6, the exercise
price per Share at which Options may be exercised;
(iv) determine the Employees to whom, and the time or times at
which, Options shall be granted, the number of shares of Optioned Stock subject
to each Option and the vesting schedule of such Options;
(v) determine the terms and provisions of each Option granted
(which need not be identical) and the forms of Option Agreements and, with the
consent of the Optionee, and subject to Section 11, to modify or amend any
outstanding Option;
(vi) accelerate or defer (with the consent of the Optionee)
the date of any outstanding Option;
(vii) authorize any person to execute on behalf of the Company
any instrument required to effectuate the grant of an Option previously granted
by the Committee;
(viii) amend the Plan as provided in Section 11;
(ix) construe and interpret the Plan and Options granted under
it, and to establish, amend and revoke rules and regulations for the
administration of the Plan, subject to Section 11; including correcting any
defect, omission or inconsistency in the Plan or in any Option Agreement, in any
manner and to the extent it shall deem necessary or expedient to make the Plan
Fully effective;
(x) authorize the sale of shares of the Company's Common Stock
in connection with the exercise of the Options;
(xi) effect, at any time and from time to time, with the
consent of the affected Optionee, the cancellation of any or all outstanding
Options and grant in substitution thereof new Options relating to the same or
different numbers of Shares, but having an exercise price per share consistent
with Section 6(b) at the date of the new Option grant; and
(xii) make all other determination deemed necessary or
advisable for the administration of the Plan.
<PAGE>
(c) Committee. The Board may appoint a committee composed of not fewer
than two (2) members of the Board to serve in its place with respect to the
Plan. All of the members of such Committee shall be Disinterested Persons, if
required under Section 3 (d). From time to time, the Board may increase the size
of the Committee and appoint such additional members, remove members (with or
without cause) and substitute new members of the committee, fill vacancies,
(however caused) and remove members of the committee and thereafter directly
administer the Plan, all to the extent permitted by the rules governing plans
intended to qualify as a discretionary plan under Rule 16b-3.
(d) Exchange Act Registration. Any requirement that an administrator of
the Plan be a Disinterested Person shall not apply (i) prior to the date of the
first registration of an equity security of the Company under Section 12 of the
Exchange Act or (ii) if the Board or the Committee expressly declares that such
requirement shall not apply. Any Disinterested Person shall otherwise comply
with the requirements of Rule 16b-3.
4. SHARES SUBJECT TO PLAN.
(a) Number of Shares. Subject to the provisions of Section 10 relating
to adjustments upon changes in stock, the stock that may be sold pursuant to
Options is 82,404 shares of the Company's Common Stock, of which Options have
previously been issued to Employees for 50,400 shares of the Company's Common
Stock pursuant to the 1994 Stock Option Plan. If any Option shall for any reason
expire or otherwise terminate without having been exercised in full, the
Optioned Shares not purchased under such Option shall revert to and again become
available for issuance under the Plan unless the Plan shall have terminated;
provided, however, that Shares that have actually been issued under the Plan
shall not be returned to the Plan and shall not become available for future
issuance under the Plan.
(b) Stock Subject to Plan. The stock subject to the Plan may be
unissued shares or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Employees. Incentive Stock Options may be granted to Employees
only.
(b) 10% Holders. No person shall be eligible for the grant of an
Incentive Stock Option, if, at the time of the grant, such person owns (or is
deemed to own pursuant to Section 424(d) of the Code) stock possessing more than
ten (10%) of the total combined voting power of all classes of stock of the
Company or of any of its Affiliates unless the exercise price of the Option is
at least one hundred ten percent (110%) of the Fair Market Value of such stock
at the date of the grant and the Incentive Stock Option is not exercisable after
the expiration of five (5) years from the date of the grant.
(c) Directors. A Director shall only be eligible for the benefits of
this Plan if he or she is also an Employee, provided, however, a Director shall
in no event be eligible for the benefits of the Plan unless at the time
discretion is exercised in the selection of the Director as a person to whom
Options may be granted, or in the selection of the Director as a person to whom
Options may be granted, or in the determination of the number of Optioned Shares
<PAGE>
which may be covered by Options granted to the Director: (i) the Committee
consists only of Non-Employee Directors; or, (ii) the Plan otherwise complies
with the requirements of Section 16b-3. This Section 5 (c) shall not apply prior
to the date of the first registration of an equity security of the Company under
Section 12 of the Exchange Act.
(d) Other Limits on Incentive Stock Options. To the extent that the
aggregate Fair Market Value (determined at the time of the grant) of stock with
respect to which Incentive Stock Options are exercisable for the first time by
any Optionee during any calendar year under all plans of the Company and its
Affiliates exceeds One Hundred Thousand ($100,000) Dollars, the Options or
portions thereof that exceed such limit (according to the order in which they
were granted) shall be treated as Nonstatutory Stock Options.
6. OPTION PROVISIONS.
Each Option Agreement shall be in such form and contain such terms and
conditions as the Committee shall deem appropriate. In the event that any
provision of the Option Agreement and the Plan conflict, the provisions of the
Plan shall control. The provisions of separate Options need not be identical,
but each Option Agreement shall include (through incorporation of provisions
hereof by reference in the Option Agreement or otherwise) the substance of each
of the following provisions:
(a) Term. No Option shall be exercisable after the expiration of five
(5) years from the date it was granted and the term of each Option shall be
stated in the Option Agreement.
(b) Price. Subject to Section 5, the exercise price shall be not less
than one hundred percent (100%) of the Fair Market Value of the stock subject to
the Option on the date the Option is granted. The exercise price of each Stock
Option shall not be less than the par value of the Optioned Shares on the date
the Option was exercised.
(c) Consideration. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations at the time the Option is exercised, either in cash or check.
(d) Exercise. Subject to 9(f), an Option shall be deemed exercised when
written notice of such exercise has been given to the Company in accordance with
the terms of the Option Agreement by the person entitled to exercise the Option
and full payment for the Shares with respect to which the Option is exercised
has been received by the Company by cash or check. Each Optionee who exercises
an Option shall, upon notification of the amount due (if any) and prior to or
concurrent with delivery of the certificate representing the Shares, pay to the
Company by cash or check, amounts necessary to satisfy applicable federal, state
or local tax withholding requirements.
(e) Non-Transferability. An Incentive Stock Option shall not be
transferrable except by will or by laws of descent and distribution and shall be
exercisable during the lifetime of the Optionee only by such person.
(f) Vesting. The total number of shares of stock subject to an Option
may, but need not, be allocated in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of the installment periods, the option may become exercisable ("Vest") with
respect to some of all of the Shares allotted to that period and may be
exercised with respect to some or all of the Shares allotted to such period
<PAGE>
and/or any prior period as to which the Option became vested but has not been
fully exercised. During the remainder of the term of the Option, (if its term
extends beyond the end of the installment period), the Option may be exercised
from time to time with respect to any Shares then remaining subject to the
Option. The provisions of the this subsection are subject to any Option
provisions governing minimum number of Shares as to which an Option may be
exercised. Options may not be exercised in fractional shares.
(g) Securities Compliance. The Company may require any Optionee, or any
person to whom an Option is transferred under Section 6 (f), as a condition of
exercising such Option, (i) to give written assurances satisfactory to the
Company as to the Optionee's knowledge and experience in financial and business
matters and/or to employ a purchaser representative reasonably satisfactory to
the Company who is knowledgeable and experienced in financial and business
matters, and that he or she is capable of evaluating, alone, or together with
the purchaser representative, the merits and risks of exercising the Option;
(ii) to give written assurances satisfactory to the Company stating that such
person is acquiring the stock subject to the Option for such person's own
account and not with the present intention of selling or otherwise distributing
the stock; and (iii) to deliver such other documentation as may be necessary to
comply with federal and state securities laws. These requirements and any
assurances given pursuant to such requirements, shall be inoperative if (i) the
issuance of the Shares upon the exercise of the Option has been registered under
a then effective registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), and all applicable state securities laws, or
(ii) as to any such requirement, a determination is made by counsel for the
Company that such requirement need not be met in the circumstances under the
applicable securities laws. The Company may, upon advice of Counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary and appropriate in order to comply with applicable
securities laws, including but not limited to, legends restricting the transfer
of the stock, and may enter stop-transfer orders against the transfer of the
Shares of Common Stock issued upon the exercise of an Option. The Company has no
obligation to undertake registration of Options or the Shares of Common Stock
issued upon the exercise of an Option.
(h) Termination of Employment. In the event an Optionee's Continuous
Status an Employee terminates (other than by the Optionee's death or
disability), the Optionee may exercise his or her Option but only prior to the
(i) expiration of three (3) months after the date of such termination and (ii)
expiration of the term of the Option as set forth in the Option Agreement, and
only to the extent that the Optionee was entitled to exercise it at the date of
such termination. If, at the date of such termination, the Optionee is not
entitled to exercise his or her entire Option, the Shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If after termination, the Optionee does not fully
exercise his or her Option within the time specified in the Option Agreement,
the Option shall terminate and the Shares covered by the unexercised portion of
the such Plan shall revert to and again become available under the Plan.
(i) Disability of Optionee. In the event that an Optionee's Continuous
Status as an Employee terminates as a result of the Optionee's Disability, the
Optionee or his or her personal representative may exercise his or her Option,
but only within twelve (12) months from the date of such termination, and only
to the extent that the Optionee was entitled to exercise it on the date of such
termination (but in no event later than the expiration of the term of the Option
<PAGE>
as set forth in the Option Agreement). If, at the date of such termination, the
Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to and again be
available under the Plan. If, after such termination, the Optionee does not
fully exercise his or her Option within the time period specified herein, the
Option shall terminate and the Shares covered by the unexercised portion of the
Option shall revert to and again become available under the Plan.
(j) Death of Optionee. In the event of the death of an Optionee, the
Option may be exercised , at any time within twelve (12) months following the
date of death (or such longer or shorter time as may be specified in the Option
Agreement) but in no event later than the expiration date of the Option as set
forth in the Option agreement, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent that the Optionee was entitled to exercise the Option as of the date
of his or her death. If at the time of death, the Optionee was not entitled to
exercise his or her entire Option, then the Shares covered by the unexercisable
portion of the Option shall revert to and again become available under the Plan.
If, after death, the Optionee's estate or a person who acquired the right to
exercise the Option, does not fully exercise the Option within the time period
specified herein, then the Shares covered by the unexercised portion of the
Option shall revert to and again become available under the Plan.
7. COVENANTS OF THE COMPANY.
(a) Reserves. During the term of the Options, the Company shall keep
available at all times and shall reserve the number of shares required to
satisfy such Options upon exercise.
(b) Regulatory Approvals. The Company shall seek and obtain from each
regulatory commission or agency having jurisdiction over the Plan such authority
as may be required to issue and sell Shares upon exercise of the Options;
provided, however, that this undertaking shall not require the Company to
register under the Securities Act either the Plan or any Option or any Shares
issued or issuable pursuant to such Options. If, after reasonable efforts, the
Company is unable to obtain from such regulatory commission or agency the
authority that counsel for the Company deems necessary for the lawful issuance
and sale of the Shares under the Plan, the Company shall be relieved from any
liability for failure to issue or sell Shares upon exercise of such Options
unless and until authority is obtained.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of the stock pursuant to Options shall
constitute general funds of the Company.
9. MISCELLANEOUS.
(a) Acceleration of Vesting. The committee shall have the power to
accelerate the time at which an Option may first be exercised or the time during
which an Option or any part thereof will Vest pursuant to Section 6 (g),
notwithstanding the provisions in the Option Agreement stating the time at which
it may first be exercised or the time during which it will Vest.
<PAGE>
(b) No Rights as Shareholder. Neither an Optionee nor any person to
whom an Option is transferred under Section 6(f) shall be deemed to be the
holder of or to have any of the rights of a holder with respect to, any Shares
subject to such Option including, but not limited to, rights to vote or to
receive dividends unless and until such person has satisfied all requirements
for the exercise of the Option according to its terms, the certificates
evidencing such Shares have been issued and such person has become the record
owner of such Shares.
(c) No Right To Continue as Employee. Nothing in the Plan or any
instrument executed or Option granted pursuant thereto shall confer upon any
Employee, or Optionee any right to continue in the employ of the Company, or any
Affiliate or shall affect the right of the Company or any Affiliate to terminate
the employment or the relationship of any Employee or Optionee with or without
cause.
(d) Date of Grant. Once shareholder approval of the Plan has been
obtained, the date of grant of an Option shall, for all purposes, be the date on
which the Committee makes the determination granting such Option. Notice of the
determination shall be given to each Optionee within a reasonable time after the
date of such grant. The Code may cause the grant date to be recognized as the
date of the grant even though shareholder approval has not been obtained.
(e) Rule 16b-3. With respect to persons subject to Section 16 of the
Exchange Act, transactions under the Plan are intended to comply with all
applicable conditions of Rule 16b-3 and with respect to such persons all
transactions shall be subject to such conditions regardless of whether they are
expressly set forth in the Plan or the Option Agreement. To the extent any
provision of the Plan or action by the Committee fails to comply, it shall not
apply to such persons or their transactions and shall be deemed null and void,
to the extent permitted by law and deemed advisable by the Committee.
(f) Conditions Upon Exercise of Options. Notwithstanding any other
provisions, Shares shall not be issued and Options shall not be exercised unless
the exercise of such Option and the Issuance and delivery of such Shares
pursuant thereto shall comply with all relevant provisions of law, including
without limitation, the Securities Act of 1933, as amended, applicable state
securities laws, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange (including NASDAQ) upon
which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(g) Grants Exceeding Allotted Shares. If the Optioned Shares exceed, as
of the date of the grant, the number of shares that may be issued under the Plan
without additional shareholder approval, such Option shall be void with respect
to such excess Shares, unless shareholder approval of an amendment to the Plan
sufficiently increasing the number of Shares subject to the Plan is timely
obtained in accordance with Section 11 of the Plan.
(h) Notice. Any written notice to the Company required by any of the
provisions of the Plan shall be addressed to the Secretary of the Company and
shall be effective when it is received. Any written notice to Optionee required
by the Plan shall be addressed to the Optionee at the address on file for the
Optionee with the Company and shall become effective 3 days after it is mailed
by certified mail, postage prepaid to such address or at the time of delivery if
delivered sooner by messenger or overnight delivery service.
<PAGE>
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the maximum number of Shares of Common Stock
subject to the Plan, the number of shares of Common Stock covered by each
outstanding Option and the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no Option has yet been
granted or have been returned to the plan upon cancellation or expiration of an
option, as well as the price per share of Common Stock shall be proportionally
adjusted for any increase or decrease in the number of issued shares of the
Common Stock, resulting from a stock split, stock dividend, combination or
reclassification of shares of Common Stock effected without consideration by the
Company; provided, however that the conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Committee, whose
determination in that respect shall be final, binding and conclusive. Except as
expressly provided herein, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or exercise price of Optioned Shares.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, each outstanding Option will
terminate immediately prior to the consummation of such proposed action, unless
otherwise provided by the Committee. The Committee may, in the exercise of its
sole discretion in such instances, declare that any Option shall terminate as of
a date fixed by the Committee and give each Optionee the right to exercise his
or her Option as to all or any part of the Optioned Shares, including Shares as
to which the Option would not otherwise be exercisable.
(c) Merger or Asset Sale. Subject to Section 10 (b), in the event of a
proposed sale of all or substantially all of the assets of the Company, or the
merger, restructure, reorganization or consolidation of the Company with or into
another entity or entities in which the shareholders of the Company receive cash
or securities of another issuer, or any combination thereof, in exchange for
their shares of Common Stock, each outstanding Option shall be assumed or an
equivalent option shall be substituted by such successor entity or an Affiliate
of such successor entity, unless the Committee determines, in the exercise of
its sole discretion and in lieu of such assumption or substitution, that the
Optionee shall have the right to exercise the Option as to all Optioned Shares,
including Shares as to which the Option would not otherwise be vested. If the
Committee makes an Option fully exercisable in lieu of assumption or
substitution in the event of a merger, restructure, reorganization,
consolidation or sale of assets, the Committee shall notify the Optionee that
the Option shall be fully exercisable for a period of thirty (30) days from the
notice, and the Option will terminate upon the expiration of such period. For
the purposes of this Section, the Option shall be considered to be assumed if
following the merger, restructure, reorganization, consolidation or sale of
assets, the Option confers the right to purchase, for each Optioned Share
immediately prior to the merger, restructure, reorganization, consolidation or
sale of assets, the consideration (whether in stock, cash,or other securities or
property) received in the merger or sale of asset by holders of Common Stock for
each share of Common Stock for each share of Common Stock held on the effective
date of the consummation of the transaction (and if holders were offered a
choice of consideration, the type of consideration, the type of Common Stock);
provided, however, that if such consideration received in the solely common
equity of the successor entity or its Affiliates, the Committee may, with the
<PAGE>
consent of the successor entity the Optionee, provide for the consideration to
be received upon the exercise of the Option, for each Optioned Share, to be
solely Common Stock of the successor entity or its Affiliates equal Common Stock
in the merger, restructure, reorganization, consolidation or sale of assets.
(d) Change of Control. Notwithstanding anything to the contrary, the
Committee may grant options which provide for the acceleration of the vesting of
shares subject to an Option upon a Change of Control. Such provisions shall be
set forth in the Option Agreement.
11. AMENDMENT OF THE PLAN.
(a) Amendments by the Committee. The Committee at any time, from time
to time, may amend the Plan, provided, however, that if required by Rule 16b-3,
no amendment shall be made more than once every six months, other than to
comport with the changes in the Code, ERISA or the rules and regulations
promulgated thereunder.
(b) Compliance with the Code and Rule 16b-3. It is expressly
contemplated that the Committee may amend the Plan in any respect the Committee
deems necessary or advisable to bring the Plan and the Options granted hereunder
into compliance with the Code and Rule 16b-3.
(c) Shareholder Approval. Notwithstanding anything to the contrary, the
Company shall obtain shareholder approval of any Plan amendment to the extent
necessary or desirable to comply with Rule 16b-3 or with the Code (or any
successor rule or statute or other applicable law, rule or regulation, including
the requirements o any exchange or quotation system on which the Common Stock is
listed or quoted). Such shareholder approval, f required shall be obtained in
such manner and to such degree as is required by the applicable law, rule or
regulation.
(d) Rights and Obligations Granted Prior to Amendments. Rights and
obligations under any Option granted before amendment of the Plan shall not be
altered or impaired by any amendment of the Plan unless (i) the Company requests
the consent of the Optionee or his or her successor and (ii) such person
consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) Termination Date. The Committee may suspend or terminate the Plan
at any time. Unless sooner terminated, the Plan shall terminate within ten (10)
years of the date the Plan is adopted by, the Board of Directors or approved by
shareholders of the Company which ever date is earlier. No Options may be
granted under the Plan while it is suspended or after it is terminated.
(b) Alteration of Existing Rights. Rights and obligations under any
Option granted while the Plan is in effect shall not be altered or impaired by
the suspension or termination of the Plan except with the consent of the
Optionee or his or her successor.
13. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no
Options granted under the Plan shall be exercised unless and until the Plan has
been approved by the shareholders of the Company. Continuance of the Plan shall
be subject to the approval of the shareholders within 12 month from the date of
the Plan or the Board.
<PAGE>
EXHIBIT B
SVB FINANCIAL SERVICES, INC.
1997 DIRECTORS STOCK OPTION PLAN
1. PURPOSES.
(a) Opportunity to Purchase Stock. The purpose of the Plan is
to provide a means by which Directors of the Company and its Affiliates may be
given an opportunity to purchase stock of the Company. The Company, by means of
the Plan, seeks to retain the services of persons who are now Non-Employee
Directors of the Company and its Affiliates, and to provide incentives for such
persons to exert maximum efforts for the success of the Company and its
Affiliates.
(b) Nonstatutory Stock Options. The Company intends that the
Options issued under the Plan shall be Nonstatutory Stock Options.
2. DEFINITIONS.
(a) "Affiliate" means any parent corporation or subsidiary corporation
of the Company, as those terms are defined in Sections 424(e) and (f)
respectively of the Code, whether such corporations are now or are hereafter
existing.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Board of Directors of the Company unless a
separate Committee has been appointed by the Board in accordance with Section
3(c) of the Plan.
(e) "Common Stock" means the common stock of SVB Financial Services,
Inc., a New Jersey corporation.
(f) "Company" means SVB Financial Services, Inc., a corporation of the
State of New Jersey.
(g) "Continuous Status as a Director" means the relationship as member
of the Board of Directors is not interrupted or terminated with the Company or
any Affiliate. Continuous Status as a Director shall not be considered
interrupted in the case of : (1) any sick leave, military leave, or any leave of
absence approved by the Committee.
(h) "Director" means a member of the Board and includes Directors who
are officers and Employees of the Company or its Affiliates and Directors that
are neither Employees or Officers of the Company or any of its Affiliates.
(i) "Disability" means permanent and total disability as defined in
Section 22 (e) (3) of the Code.
(j) "Non-Employee Director" means a Director who is considered to be a
"non-employee director" in accordance with Section (b) (3) (i) of Rule 16b-3,
and any other applicable rules, regulations and interpretations of the
Securities and Exchange Commission.
<PAGE>
(k) "Employee" means any person, including officers and Directors,
employed by the Company or any Affiliate. Neither service as a Director nor
payment of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
(l) "Exchange Act" means the Securities and Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of the any date, the value of the
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the National
Market System of the National Association of Securities Dealers, Inc. Automated
Quotation (NASDAQ) System, the Fair Market Value of a Share of Common Stock
shall be the Closing sales price for such stock on the date of determination
(or, if no such price is reported on such date, such price as reported on the
nearest preceding day) as quoted on such system or exchange (or exchange with
the greatest volume of trading in the Common Stock), as reported in The Wall
Street Journal or such other source as the Committee deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but
not on the National Market System thereof) or is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean of the closing bid and
the asked prices for the Common Stock on the date of determination (or, if such
prices are not reported for such date, such prices as reported on the nearest
preceding date), as reported in the Wall Street Journal or such other source as
the Committee deems reliable;
(iii) If the Fair Market Value is not determined pursuant to
(i) or (ii) above, then the Fair Market Value shall be determined in good faith
by the Committee.
(n) "Non-Statutory Stock Option" means an Option not qualifying as an
Incentive Stock Option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "Option" means a stock option granted pursuant to the Plan.
(q) "Option Agreement" means a written agreement between the Company
and the Optionee evidencing the conditions of an individual Option grant. The
Option Agreement shall be subject to the terms and conditions of the Plan.
(r) "Optioned Shares" means with respect to any Option the Shares of
the Common Stock subject to the Option.
(s) "Optionee" means a Director who holds an outstanding Option.
(t) "Person" means an individual or an entity.
(u) "Plan" the SVB Financial Services, Inc. 1997 Directors Stock Option
Plan.
<PAGE>
(v) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3.
(w) "Shares" shall mean a Share of Common Stock, as adjusted in
accordance with Section 10.
3. ADMINISTRATION.
(a) Committee. The Plan shall be administered by the Committee.
(b) Powers. The Committee shall have the power, subject to, and within
the limitations of, the express provisions of the Plan to:
(i) determine, in accordance with Section 6 of the Plan, the
Fair Market Value per Share of the Common Stock;
(ii) determine the terms, provisions, and the forms of Option
Agreements and, with the consent of the Optionee, and subject to Section 11, to
modify or amend any outstanding Option;
(iii) accelerate or defer (with the consent of the Optionee)
the date of any outstanding Option;
(iv) authorize any person to execute on behalf of the Company
any instrument required to effectuate the grant of an Option;
(v) construe and interpret the Plan and Options granted under
it, and to establish, amend and revoke rules and regulations for the
administration of the Plan, subject to Section 11; including correcting any
defect, omission or inconsistency in the Plan or in any Option Agreement, in any
manner and to the extent it shall deem necessary or expedient to make the Plan
Fully effective;
(vi) effect, at any time and from time to time, with the
consent of the affected Optionee, the cancellation of any or all outstanding
Options and grant in substitution thereof new Options relating to the same
numbers of Shares, but having an exercise price per Share consistent with
Section 6(b) at the date of the new Option grant; and
(vii) make all other determination deemed necessary or
advisable for the administration of the Plan.
(c) Committee. The Board may appoint a committee composed of not fewer
than two (2) members of the Board to serve in its place with respect to the
Plan. All of the members of such Committee shall be Non- Employee Directors, if
required under Section 3(d). From time to time, the Board may increase the size
of the Committee and appoint such additional members, remove members (with or
without cause) and substitute new members of the committee, fill vacancies,
(however caused) and remove members of the committee and thereafter directly
administer the Plan, all to the extent permitted by the rules governing plans
intended to qualify as a discretionary plan under Rule 16b-3.
(d) Exchange Act Registration. Any requirement that an administrator of
the Plan be a Non-Employee Director shall not apply (i) prior to the date of the
first registration of an equity security of the Company under Section 12 of the
Exchange Act or (ii) if the Board or the Committee expressly declares that such
requirement shall not apply. Any Non-Employee Director shall otherwise comply
with the requirements of Rule 16b-3.
<PAGE>
4. GRANT OF OPTIONS AND SHARES SUBJECT TO PLAN.
(a) Upon the Effective Date of the Plan as set forth in Section 13
hereof, each Non-Employee Director as of December 31, 1996 shall be granted an
Option to purchase 3,900 Shares of the Common Stock at Fair Market Value on said
Effective Date.
(b) Number of Shares. Subject to the provisions of Section 10 relating
to adjustments upon changes in stock, the stock that may be sold pursuant to
Options is 54,600 Shares of the Company's Common Stock. If any Option shall for
any reason expire or otherwise terminate without having been exercised in full,
the Optioned Shares not purchased under such Option shall not become available
for future issuance under the Plan.
(c) Stock Subject to Plan. The stock subject to the Plan may be
unissued shares or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Directors Eligible. Nonstatutory Stock Options shall be granted to
each of the Non-Employee Directors upon the Effective Date of the Plan as set
forth in Section 13 hereof immediately following adoption of the Plan by the
Board and approval thereof by the stockholders as provided in Section 13
hereafter.
(b) Directors. A Director shall be eligible for the benefits of the
Plan only if he/she is a Non-Employee Director.
6. OPTION PROVISIONS.
Each Option Agreement shall be in such form and contain such terms and
conditions as the Committee shall deem appropriate. In the event that any
provision of the Option Agreement and the Plan conflict, the provisions of the
Plan shall control. The provisions of separate Options need not be identical,
but each Option Agreement shall include (through incorporation of provisions
hereof by reference in the Option Agreement or otherwise) the substance of each
of the following provisions:
(a) Term. No Option shall be exercisable after the expiration of five
(5) years from the date it was granted and the term of each Option shall be
stated in the Option Agreement.
(b) Price. The exercise price shall be not less than one hundred
percent (100%) of the Fair Market Value of the stock subject to the Option on
the date the Option is granted. The exercise price of each Stock Option shall
not be less than the par value of the Optioned Shares on the date the Option was
exercised.
(c) Consideration. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations at the time the Option is exercised, either in cash or check.
(d) Exercise. Subject to 9(f), an Option shall be deemed exercised when
written notice of such exercise has been given to the Company in accordance with
the terms of the Option Agreement by the person entitled to exercise the Option
and full payment for the Shares with respect to which the Option is exercised
<PAGE>
has been received by the Company by cash or check. Each Optionee who exercises
an Option shall, upon notification of the amount due (if any) and prior to or
concurrent with delivery of the certificate representing the Shares, pay to the
Company by cash or check, amounts necessary to satisfy applicable federal, state
or local tax withholding requirements.
(e) Non-Transferability. A Directors Stock Option shall not be
transferrable except: (i) by will or by laws of descent and distribution or
pursuant to a qualified domestic relations order, as defined by the Code or
Title I of the Employee Retirement Income Act, as amended ("ERISA), or the rules
thereunder (a "QDRO") and shall be exercisable during the lifetime of the
Optionee only by such person or any transferee pursuant to a QDRO; or (ii)
without payment of consideration, to immediate family members (i.e. spouses,
children and grandchildren) of the Optionee or to a trust for the benefit of
such family members, or partnership whose only partners are such family members.
(f) Securities Compliance. The Company may require any Optionee, or any
person to whom an Option is transferred under Section 6 (f), as a condition of
exercising such Option, (i) to give written assurances satisfactory to the
Compnay as to the Optionee's knowledge and experience in financial and business
matters and/or to employ a purchaser representative reasonably satisfactory to
the Company who is knowledgeable and experienced in financial and business
matters, and that he or she is capable of evaluating, alone, or together with
the purchaser representative, the merits and risks of exercising the Option;
(ii) to give written assurances satisfactory to the Company stating that such
person is acquiring the stock subject to the Option for such person's own
account and not with the present intention of selling or otherwise distributing
the stock; and (iii) to deliver such other documentation as may be necessary to
comply with federal and state securities laws. These requirements and any
assurances given pursuant to such requirements, shall be inoperative if (i) the
issuance of the Shares upon the exercise of the Option has been registered under
a then effective registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), and all applicable state securities laws, or
(ii) as to any such requirement, a determination is made by counsel for the
Company that such requirement need not be met in the circumstances under the
applicable securities laws. The Company may, upon advice of Counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary and appropriate in order to comply with applicable
securities laws, including but not limited to, legends restricting the transfer
of the stock, and may enter stop-transfer orders against the transfer of the
Shares of Common Stock issued upon the exercise of an Option. The Company has no
obligation to undertake registration of Options or the Shares of Common Stock
issued upon the exercise of an Option.
(g) Termination of Service. In the event an Optionee's Continuous
Status a Director terminates (other than by the Optionee's death or disability),
the Optionee may exercise his or her Option but only prior to the (i) expiration
of three (3) months after the date of such termination and (ii) expiration of
the term of the Option as set forth in the Option Agreement, and only to the
extent that the Optionee was entitled to exercise it at the date of such
termination. If after termination, the Optionee does not fully exercise his or
her Option within the time specified in the Option Agreement, the Option shall
terminate.
(h) Disability of Optionee. In the event that an Optionee's Continuous
Status as a Director terminates as a result of the Optionee's Disability, the
Optionee or his or her personal representative may exercise his or her Option,
but only within twelve (12) months from the date of such termination, and only
<PAGE>
to the extent that the Optionee was entitled to exercise it on the date of such
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Agreement). If, after such termination, the Optionee
does not fully exercise his or her Option within the time period specified
herein, then the Option shall terminate.
(i) Death of Optionee. In the event of the death of an Optionee, the
Option may be exercised , at any time within twelve (12) months following the
date of death (or such longer or shorter time as may be specified in the Option
Agreement) but in no event later than the expiration date of the Option as set
forth in the Option agreement, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent that the Optionee was entitled to exercise the Option as of the date
of his or her death. If, after death, the Optionee's estate or a person who
acquired the right to exercise the Option, does not fully exercise the Option
within the time period specified herein, then the Option shall terminate.
7. COVENANTS OF THE COMPANY.
(a) Reserves. During the term of the Options, the Company shall keep
available at all times and shall reserve the number of Shares required to
satisfy such Options upon exercise.
(b) Regulatory Approvals. The Company shall seek and obtain from each
regulatory commission or agency having jurisdiction over the Plan such authority
as may be required to issue and sell Shares upon exercise of the Options;
provided, however, that this undertaking shall not require the Company to
register under the Securities Act either the Plan or any Option or any Shares
issued or issuable pursuant to such Options. If, after reasonable efforts, the
Company is unable to obtain from such regulatory commission or agency the
authority that counsel for the Company deems necessary for the lawful issuance
and sale of the Shares under the Plan, the Company shall be relieved from any
liability for failure to issue or sell Shares upon exercise of such Options
unless and until authority is obtained.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of the stock pursuant to Options shall
constitute general funds of the Company.
9. MISCELLANEOUS.
(a) No Rights as Shareholder. Neither an Optionee nor any person to
whom an Option is transferred under Section 6(f) shall be deemed to be the
holder of or to have any of the rights of a holder with respect to, any Shares
subject to such Option including, but not limited to, rights to vote or to
receive dividends unless and until such person has satisfied all requirements
for the exercise of the Option according to its terms, the certificates
evidencing such Shares have been issued and such person has become the record
owner of such Shares.
(b) No Right To Continue as Director. Nothing in the Plan or any
instrument executed or Option granted pursuant thereto shall confer upon any
Director or Optionee any right to continue in the employ of the Company, or any
Affiliate, or to continue to serve as a member of the Board of Directors of the
Company or any Affiliate or shall affect the right of the Company or any
Affiliate to terminate the employment or the relationship of any Director,
Employee, Officer or Optionee with or without cause.
<PAGE>
(c) Date of Grant. Once Shareholder approval of the Plan has been
obtained, the date of grant of an Option shall, for all purposes, be the date on
which the Shareholder approval of the Plan was obtained. Notice shall be given
to each Optionee within a reasonable time after the date of such grant.
(d) Rule 16b-3. With respect to persons subject to Section 16 of the
Exchange Act, transactions under the Plan are intended to comply with all
applicable conditions of Rule 16b-3 and with respect to such persons all
transactions shall be subject to such conditions regardless of whether they are
expressly set forth in the Plan or the Option Agreement. To the extent any
provision of the Plan or action by the Committee fails to comply, it shall not
apply to such persons or their transactions and shall be deemed null and void,
to the extent permitted by law and deemed advisable by the Committee.
(e) Conditions Upon Exercise of Options. Notwithstanding any other
provisions, Shares shall not be issued and Options shall not be exercised unless
the exercise of such Option and the Issuance and delivery of such Shares
pursuant thereto shall comply with all relevant provisions of law, including
without limitation, the Securities Act of 1933, as amended, applicable state
securities laws, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange (including NASDAQ) upon
which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(f) Notice. Any written notice to the Company required by any of the
provisions of the Plan shall be addressed to the Secretary of the Company and
shall be effective when it is received. Any written notice to Optionee required
by the Plan shall be addressed to the Optionee at the address on file for the
Optionee with the Company and shall become effective 3 days after it is mailed
by certified mail, postage prepaid to such address or at the time of delivery if
delivered sooner by messenger or overnight delivery service.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
(a) Changes in Capitalization. Subject to any required action by the
Shareholders of the Company, the maximum number of Shares of Common Stock
subject to the Plan, the number of Shares of Common Stock covered by each
outstanding Option and the number of Shares of Common Stock that have been
authorized for issuance under the Plan but have been returned to the plan upon
cancellation or expiration of an option, as well as the price per Share of
Common Stock shall be proportionally adjusted for any increase or decrease in
the number of issued Shares of the Common Stock, resulting from a stock split,
stock dividend, combination or reclassification of Shares of Common Stock
effected without consideration by the Compnay; provided, however that the
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Committee, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of Shares of stock of any class, or securities convertible into Shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or exercise price of Optioned Shares.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, each outstanding Option will
terminate immediately prior to the consummation of such proposed action, unless
<PAGE>
otherwise provided by the Committee. The Committee may, in the exercise of its
sole discretion in such instances, declare that any Option shall terminate as of
a date fixed by the Committee and give each Optionee the right to exercise his
or her Option as to all or any part of the Optioned Shares, including Shares as
to which the Option would not otherwise be exercisable.
(c) Merger or Asset Sale. Subject to Section 10 (b), in the event of a
proposed sale of all or substantially all of the assets of the Company, or the
merger, restructure, reorganization or consolidation of the Company with or into
another entity or entities in which the Shareholders of the Company receive cash
or securities of another issuer, or any combination thereof, in exchange for
their Shares of Common Stock, each outstanding Option shall be assumed or an
equivalent option shall be substituted by such successor entity or an Affiliate
of such successor entity, unless the Committee determines, in the exercise of
its sole discretion and in lieu of such assumption or substitution, that the
Optionee shall have the right to exercise the Option as to all Optioned Shares,
including Shares as to which the Option would not otherwise be vested. If the
Committee makes an Option fully exercisable in lieu of assumption or
substitution in the event of a merger, restructure, reorganization,
consolidation or sale of assets, the Committee shall notify the Optionee that
the Option shall be fully exercisable for a period of thirty (30) days from the
notice, and the Option will terminate upon the expiration of such period. For
the purposes of this Section, the Option shall be considered to be assumed if
following the merger, restructure, reorganization, consolidation or sale of
assets, the Option confers the right to purchase, for each Optioned Share
immediately prior to the merger, restructure, reorganization, consolidation or
sale of assets, the consideration (whether in stock, cash,or other securities or
property) received in the merger or sale of asset by holders of Common Stock for
each Share of Common Stock for each Share of Common Stock held on the effective
date of the consummation of the transaction (and if holders were offered a
choice of consideration, the type of consideration, the type of Common Stock);
provided, however, that if such consideration received in the solely common
equity of the successor entity or its Affiliates, the Committee may, with the
consent of the successor entity the Optionee, provide for the consideration to
be received upon the exercise of the Option, for each Optioned Share, to be
solely Common Stock of the successor entity or its Affiliates equal Common Stock
in the merger, restructure, reorganization, consolidation or sale of assets.
11. AMENDMENT OF THE PLAN.
(a) Amendments by the Committee. The Committee at any time, from time
to time, may amend the Plan, provided, however, that if required by Rule 16b-3,
no amendment shall be made more than once every six months, other than to
comport with the changes in the Code, ERISA or the rules and regulations
promulgated thereunder.
(b) Compliance with the Code and Rule 16b-3. It is expressly
contemplated that the Committee may amend the Plan in any respect the Committee
deems necessary or advisable to bring the Plan and the Options granted hereunder
into compliance with the Code and Rule 16b-3.
(c) Shareholder Approval. Notwithstanding anything to the contrary, the
Company shall obtain Shareholder approval of any Plan amendment to the extent
necessary or desirable to comply with Rule 16b-3 or with the Code (or any
successor rule or statute or other applicable law, rule or regulation, including
the requirements o any exchange or quotation system on which the Common Stock
may be listed or quoted). Such Shareholder approval, if required, shall be
obtained in such manner and to such degree as is required by the applicable law,
rule or regulation.
<PAGE>
(d) Rights and Obligations Granted Prior to Amendments. Rights and
obligations under any Option granted before amendment of the Plan shall not be
altered or impaired by any amendment of the Plan unless (i) the Company requests
the consent of the Optionee or his or her successor and (ii) such person
consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) Termination Date. The Committee may suspend or terminate the Plan
at any time. Unless sooner terminated, the Plan shall terminate within ten (10)
years of the date the Plan is adopted by, the Board of Directors or approved by
Shareholders of the Company which ever date is earlier. No Options may be
granted under the Plan while it is suspended or after it is terminated.
(b) Alteration of Existing Rights. Rights and obligations under any
Option granted while the Plan is in effect shall not be altered or impaired by
the suspension or termination of the Plan except with the consent of the
Optionee or his or her successor.
13. EFFECTIVE DATE OF PLAN AND GRANT OF OPTIONS.
The Plan and the Options granted hereunder shall become effective as of
the date of approval of the Plan by the affirmative votes of the holders of a
majority of the Common Stock present, or represented, and entitled to vote at
the 1997 Annual meeting of the Shareholders duly held in accordance with the
applicable laws of the State of New Jersey.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SVB Financial Service, Inc.:
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated January 22, 1997 and to all
reference to our Firm. It should be noted that we have not audited any financial
statements of SVB Financial Services, Inc. subsequent to December 31, 1996 or
performed any audit procedures subsequest to the date of our report.
ARTHUR ANDERSEN LLP
Roseland, New Jerse
March 26, 1997
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