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, 1997
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, no 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 February 28, 1998, was $10,557,945.
The number of shares of the Registrant's Common Stock, no par value,
outstanding as of February 28, 1998, was 1,376,630.
<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, 1997, the Bank had total
assets of $148.5 million and is considered a small bank relative to other banks
in New Jersey. In 1996, the Bank opened its first full service branch office in
Hillsborough Township, New Jersey. During 1997, the Bank opened a full service
branch in Bridgewater Township, New Jersey and a mini branch with a drive
through on Gaston Avenue in Somerville. The Bank also received approval to put a
mini branch facility in the Arbor Glen Retirement Community in Bridgewater
Township.
The Bank provides a wide range of commercial and consumer banking
services.
Deposit services include business and personal checking accounts,
interest-bearing NOW accounts, Money Market Deposit Accounts, Savings Accounts
and Certificates of Deposit. In order to compete with the larger banks for
deposit accounts, the Bank gives favorable terms (interest rates, minimum
balances, service charges, etc.). As of December 31, 1997, the Bank had $133.9
million in deposits and approximately 9,800 deposit accounts.
The Bank makes secured and unsecured loans to small and mid-sized
businesses and professionals in its market area. Because Somerville is the
county seat of Somerset County and home to Somerset Medical Center, the Bank is
uniquely positioned to provide loans and other services to the medical,
accounting and legal professionals. Bridgewater and Hillsborough Townships are
also areas of significant small and mid-size business activity. Small and medium
sized businesses and professionals make up the primary focus of the Bank's
lending efforts. It is also a preferred SBA lender and as such it originates SBA
loans and sells the government guaranteed portion in the secondary market while
retaining the servicing of such loans.
Secured and unsecured personal loans to finance the purchase of
consumer goods are also available. Through its relationship with nine local
automobile dealerships, the Bank indirectly finances automobile loans.
Residential and commercial mortgages are also provided by the Bank.
Residential mortgages are currently written by the Bank with a three or
five-year fixed rate which adjusts annually thereafter for the life of the loan
which may be up to 30 years. The Bank is an approved Federal National Mortgage
Association (FNMA) lender for origination and servicing of mortgages, long term
fixed rate mortgages are originated and sold in the secondary market with
servicing retained.
<PAGE>
As of December 31, 1997, the Bank had approximately 2,700 loans of all
types totaling $105.3 million.
Other services provided by the Bank include wire transfers, safe
deposit boxes, money orders, travelers cheques, direct deposit of payroll and
social security checks, ACH origination and Visa/MasterCard processing. The Bank
has two ATM machines and the Bank is a member of the MAC network. The Bank
currently employs three licensed agents to sell annuities.
During 1997, the Bank began offering customers access to their accounts
through a telephone or personal computer. These products known as PC Plus and
TelePlus also offer a bill payment feature. A Debit Card is also offered
allowing customers to access funds anywhere MasterCard is accepted.
The Bank's data processing services are provided by Fiserv, which is
one of the leading data processing service providers to financial institutions
in the United States. As such, the Bank has access to many banking products and
services that are technologically competitive with other Banks. Not all of these
services, however, are economically feasible to the Bank at this time.
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test the systems for the year 2000
compliance. It is anticipated that all reprogramming efforts will be complete by
December 31, 1998, allowing adequate time for testing. To date, confirmations
have been received from the Company's primary processing vendors that plans are
being developed to address processing of transactions in the year 2000.
Management has not yet assessed the year 2000 compliance expense and related
potential effect on the Company's earnings.
Market Area
The Bank's market area is primarily Somerset County which is located
midway between New York and Philadelphia. Somerset County is considered an
affluent suburban area with significant commercial and residential activity. A
number of large national firms such as ATT, Metropolitan Life and Johnson and
Johnson companies locate their offices in Somerset County. The county is
crisscrossed by five major highways including interstate Routes 78 and 287 and
U.S. Routes 22, 202 and 206, adding to its desirability as a commercial center.
A large regional shopping mall is located in Bridgewater Township with several
small shopping centers located throughout the county.
Although the Bank serves primarily Somerset County, it also draws
business from the counties of Hunterdon, Middlesex, Union, Mercer, Morris and
Monmouth.
Competition
All phases of the Bank's business are highly competitive. As of June
30, 1997 (the latest date for which figures are available), Somerset County had
23 banks and saving banks with 99 offices. In just 5 1/2 years and having only
two locations, the Bank was ranked 10 of 23 in terms of total deposits. Somerset
<PAGE>
County has experienced significant merger activity in recent years. These
mergers will result in the closing of several branch locations throughout the
Bank's market area. A possibility exists that there will be competition for
acquisition of one or more of these existing branches. Such competition could
come from not only New Jersey financial institutions but, under recent
amendments to New Jersey banking statutes, also from out-of-state and foreign
banks as well.
Management of the Bank believes that loans to small and mid-size
businesses and professionals are not always of primary importance to the larger
banking institutions, whereas they represent the main commercial loan business
of the Bank. The Bank can compete for this segment of the market because it
provides responsive personalized services, local decision-making and knowledge
of its customers and their businesses.
By virtue of their greater total capital, certain commercial banks have
substantially higher lending limits. These banks can also finance broad
advertising campaigns and with lower average overhead ratios can be very
competitive in pricing. Accordingly, there are certain borrowers that the Bank
will not be able to service and others who will be reached by the more extensive
advertising of larger competing banks.
Employees
At December 31, 1997, the Company employed 49 full time and 3 part time
employees. None of these employees is covered by a collective bargaining
agreement and the Company believes that its employees' relations are good. The
Company offers its employees health, life, dental benefits, as well as a 401(k)
Plan.
ITEM 2. PROPERTIES.
The Company presently owns no properties. The Bank leases its banking
facilities at 103 West End Avenue and its back-office facility at 117 West End
Avenue in Somerville from a partnership consisting of all but one of the members
of its Board of Directors and one non director. The lease for 103 West End
Avenue expires in July of 2001, but contains four five-year renewal options
allowing the Bank to extend the lease. The lease for 117 West End Avenue expires
in 2003. The Bank also leases property from the partnership described above
located at 48 North Middaugh Street, Somerville on a month-to-month basis for
possible future expansion. The lease for 103 West End Avenue, was reviewed by
both the FDIC and the Department of Banking prior to the Bank's opening to
determine that the terms of the lease are comparable to those the Bank would
receive in an arms length transaction with an unaffiliated third party. Neither
the FDIC nor the Department of Banking objected to the terms of the lease. The
office space at 117 West End Avenue is also leased at such comparable terms.
The Hillsborough office located at 649 Route 206, Belle Mead, New
Jersey, is leased from an unaffiliated partnership and the lease expires in 2004
with two five-year renewal options.
The Bridgewater office located at 481 North Bridge Street, Bridgewater,
New Jersey, is leased from an unaffiliated partnership and the lease expires in
2027, with an initial five-year term lease with five five-year renewal options.
The Gaston Avenue office is located at 91 North Gaston Avenue,
Somerville, New Jersey. The Company owns the building and the land is leased
with a forty-two-month lease expiring in 2001 with one five-year renewal at the
landlord's option.
<PAGE>
The Arbor Glen office located at 100 Monroe Street, Bridgewater, New
Jersey, has a lease with an original term of three years expiring in 2001, with
three five-year renewal options.
ITEM 3. 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 1997.
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 481 shareholders of the Company's common stock
as of December 31, 1997.
The Company has never paid a dividend and there are no plans to pay
cash dividends at this time.
ITEM 6. SELECTED FINANCIAL DATA.
This information is incorporated by reference from the Company's 1997
Annual Report to Shareholders at page 1 under the caption "Selected Consolidated
Financial Information."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This information is incorporated by reference from the Company's 1997
Annual Report to Shareholders at pages 18-31 under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements and Independent Auditors Report thereon is incorporated by reference
from pages 3-16 of the 1997 Annual Report to Shareholders.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference from
page 5-13 under the caption "Directors/Principal Shareholders/Executive Officers
and Director Committees" of the Company's Proxy Statement for its 1998 Annual
Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
This information required by this item is incorporated by reference
from page 5-6 under the caption "Executive Compensation" of the Company's Proxy
Statement for its 1998 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from
page 2-4 under the caption "Directors/Principal Shareholders/Executive Officers"
of the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information required by this item is incorporated by reference
from page 13 under the caption "Transactions with Related Persons" of the
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND
REPORTS ON FORM 8-K.
(a) Financial Statements and Financial Statement Schedules
The following documents are filed as part of this report:
1 Financial Statements of SVB Financial Services, Inc.
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity -
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years Ended December
31, 1997, 1996 and 1995
Reports of Independent Accountants
<PAGE>
These statements are incorporated by reference to the Company's Annual
Report to Shareholders for the year ended December 31, 1997.
2 All schedules are omitted because either they are inapplicable
or not required, or because the information required therein
is included in the Consolidated Financial Statements and Notes
thereto.
3 Exhibits
Exhibit
Number Description
------ -----------
3(i) Certificate of Incorporation (1)
3(ii) By-Laws(1)
4.1 Specimen Stock Certificate (1)
4.2 Pages 3, 4, 5, 6, 7, 8, 9, 10 and 11
from the Certificate of Incorporation of
SVB Financial Services, Inc. (1)
4.3 Pages 1, 2, 3, 9, 10, 11, 14 and 15
from the By-Laws of SVB Financial Services, Inc. (1)
10.1 Employment Agreements (1)
10.2 SVB Financial Services, Inc.
Nonstatutory Stock Option Plan
10.3 SVB Financial Services, Inc. Restated Incentive
Stock Option Plan
13 Annual Report to Security-Holders
20 Proxy Statement for the 1998 Annual Meeting of
Shareholders
27 Financial Data Schedule
(1) Incorporated by reference to the Company's Registration Statement
on SB-2. Registration Number 333-12305.
<PAGE>
SVB FINANCIAL SERVICES, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
13 Annual Report to Security-Holders
20 Proxy Statement for the 1998 Annual Meeting of Shareholders
27 Financial Data Schedule
<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 26, 1998
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/John K. Kitchen
- ------------------- Director and Chairman of the Board March 26, 1998
John K. Kitchen
/s/Robert P. Corcoran
- ---------------------- President and Chief Executive Officer March 26, 1998
Robert P. Corcoran and Director
/s/Keith B. McCarthy
- -------------------- Chief Financial Officer/Chief March 26, 1998
Keith B. McCarthy Accounting Officer
/s/Bernard Bernstein
- -------------------- Director March 26, 1998
Bernard Bernstein
- --------------- Director March 26, 1998
Mark S. Gold, MD
- -------------------- Director March 26, 1998
Raymond L. Hughes
<PAGE>
/s/S. Tucker S. Johnson
- ----------------------- Director March 26, 1998
S. Tucker S. Johnson
- ----------------- Director March 26, 1998
Willem Kooyker
/s/Frank Orlando
- ---------------- Director March 26, 1998
Frank Orlando
/s/Gilbert E. Pittenger
- ----------------------- Director March 26, 1998
Gilbert E. Pittenger
/s/Frederick D. Quick
- --------------------- Director March 26, 1998
Frederick D. Quick
/s/Anthony J.Santye, Jr.
- ------------------------ Director March 26, 1998
Anthony J. Santye, Jr.
/s/G. Robert Santye
- ------------------- Director March 26, 1998
G. Robert Santye
/s/Donald Sciaretta
- ------------------- Director March 26, 1998
Donald Sciaretta
/s/Herman C. Simonse
- -------------------- Director March 26, 1998
Herman C. Simonse
- ---------------------- Director March 26, 1998
Donald R. Tourville
</TABLE>
TABLE OF CONTENTS
1: SELECTED CONSOLIDATED FINANCIAL INFORMATION
2: LETTER TO THE SHAREHOLDERS
3: CONSOLIDATED BALANCE SHEETS
4: CONSOLIDATED STATEMENTS OF INCOME
5: CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
6: CONSOLIDATED STATEMENTS OF CASH FLOW
7: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17: REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
18: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Selected Consolidated Financial Information
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest Income $ 10,753,855 $ 8,382,903 $ 6,296,011 $ 4,396,324 $ 2,703,788
Interest Expense 4,879,599 3,813,161 2,870,884 1,765,907 1,092,806
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 5,874,256 4,569,742 3,425,127 2,630,417 1,610,982
Provision for Possible Loan Losses 280,000 309,500 206,000 156,000 130,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Possible Loan Losses 5,594,256 4,260,242 3,219,127 2,474,417 1,480,982
Non-Interest Income 561,330 371,615 362,820 207,642 192,083
Non-Interest Expense 4,303,238 3,426,609 2,495,340 2,162,657 1,741,896
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 1,852,348 1,205,248 1,086,607 519,402 (68,831)
Income Tax Expense (Benefit) 749,310 485,163 423,390 (307,752) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 1,103,038 $ 720,085 $ 663,217 $ 827,154 $ (68,831)
====================================================================================================================================
BALANCE SHEET DATA:
Total Assets $148,549,488 $124,995,467 $ 88,743,914 $ 74,075,685 $ 52,660,542
Federal Funds Sold and Other
Short Term Investments 188,304 7,213,478 5,170,063 3,625,661 2,914,280
Securities Available For Sale 11,266,269 8,726,878 4,874,738 3,473,951 5,329,917
Securities Held To Maturity 22,101,977 13,989,481 14,580,823 18,091,163 6,410,724
Loans, Net 105,389,043 86,992,283 59,528,167 44,988,469 35,015,352
Deposits 133,930,016 112,521,390 79,679,792 67,053,817 46,604,614
Shareholders' Equity 13,095,530 11,909,659 8,703,176 6,819,399 5,989,086
====================================================================================================================================
PERFORMANMCE RATIOS:
Return on Average Assets .80% .67% .83% 1.30% (.16)%
Return on Average Equity 8.89% 8.07% 8.16% 13.50% (1.35)%
Net Interest Margin 4.52% 4.51% 4.53% 4.38% 4.07 %
====================================================================================================================================
ASSET QUALITY:
Loans Past Due Over 90 Days $ -- $ 20,600 $ -- $ -- $ 5,985
Non-Accrual Loans 62,632 24,384 -- -- --
Net Charge Offs 81,168 53,153 51,043 14,973 5,965
Allowance for Loan Losses To Total Loans .92% .89% .88% .82% .65 %
====================================================================================================================================
PER SHARE DATA (1):
Earnings Per Share (Basic) $ .81 $ .61 $ .58 $ .80 $ (.08)
Earnings Per Share (Assuming Dilution) .80 .60 .58 .80 (.08)
Book Value 9.54 8.72 7.42 6.61 5.83
====================================================================================================================================
CAPITAL RATIOS:
Total Risked-Based Capital 12.81% 13.40% 14.11% 14.03% 15.99 %
Tier I Risked-Based Capital 11.89% 12.56% 13.29% 13.28% 15.39 %
Leverage Capital 8.72% 9.58% 9.89% 9.21% 11.19 %
====================================================================================================================================
</TABLE>
(1) Retroactively restated for the 6 for 5 exchange of shares resulting from the
acquisition of Somerset Valley Bank by SVB Financial Services, Inc.
<PAGE>
Dear Shareholder:
The year 1997 will be remembered for significant price fluctuations in the
stock market, low inflation, modest but steady economic growth, low interest
rates, and a generally favorable climate for the banking industry. Bank mergers
and acquisitions continued at a frenetic pace, particularly in the Middle
Atlantic States, further consolidating the industry and allowing for additional
market penetration by the community banks.
Throughout this flurry of activity, SVB Financial Services, Inc., through its
wholly owned subsidiary, Somerset Valley Bank, has continued to thrive while
taking advantage of the general upheaval caused by this consolidation process.
Both commercial and individual customers have reached out for stability and
familiarity and we have responded by adding technological enhancements to our
product lines and continuing our focus on personal service. We have added
convenient branch locations and introduced remote banking systems which allow
customers access to their accounts from their telephones, personal computers and
a worldwide debit card in a partnership with MasterCard. These products,
Teleplus, PC Plus and Master Money Debit Card, have been well accepted by our
clients and continue to grow in popularity.
Our branch in Hillsborough Centre has grown to over $18 million in less than
two years, and our new office in Bridgewater Township has reached over $6
million in less than six months of operation. The Bank has also acquired a
mini-branch/drive-up facility on Gaston Avenue in Somerville which now provides
additional convenience for our Somerville customers, mitigating the lack of
drive-up services at our highly successful West End Avenue headquarters
facility. We are very excited about the opening, in February of 1998, of an
on-site banking facility at Arbor Glen, a continuing health care facility in
Bridgewater Township. Arbor Glen will ultimately house over 300 residents, 150
employees and its own health and wellness center that will serve the residents
and the community at large.
Several milestones occurred in 1997, including Somerset Valley Bank
surpassing net earnings of over $1 million, exceeding $150 million in assets
during the fourth quarter, and ending the year with more than $100 million in
loans ($106,470,674 or an increase of 21% over last year's total of
$87,855,063).
Our year-end total assets of $148,549,488 was an increase of 19% over total
assets of $124,995,467 as of December 31, 1996, and our deposits grew from
$112,521,390 on December 31, 1996, to $133,930,016 or an increase of 19%. As a
result of this growth and despite the expense involved in adding new branches
with related occupancy and personnel costs, Somerset Valley Bank had net income
of $1,103,038 or a 53% increase over 1996 earnings of $720,085. As our new
branches mature and additional branches are added to our network, we fully
expect to continue our history of impressive growth and profitability.
In October of 1997, Somerset Valley engaged the services of a respected
consulting firm to assist us in locating and securing future branch sites as
part of our plans for continued growth. We are currently negotiating for two
additional branch sites in Somerset County and another in the northeastern
portion of Monmouth County. As part of our strategic planning process, we have
defined an expanded market area contiguous to our present branch network within
which we will explore future branching opportunities.
<PAGE>
In addition to our plans for expansion, the company is also exploring the
possibility of listing our stock on one of the national exchanges. The purpose
of such an action would be to have the price of our stock determined on the open
market based upon performance factors as the company goes forward. Such a
listing should create liquidity for the stock and provide shareholders with a
source to determine the value and marketability of their shares in a public
environment. It is our intention to initiate whatever actions are necessary to
complete this task prior to the end of 1998.
Although our challenges for the next several years are considerable, we are
confident that we are up to the task. The company will continue to pursue new
product offerings as technology changes the landscape of our industry and brings
banking closer to home. We are well on our way to identifying and resolving the
problems expected with computer glitches at the change of the millennium. (In
many programs sensitive to date functions, certain systems are not designed to
recognize the difference between the year 2000 or 1900 due to only a two-digit
field for the date.) A committee of senior management is functioning and
communicating with hardware and software vendors in determining which systems
are compliant with the changeover to the year 2000 and we have begun an
education process directed at both our borrowing and non-borrowing customers to
assist them in recognizing potential exposures. Through those efforts we are
diligently working to assure that this changeover is a non-event. We will be
reporting the status of our efforts to our shareholders in future
communications.
Above all, our commitment to personal service, community support and
increased shareholder value continues to drive the company. We truly appreciate
the support of our directors and shareholders in making SVB Financial Services,
Inc., an economic partner in our community and an investment of which we can be
proud.
Very truly yours,
/s/John K. Kitchen /s/Robert P. Corcoran
John K. Kitchen Robert P. Corcoran
CHAIRMAN OF THE BOARD PRESIDENT AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Balance Sheets
AS OF DECEMBER 31, 1997 AND 1996
=======================================================================================
1997 1996
=======================================================================================
<S> <C> <C>
ASSETS
Cash & Due from Banks $ 5,794,622 $ 4,914,698
Federal Funds Sold -- 5,450,000
Other Short Term Investments 188,304 1,763,478
- ---------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 5,982,926 12,128,176
- ---------------------------------------------------------------------------------------
Securities
Available for Sale, at Market Value 11,266,269 8,726,878
Held to Maturity, (Market Value $22,143,036 in 1997
and $13,998,228 in 1996) 22,101,977 13,989,481
- ---------------------------------------------------------------------------------------
Total Securities 33,368,246 22,716,359
- ---------------------------------------------------------------------------------------
Loans 106,470,674 87,855,063
Allowance for Possible Loan Losses (982,198) (783,366)
Unearned Income (99,433) (79,414)
- ---------------------------------------------------------------------------------------
Net Loans 105,389,043 86,992,283
- ---------------------------------------------------------------------------------------
Premises & Equipment, Net 1,733,516 1,066,109
Other Real Estate -- 304,700
Other Assets 2,075,757 1,787,840
- ---------------------------------------------------------------------------------------
Total Assets $ 148,549,488 $ 124,995,467
=======================================================================================
<PAGE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Balance Sheets
AS OF DECEMBER 31, 1997 AND 1996
=======================================================================================
1997 1996
=======================================================================================
<S> <C> <C>
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Demand
Non-interest Bearing $ 21,965,676 $ 21,420,923
NOW Accounts 13,014,148 6,439,160
Savings 9,042,660 7,675,671
Money Market Accounts 16,227,255 15,710,515
Time
Greater than $100,000 12,879,808 6,211,335
Less than $100,000 60,800,469 55,063,786
- ---------------------------------------------------------------------------------------
Total Deposits 133,930,016 112,521,390
- ---------------------------------------------------------------------------------------
Federal Funds Purchased 500,000 --
Obligation Under Capital Lease 443,697 --
Accrued Expenses & Other Liabilities 580,245 564,418
- ---------------------------------------------------------------------------------------
Total Liabilities 135,453,958 113,085,808
- ---------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common Stock, $4.17 Par Value: 10,000,000
Shares Authorized; 1,373,030 Shares in 1997 and
1,366,523 Shares in 1996 Issued and Outstanding 5,725,535 5,698,401
Additional Paid-in Capital 5,473,127 5,447,009
Retained Earnings 1,859,173 756,135
Unrealized Gain on Securities Available for Sale,
Net of Income Taxes 37,695 8,114
- ---------------------------------------------------------------------------------------
Total Shareholders' Equity 13,095,530 11,909,659
- ---------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 148,549,488 $ 124,995,467
=======================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Statements of Income
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
=======================================================================================================
1997 1996 1995
=======================================================================================================
<S> <C> <C> <C>
INTEREST INCOME
Interest on Loans $ 8,664,936 $ 6,827,602 $ 4,850,687
Interest on Securities Available for Sale 754,742 350,166 205,413
Interest on Securities Held to Maturity 990,574 918,011 1,013,811
Interest on Other Short Term Investments 54,307 46,757 14,798
Interest on Federal Funds Sold 289,296 240,367 211,302
- -------------------------------------------------------------------------------------------------------
Total Interest Income 10,753,855 8,382,903 6,296,011
- -------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits 4,866,837 3,813,161 2,870,715
Interest on Obligation Under Capital Lease 12,590 -- --
Interest on Federal Funds Purchased 172 -- 169
- -------------------------------------------------------------------------------------------------------
Total Interest Expense 4,879,599 3,813,161 2,870,884
- -------------------------------------------------------------------------------------------------------
Net Interest Income 5,874,256 4,569,742 3,425,127
PROVISION FOR POSSIBLE LOAN LOSSES 280,000 309,500 206,000
- -------------------------------------------------------------------------------------------------------
Net Interest Income after Provision For Possible Loan Losses 5,594,256 4,260,242 3,219,127
- -------------------------------------------------------------------------------------------------------
OTHER INCOME
Service Charges on Deposit Accounts 231,117 171,130 120,411
Gain/(Loss) on the Sale of Securities Available for Sale 1,283 (2,117) 2,336
Gain on the Sale of Loans 214,533 131,966 181,599
Other Income 114,397 70,636 58,474
- -------------------------------------------------------------------------------------------------------
Total Other Income 561,330 371,615 362,820
- -------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Statements of Income
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
=======================================================================================================
1997 1996 1995
=======================================================================================================
<S> <C> <C> <C>
OTHER EXPENSE
Salaries and Employee Benefits 2,180,133 1,781,085 1,269,371
Occupancy Expense 476,797 400,770 240,049
Equipment Expense 305,688 246,190 174,985
Other Expenses 1,340,620 998,564 810,935
- -------------------------------------------------------------------------------------------------------
Total Other Expense 4,303,238 3,426,609 2,495,340
- -------------------------------------------------------------------------------------------------------
Net Income Before Provision for Income Taxes 1,852,348 1,205,248 1,086,607
- -------------------------------------------------------------------------------------------------------
Provision for Income Taxes 749,310 485,163 423,390
- -------------------------------------------------------------------------------------------------------
NET INCOME $ 1,103,038 $ 720,085 $ 663,217
=======================================================================================================
EARNINGS PER COMMON SHARE - BASIC $ .81 $ .61 $ .58
=======================================================================================================
EARNINGS PER COMMON SHARE - ASSUMING DILUTION $ .80 $ .60 $ .58
=======================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Statements of Changes in Shareholders' Equity
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
UNREALIZED
ADDITIONAL RETAINED GAIN (LOSS) TOTAL
COMMON PAID-IN EARNINGS ON SECURITIES SHAREHOLDERS'
STOCK CAPITAL (DEFICIT) AVAILABLE FOR SALE EQUITY
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of Common Stock 27,134 26,118 -- -- 53,252
Net Income for the Year -- -- 1,103,038 -- 1,103,038
Change in Unrealized Gain (Loss)
on Securities Available for Sale -- -- -- 29,581 29,581
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ 5,725,535 $ 5,473,127 $ 1,859,173 $ 37,695 $ 13,095,530
====================================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
<PAGE>
<TABLE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
====================================================================================================================================
1997 1996 1995
====================================================================================================================================
<S> <C> <C> <C>
OPERATING ACITIVITES
Net Income $ 1,103,038 $ 720,085 $ 663,217
Adjustments to Reconcile Net Income to Net
Cash Provided By Operating Activities
Provision for Possible Loan Losses 280,000 309,500 206,000
Depreciation and Amortization 298,248 208,228 170,619
(Accretion)of Securities Discount (27,240) (50,581) (208,496)
(Gains)/ Losses on Sales of Securities
Available for Sale, Net (1,283) 2,117 (2,336)
(Increase)in Other Assets (301,439) (728,809) (92,653)
Increase in Accrued Expenses
and Other Liabilities 588 204,356 153,414
Increase/(Decrease) in Unearned Income 20,020 (9,828) (14,414)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 1,371,932 655,068 875,351
====================================================================================================================================
INVESTING ACTIVITIES
Proceeds from Sales of Securities Available for Sale 1,502,109 1,994,043 490,909
Proceeds from Maturities of Securities
Available for Sale 4,747,425 4,333,967 2,501,243
Held to Maturity 11,112,112 8,717,552 27,278,825
Purchases of Securities
Available for Sale (8,736,079) (10,142,305) (3,233,692)
Held to Maturity (19,204,111) (8,117,765) (24,643,976)
(Increase) in Loans (18,696,780) (27,763,788) (14,731,285)
Decrease in Other Real Estate 304,700 -- --
Capital Expenditures (508,436) (862,822) (394,874)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities (29,479,060) (31,841,118) (12,732,850)
====================================================================================================================================
<PAGE>
<CAPTION>
SVB FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
====================================================================================================================================
1997 1996 1995
====================================================================================================================================
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net Increase in Demand Deposits 7,119,741 9,154,962 2,465,193
Net Increase (Decrease) in Savings Deposits 1,366,989 1,975,168 (1,257,739)
Net Increase in Money Market Deposits 516,740 6,395,137 1,343,585
Net Increase in Time Deposits 12,405,156 15,316,331 10,074,936
Increase in Federal Funds Purchased 500,000 -- --
Proceeds from the Issuance of Common Stock, Net 53,252 2,555,208 1,173,160
(Decrease)in Common Stock from Non Acceptance
of Exchange Offer -- (67,520) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 21,961,878 35,329,286 13,799,135
- ------------------------------------------------------------------------------------------------------------------------------------
(Decrease)/Increase in Cash and Cash Equivalents, Net (6,145,250) 4,143,236 1,941,636
Cash and Cash Equivalents, Beginning of Year 12,128,176 7,984,940 6,043,304
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 5,982,926 $ 12,128,176 $ 7,984,940
====================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Year for Interest $ 4,760,500 $ 2,685,545 $ 2,914,732
====================================================================================================================================
Cash Paid During the Year for Federal Income Taxes $ 737,562 $ 325,000 $ 225,000
====================================================================================================================================
Transfer of Loans to Other Real Estate $ -- $ 304,700 $ --
====================================================================================================================================
Capital Expenditures Used for Capital Lease Obligation $ 443,697 $ -- $ --
====================================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements
6
<PAGE>
SVB FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
1. ORGANIZATION AND NATURE OF OPERATIONS
SVB Financial Services, Inc., (the "Company"), a bank holding company, was
incorporated on February 7, 1996 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 , Hillsborough, and Bridgewater,
New Jersey. The Bank's customers are predominately small and middle market
businesses and professionals. The Bank's market area is primarily Somerset
County. The Bank competes with other banking and financial institutions in their
primary market area, including financial institutions with resources
substantially greater than their own. Commercial banks, savings banks, savings
and loan associations, credit unions and money market funds actively compete for
deposits and for types of loans. Such institutions, as well as consumer finance
and insurance companies, may be considered competitors of the Bank with respect
to one or more of the services they render. In addition to being subject to
competition from other financial institutions, the Bank is subject to federal
and state laws and to regulations of certain federal agencies, and accordingly,
they are periodically examined by those regulatory agencies.
The consolidated financial statements include the accounts of the Bank. All
significant intercompany accounts and transactions have been eliminated in
consolidation and certain reclassifications are made when necessary to conform
the previous years' financial statements to the current year's presentation.
2: SIGNIFICANT ACCOUNTING POLICIES
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 and are included in the
consolidated statements of income.
The Company had no securities held for trading purposes at December 31, 1997
and 1996.
ALLOWANCE FOR POSSIBLE LOAN LOSSES: The Company's process for evaluating the
adequacy of the allowance for possible loan losses has three basic elements:
First, the identification of problem loans when they occur; second, the
establishment of appropriate allowance for possible loan losses once specific
problem loans are identified; and third, a methodology for establishing general
loan loss allowances. The identification of problem loans is achieved mainly
through review of specific major loans based on delinquency criteria, size of
the loan and location and value of collateral property. Specific loss reserves
are established for identified problem loans based on reviews of current
operating financial information and fair value appraisals. A range of loss
allowances is estimated based upon consideration of past experience of
originated loans by loan type, year of origination, location of collateral
property and loan-to-value ratios. Based upon this process, consideration of the
current economic environment and other factors, management determines what it
considers to be an appropriate allowance for possible loan losses. Although
Company's management believes it has a sound basis for this estimation, actual
write-offs incurred in the future are highly dependent upon future events,
including the economy of the area in which the Company lends. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their judgment
of information available to them at the time of their examination.
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. Depreciation and amortization are
computed primarily on the straight-line method over the shorter of the estimated
useful lives of the assets (three to thirty 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.
7
<PAGE>
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: The Company accounts for income taxes under the liability method
specified by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. The principal types of
accounts, resulting in differences between assets and liabilities for financial
statements and tax return purposes, are the allowance for possible loan losses,
leased assets, deferred loan fees and compensation.
EARNINGS PER SHARE: During 1997, the Company adopted the provisions of SFAS No.
128, "Earnings per Share." SFAS No. 128 eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings per
share in conjunction with the disclosure of the methodology used in computing
such earnings per share. Basic earnings per share excludes dilution and is
computed by dividing income available to common shareholders by the
weighted-average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock. Prior periods' earnings per share calculations have been
restated to reflect the adoption of SFAS No. 128.
OTHER REAL ESTATE OWNED: Other real estate owned includes foreclosed real estate
which is carried at the lower of cost (lesser of carrying value of loan or fair
value at date of acquisition) or estimated fair value less selling costs. Any
write-down, at or prior to the dates the real estate is considered foreclosed,
is charged to the allowance for loan losses. Subsequent write-downs are recorded
in other expenses, and expenses incurred in connection with holding such assets
and any gains or losses upon their sale are included in other income and
expenses.
ADVERTISING COSTS: The Company expenses advertising costs as incurred.
NEW FINANCIAL ACCOUNTING STANDARDS: The Company adopted SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", as amended by SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of SFAS No. 125-An Amendment of FASB Statement No. 125", on
January 1, 1997. SFAS No. 125 applies a control-oriented, financial-components
approach to financial-asset-transfer transactions whereby the Company (1)
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, (2) derecognizes financial assets when control has been
surrendered, and (3) derecognizes liabilities once they are extinguished. Under
SFAS No. 125, control is considered to have been surrendered only if: (i) the
transferred assets have been isolated from the transferor and its creditors,
even in bankruptcy or other receivership (ii) the transferee has the right to
pledge or exchange the transferred assets, or, is a qualifying special-purpose
entity (as defined) and the holders of beneficial interests in that entity have
the right to pledge or exchange those interests; and (iii) the transferor does
not maintain effective control over the transferred assets through an agreement
which both entitles and obligates it to repurchase or redeem those assets prior
to maturity, or through an agreement which both entitles and obligates it to
repurchase or redeem those assets prior to maturity, or through an agreement
which both entitles and obligates it to repurchase or redeem those assets if
they were not readily obtainable elsewhere. If any of these conditions are not
met, the Company accounts for the transfer as a secured borrowing.
SFAS No. 125 also requires that the Company derecognize a liability if and
when it is extinguished. A liability is considered extinguished under SFAS No.
125 if (1) the Company pays the creditor, and thus, is relieved of its
obligation for the liability, or (2) is legally released from being the primary
obligor under the liability, either judicially or by the creditor.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income", which is effective for years beginning
after December 15, 1997. SFAS No. 130 requires entities presenting a complete
set of financial statements to include details of comprehensive income.
Comprehensive income consists of net income or loss for the current period and
income, expenses, gains and losses that bypass the income statement and are
reported directly in a separate component of equity. The effect of adopting SFAS
No. 130 is not expected to be material to the Company's financial position or
results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which is effective for all periods
beginning after December 15, 1997. SFAS No. 131 requires that public business
enterprises report certain information about operating segments in complete sets
of financial statements of the enterprise and in condensed financial statements
of interim periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. Management is
currently evaluating the disclosure impact of SFAS No. 131 on its financial
statements.
8
<PAGE>
3: SECURITIES
Information relative to the Company's securities portfolio at December 31, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
AMORTIZED GROSS GROSS ESTIMATED
COST UNREALIZED GAINS UNREALIZED LOSSES MARKET VALUE
====================================================================================================================================
<S> <C> <C> <C> <C>
1997
AVAILABLE FOR SALE
U.S. Treasury Securities $ 2,249,153 $ 1,397 $ -- $ 2,250,550
U.S. Government Agency Securities 5,999,700 12,665 4,780 6,007,585
Mortgage-Backed Securities 2,960,302 54,498 6,666 3,008,134
- ------------------------------------------------------------------------------------------------------------------------------------
$11,209,155 $ 68,560 $ 11,446 $11,266,269
====================================================================================================================================
HELD TO MATURITY
U.S. Treasury Securities $ 8,753,699 $ 16,119 $ 48 $ 8,769,770
U.S. Government Agency Securities 11,477,026 26,117 4,923 11,498,220
Mortgage-Backed Securities 1,871,252 5,891 2,097 1,875,046
- ------------------------------------------------------------------------------------------------------------------------------------
$22,101,977 $ 48,127 $ 7,068 $22,143,036
====================================================================================================================================
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
====================================================================================================================================
</TABLE>
<PAGE>
There are no significant concentrations of securities (greater than 10% of
shareholders' equity) in any individual security issues.
The amortized cost and estimated value of securities at December 31, 1997, 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 $ 2,249,153 $ 2,250,550
Due after 1 year through 5 years 5,999,700 6,007,585
Mortgage-Backed Securities 2,960,302 3,008,134
- --------------------------------------------------------------------------------
$11,209,155 $11,266,269
================================================================================
HELD TO MATURITY
Due in 1 year or less $10,981,476 $10,990,267
Due after 1 year through 5 years 9,249,249 9,277,723
Mortgage-Backed Securities 1,871,252 1,875,046
- --------------------------------------------------------------------------------
$22,101,977 $22,143,036
================================================================================
</TABLE>
At December 31, 1997, securities having a book value of approximately
$250,000 were pledged to secure public deposits and for other purposes as
required by law.
Proceeds from sales of investment securities available for sale during 1997
were $1,502,109. Gross gains of $1,283 were realized on these sales. Proceeds
from sales of investments securities available for sale during 1996 were
$1,994,043. Gross losses of $2,117 were realized on these sales. Proceeds from
sales of investment securities available for sale during 1995 were $490,909.
Gross gains of $2,336 were realized on these sales.
9
<PAGE>
4: LOANS
At December 31, 1997 and 1996, the composition of outstanding loans is
summarized as follows:
<TABLE>
<CAPTION>
================================================================================
1997 1996
================================================================================
<S> <C> <C>
Secured by Real Estate:
Residential Mortgage $ 33,248,717 $ 28,023,269
Commercial Mortgage 29,793,163 23,690,659
Construction 4,851,720 2,289,233
Commercial & Industrial 20,889,305 17,135,417
Loans to Individuals
for Automobiles 12,177,339 13,260,060
Loans to Individuals 4,969,103 3,456,425
Other Loans 541,327 --
- --------------------------------------------------------------------------------
$106,470,674 $ 87,855,063
================================================================================
</TABLE>
There were no loans restructured during 1997 or 1996. There were no loans past
due 90 days or more as to principal and interest and $62,632 on a non-accrual
status as of December 31, 1997. 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.
Effective January 1, 1995, the Company adopted the provisions of SFAS No. 114
"Accounting by Creditors for Impairment of a Loan" 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 . As of December 31, 1997, no loans were deemed to be impaired. 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.
<PAGE>
Interest payments received on impaired loans will be recorded as interest
income unless collection of the remaining recorded investment is doubtful at
which time payments received will be recorded as reductions of principal.
The Company has no concentration of loans to borrowers engaged in similar
activities which exceeded 10% of total loans at December 31, 1997 and 1996. The
Company continues to pursue new lending opportunities while seeking to maintain
a portfolio that is diverse as to industry concentration, type and geographic
distribution. The Company's geographic lending area is primarily concentrated in
Somerset County, but also includes Middlesex and Hunterdon counties.
Loans to executive officers are made in the ordinary course of business and
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with others. Loans to
executive officers totaled $11,978 at December 31, 1997 and $146,517 at December
31, 1996, all of which were current as to principal and interest. There are no
loans to Directors or their affiliated interests.
5: ALLOWANCE FOR 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>
================================================================================
1997 1996 1995
================================================================================
<S> <C> <C> <C>
Balance at January 1, $ 783,366 $ 527,019 $ 372,062
Provision Charged to
Operations 280,000 309,500 206,000
Charge Offs (86,399) (57,593) (51,043)
Recoveries 5,231 4,440 --
- --------------------------------------------------------------------------------
Balance at December 31, $ 982,198 $ 783,366 $ 527,019
================================================================================
</TABLE>
6: PREMISES AND EQUIPMENT
Premises and equipment consists of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
================================================================================
ESTIMATED
USEFUL LIVES 1997 1996
================================================================================
<S> <C> <C> <C>
Construction in Progress $ 209,585 $ 63,079
Premises & Improvements 5-30 years 1,053,920 491,355
Furniture & Equipment 3-10 years 1,218,935 1,101,924
- --------------------------------------------------------------------------------
2,482,440 1,656,358
Less: Accumulated Depreciation (748,924) (590,249)
- --------------------------------------------------------------------------------
$1,733,516 $1,066,109
================================================================================
</TABLE>
10
<PAGE>
7: DEPOSITS
At December 31, 1997, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
OVER THREE OVER ONE YEAR
THREE MONTHS OR MONTHS THROUGH THROUGH THREE OVER THREE
LESS TWELVE MONTHS YEARS YEARS TOTAL
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
$100,000 or more $ 8,797,987 $ 2,705,109 $ 1,274,110 $ 102,602 $12,879,808
Less than $100,000 16,769,957 32,558,717 10,361,224 1,110,571 60,800,469
====================================================================================================================================
</TABLE>
8: OTHER EXPENSE
The major components of other expenses are as follows:
<TABLE>
<CAPTION>
================================================================================
1997 1996 1995
================================================================================
<S> <C> <C> <C>
Data Processing Services $ 215,210 $ 163,691 $ 131,038
Marketing & Business
Development 143,947 129,915 94,597
Stationery, Forms &
Supplies 155,863 121,470 80,453
Insurance 88,108 75,508 62,773
Amortization of
Organizational Costs 13,522 43,452 41,340
Legal, Examination &
Accounting 176,915 106,062 83,847
FDIC Insurance
Assessment 13,906 2,000 74,332
Other, Net 533,149 356,466 242,555
- --------------------------------------------------------------------------------
$1,340,620 $ 998,564 $ 810,935
================================================================================
</TABLE>
9: 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. As of December 31, 1997, future minimum rental
payments, including the renewal options under these leases for the subsequent
five years are as follows:
===================================
1998 $ 403,465
- -----------------------------------
1999 $ 421,413
- -----------------------------------
2000 $ 431,417
- -----------------------------------
2001 $ 439,989
- -----------------------------------
2002 $ 442,639
- -----------------------------------
TOTAL $2,138,923
===================================
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 $286,047, $244,413, and
$153,618 for the years ended December 31, 1997, 1996 and 1995 respectively.
The Company had outstanding commitments to extend credit of $18,585,000 at
December 31, 1997 and $11,809,000 at December 31, 1996. 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, 1997.
The Company has employment contracts with certain key executives that provide
severance pay benefits if there is a change in control of the Company. The
agreements will continue in effect on a year-to-year basis until terminated or
not renewed by the Company or key executives. Upon a change in control, the
Company shall continue to pay the key executives' salary, including bonuses, per
the agreements and certain benefits for one to two years. The maximum contingent
liability under the agreements at December 31, 1997 was $730,330.
10: BENEFIT PLAN
The Company has a 401(k) Savings Plan covering substantially all employees.
Under the terms of the Plan, the Company matched 67% of an employee's
contribution in 1997 and 50% in 1996 and 1995, 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 $44,316, $25,495, and $19,159 to the
Plan in 1997, 1996 and 1995, respectively.
11
<PAGE>
11: INCOME TAXES
The components of the provision (benefit) for income taxes in 1997, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
================================================================================
1997 1996 1995
================================================================================
<S> <C> <C> <C>
Federal
Current $ 653,283 $ 440,740 $ 239,708
Deferred (70,760) (64,396) 122,338
State 166,787 108,819 61,344
- --------------------------------------------------------------------------------
$ 749,310 $ 485,163 $ 423,390
================================================================================
</TABLE>
Deferred income taxes are provided for the differences between the financial
reporting basis and the tax basis of the Company's asset and liabilities.
Cumulative temporary differences at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
================================================================================
1997 1996
================================================================================
<S> <C> <C>
Start-up and Organization Costs $ (900) $ (4,575)
Depreciation 24,514 4,296
Accretion of Securities Discount (12,398) (2,893)
Allowance for Possible Loan Losses318,119 259,237
- --------------------------------------------------------------------------------
Deferred Tax Asset, Net $ 329,335 $ 256,065
================================================================================
</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>
================================================================================
1997 1996 1995
================================================================================
<S> <C> <C> <C>
Statutory Provision $ 630,218 $ 409,784 $ 369,446
State Taxes on Income,
net of Federal Tax Benefit 110,079 72,009 61,344
Other 9,013 3,370 (7,400)
- --------------------------------------------------------------------------------
$ 749,310 $ 485,163 $ 423,390
================================================================================
</TABLE>
<PAGE>
12: STOCK OPTION PLAN
At December 31, 1997, the Company had two stock option plans. The Company
applies APB Opinion 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its plans. Accordingly, no compensation costs
have been recognized for either plan.
On April 24, 1997, the Company's shareholders approved the 1997 Restated
Incentive Stock Option Plan (the "Plan"), a non-qualified stock option plan. The
Plan had the effect of restating the previously existing 1994 Stock Option Plan.
Under the Plan, the Board of Directors may grant options to officers to purchase
the Company's stock. Stock options are issued at prices equal to the market
price at the date of grant. The stock options have a vesting period of one year
from the date of issuance. Shares totaling 82,404 are reserved for issuance
under the Plan including 76,700 shares outstanding at December 31, 1997.
On April 24, 1997, the Company's shareholders also approved the 1997
Directors Stock Option Plan, a non-qualified stock option plan. Under the plan,
stock options are granted to Directors at the fair value at the date of grant.
The stock options have a vesting period of one year from the date of issuance.
Shares totaling 54,600 are reserved for issuance under the Plan, all of which
were outstanding at December 31, 1997.
Had compensation cost for the plan year been determined based on the fair
value of options at the grant dates consistent with the method of SFAS 123,
"Accounting for Stock-Based Compensation", the Company's net income and diluted
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
================================================================
1997 1996
================================================================
<S> <C> <C>
Net Income
As reported $1,103,038 $720,085
Pro forma 1,022,527 660,685
Basic Earnings per share
As reported $.81 $.61
Pro forma $.75 $.56
Diluted earnings per share
As reported $.80 $.60
Pro forma $.74 $.55
================================================================
</TABLE>
These pro forma amounts may not be representative of future disclosure because
they do not take into effect the pro forma compensation expense related to
grants before 1995. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model, with the following
weighted average assumptions used for grants in 1997 and 1996, respectively; no
dividend yield for both years; expected volatility of 39.82% and 39.77%;
risk-free interest rate of 5.85% and 6.35% and expected lives of five years for
both years.
12
<PAGE>
A summary of the status of the Company's option plans as of December 31, 1997,
and changes for the three years ended is as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
1997 1996 1995
====================================================================================================================================
NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
OF EXERCISE PRICE OF EXERCISE PRICE OF EXERCISE PRICE
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 49,200 $ 8.33 24,000 $ 8.33 24,000 $ 8.33
Options granted 85,100 13.00 26,400 8.33 -- --
Options exercised 3,000 8.33 1,200 8.33 -- --
Options expired -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 131,300 $ 11.35 49,200 $ 8.33 24,000 $ 8.33
Options exercisable at year end 46,200 $ 8.33 22,800 $ 8.33 24,000 $ 8.33
Weighted average fair value of
options granted during the year $ 5.71 $3.75 --
====================================================================================================================================
</TABLE>
The following table summarizes information about non-qualified stock options at
December 31, 1997:
<TABLE>
<CAPTION>
====================================================================================================================================
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
========================================================= =============================
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT CONTRACTUAL EXERCISE AT EXERCISE
PRICES 12/31/97 LIFE PRICE 12/31/97 PRICE
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
$ 8.33 to $12.50 46,200 2.6 years $ 8.33 46,200 $ 8.33
$13.00 to $19.50 85,100 4.9 years $ 13.00 -- --
====================================================================================================================================
</TABLE>
13: 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 methodology 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 ESTIMATED CARRYING
VALUE AMOUNT
================================================================================
<S> <C> <C>
Cash and Cash Equivalents $5,982,926 $5,982,926
</TABLE>
For securities held in the Company's investment portfolio fair value was
determined by reference to quoted market prices as of December 31, 1997.
<TABLE>
<CAPTION>
================================================================================
ESTIMATED FAIR CARRYING
VALUE VALUE
================================================================================
<S> <C> <C>
Available for Sale Securities $11,266,269 $11,266,269
Held to Maturity Securities $22,143,036 $22,101,977
</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.
<TABLE>
<CAPTION>
================================================================================
ESTIMATED FAIR CARRYING
VALUE VALUE
================================================================================
<S> <C> <C>
Loans $107,896,000 $106,470,674
Deposits $134,205,000 $133,930,016
</TABLE>
13
<PAGE>
14: 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, 1997, that the
Company and its subsidiary Bank meets all capital adequacy requirements to which
they are subject.
As of December 31, 1997 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.
The Company and its subsidiary Bank's actual capital amounts and ratios are
presented in the following tables.
<TABLE>
<CAPTION>
====================================================================================================================================
SVB FINANCIAL SERVICES, INC. AND SOMERSET VALLEY BANK
TO BE ADEQUATELY
ACTUAL CAPITALIZED TO BE WELL CAPITALIZED
===================== ====================== ============================
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital to Risk Weighted Assets $13,678,286 12.81% $ 8,542,296 8.00% $10,677,871 10.00%
Tier I Capital to Risk Weighted Assets $12,696,088 11.89% $ 4,271,148 4.00% $ 6,406,723 6.00%
Tier I Capital to Average Assets $12,696,088 8.72% $ 5,491,359 4.00% $ 6,864,199 5.00%
====================================================================================================================================
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%
====================================================================================================================================
<CAPTION>
====================================================================================================================================
SOMERSET VALLEY BANK
TO BE ADEQUATELY
ACTUAL CAPITALIZED TO BE WELL CAPITALIZED
===================== ====================== ============================
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital to Risk Weighted Assets $13,019,484 12.20% $ 8,540,861 8.00% $10,670,608 10.00%
Tier I Capital to Risk Weighted Assets $12,037,286 11.28% $ 4,270,431 4.00% $ 6,405,646 6.00%
Tier I Capital to Average Assets $12,037,286 8.25% $ 5,488,501 4.00% $ 6,860,626 5.00%
====================================================================================================================================
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%
====================================================================================================================================
</TABLE>
15: YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The "Year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test the systems for the Year 2000 compliance. It is
anticipated that all reprogramming efforts will be complete by December 31,
1998, allowing adequate time for testing. To date, confirmations have been
received from the Company's primary processing vendors that plans are being
developed to address processing of transactions in the Year 2000. Management has
not yet assessed the Year 2000 compliance expense and related potential effect
on the Company's earnings.
14
<PAGE>
16: CONDENSED FINANCIAL STTEMENTS OF SVB FINANCIAL SERVICES, INC.
(PARENT COMPANY ONLY):
<TABLE>
<CAPTION>
BALANCE SHEET DECEMBER 31, 1997 DECEMBER 31, 1996
============================================================================================
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 640,858 $ 626,091
Other Assets 69,775 68,615
Investment in Subsidiary (Equity Method) 12,384,897 11,214,953
- --------------------------------------------------------------------------------------------
Total Assets $ 13,095,530 $ 11,909,659
============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' Equity
Common Stock $ 5,725,535 $ 5,694,077
Capital Paid-in Excess of Par Value 5,473,127 5,451,333
Retained Earnings 1,859,173 756,135
Net Unrealized Holding Gains on Securities
Available for Sale, Net of Tax 37,695 8,114
- --------------------------------------------------------------------------------------------
Total Shareholders' Equity 13,095,530 11,909,659
- --------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 13,095,530 $ 11,909,659
============================================================================================
<CAPTION>
YEARS ENDED
STATEMENT OF INCOME DECEMBER 31, 1997 DECEMBER 31, 1996
============================================================================================
<S> <C> <C>
OPERATING INCOME
Dividends from Bank Subsidiary $ -- $ 150,000
Interest Income 20,945 3,187
- --------------------------------------------------------------------------------------------
Total Income $ 20,945 $ 153,187
- --------------------------------------------------------------------------------------------
OPERATING EXPENSE
Other Expense 32,470 3,747
- --------------------------------------------------------------------------------------------
Total Expense 32,470 3,747
- --------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Income of Subsidiary (11,525) 149,440
Equity in Undistributed Income of Subsidiary 1,114,563 570,645
- --------------------------------------------------------------------------------------------
NET INCOME $ 1,103,038 $ 720,085
============================================================================================
<CAPTION>
YEARS ENDED
STATEMENT OF CASH FLOWS DECEMBER 31, 1997 DECEMBER 31, 1996
============================================================================================
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,103,038 $ 720,085
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Equity in Undistributed Income of Subsidiary (1,114,563) (570,645)
Amortization of Organization Costs 13,522 --
(Increase) in Other Assets (14,682) (68,615)
- --------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities (12,685) 80,825
- --------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of Additional Common Stock in Subsidiary Bank (25,800) (2,000,000)
- --------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from Stock Issuance, Net 53,252 2,545,266
- --------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents, Net 14,767 626,091
Cash and Cash Equivalents, Beginning of Year 626,091 --
- --------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 640,858 $ 626,091
============================================================================================
</TABLE>
15
<PAGE>
17: EARNINGS PER SHARE
The following table illustrates the reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
<TABLE>
<CAPTION>
====================================================================================================================================
INCOME SHARES PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 1997 (NUMERATOR) (DENOMINATOR) AMOUNT
====================================================================================================================================
<S> <C> <C> <C>
BASIC EPS
Income available to Common Shareholders $1,103,038 1,369,701 $ .81
Effect of Dilutive Securities
Stock Options 16,596
- ------------------------------------------------------------------------------------------------------------------------------------
DILUTED EPS
Income available to Common Shareholders
plus assumed conversions $1,103,038 1,386,297 $ .80
====================================================================================================================================
</TABLE>
Options to purchase 84,600 shares of common stock at $13 a share were
outstanding during the year. They were not included in the computation of
diluted EPS because the options' exercise price was equal to the average market
price of the common shares for the year. The options, which expire on November
20, 2002, were still outstanding at December 31, 1997.
<TABLE>
<CAPTION>
====================================================================================================================================
INCOME SHARES PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 1996 (NUMERATOR) (DENOMINATOR) AMOUNT
====================================================================================================================================
<S> <C> <C> <C>
BASIC EPS
Income available to Common Shareholders $ 720,085 1,178,100 $ .61
Effect of Dilutive Securities
Stock Options 17,674
- ------------------------------------------------------------------------------------------------------------------------------------
DILUTED EPS
Income available to Common Shareholders
plus assumed conversions $ 720,085 1,195,774 $ .60
====================================================================================================================================
<CAPTION>
====================================================================================================================================
INCOME SHARES PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 1996 (NUMERATOR) (DENOMINATOR) AMOUNT
====================================================================================================================================
BASIC EPS
<S> <C> <C> <C>
Income available to Common Shareholders $ 663,217 1,152,408 $ .58
====================================================================================================================================
</TABLE>
Options to purchase 24,000 shares of common stock at $8.33 a share were
outstanding during the year. They were not included in the computation of
diluted EPS because the options' exercise price was equal to the average market
price of the common shares for the year. The options, which expire on August 25,
1999, were still outstanding at December 31, 1997.
16
<PAGE>
SVB FINANCIAL SERVICES, INC.
Report of Independent Public Accountants
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders
SVB Financial Services, Inc.
We have audited the consolidated balance sheet of SVB Financial
Services, Inc. and Subsidiary as of December 31, 1997, and the related
consolidated statements of income, shareholders' equity and cash flows the year
ended December 31, 1997. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. We also audited the
adjustments to shares and earnings per share data for 1996 and 1995 due to the
adoption of Statement of Financial Accounting Standards No 128, "Earnings per
Share" as discussed in Note 17. In our opinion such adjustments are appropriate
and have been properly applied.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our 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 consolidated 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 our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to
above present fairly, in all material aspects, the consolidated financial
positions of SVB Financial Services, Inc. and Subsidiary at December 31, 1997,
and the consolidated results of their operations and their consolidated cash
flows for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/Grant Thornton LLP
- ---------------------
Grant Thornton LLP
January 14, 1998
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDPENDENT PUBLIC ACCOUNTANTS
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 the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the two 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 the results of their operations and
their cash flows for each of the two 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
17
<PAGE>
SVB FINANCIAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management of SVB Financial Services, Inc. (the "Company") is not aware of any
known trends, events or uncertainties that will have or are reasonably likely to
have a material effect on the Company's liquidity, capital resources or results
of operations. The following discussion and analysis should be read in
conjunction with the detailed information and consolidated financial statements,
including notes thereto, included elsewhere in this report. The consolidated
financial condition and results of operations of the Company are essentially
those of the Bank. Therefore, the analysis that follows is directed to the
performance of the Bank. Such financial condition and result of operations are
not intended to be indicative of future performance.
In addition to historical information, this discussion and analysis contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking statements.
Important factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as the date hereof. The Company undertakes no
obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date hereof.
RESULTS OF OPERATIONS:
Net income for the year ended December 31, 1997 was $1,103,038, an increase of
$382,953 or 53% from 1996. It is a milestone in that it represents the first
time that net income has exceeded $1 million in the Company's six year history.
Net interest income was the major contributor to the increase in net income.
As a result of the growth in the Company's earning assets, net interest income
increased $1,334,014 or 31% from 1996. Non-interest income also showed
significant growth in 1997. Total non-interest income was $561,330, an increase
of $189,715 or 51% as a result of gains on the sale of SBA loans and service
charges on deposit accounts. Partially offsetting the growth in income was an
increase in non-interest expenses of $876,629 or 26% much of which resulted from
additions to the banking staff.
The Company's total assets grew $23,554,021 or 19%. Most of this growth
occurred in the loan portfolio. Net income for the year ended December 31, 1996
was $720,085, an increase of $56,868 or 9% 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% in 1996. 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.
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.
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.
18
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF NET INTEREST INCOME
===================================================================================================
1997
==========================================
AVERAGE AVERAGE
BALANCE RATE INTEREST
===================================================================================================
<S> <C> <C> <C>
ASSETS
Federal Funds Sold $ 5,236,575 5.52% $ 289,296
Other Short Term Investments 1,060,250 5.12% 54,307
Securities Available for Sale 12,380,885 6.10% 754,742
Securities Held to Maturity 16,381,012 6.05% 990,574
- ---------------------------------------------------------------------------------------------------
Total Securities 28,761,897 6.07% 1,745,316
- ---------------------------------------------------------------------------------------------------
Loans 95,038,942 9.12% 8,664,936
- ---------------------------------------------------------------------------------------------------
Total Interest Earning Assets 130,097,664 8.27% 10,753,855
Cash and Due from Banks 4,652,258
Allowance for Possible Loan Losses (872,296)
Premises and Equipment 1,279,351
Other Real Estate Owned 227,064
Other Assets 1,899,930
- ---------------------------------------------------------------------------------------------------
Total Assets $137,283,971
===================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Savings Deposits $ 8,231,620 3.11% $ 256,214
Money Market Deposit Accounts 18,016,816 3.53% 636,811
NOW Accounts 8,902,947 2.56% 228,342
Time Deposits 68,428,340 5.47% 3,745,470
- ---------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 103,579,723 4.70% 4,866,837
Federal Funds Purchased 2,740 6.28% 172
Obligations Under Capital Lease 152,188 8.27% 12,590
- ---------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 103,734,651 4.70% 4,879,599
Demand Deposits 20,583,833
Accrued Expenses and Other Liabilities 559,103
Cost to Fund Earning Assets 3.75%
Shareholders' Equity 12,406,384
- ---------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $137,283,971
===================================================================================================
Net Interest Income $5,874,256
===================================================================================================
Net Interest Margin 4.52%
===================================================================================================
<PAGE>
<CAPTION>
SUMMARY OF NET INTEREST INCOME
==============================================================================================
Years Ended December 31,
1996
=====================================
AVERAGE AVERAGE
BALANCE RATE INTEREST
==============================================================================================
<S> <C> <C> <C>
ASSETS
Federal Funds Sold $ 4,504,304 5.34% $ 240,367
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
Federal Funds Purchased - - -
Obligations Under Capital Lease - - -
- ----------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 81,660,544 4.67% 3,813,161
Demand Deposits 16,027,197
Accrued Expenses and Other Liabilities 606,068
Cost to Fund Earning Assets 3.77%
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>
SUMMARY OF NET INTEREST INCOME
=============================================================================================
1995
=====================================
AVERAGE AVERAGE
BALANCE RATE INTEREST
=============================================================================================
<S> <C> <C> <C>
ASSETS
Federal Funds Sold $ 3,592,027 5.88% $ 211,302
Other Short Term Investments 283,389 5.22% 14,798
Securities Available for Sale 3,615,515 5.68% 205,413
Securities Held to Maturity 17,146,453 5.91% 1,013,811
- ---------------------------------------------------------------------------------------------
Total Securities 20,761,968 5.87% 1,219,224
- ---------------------------------------------------------------------------------------------
Loans 51,047,241 9.50% 4,850,688
- ---------------------------------------------------------------------------------------------
Total Interest Earning Assets 75,684,625 8.32% 6,296,012
Cash and Due from Banks 3,134,843
Allowance for Possible Loan Losses (451,397)
Premises and Equipment 490,206
Other Real Estate Owned -
Other Assets 1,033,880
- ---------------------------------------------------------------------------------------------
Total Assets $79,892,157
=============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Savings Deposits $ 5,942,451 3.27% $ 194,043
Money Market Deposit Accounts 8,366,762 3.54% 296,300
NOW Accounts 4,417,143 2.31% 102,187
Time Deposits 41,703,884 5.46% 2,278,185
- ---------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 60,430,240 4.75% 2,870,715
Federal Funds Purchased 2,740 6.20% 170
Obligations Under Capital Lease - - -
- ---------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 60,432,980 4.75% 2,870,885
Demand Deposits 10,838,744
Accrued Expenses and Other Liabilities 492,190
Cost to Fund Earning Assets 3.79%
Shareholders' Equity 8,128,243
- ---------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $79,892,157
=============================================================================================
Net Interest Income $3,425,127
=============================================================================================
Net Interest Margin 4.53%
=============================================================================================
</TABLE>
NOTE: Non-accrual loans are included in the Average Loan Balances.
19
<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>
===============================================================================================================================
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1997 VS 1996 1996 VS 1995
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 $ 40,209 $ 8,720 $ 48,929 $ 45,811 $(16,746) $ 29,065
Other Short Term Investments 6,326 1,224 7,550 32,576 (617) 31,959
Securities Available for Sale 394,023 10,553 404,576 135,691 9,062 144,753
Securities Held to Maturity 69,145 3,418 72,563 (115,456) 19,656 (95,800)
- -------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 463,168 13,971 477,139 20,235 28,718 48,953
Loans 1,858,953 (21,619) 1,837,334 2,151,257 (174,342) 1,976,915
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 2,368,656 2,296 2,370,952 2,249,879 (162,987) 2,086,892
- -------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Savings Deposits 39,027 (1,014) 38,013 31,902 (7,744) 24,158
Money Market Deposit Accounts 212,330 35,667 247,997 114,007 (21,493) 92,514
NOW Accounts 73,119 6,511 79,630 39,649 6,876 46,525
Time Deposits 641,333 46,703 688,036 808,244 (28,995) 779,249
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 965,809 87,867 1,053,676 993,802 (51,356) 942,446
Borrowed Funds 12,762 - 12,762 (169) - (169)
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 978,571 87,867 1,066,438 993,633 (51,356) 942,277
- -------------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $1,390,085 $(85,571) $1,304,514 $1,256,246 $(111,631) $1,144,615
===============================================================================================================================
</TABLE>
1997 vs. 1996
Net interest income for 1997 was $5,874,256, an increase of $1,304,514 or 29%
from 1996. An increase in the Company's average earning assets from $101.2
million in 1996 to $130.0 million was mostly responsible for the overall
increase in interest income of $2,370,952. Average loan growth produced most of
this increase. Total loans averaged $95.0 million in 1997 compared to $74.7
million in 1996.
Interest rates remained relatively stable during 1997. The prime lending rate
changed once from 8.25% to 8.50% in March. The yield on the Company's earning
assets dropped one basis point from 8.28% to 8.27%. The yield on loans dropped
three basis points to 9.12% while the yield on investments improved from 6.00%
to 6.07%.
Although the cost of interest bearing liabilities increased three basis points
from 4.67% to 4.70%, the overall cost of funding the Company's earning assets
declined two basis points from 3.77% to 3.75%. This was a result of an
improvement in the percentage of the Company's earning assets being supported by
non-interest bearing funds, i.e., demand deposits and capital from 19% in 1996
to 20% in 1997.
The net interest margin remained stable at 4.52% compared to 4.51% in 1996 in
spite of the 25 basis point change in the prime rate. The Company attempts to
maintain a balanced interest rate risk position. See "Interest Rate Risk".
20
<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 increase was attributable to the growth in
average earning assets which were $101.2 million in 1997 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
Company increased its outstanding auto loans through its dealer network. The net
increase in interest income compared to 1995 was $2,086,892.
OTHER INCOME
A comparison of the major components of other income is included in the
following table:
<TABLE>
<CAPTION>
================================================================================
THE YEARS ENDED: 1997 1996 1995
================================================================================
<S> <C> <C> <C>
Service Charges on
Deposit Accounts $ 231,117 $ 171,130 $ 120,411
Gain (Loss) on the
Sale of Securities 1,283 (2,117) 2,336
Gain on the
Sale of Loans 214,533 131,966 181,599
Other Income 114,397 70,636 58,474
- --------------------------------------------------------------------------------
$ 561,330 $ 371,615 $ 362,820
================================================================================
</TABLE>
Other income increased $189,715 or 51% during 1997 in comparison to 1996.
Service charges on deposit accounts increased $59,987 or 35% due to growth in
the number of both commercial and consumer checking accounts, which in turn
resulted in an increase in overdraft, account maintenance and wire transfer
fees. These increases were largely a result of additional volume, rather than an
increase in service charges. As of December 31, 1997, the Company had three full
service banking locations as compared to two in 1996.
Gains on the sale of loans were $214,533 in 1997 compared to $131,966 in 1996,
an increase of $82,567 or 63%. The Company is a preferred SBA lender and as
such, originates SBA loans and sells the guaranteed portion in the secondary
market while retaining the servicing. SBA loans are not the primary focus of the
Company and consequently, sales of these loans can vary from period to period
depending upon the volume of SBA loans generated.
Other income increased $43,761 or 62% during 1997. A good portion of this
increase was related to the servicing of SBA loans as described above.
Additionally, fees received on the issuance of letters of credit more than
doubled in 1997 due to the increase in the volume of lending activity.
Other income increased $8,795 or 2% from 1995 to 1996. Service charges on
deposit accounts increased $50,719 or 42% due to volume increases in the number
of accounts and also due to an increase in the charge for overdrafts.
Gains on the sale of loans were $131,966 in 1996 compared to $181,599 in 1995.
As mentioned above, these sales will vary and are dependent on SBA lending
activity. Other income increased $12,162 or 21% mainly due to servicing fees on
SBA loans sold.
21
<PAGE>
A comparison of the major components of other expense is included in the
following table:
<TABLE>
<CAPTION>
================================================================================
THE YEARS ENDED: 1997 1996 1995
================================================================================
<S> <C> <C> <C>
Salaries and
Employee Benefits $2,180,133 $1,781,085 $1,269,371
Occupancy Expense 476,797 400,770 240,049
Equipment Expense 305,688 246,190 174,985
Other Expenses 1,340,620 998,564 810,935
- --------------------------------------------------------------------------------
$4,303,238 $3,426,609 $2,495,340
================================================================================
</TABLE>
Total other expense increased $876,629 or 26% in comparison to 1996. The
Company opened its second branch office in Bridgewater Township in July of 1997.
Expenses were impacted by additional personnel, occupancy costs and other
expenses related to the opening of a new branch.
Salaries and Benefits expense increased $399,048 or 22% from 1996 levels.
Because of the growth in assets (19%) and the opening of the Bridgewater office,
the Company has had to hire additional personnel to better service its customer
base. The number of employees grew to 52 at December 31, 1997 from 39 at
December 31, 1996. The increase in employees combined with normal salary
increases, accounted for the variance from 1996.
Occupancy expense increased $76,027 or 19% from 1996 mainly due to the
increased rent from the Bridgewater office and increased depreciation from
facility improvements. Equipment expense increased $59,248 or 24% during 1997.
In 1997, the Company made an investment in a computer network to remain current
with technology and improve efficiency. The Company has also been able to supply
each employee with access to a personal computer.
Other expenses increased $342,056 or 34%. Much of the increase was related to
the growth in the Company, which affected many areas, especially examination and
data processing costs, which were up $49,978 and $51,519 respectively. Costs of
$13,636 were incurred for the maintenance of other real estate owned which was
disposed of in the third quarter of 1997. Advertising and business development
expenses as well as stationery and supplies included costs associated with the
promotion of the Bridgewater branch as well as the introduction of several new
banking products. Directors fees increased by $54,881.
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. 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. Deposits and
loans showed substantial increases in 1996 and the Company's total assets grew
over 40%. Such growth necessitated additional employees.
Occupancy expense 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 department 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.
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.
22
<PAGE>
The following table sets forth the amortized cost and estimated market values of
securities in the investment portfolios as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
====================================================================================================================================
1997 1996
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST MARKET VALUE COST MARKET VALUE
====================================================================================================================================
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury Securities $ 2,249,153 $ 2,250,550 $ 2,748,885 $ 2,752,700
U.S. Government Agency Securities 5,999,700 6,007,585 4,244,256 4,240,863
Mortgage-Backed Securities 2,960,302 3,008,134 1,721,442 1,733,315
- ------------------------------------------------------------------------------------------------------------------------------------
$11,209,155 $11,266,269 $ 8,714,583 $ 8,726,878
====================================================================================================================================
HELD TO MATURITY:
U.S. Treasury Securities $ 8,753,699 $ 8,769,770 $ 6,249,421 $ 6,264,063
U.S. Government Agency Securities 11,477,026 11,498,220 5,738,111 5,735,196
Other Securities - - 498,248 502,187
Mortgage-Backed Securities 1,871,252 1,875,046 1,503,701 1,496,782
- ------------------------------------------------------------------------------------------------------------------------------------
$22,101,977 $22,143,036 $13,989,481 $13,998,228
====================================================================================================================================
</TABLE>
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, 1997, 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, 1997 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 $2,250,550 - $ 2,250,550
Yield 5.59% - 5.59%
U.S. Government Agency Securities
Market Value - $6,007,585 $ 6,007,585
Yield 6.27 % 6.27%
Mortgage-Backed Securities
Market Value $3,008,134 - - $ 3,008,134
Yield 6.52% - - 6.52%
====================================================================================================================================
HELD TO MATURITY:
U.S. Treasury Securities
Book Value $6,749,878 $2,003,821 $ 8,753,699
Yield 5.77% 5.97 % 5.82%
U.S. Government Agency Securities
Book Value $4,231,598 $7,245,428 $11,477,026
Yield 5.66% 6.61 % 6.26%
Mortgage-Backed Securities
Book Value $1,871,252 - - $1,871,252
Yield 6.17% - - 6.17%
====================================================================================================================================
</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.
23
<PAGE>
LOANS
The following table summarizes the Company's loan portfolio as of December 31,
1997 and 1996.
<TABLE>
<CAPTION>
================================================================================
1997 1996
================================================================================
<S> <C> <C>
Secured by Real Estate:
Residential Mortgage $ 33,248,717 $ 28,023,269
Commercial Mortgage 29,793,163 23,690,659
Construction 4,851,720 2,289,233
Commercial & Industrial 20,889,305 17,135,417
Loans to Individuals for
Automobiles 12,177,339 13,260,060
Other Loans to Individuals 4,969,103 3,456,425
Other Loans 541,327 --
- --------------------------------------------------------------------------------
$106,470,674 $ 87,855,063
================================================================================
</TABLE>
Note: The Company's commercial loans are not concentrated within a single
industry or group of related industries.
The Company had strong growth in the loan portfolio in both 1997 and 1996. The
loan portfolio increased by $18.6 million or 21% in 1997 and $27.7 million or
46% in 1996.
The Company targets small to medium sized businesses and professionals in the
lending market area. For much of 1996 and continuing into 1997, the Company was
able to attract customers that were dissatisfied with the services of the larger
regional banks. The Company tries to remain competitive in its pricing of loans,
but will not sacrifice loan quality to capture business. It is important to note
that 30% of the loans secured by residential real estate as of December 31,
1997, were for commercial purposes. It is common for small business owners to
secure commercial loans with their personal businesses.
During 1996, the Company was actively seeking relationships with local
automobile dealerships to generate indirect financing of consumer automobile
loans. A decision was made in 1997 to remain competitive, but not aggressive
with respect to pricing on these types of loans. Consequently, loans to
individuals for automobiles dropped $1.1 million or 8% in 1997. Construction
loans increased $2.6 million or 112% due to increased construction activity in
the market area.
<PAGE>
The following table sets forth the Company's total loans by maturity and
interest rate sensitivity as of December 31, 1997:
<TABLE>
<CAPTION>
====================================================================================================================================
MATURITY AFTER
WITHIN 1 THROUGH AFTER
1 YEAR 5 YEARS 5 YEARS TOTAL
====================================================================================================================================
<S> <C> <C> <C> <C>
Loans with fixed rates $12,273,721 $38,460,772 $ 1,354,065 $ 52,088,558
Loans with floating rates 19,808,901 9,859,120 24,714,095 54,382,116
- ------------------------------------------------------------------------------------------------------------------------------------
Total $32,082,622 $48,319,892 $26,068,160 $106,470,674
====================================================================================================================================
</TABLE>
24
<PAGE>
ASSET QUALITY
Various degrees of credit risk are associated with substantially all investing
activities. The lending function, however, carries the greatest risk of loss.
Risk elements include loans past due, non-accrual loans, renegotiated loans,
other real estate owned and loan concentrations. The Company closely monitors
its loan portfolio to minimize the risk of delinquency and problem credits. As a
general rule a loan that is past due for principal or interest in excess of
ninety days is placed on a non-accrual basis unless circumstances exist that
would lead management to find that non-accrual is unnecessary (i.e., liquidation
of collateral or the borrower has the ability to bring the loan current as to
principal and interest).
The Company's loan portfolio consists of commercial loans, commercial
mortgages, real estate construction loans, residential mortgage loans and
consumer loans.
The Company's commercial loans are primarily made to small businesses and
professionals in its market area with maturities between one and five years. The
majority of these loans are collateralized by real estate consisting of single
family homes or commercial properties, and/or the assets of the businesses and
further secured by personal guarantees. The Company primarily requires that
there be a loan to value ratio not exceeding 80% on these loans. The Company
also reviews borrowers' cash flows in analyzing loan applications. Risks
inherent in these loans include risks that a borrower's cash flow generated from
its business may not be sufficient to repay the loans, either because of general
economic conditions, downturns specific to the borrower's business or interest
rate changes which cause deterioration in a borrower's cash flow as well as
risks associated with the collateral securing the loans, such as possible
deterioration in value of the collateral or environmental contamination of the
collateral.
Commercial mortgages are made to small businesses and professionals in the
market area to purchase commercial real estate for use in their businesses. The
Company will generally not finance in excess of 75% of appraised value. In
reviewing a borrower's qualifications, the Company pays particular attention to
cash flow. In addition, the Company frequently requires personal guarantees.
Risk factors associated with these loans include general economic performance
which will affect vacancy rates for commercial properties and the ability of
businesses to maintain cash flows as well as the resale value which may be
yielded on a particular property.
The Company originates and retains residential mortgages loans. They are
generally written with a three 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 earnings potential of the borrower as
well as potential resale values associated with the collateral securing 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 75% of the appraised completed value of the project. Risks
inherent with these loans include performance of the general economy which will
affect whether the sale of the project actually closes despite its contracted
status and the risk inherent with whether the construction of a project will
actually be completed and completed within budget. Environmental factors may
affect whether a project can be completed and the cost associated with its
completion. Although the Company does environmental due diligence prior to
closing, an environmental risk factor may arise during construction. 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.
25
<PAGE>
The following table summarizes the composition of the Company's non-performing
assets as of the dates indicated:
<TABLE>
<CAPTION>
============================================================================================
DECEMBER 31, 1997 1996 1995
============================================================================================
<S> <C> <C> <C>
Non-performing assets (1):
Non-accruing loans
Commercial and Construction $ -- $ -- $ --
Real Estate -- -- --
Installment 62,632 24,384 --
Total non-accrual loans 62,632 24,384 --
Restructured loans -- -- --
- --------------------------------------------------------------------------------------------
Total non-performing loans 62,632 24,384 --
- --------------------------------------------------------------------------------------------
Other real estate owned -- 304,700 --
- --------------------------------------------------------------------------------------------
Total non-performing assets $ 62,632 $ 329,084 $ --
- --------------------------------------------------------------------------------------------
Loans past due 90 days or more (2) $ -- $ 20,600 $ --
- --------------------------------------------------------------------------------------------
Non-performing loans to total loans 0.06% 0.03% N/A
Non-performing assets to total assets 0.04% 0.26% N/A
Allowance for loan losses to non-performing loans 1,568.20% 3,212.62% N/A
============================================================================================
</TABLE>
(1) Non-performing assets excludes loans past due 90 days or more and still
accruing.
(2) Loans past due 90 days or more and still accruing.
The following table summarizes the activity in the allowance for possible loan
losses for the period indicated:
<TABLE>
<CAPTION>
============================================================================================
DECEMBER 31, 1997 1996 1995
============================================================================================
<S> <C> <C> <C>
Balance, beginning of period $ 783,366 $ 527,019 $ 372,062
Loans charged off
Commercial and Construction (33,814) (2,035) (43,969)
Real Estate -- (2,375) --
Installment (52,585) (53,183) (7,074)
- --------------------------------------------------------------------------------------------
Total charge offs (86,399) (57,593) (51,043)
- --------------------------------------------------------------------------------------------
Recoveries of loans previously charged off
Commercial and Construction -- 619 --
Real Estate -- -- --
Installment 5,231 3,821 --
- --------------------------------------------------------------------------------------------
Total recoveries 5,231 4,440 --
- --------------------------------------------------------------------------------------------
Net Loans charged off (81,168) (53,153) (51,043)
- --------------------------------------------------------------------------------------------
Provision charged to expense 280,000 309,500 206,000
- --------------------------------------------------------------------------------------------
Balance, end of period $ 982,198 $ 783,366 $ 527,019
- --------------------------------------------------------------------------------------------
Net charge offs as a percentage of average loans 0.09% 0.07% 0.10%
Allowance for loan losses to total loans 0.92% 0.89% 0.88%
Allowance for loan losses to non-accrual loans 1,568.20% 3,212.62% N/A
============================================================================================
</TABLE>
26
<PAGE>
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.
The increases in the Company's provision for loan losses during 1997 and 1996
were 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 1995, and non-performing loans as of December 31, 1997
and 1996 totaled $62,632 or .06% and $24,384 or .03% of total loans
respectively. 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 date indicated:
<TABLE>
<CAPTION>
====================================================================================================================================
DECEMBER 31, 1997 DECEMBER 31, 1996
=============================== ==================================
PERCENT PERCENT
AMOUNT LOANS TO TOTAL AMOUNT LOANS TO TOTAL
====================================================================================================================================
<S> <C> <C> <C> <C>
Commercial and Construction $727,603 64.37% $547,181 61.80%
Real Estate 47,393 21.69% 33,058 20.68%
Installment 207,202 13.94% 203,127 17.52%
- ------------------------------------------------------------------------------------------------------------------------------------
$982,198 100.00% $783,366 100.00%
====================================================================================================================================
</TABLE>
27
<PAGE>
DEPOSITS
Following is the average balances and rates paid on deposits for the periods
indicated:
<TABLE>
<CAPTION>
====================================================================================================================================
YEARS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
====================================================================================================================================
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 20,583,833 - $16,027,197 - $10,838,744 -
Savings Deposits 8,231,620 3.11% 6,977,173 3.13% 5,942,451 3.27%
Money Market Deposits Accounts 18,016,816 3.53% 11,940,716 3.26% 8.366,762 3.54%
NOW Accounts 8,902,947 2.56% 6,042,628 2.46% 4,417,143 2.31%
Time Deposits 68,428,340 5.47% 56,700,027 5.39% 41,703,884 5.46%
- ------------------------------------------------------------------------------------------------------------------------------------
$124,163,556 3.92% $97,687,741 3.90% $71,268,984 4.03%
====================================================================================================================================
</TABLE>
Following is the maturity distribution of time certificates of deposit $100,000
and over at December 31, 1997:
===============================================================
Three months or less $ 8,797,987
Over three months through twelve months 2,705,109
Over 1 year through five years 1,376,712
- ---------------------------------------------------------------
$12,879,808
===============================================================
LIQUIDITY
The Company's liquidity needs arise principally to accommodate possible
deposit outflows and meet loan demand. The Company's liquidity is dependent on
the successful management of its assets and liabilities so as to meet these
needs of both its deposit and loan customers.
Liquidity, as represented by cash and cash equivalents, is a product of its
operating, investing, and financing activities.
During 1997, the Company generated cash flow from operations of $1,371,932.
This was more than the $655,068 generated in 1996 for several reasons. Net
income of $1,103,038 was $382,953 higher in 1997 as compared to 1996. The
increase in other assets of $301,439 was $427,370 lower than the 1996 increase
in other assets, but was partially offset by the increase in accrued expenses
and other liabilities of $588 which was $203,768 lower than the 1996 increase in
other liabilities.
Net cash used in investing activities was $29,479,060. Proceeds from the sales
and maturities of securities totaled $17,361,646 all of which was used to
purchase securities. These purchases totaled $27,940,190. The increase in loans
for 1997 represented $18,696,780 net cash used for investing activities.
The increases in loans were funded by net cash provided by financing
activities of $21,961,878. Deposits, most notably time and demand deposits
accounted for most of the amount.
There was a decrease in cash and cash equivalents of $6,145,250 during the
period. In addition to cash and cash equivalents, the Company's primary source
of liquidity includes securities held for sale and securities held to maturity
that mature in one year of less, which totaled $28.2 million inclusive of cash
and cash equivalents at December 31, 1997 and represents 19% 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.
28
<PAGE>
ASSET AND LIABILITY MANAGEMENT
Interest rate risk is defined as the sensitivity of the Company's current and
future earnings as well as its capital to changes in the level of market
interest rates. The Company's exposure to interest rate risk results from, among
other things, the difference in maturities on interest earning assets and
interest bearing liabilities. The relationship between the interest rate
sensitivity of the Bank's assets and liabilities is continually monitored by the
Bank's Asset/Liability Management Committee (the "ALCO"). The purpose of the
ALCO is to review and monitor the volume, mix and pricing of the interest
sensitive assets and liabilities consistent with the Bank's overall liquidity,
capital, growth and profitability goals.
Loans make up the largest portion of the Bank's assets. In making commercial
loans, the emphasis is placed on floating rate loans tied to the prime lending
rate. Fixed rate commercial loans are generally written so that the rates can be
adjusted within 3-5 years with payouts up to 20 years. Mortgage loans are
currently written to be adjusted annually after the first 3 or 5 year term. Home
equity loans are tied to the prime lending rate although special promotions may
offer a fixed rate for periods of not greater than one year. Installment loans
are written at fixed rates from 3 to 5 years.
The Bank utilizes its securities to manage its liquidity and rate
sensitivity. Fixed rate securities are purchased for terms of less than five
years. Adjustable rate securities require an estimate average life at time of
purchase of ten years or less. Callable securities are also purchased for terms
of five years or less with call period of three months to two years.
A significant portion of the Bank's assets have been funded with CDs
including jumbo CDs. Unlike other deposit products, such as, checking and
savings accounts CDs carry a high degree of interest rate sensitivity and
therefore, their renewal will vary based on the competitiveness of the Bank's
interest rates. The Bank has attempted to price its CDs competitively.
The nature of the Bank's current operations is such that it is not subject to
foreign currency exchange or commodity price risk. Additionally neither the
Company nor the Bank owns any trading assets. At December 31, 1997, the Bank did
not have any hedging transactions in place.
INTEREST RATE SENSITIVITY ANALYSIS
One measure of the Bank's interest rate sensitivity is through the use of a
sensitivity gap analysis. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets maturing or repricing
within a specific time period and the amount of interest-bearing liabilities
maturing or repricing within that same time period. A gap is positive when the
amount of interest-earning assets maturing or repricing exceeds the amount of
interest-bearing liabilities maturing or repricing within that same period and
is negative when the amount of interest-bearing liabilities maturing or
repricing exceeds the amount of interest-earning assets maturing or repricing
within the same period. Accordingly, during a period of rising interest rates,
an institution with a negative gap position would not be in as favorable a
position, compared to an institution with a positive gap, to invest in higher
yielding assets. A negative gap may result in the yield on an institution's
interest-earning assets increasing at a slower rate than the increase in an
institution's cost of interest-bearing liabilities than if it had a positive
gap. During a period of falling interest rates, an institution with a negative
gap would experience a repricing of its interest-earning assets at a slower rate
than its interest-bearing liabilities which, consequently, may result in its net
interest income growing at a faster rate than an institution with a positive gap
position.
29
<PAGE>
<TABLE>
<CAPTION>
INTEREST RATE SENSITVITY AT DECEMBER 31, 1997 (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 $ 17,496 $ 5,529 $ 10,343 $ -- $ 33,368
Federal Funds Sold -- -- -- -- --
Other Short Term Investments 188 -- -- -- 188
Loans 45,663 13,073 47,672 62 106,470
Valuation Reserve(1) -- -- -- (1,082) (1,082)
Non-interest Earning Assets -- -- -- 9,605 9,605
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 63,347 $ 18,602 $ 58,015 $ 8,585 $ 148,549
====================================================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Money Market accounts $ 16,227 $ -- $ -- $ -- $ 16,227
NOW accounts 13,014 -- -- -- 13,014
Other Savings Deposits 9,043 -- -- -- 9,043
Time CDs over $100,000 8,798 2,705 1,377 -- 12,880
Other Time Deposits 16,772 32,557 11,471 -- 60,800
Federal Funds Purchased 500 -- -- -- 500
Obligation Under Capital Lease -- -- 443 -- 443
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities 64,354 35,262 13,291 -- 112,907
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest Bearing Liabilities -- -- -- 21,966 21,966
Other Liabilities -- -- -- 580 580
Stockholders' Equity -- -- -- 13,096 13,096
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 64,354 $ 35,262 $ 13,291 $ 35,642 $ 148,549
====================================================================================================================================
Interest Rate Sensitivity Gap $ (1,007) $ (16,660) $ 44,724 $ (27,057)
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative Gap $ (1,007) $ (17,667) $ 27,057
====================================================================================================================================
Cumulative Gap to Total Assets (.68 )% (11.89 )% 18.21 %
====================================================================================================================================
</TABLE>
(1) Valuation Reserves include allowance for loan losses and deferred loan fees.
(2) The following are the assumptions that were used to prepare the Gap
analysis:
(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.
The ALCO attempts 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.
An additional analysis of the Bank's interest rate risk is a forecast of
changes in the Bank's market value of portfolio equity (MVPE) under alternative
interest rate environments. The MVPE is defined as the net present value of the
Bank's existing assets, liabilities and off balance sheet instruments. The
calculated estimated of change in MVPE for the Bank at December 31, 1997 is as
follows:
30
<PAGE>
<TABLE>
<CAPTION>
CHANGES IN INTERESTS
===============================================================
MVPE PERCENT
AMOUNT CHANGE
(IN THOUSANDS)
===============================================================
<S> <C> <C>
+200 Basis Points $14,597 (4.00)%
Flat Rate 15,241 -
- -200 Basis Points 15,499 2.00%
===============================================================
</TABLE>
Management has not yet established policy for acceptable change in the MVPE
under alternate interest rate.
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,
=================================
1997 1996 1995
===============================================================
<S> <C> <C> <C>
Return on Average
Assets 0.80% 0.67% 0.83%
Return on Average
Equity 8.89% 8.07% 8.16%
Average Equity to
Average Assets 9.04% 8.30% 10.17%
===============================================================
</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,
=================================
1997 1996 1995
===============================================================
<S> <C> <C> <C>
Total Capital to
Risk Weighted Assets 12.81% 13.40% 14.11%
Tier 1 Capital to
Risk Weighted Assets 11.89% 12.56% 13.29%
Leverage Ratio 8.72% 9.58% 9.89%
===============================================================
</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>
SUMMARY OF QUARTERLY RESULTS
The following summarizes the results of operations during 1997 on a quarterly
basis:
<TABLE>
<CAPTION>
====================================================================================================================================
For the Quarters Ended
=========================================================================================
March 31 June 30 September 30 December 31
====================================================================================================================================
<S> <C> <C> <C> <C>
Interest Income $2,466,755 $2,620,462 $2,776,010 $2,890,628
Interest Expense 1,106,398 1,196,057 1,273,565 1,303,579
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 1,360,357 1,424,405 1,502,445 1,587,049
Provision for Loan Losses 75,000 75,000 65,000 65,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 1,285,357 1,349,405 1,437,445 1,522,049
- ------------------------------------------------------------------------------------------------------------------------------------
Gain on the Sale of Loans 26,755 27,353 44,485 115,940
Other Non Interest Income 83,523 81,382 83,082 98,810
Other Non Interest Expense 1,008,115 1,038,323 1,093,504 1,163,296
- ------------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 387,520 419,817 471,508 573,503
Income Taxes 156,027 168,991 190,156 234,136
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 231,493 $ 250,826 $ 281,352 $ 339,367
====================================================================================================================================
</TABLE>
31
<PAGE>
SVB Financial Services, Inc. and Somerset Valley Bank
BOARD OF DIRECTORS SOMERSET VALLEY BANK FOUNDERS
ADVISORY COUNCIL:
John K. Kitchen
Chairman of the Board Richard Bradley
G. Robert Santye Maureen T. Kruse
Vice Chairman of the Board Matthew Madlinger
Bernard Bernstein John Majcher
Robert P. Corcoran Thomas C. Miller, Esq.
Mark S. Gold, MD Harold T. Moscatiello
Raymond L. Hughes Edward Rego
S. Tucker S. Johnson Janak Sakaria, MD
Willem Kooyker Helga Schwartz, MD
Frank Orlando Michael A. Sena
Gilbert E. Pittenger Albert DiFiore
Frederick D. Quick Sandra L. Runyon
Anthony J. Santye, Jr. Frank Tourville
Donald Sciaretta Donald Sweeney, MD
Herman C. Simonse
Donald R. Tourville
SOMERSET VALLEY BANK
HILLSBOROUGH ADVISORY COUNCIL:
Michael Avolio
Elaine DeMilia
Walter J. Dietz, III
Peter McGavisk
John Mondoro
Dan Pullen, DDS
Harry Smith
Kevin Sweeney
Frank N. Yurasko, Esq.
<PAGE>
Somerset Valley Banking Staff
Robert P. Corcoran Kathy Ruggiero
President and C.E.O. Assistant Vice President
Branch Administration
Keith B. McCarthy
Chief Operating Officer Mary Ann Soriano
Assistant Vice President
Arthur E. Brattlof
Executive Vice President, Marguerite Eppler
Senior Loan Officer Secretary to the Board
Robert F. Cramer Jeannette Capra
Vice President Assistant Treasurer
Consumer Loans
Christopher Fenimore
Michael A. Novak Assistant Treasurer
Vice President
Commercial Loans Christopher Seaman
Assistant Treasurer
Roger W. Russell
Vice President Margaret O'Keeffe
Loan Administration Assistant Treasurer
Manager
Karen L. Zaliwski
Vice President Jeanne G. Hagen
Operations Human Resources Director
Rene Miranda Suzanne B. Lennard
Assistant Vice President Assistant Secretary
Assistant Manager
W. Gay Pfahler
Assistant Vice President
Mary E. Rowe
Assistant Vice President
<PAGE>
GENERAL COUNSEL:
Thomas C. Miller, Esq.
Miller, Robertson and Rogers, P.C.
21 North Bridge Street
Somerville, NJ 08876
INDEPENDENT PUBLIC ACCOUNTANTS:
Grant Thornton, LLP
Two Commerce Square
2001 Market Street, Suite 3100
Philadelphia, PA 19103-7080
TRANSFER AGENT:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
SVB Financial Services, Inc.
SOMERSET VALLEY BANK
MAIN OFFICE
103 West End Avenue
Somerville, NJ 08876
Telephone: (908) 704-1188
Fax: (908) 685-2180
HILLSBOROUGH OFFICE
649 Route 206
Hillsborough Centre
Belle Mead, NJ 08502
Telephone: (908) 281-4009
Fax: (908) 281-3042
BRIDGEWATER OFFICE
481 North Bridge Street
Bridgewater, NJ 08807
Telephone: (908) 725-0033
Fax: (908) 725-0110
GASTON AVENUE OFFICE
91 North Gaston Avenue
Somerville, NJ 08876
Telephone: (908) 575-7300
Fax: (908) 575-9395
ARBOR GLEN OFFICE
100 Monroe Street
Bridgewater, NJ 08807
Telephone: (908) 595-9700
Fax: (908) 526-3418
FORM 10-K:
The annual report filed with the Securities and Exchange Commission on
Form 10-K is available without charge upon written request to:
Mr. Keith McCarthy
Somerset Valley Bank
103 West End Avenue
Somerville, NJ 08876
SVB FINANCIAL SERVICES, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON THURSDAY, APRIL 30, 1998
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 30, 1998 at 5:30 P.M., for
the following purposes:
1. Election of five (5) Directors for the terms as set forth in the
accompanying Proxy Statement.
2. 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 23, 1998, 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 31, 1998
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 29, 1998.
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 30, 1998
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 30, 1998 and all adjournments thereof.
This Proxy Statement and accompanying materials are being mailed to shareholders
on or about March 31, 1998.
The close of business March 23, 1998, 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 1,377,830
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.
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 five (5) Directors listed below have been nominated to serve until
the 2001 Annual Meeting or until his/her successor is elected and qualified, or
until their earlier resignation or removal.
The following table presents the name, title, address, age and
principal occupation of each nominee for Director followed by the remaining
Directors and the Executive Officers, the number of shares and the percentage of
the outstanding shares of common stock of the Company beneficially owned,
directly or indirectly, by each of them as of March 23, 1998. There is no one
other than the persons listed below who owns beneficially 5% or more of the
outstanding common stock. In addition to the shares listed in the table, each
Director with the exception of Mr. Corcoran owns 3,900 options to purchase 3,900
shares at a price of $13.00 per share.
<PAGE>
<TABLE>
<CAPTION>
Shares
Beneficially % of Total
Name, Title, and Address Age Principal Occupation Owned Outstanding
- ------------------------------ --- -------------------- ----- -----------
Directors Nominated to Serve
Until the 2001 Annual Meeting:
<S> <C> <C> <C> <C>
Bernard Bernstein 60 President and CEO, 50,662 3.68
Director Mid-State Lumber Corp.,
200 Industrial Parkway a wholesale lumber
Branchburg, NJ 08876 distributor
Robert P. Corcoran 57 President and CEO 5,000(1) .36
President, CEO and Director Somerset Valley Bank
12 Harvest Court SVB Financial Services, Inc.
Flemington, NJ 08822
Mark S. Gold, MD 48 Author and Professor 81,886(2) 5.94
Director University of Florida
2002 San Marco Boulevard
Jacksonville, FL 32207
Raymond L. Hughes 66 President of N.J. Risk 31,090(3) 2.26
Director Managers & Consultants
20 West End Avenue
Somerville, NJ 08876
S. Tucker S. Johnson 32 Farmer 19,860 1.44
Director
P.O. Box 675
Oldwick, NJ 08858
<CAPTION>
Shares
Beneficially % of Total
Name, Title, and Address Age Principal Occupation Owned Outstanding
- ------------------------------------- --- -------------------- ----- -----------
Directors Whose Terms Expire in 1999.
<S> <C> <C> <C> <C>
Willem Kooyker 55 Chairman and CEO of Blenheim 129,218(4) 9.38
Director Investments, Inc., an international
2 Worlds Drive fund management firm.
Somerset, NJ 08875
Frank Orlando 64 Retired 57,860(5) 4.20
Director
786 Princeton Avenue
Brick, NJ 08724
Gilbert E. Pittenger 73 Retired 33,524(6) 2.43
Director
RD #1, Box 91
New Ringgold, PA 17960
Frederick D. Quick 66 President of Hesco 88,800(7) 6.44
Director Electric Supply Co., Inc.,
924 River Road a lighting and electrical
Neshanic Station, NJ 08853 supply firm
Donald Sciaretta 42 President of Claremont 30,655 2.22
Director Construction Group, Inc.
P.O. Box 808
Far Hills, NJ 07931
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Directors Whose Terms Expire in 2000.
<S> <C> <C> <C> <C>
John K. Kitchen 54 President of Title Central 25,339(8) 1.84
Chairman of Board and Director Agency, a title insurance
P.O. Box 421 firm
Somerville, NJ 08876
Anthony J. Santye, Jr. 47 Managing Partner of A.J. 18,480(9)(10) 1.34
Director Santye and Co., an
36 East Main Street accounting and consulting
Somerville, NJ 08876 firm
G. Robert Santye Director of Real Estate and 11,520(9)(11) .84
Vice Chairman and Director Business Valuation Services
36 East Main Street for A.J. Santye and Co.
Somerville, NJ 08876
Herman C. Simonse 66 President of HCS Consultants, Inc. 17,600 1.28
Director
93 Douglass Avenue
Bernardsville, NJ 07924
Donald R. Tourville 61 Chairman and CEO of Zeus 66,176 4.80
Director Scientific, Inc., a manu-
P.O. Box 38 facturer of diagnostic
Raritan, NJ 08869 test kits
Executive Officers:
Keith B. McCarthy 40 Chief Operating 3,600(12) .26
Executive Vice President and Officer of the Bank
Treasurer Executive Vice President and
501 Red School Lane Treasurer of the Company
Phillipsburg, NJ 08865
Arthur E. Brattlof 54 Executive Vice President and 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 672,767 48.82%
</TABLE>
(1) Includes 720 shares in the name of his son, a minor. He also has options to
purchase 7,800 shares at $8.33 per share which expire in August 1999, 4,800
shares at $8.33 per share which expire in April 2001 and 5,000 shares at
$13.00 per share which expire November 2002.
(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.
(5) Includes 32,400 shares held by Eight Mountain Trail, Inc. Employees Profit
Sharing Plan.
<PAGE>
(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 Quick Family Investments LP.
(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, he has options to purchase 8,400 shares at $8.33 per share
which expire August 1999, 4,800 shares at $8.33 per share which expire
April 2001 and 5,000 shares at $13.00 per share which expire November 2002.
(13) In addition, he has options to purchase 6,240 shares at $8.33 per share
which expire April 2001 and 5,000 shares at $13.00 per share which expire
November 2002.
Director Committees
All members 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.
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.
<PAGE>
The Compensation Committee, composed of Messrs. Bernstein, Johnson,
Kitchen, Kooyker, Quick, Orlando and A.J. Santye, Jr., 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, Executive Vice President, is a
non-director voting member of the Loan Committee.
During 1997, the Board of Directors held 12 meetings, the Executive
Committee 4 meetings, the Loan Committee 11 meetings, the Audit Committee 5
meetings, the Investment Committee 4 meetings, the Compensation Committee 1
meeting, and the Real Estate Committee 6 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 1997, all
Directors attended at least 75% of the total Board and Committee meetings with
the exception of Messrs. Hughes, Johnson, Kooyker and Sciaretta. 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>
Annual
Compensation All Other
Name and Position Year Salary Bonus Compensation
- ----------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Robert P. Corcoran 1997 $136,500 $18,632(1) $16,410(3)
President and CEO of 1996 130,000 29,023 8,467(3)
the Company and the Bank 1995 125,000 31,250 9,044(3)
Keith B. McCarthy 1997 102,500 11,325(1) 4,703(4)
Treasurer of the Company 1996 97,650 16,011 2,592(2)
Chief Operating Officer of 1995 93,000 13,350 2,672(2)
the Bank
Arthur E. Brattlof 1997 88,500 9,708(1) 3,467(2)
Executive Vice President 1996 82,000 13,444 2,176(2)
of the Bank 1995 78,000 11,700 2,271(2)
</TABLE>
<PAGE>
(1) The Bonus for 1997 is based 75% on a comparison of the Company's
results for 1997 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 $5,308 in 1997,
$3,450 in 1996 and $3,706 in 1995, Director fees of $4,950 in 1997,
$3,000 in 1996 and $1,800 in 1995 and term life insurance premiums paid
by the Bank of $6,152 in 1997, $2,017 in 1996 and $3,538 in 1995.
(4) Includes matching contributions to the 401(k) Plan of $4,028 and life
insurance premiums paid by the Bank of $675.
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 1997, the Compensation Committee of the Board of Directors has
approved a bonus plan for the three executive officers listed in the previous
table. 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.
1997 Restated Incentive Stock Option Plan
On April 24, 1997, the shareholders approved the 1997 Restated
Incentive Stock Option Plan, which provides for officers and employees of the
Company to purchase up to 82,404 shares of Common Stock. The purpose of the Plan
is to (i) replace and expand certain existing stock options of the Bank (ii)
assist the Company and the Bank in attracting and retaining qualified persons as
their employees and (iii) to help insure that employees of the Company and the
Bank have shared economic interests with the shareholders of the Company.
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
<PAGE>
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 Section 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
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 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.
<PAGE>
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.
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 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 Section 16b-3.
<PAGE>
The Company will obtain shareholder approval of any Plan amendment to
the extent necessary or desirable to comply with Section 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.
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.
<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
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
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.
<TABLE>
<CAPTION>
OPTIONS GRANTS IN LAST FISCAL YEAR
(Individual Grants)
Number of Percent of Total
Securities Options Granted
Underlying Options to Employees in
Name Granted Fiscal Year Exercise Price Expiration Date
---- ------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
Robert P. Corcoran 5,000 16.6% $13.00 November 20, 2002
Keith B. McCarthy 5,000 16.6% $13.00 November 20, 2002
Arthur E. Brattlof 5,000 16.6% $13.00 November 20, 2002
</TABLE>
<PAGE>
1997 Directors Stock Option Plan
On April 24, 1997, the shareholders of the Company approved the 1997
Directors Stock Option Plan. The Plan is intended to promote the Company's
interest by establishing a mechanism to reward Directors based on 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.
On June 26, 1997, each non-employee member of the Company's Board of
Directors was granted an option to purchase 3,900 shares of the Common Stock of
the Company at $13.00 per share, which was the fair market value of the Common
Stock as of that date.
As there were 14 Directors eligible to participate under the 1997
Directors Stock Option Plan all of the shares available under the Plan are
subject to option.
Administration
The 1997 Directors Stock Option Plan will 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 will 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.
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.
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 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.
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 Qualified Domestic
Relations Order (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.
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 non-qualified 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 non-qualified stock option ordinarily will result in
<PAGE>
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
non-qualified 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
non-qualified 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 non-qualified stock option.
If a non-qualified 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 non-qualified stock option.
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.
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 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 1997, Directors of the Bank received compensation for service on
the Board of Directors of $450 per Board of Directors meeting attended and $100
for each committee meeting. Mr. John Kitchen as Chairman of the Board received
compensation of $24,000 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 67% 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
$44,316 to the Plan in 1997.
<PAGE>
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 in
1991 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, 1998. 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.
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 1999
Annual Meeting of Shareholders (which the Company currently intends to hold in
April of 1999) must be received by the Secretary of the Company by November 28,
1998 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 shareholders of the change and the date by which proposals of
shareholders 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>
REVOCABLE PROXY
SVB FINANCIAL SERVICES, INC.
[ X ] PLEASE MARK VOTES AS IN THIS EXAMPLE
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS
APRIL 30, 1998
The undersigned shareholder hereby constitutes and appoints each of ARTHUR E.
BRATTLOF, MARGUERITE EPPLER and KEITH B. McCARTHY, with full power of
substitution, to act as proxy for and to vote all shares of Common Stock which
the undersigned is entitled to vote at the Annual Meeting of Shareholders to be
held on April 30, 1998, at 5:30 p.m. prevailing local time at the Raritan Valley
Country Club, Route 28, Somerville, New Jersey, or at any adjournment(s)
thereof, on all matters coming before the meeting, including (but not limited
to) the election of any person to the directorship for which a nominee named
hereon is unable to serve.
The undersigned instructs said proxies to vote:
I. Election of Directors
For a term to continue to the 2001 Annual Meeting:
[ ] FOR [ ] WITHHOLD [ ] EXCEPT
Bernard Bernstein, Robert P. Corcoran, Mark S. Gold, M.D., Raymond L.
Hughes, S. Tucker S. Johnson.
INSTRUCTION: To withhold authority to vote for any individual nominee, mark "For
All Except" and write that nominee's name in the space provided below.
- --------------------------------------------------------------------------------
THE PROXIES SHALL VOTE AS SPECIFIED ABOVE, OR IF A CHOICE IS NOT SPECIFIED
FOR ANY OF THE ABOVE NOMINEES, THE PROXIES WILL VOTE "FOR" THE ELECTION OF THE
BOARD OF DIRECTORS NOMINEES.
Please be sure to sign and date
this Proxy in the box below.
_________________________________________
Date
_________________________________________
Stockholder sign above
_________________________________________
Co-holder (if any) sign above
<PAGE>
Detach above card, sign, date and mail in postage paid envelope provided.
SVB FINANCIAL SERVICES, INC.
Please mark, sign, date and return this Proxy promptly using the envelope
provided. Please sign exactly as your name(s) appear hereon. Joint owners should
each sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such.
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,794,622
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,454,573
<INVESTMENTS-CARRYING> 22,101,977
<INVESTMENTS-MARKET> 22,143,036
<LOANS> 106,371,241
<ALLOWANCE> 982,198
<TOTAL-ASSETS> 148,549,488
<DEPOSITS> 133,930,016
<SHORT-TERM> 500,000
<LIABILITIES-OTHER> 580,245
<LONG-TERM> 443,697
0
0
<COMMON> 5,725,535
<OTHER-SE> 7,377,140
<TOTAL-LIABILITIES-AND-EQUITY> 148,549,488
<INTEREST-LOAN> 8,664,936
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<INTEREST-TOTAL> 10,753,855
<INTEREST-DEPOSIT> 4,866,837
<INTEREST-EXPENSE> 4,879,599
<INTEREST-INCOME-NET> 5,874,256
<LOAN-LOSSES> 280,000
<SECURITIES-GAINS> 1,283
<EXPENSE-OTHER> 4,303,238
<INCOME-PRETAX> 1,852,348
<INCOME-PRE-EXTRAORDINARY> 1,103,038
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,103,038
<EPS-PRIMARY> .81
<EPS-DILUTED> .80
<YIELD-ACTUAL> 4.52
<LOANS-NON> 62,632
<LOANS-PAST> 0
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<ALLOWANCE-OPEN> 783,366
<CHARGE-OFFS> 86,399
<RECOVERIES> 5,231
<ALLOWANCE-CLOSE> 982,198
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