================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
-----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-12431
-------
UNITY BANCORP, INC.
- -------------------------------------------------------------------------------
(Name of small business issuer as specified in its charter)
DELAWARE 22-3282551
- ------------------------------------ -------------------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
64 Old Highway 22, Clinton, NJ 08809
- ------------------------------------ -------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (908) 730-7630
---------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class: Name of each exchange on which
registered:
Common Stock, No Par Value American Stock Exchange
- -------------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Exchange Act: None.
Indicate by check mark whether the Issuer: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, 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 No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. (X)
The aggregate market value of the voting stock held by non-affiliates of
the Issuer as of February 28, 1997, was $14,763,625.
The number of shares of the Issuer's Common Stock, no par value,
outstanding as of February 28, 1997, was 1,973,425.
For the fiscal year ended December 31, 1996, the Issuer had total revenues
of $13,264,013.
================================================================================
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
10-KSB Item Document Incorporated
----------- ---------------------
Item 6. Management's Discussion Registrant's Annual Report to
and Analysis or Plan of Shareholders under the caption
Operation "Management Discussion and
Analysis"
Item 7. Financial Statements Registrant's Annual Report to
Shareholders under the caption
"Consolidated Financial
Statements"
Item 9. Directors and Executive Proxy Statement for 1997 Annual
Officers of the Company; Meeting of Shareholders to be
Compliance with Section filed no later than April 29, 1997
16(a) of the Exchange Act
Item 10. Executive Compensation Proxy Statement for 1997 Annual
Meeting of Shareholders to be
filed no later than April 29, 1997
Item 11. Security Ownership of Proxy Statement for 1997 Annual
Certain Beneficial Owners Meeting of Shareholders to be
and Management filed no later than April 29, 1997
Item 12. Certain Relationships and Proxy Statement for 1997 Annual
Related Transactions Meeting of Shareholders to be
filed no later than April 29, 1997
-2-
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
- --------------------------------
GENERAL
Unity Bancorp, Inc. (the "Company" or "Registrant") is a one-bank holding
company incorporated under the laws of the State of Delaware to serve as a
holding company for First Community Bank (the "Bank"). The Company was organized
at the direction of the Board of Directors of the Bank for the purpose of
acquiring all of the capital stock of the Bank. Pursuant to the New Jersey
Banking Act of 1948 (the "Banking Act"), and pursuant to approval of the
shareholders of the Bank, the Company acquired the Bank and became its holding
company on December 1, 1994. The only significant activity of the Company is
ownership and supervision of the Bank.
The Bank opened for business on September 16, 1991. The Bank is a
full-service commercial bank, providing a wide range of business and consumer
financial services through its main office and five branches located in Clinton,
North Plainfield, Flemington, Springfield, Scotch Plains and Union, New Jersey.
The Bank's primary service area encompasses the Route 22/Route 78 corridor
between the Bank's Clinton, New Jersey main office and its Union, New Jersey
branch. This service area includes communities in Essex, Hunterdon, Middlesex,
Morris, Somerset, Union and Warren Counties, New Jersey.
The Company is subject to the supervision and regulation of the Board of
Governors of the Federal Reserve System (the "FRB"). The Bank is a New Jersey
chartered commercial bank whose deposits are insured by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
The operations of the Company and the Bank are subject to the supervision and
regulation of FRB, FDIC and the New Jersey Department of Banking (the
"Department").
The principal executive offices of the Company are located at 64 Old
Highway 22, Clinton, New Jersey 08809, and the telephone number is (908)
730-7630.
BUSINESS OF THE COMPANY
The Company's primary business is ownership and supervision of the Bank.
The Company, through the Bank, conducts a traditional and community-oriented
commercial banking business, and offers services including personal and business
checking accounts and time deposits, money market accounts and regular savings
accounts. The Company structures its specific services and charges in a manner
designed to attract the business of the small and medium sized
-3-
<PAGE>
business and professional community as well as that of individuals residing,
working and shopping in its service area. The Company engages in a wide range of
lending activities and offers commercial, consumer, mortgage, home equity and
personal loans.
SERVICE AREA
The Company's primary service area is defined as the neighborhoods served
by the Bank's offices. The Bank's main office, located in Clinton, in
combination with its Flemington office, serve the greater area of Hunterdon
County. The Bank's North Plainfield office serves those communities located in
the northern, eastern and central parts of Somerset County, and the southernmost
communities of Union County. The Bank's Springfield, Scotch Plains and Union
offices serve the majority of the communities in Union County, and the
southwestern communities of Essex County.
The Company has a secondary service area along the Route 78/Route 22
corridor between its two Hunterdon County offices and its offices located in
Union County. In addition to the previously mentioned Interstate highways, the
Bank's primary and secondary service areas also have access to a major network
of other roads which includes Route 287 and Route 202.
COMPETITION
The Company is located in an extremely competitive area. The Company's
service area is already serviced by major regional banks, large thrift
institutions and by a variety of credit unions. Most of the Company's
competitors have substantially more capital and therefore greater lending limits
than the Company. The Company's competitors generally have established positions
in the service area and have greater resources than the Company with which to
pay for advertising, physical facilities, personnel and interest on deposited
funds. The Company relies upon the competitive pricing of its loans, deposits
and other services as well as its ability to provide local decision making and
personal service in order to compete with these larger institutions.
EMPLOYEES
The Company employs 80 full-time and 6 part-time employees. None of the
Company's employees are represented by any collective bargaining agreements. The
Company believes that its relations with its employees are good.
-4-
<PAGE>
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. These laws and regulations are intended to protect
depositors, not stockholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in the applicable law or regulation may have a material effect on the business
and prospects of the Company and the Bank.
BANK HOLDING COMPANY REGULATION
GENERAL. As a bank holding company registered under the Bank Holding
Company Act of 1956, as amended, (the "BHCA"), the Company is subject to the
regulation and supervision of the FRB. The Company is required to file with the
FRB annual reports and other information regarding its business operations and
those of its subsidiaries. Under the BHCA, the Company's activities and those of
its subsidiaries are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries or engaging
in any other activity which the FRB determines to be so closely related to
banking or managing or controlling banks as to be properly incident thereto.
The BHCA requires, among other things, the prior approval of the FRB in any
case where a bank holding company proposes to (i) acquire all or substantially
all of the assets of any other bank, (ii) acquire direct or indirect ownership
or control of more than 5% of the outstanding voting stock of any bank (unless
it owns a majority of such bank's voting shares), or (iii) merge or consolidate
with any other bank holding company. The FRB will not approve any acquisition,
merger, or consolidation that would have a substantially anti-competitive
effect, unless the anti- competitive impact of the proposed transaction is
clearly outweighed by a greater public interest in meeting the convenience and
needs of the community to be served. The FRB also considers capital adequacy and
other financial and managerial resources and future prospects of the companies
and the banks concerned, together with the convenience and needs of the
community to be served, when reviewing acquisitions or mergers.
Additionally, the BHCA prohibits a bank holding company, with certain
limited exceptions, from (i) acquiring or retaining direct or indirect ownership
or control of more than 5% of the outstanding voting stock of any company which
is not a bank or bank holding company, or (ii) engaging directly or indirectly
in activities other than those of banking, managing or controlling banks, or
performing services for its subsidiaries; unless such non-banking business is
determined by the FRB to be so closely related to banking or managing or
controlling banks as to be properly incident thereto. In making such
determinations, the FRB is required to
-5-
<PAGE>
weigh the expected benefits to the public, such as greater convenience,
increased competition or gains in efficiency, against the possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default. Under a policy of the FRB with respect
to bank holding company operations, a bank holding company is required to serve
as a source of financial strength to its subsidiary depository institutions and
to commit resources to support such institutions in circumstances where it might
not do so absent such policy. The FRB also has the authority under the BHCA to
require a bank holding company to terminate any activity or to relinquish
control of a non-bank subsidiary upon the FRB's determination that such activity
or control constitutes a serious risk to the financial soundness and stability
of any bank subsidiary of the bank holding company.
CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES. The FRB has adopted
risk-based capital guidelines for bank holding companies. The risk-based capital
guidelines are designed to make regulatory capital requirements more sensitive
to differences in risk profile among banks and bank holding companies, to
account for off-balance sheet exposure, and to minimize disincentives for
holding liquid assets. Under these guidelines, assets and off-balance sheet
items are assigned to broad risk categories each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items.
The risk-based guidelines apply on a consolidated basis to bank holding
companies with consolidated assets of $150 million or more. For bank holding
companies with less than $150 million in consolidated assets, the guidelines
will be applied on a bank-only basis unless: (a) the parent bank holding company
is engaged in non-bank activity involving significant leverage; or (b) the
parent company has a significant amount of outstanding debt that is held by the
general public. The minimum ratio of total capital at risk- weighted assets
(including certain off-balance sheet activities, such as standby letters of
credit) is 8%. At least 4% of the total capital is required to be "Tier I,"
consisting of common stockholders' equity and certain preferred stock, less
certain goodwill items and other intangible assets. The remainder, "Tier II
Capital," may consist of (a) the allowance for loan losses of up to 1.25% of
risk-weighted assets, (b) excess of qualifying preferred stock, (c) hybrid
capital instruments, (d) debt, (e) mandatory convertible securities, and (f)
qualifying subordinated
-6-
<PAGE>
debt. Total capital is the sum of Tier I and Tier II capital less reciprocal
holdings of other banking organizations' capital instruments, investments in
unconsolidated subsidiaries and any other deductions as determined by the FRB
(determined on a case-by-case basis or as a matter of policy after formal
rule-making).
Bank holding company assets are given risk-weights of 0%, 20%, 50% and
100%. In addition, certain off-balance sheet items are given similar credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for performing first mortgage loans fully secured by residential property which
carry a 50% risk-weighing. Most investment securities (including, primarily,
general obligation claims of states or other political subdivisions of the
United States) are assigned to the 20% category, except for municipal or state
revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S.
Treasury or obligations backed by the full faith and credit of the U.S.
Government, which have a 0% risk-weight. In converting off-balance sheet items,
direct credit substitutes including general guarantees and standby letters of
credit backing financial obligations, are given a 100% risk-weighing.
Transaction related contingencies such as bid bonds, standby letters of credit
backing nonfinancial obligations, and undrawn commitments (including commercial
credit lines with an initial maturity or more than one year) have a 50%
risk-weighing. Short term commercial letters of credit have a 20% risk-weighing
and certain short-term unconditionally cancelable commitments have a 0%
risk-weighing.
In addition to the risk-based capital guidelines, the FRB has adopted a
minimum Tier I capital (leverage) ratio, under which a bank holding company must
maintain a minimum level of Tier I capital to average total consolidated assets
of at least 3% in the case of a bank holding company that has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the stated minimum.
BANK REGULATION
As a New Jersey-chartered commercial bank, the Bank is subject to the
regulation, supervision, and control of the Department. As an FDIC-insured
institution, the Bank is subject to regulation, supervision and control of the
FDIC, an agency of the federal government. The regulations of the FDIC and the
Department impact virtually all activities of the Bank, including the minimum
level of capital the Bank must maintain, the ability of the Bank to pay
dividends, the ability of the Bank to expand through new branches or
acquisitions and various other matters.
-7-
<PAGE>
INSURANCE OF DEPOSITS. The Bank's deposits are insured up to a maximum of
$100,000 per depositor under the SAIF of the FDIC. The Federal Deposit Insurance
Corporation Improvements Act of 1991 ("FDICIA") effected a major restructuring
of the federal regulatory framework applicable to depository institutions and
deposit insurance. FDICIA requires the FDIC to establish a risk-based assessment
system for all insured depository institutions. Under this legislation, the FDIC
is required to establish an insurance premium assessment system based upon: (i)
the probability that the insurance fund will incur a loss with respect to the
institution; (ii) the likely amount of the loss; and (iii) the revenue needs of
the insurance fund. In compliance with this mandate, FDIC has developed a matrix
that sets the assessment premium for a particular institution in accordance with
its capital level and overall rating by the primary regulator.
DIVIDEND RIGHTS. Under the Banking Act, a bank may declare and pay
dividends only if, after payment of the dividend, the capital stock of the bank
will be unimpaired and either the bank will have a surplus of not less than 50%
of its capital stock or the payment of the dividend will not reduce the bank's
surplus.
RECENT REGULATORY ENACTMENTS. On September 30, 1996, the Deposit Insurance
Fund Act of 1996 (the "Deposit Act") became law. The primary purpose of the
Deposit Act is to recapitalize the SAIF by charging all SAIF member institutions
a one time special assessment of 65.7 basis points of the institution's SAIF
assessable deposits as of March 31, 1995. Certain institutions, like the Bank,
which were chartered as de novo SAIF-insured commercial banks received a
reduction in their assessment of 20%. Based upon the Bank's March 31, 1995 SAIF
assessable deposits, the after tax cost to the Bank of the special assessment,
recognized in the third quarter of 1996, was $222,300. As a result of the
recapitalization of the SAIF, FDIC premium assessments to SAIF members, both in
the form of insurance premiums and for repayment of the Federal Finance
Corporation obligations, have been reduced from 23 basis points to 6.4 basis
points for the healthiest thrift institutions. The Deposit Act also calls for
the federal banking agencies to study the various financial institution charters
and propose a single standard federal charter, thereby doing away with the
separate bank and thrift charters. If a single charter is adopted, the Bank
Insurance Fund ("BIF") and SAIF will be merged on January 1, 1999. At that time,
all insured institutions will pay the same FDIC assessment. The Deposit Act also
contains a provision which prohibits deposit migration for the purposes of
evading the premium differential between BIF and SAIF members. At this time,
management of the Company is unable to predict when or if a unified federal
charter will be adopted and when and if the BIF and the SAIF will be merged, or
the effect, if any, of these events upon the Company.
-8-
<PAGE>
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act (the "Interstate Act") was enacted. The Interstate Act generally
enhances the ability of bank holding companies to conduct their banking business
across state borders. The Interstate Act has two main provisions. The first
provision generally provides that, commencing on September 29, 1995, bank
holding companies may acquire banks located in any state regardless of the
provisions of state law. These acquisitions are subject to certain restrictions,
including caps on the total percentage of deposits that a bank holding company
may control both nationally and in any single state. New Jersey law currently
allows interstate acquisitions by bank holding companies whose home state has
"reciprocal" legislation which would allow acquisitions by New Jersey- based
bank holding companies.
The second major provision of the Interstate Act permits, beginning on June
1, 1997, banks located in different states to merge and continue to operate as a
single institution in more than one state. States may, by legislation passed
before June 1, 1997, opt out of the interstate bank merger provisions of the
Interstate Act. In addition, states may elect to opt in and allow interstate
bank mergers prior to June 1, 1997.
A final provision of the Interstate Act permits banks located in one state
to establish new branches in another state without obtaining a separate bank
charter in that state, but only if the state in which the branch is located has
adopted legislation specifically allowing interstate de novo branching.
In April, 1996, the New Jersey legislature passed legislation which would
permit interstate bank mergers prior to June 1, 1997, provided that the home
state of the institution acquiring the New Jersey institution permits interstate
mergers prior to June 1, 1997. In addition, the legislation permits an
out-of-state institution to acquire an existing branch of a New Jersey-based
institution, and thereby conduct a business in New Jersey. The legislation does
not permit interstate de novo branching. This legislation is likely to enhance
competition in the New Jersey marketplace as bank holding companies located
outside of New Jersey become freer to acquire institutions located within the
state of New Jersey.
ITEM 2. DESCRIPTION OF PROPERTY
The Company conducts its business through its main office located at 64 Old
Highway 22, Clinton, New Jersey, and its five branch offices. The following
table sets forth certain information regarding the Company's properties as of
December 31, 1996.
-9-
<PAGE>
Leased Date of Lease
Location or Owned Expiration
- -------- -------- ----------
64 Old Highway 22 Leased 7/3/04
Clinton, NJ
450 Somerset Street Owned N/A
North Plainfield, NJ
110 Main Street Leased 3/31/98
Flemington, NJ
733 Mountain Avenue Leased 9/30/98
Springfield, NJ
2222 South Avenue Leased 4/30/06
Scotch Plains, NJ
752 Stuyvesent Avenue Leased 10/31/99
Union, NJ
===============================================================================
ITEM 3. LEGAL PROCEEDINGS
The Company and the Bank are periodically parties 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 Bank's business. Management does not believe
that there is any pending or threatened proceeding against the Company or the
Bank which, if determined adversely, would have a material effect on the
business or financial position of the Company or the Bank.
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 fiscal 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Commencing on January 13, 1997, the Company's Common Stock began trading on
the American Stock Exchange under the symbol "UBI." Prior to that time,
commencing in November, 1995, the Common Stock became listed for trading on the
NASDAQ Bulletin Board. Prior to trading on the NASDAQ Bulletin Board, the Common
Stock was not traded on any recognized securities exchange. As of
-10-
<PAGE>
December 31, 1996, there were 852 stockholders of record of the Common Stock.
The following table sets forth the high and low bid prices of the Common
Stock, as reported on the NASDAQ Bulletin Board from November, 1995, the date
the Company first became listed on the NASDAQ Bulletin Board, to December 31,
1996. The high and low bid prices reflect interdealer quotations, without retail
mark-up, mark-down or commissions and do not necessarily represent actual
transactions. The table also sets forth cash dividends paid on the Common Stock.
The bid prices and dividends give retroactive effect to the Company's five for
four stock split paid on October 28, 1996.
===============================================================================
Bid
------------------------------------
- -------------------------------------------------------------------------------
Cash
High Low Dividend
---- --- --------
- -------------------------------------------------------------------------------
1995:
4th Quarter............................. $12.00 $11.20 $.04
- -------------------------------------------------------------------------------
1996:
1st Quarter............................. 13.00 11.20 .05
- -------------------------------------------------------------------------------
2nd Quarter............................. 14.20 12.00 .05
- -------------------------------------------------------------------------------
3rd Quarter ............................ 14.00 13.00 .05
- -------------------------------------------------------------------------------
4th Quarter............................. 13.50 12.75 .10
===============================================================================
The Company began paying a cash dividend in the first quarter of 1995 and
has paid a quarterly dividend each quarter since. The Company's current dividend
is $.06 per share. Additionally, the Company issued 10% stock dividends during
1992 and 1993 and a 5% stock dividend in 1996.
The future payment of cash dividends, if any, by the Company will be
determined from time to time by the Board of Directors which will consider,
among other factors, the Company's financial condition and results of
operations, investment opportunities, capital requirements and regulatory
limitations. Funds for the
-11-
<PAGE>
payment of cash dividends by the Company are derived from dividends paid by the
Bank to the Company. Accordingly, restrictions on the Bank's ability to pay cash
dividends directly affect the payment of cash dividends by the Company. The Bank
is subject to certain limitations on the amount of cash dividends that it may
pay under the Banking Act, which provides that a bank may pay dividends only if,
after payment of the dividend, the capital stock of the bank will be unimpaired
and either the bank will have a surplus of not less than 50% of its capital
stock or the payment of the dividend will not reduce the bank's surplus. As of
December 31, 1996, the Bank had $4,642,430 available for the payment of
dividends to the Company pursuant to these restrictions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information required by this item is incorporated by reference from the
Registrant's Annual Report to Shareholders under the caption "Management's
Discussion and Analysis."
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is incorporated by reference from the
Registrant's Annual Report to Shareholders under the caption "Consolidated
Financial Statements."
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-12-
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT
Information concerning directors and executive officers is included in the
definitive Proxy Statement for the Company's 1997 Annual Meeting under the
captions "PROPOSAL 1. ELECTION OF DIRECTORS" and information concerning
compliance with Section 16(a) of the Exchange Act is included under the caption
"COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934," each of
which is incorporated herein by reference. It is expected that such Proxy
Statement will be filed with the Securities and Exchange Commission no later
than April 29, 1997.
The following table sets forth certain information about each executive
officer of the Company who is not also a director.
===============================================================================
Principal Occupation
During Past Five
Name, Age and Position Officer Since (1) Years
- ---------------------- ----------------- --------------------
- -------------------------------------------------------------------------------
Thomas B. Maresca, 39, 1991 Chief Financial
Chief Financial Officer Officer of the
of the Company; Senior Company since its
Vice President of the inception; Senior
Bank. Vice President of the
Bank since 1994;
employed by the Bank
since its inception.
- -------------------------------------------------------------------------------
Peter G. Schoberl, 42, 1995 Executive Vice
Executive Vice President and Senior
President and Senior Lending Officer of
Lending Officer of the the Bank since 1995.
Bank Previously, Senior
Vice President and
Senior Lending
Officer of American
Union Bank from 1990
to 1995.
===============================================================================
- ---------------
(1) Includes prior service as an officer of the Bank.
-13-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is included in the definitive
Proxy Statement for the Company's 1997 Annual Meeting under the caption
"EXECUTIVE COMPENSATION," which is incorporated herein by reference. It is
expected that such Proxy Statement will be filed with the Securities and
Exchange Commission no later than April 29, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is included in the definitive Proxy Statement for the Company's 1997
Annual Meeting under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT," which is incorporated herein by reference. It is
expected that such Proxy Statement will be filed with the Securities and
Exchange Commission no later than April 29, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
included in the definitive Proxy Statement for the Company's 1997 Annual Meeting
under the caption "Certain Transactions with Management," which is incorporated
herein by reference. It is expected that such Proxy Statement will be filed with
the Securities and Exchange Commission no later than April 29, 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description of Exhibits
- ------- -----------------------
3(i) Certificate of Incorporation of the Company, as amended(2)
3(ii) Bylaws of the Company(1)
4(i) Warrant Agreement/Form of Warrant(2)
4(ii) Form of Stock Certificate(2)
-14-
<PAGE>
4(iii) 1994 Stock Option Plan for Employees(1)
4(iv) 1994 Stock Option Plan for Non-Employee Directors(1)
4(v) Stock Bonus Plan(2)
4(vi) Subscription Agreement(2)
10(i) Lease Agreement (for Clinton, NJ main office)(2)
10(ii) Lease Agreement for Flemington Branch Office; Addenda to Lease
and Lease for Parking(2)
10(iii) Lease Agreement for Springfield Branch Office(2)
10(iv) Lease Agreement for Scotch Plains Office(2)
10(v) 1994 Stock Option Plan for Employees and 1994 Stock Option Plan
for Non-Employee Directors (See Exhibits 4(iii) and 4(iv))
10(vi) Change in Control Agreement(2)
10(vii) Stock Bonus Plan (See Exhibit 4(v))
13 Annual Report to Shareholders for the year ended December 31, 1996
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
- ----------------
(1) Incorporated by reference from Exhibits 2(a) to 99(b) from the Registrant's
Registration Statement on Form S-4, Registration No. 33-76392.
(2) Incorporated by reference from Exhibits 3(i) to 27 from the Registrant's
Registration Statement on Form SB-2, Registration No. 333-12565.
(b) Reports on Form 8-K
None.
-15-
<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.
UNITY BANCORP, INC.
By: /s/ JAMES HYMAN
-----------------------
James Hyman
President and
Chief Operating Officer
Dated: March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
================================================================================
NAME TITLE DATE
- --------------------------------------------------------------------------------
Chairman of the Board
and Chief Executive
/s/ ROBERT J. VAN VOLKENBURGH Officer March 24, 1997
- -----------------------------
Robert J. Van Volkenburgh
- --------------------------------------------------------------------------------
President, Chief
Operating Officer and
/s/ JAMES HYMAN Director March 24, 1997
- -----------------------------
James Hyman
- --------------------------------------------------------------------------------
Chief Financial Officer
(Principal Financial
/s/ THOMAS B. MARESCA and Accounting Officer) March 24, 1997
- -----------------------------
Thomas B. Maresca
- --------------------------------------------------------------------------------
Vice Chairman and
/s/ DAVID D. DALLAS Corporate Secretary March 24, 1997
- -----------------------------
David D. Dallas
- --------------------------------------------------------------------------------
/s/ WALTER HAZARD Director March 24, 1997
- -----------------------------
Walter Hazard
- --------------------------------------------------------------------------------
/s/ PETER P. DETOMMASO Director March 24, 1997
- -----------------------------
Peter P. DeTommaso
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
UNITY BANCORP, INC.
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
- ------- -----------------------
3(i) Certificate of Incorporation of the Company, as amended(2)
3(ii) Bylaws of the Company(1)
4(i) Warrant Agreement/Form of Warrant(2)
4(ii) Form of Stock Certificate(2)
4(iii) 1994 Stock Option Plan for Employees(1)
4(iv) 1994 Stock Option Plan for Non-Employee Directors(1)
4(v) Stock Bonus Plan(2)
4(vi) Subscription Agreement(2)
10(i) Lease Agreement (for Clinton, NJ main office)(2)
10(ii) Lease Agreement for Flemington Branch Office; Addenda
to Lease and Lease for Parking(2)
10(iii) Lease Agreement for Springfield Branch Office(2)
10(iv) Lease Agreement for Scotch Plains Office(2)
10(v) 1994 Stock Option Plan for Employees and 1994 Stock Option
Plan for Non-Employee Directors (See Exhibits 4(iii) and 4(iv))
10(vi) Change in Control Agreement(2)
10(vii) Stock Bonus Plan (See Exhibit 4(v))
13 Annual Report to Shareholders for the Year Ended
December 31, 1996
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
- ------------------
(1) Incorporated by reference from Exhibits 2(a) to 99(b) from the
Registrant's Registration Statement on Form S-4, Registration No. 33-76392.
(2) Incorporated by reference from Exhibits 3(i) to 27 from the Registrant's
Registration Statement on Form SB-2, Registration No. 333-12565.
EXHIBIT 13
ANNUAL REPORT
The Cover
The cover depicts the Bank's decision to enhance its founding commitment to
customer service by integrating a variety of electronic delivery systems.
MISSION STATEMENT
Unity Bancorp, Inc.'s business philosophy is to build a significant presence in
its primary and secondary markets by professionally delivering high caliber
financial services to small businesses, professional firms and individuals. By
delivering such services, Unity Bancorp, Inc. looks to enhance shareholders'
value through achieving levels of profitability and growth in the book value of
its stock that exceed peer comparisons.
<PAGE>
Unity Bancorp, Inc. and Subsidiary
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's financial statements
and the notes relating thereto including herein. When necessary,
reclassifications have been made to prior years' data throughout the following
discussion and analysis for purposes of comparability with 1996 data.
Overview and Strategy
Since the Company commenced operations in September, 1991, the Company has
increased its asset base at a rapid pace. The Company was created through the
purchase of two existing branches from the Resolution Trust Corporation ("RTC").
Upon commencement of its operations, the Company had total assets of $61.9
million, consisting primarily of cash and cash equivalents and investment
securities. At December 31, 1996, the Company had total assets of $172.7
million, including loans of $97.8 million. Upon commencing operations, the
Company had two offices located in Annandale and North Plainfield, New Jersey.
The Company has subsequently expanded along the Route 22/78 corridor into
Flemington and eastward into Scotch Plains, Springfield and Union, New Jersey.
In addition, the Company has relocated its main office from Annandale to
Clinton, New Jersey. Although the Company's emphasis has been on growth, the
Company became profitable in its second year of operation, and its net income
has increased to $1.044 million for the year ended December 31, 1996. The
Company's income for the year ended December 31, 1996 would have been $1.267
million without giving effect to the one time special Savings Association
Insurance Fund "SAIF" assessment discussed below. As a result of the Company's
success in continuing growth while increasing profitability, and in order to
provide stockholders a return on their investment, the Company began paying cash
dividends in the first quarter of 1995.
Results of Operations
The Company's results of operations depend primarily on its net interest income,
which is the difference between the interest earned on its interest-earning
assets and the interest paid on funds borrowed to support those assets, such as
deposits. Net interest margin is a function of the difference between the
weighted average rate received on interest-earning assets and the weighted
average rate paid on interest-bearing liabilities, as well as the average level
of interest-earning assets as compared with that of interest-bearing
liabilities. Net income is also affected by the amount of non-interest income
and operating expenses.
Net Income
For the year ended December 31, 1996, net income totaled $1.044 million, or $.74
per share, remaining relatively unchanged from the $1.005 million or $.83 per
share, earned in the comparable period of 1995. Income for the year ended
December 31, 1996, was adversely affected by the Company's payment of a one time
assessment of $370 thousand in connection with the congressionally mandated
recapitalization of the SAIF. Absent this one time assessment, the Company's net
income would have increased by $261 thousand, or 26%, over net income for the
year ended 1995 to $1.267 million or $.89 per share. Although the Company's net
interest income increased by $1.7 million, or 37.6%, over the comparable period
of 1995, the increase was offset by an increase of $2.4 million, or 61.0%, in
total other expenses, including the one time SAIF assessment. The increase in
the Company's net interest income resulted from an increase of $3.1 million, or
39.8%, in total interest income partially offset by a $1.4 million increase in
total interest expense. The increase in total interest income was attributable
to a $38.7 million, or 65.5%, increase in the Company's loan portfolio,
partially offset by a decline in rate on the portfolio. The Company's average
yield on its interest earning assets declined to 7.94% for the year ended
December 31, 1996 from 8.24% for the comparable period of 1995, as the yield on
its loan portfolio declined from 10.69% for the twelve months ended December 31,
1996 to 9.78% for the twelve months ended December 31, 1995. The decline in the
Company's average yield reflects the repricing of the Company's adjustable rate
loans to lower market rates of interest during 1996. In addition, new loans
originated by the Company during 1996 were at lower rates of interest than those
loans originated during 1995, reflecting reduced market rates.
The Company's net income increased from 1994 to 1995 by $249 thousand, or 32.9%,
to $1.0 million for the year ended December 31, 1995 from $756 thousand for the
year ended December 31, 1994. This increase was primarily attributable to an
increase in net interest income of $1.3 million, or 42.7%, during 1995. The
increase in net interest income was attributable to an increase in interest
income of $2.8 million, or 57.4%, to $7.8 million for the year ended December
31, 1995 from $4.9 million for the year ended December 31, 1994, primarily as a
result of an increase in the Company's loan portfolio. The volume increases in
the Company's loan portfolio were primarily funded through the maturation of
lower yielding securities, thereby increasing the Company's average yield and
net margin. The Company's average yield on interest earning assets increased to
8.24% for the year ended December 31, 1995 from 7.18% for the year ended
December 31, 1994.
8
<PAGE>
Unity Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Interest expense rose $1.4 million, or 42.7%, to $4.8 million for the year ended
December 31, 1996 compared to $3.3 million for the year ended December 31, 1995,
and $1.5 million, or 82.2%, to $3.3 million for the year ended December 31, 1995
from $1.8 million for the year ended December 31, 1994. The increases in
interest expense over all periods is primarily attributable to a 38.3% increase
in the Company's deposits from December 31, 1995 to December 31, 1996.
The increase in net interest income during 1995 compared to 1994 was partially
offset by higher other expenses and a higher provision for loan losses.
COMPARATIVE AVERAGE BALANCE SHEETS
The following table reflects the components of the Company's net interest
income, setting forth for the periods presented herein, (1) average assets,
liabilities and stockholders' equity, (2) interest income earned on
interest-earning assets and interest expense paid on interest-bearing
liabilities, (3) average yields earned on interest-earning assets and average
rates paid on interest-bearing liabilities, (4) the Company's net interest
spread (i.e., the average yield on interest-earning assets less the average rate
on interest-bearing liabilities) and (5) the Company's net yield on
interest-earning assets. Rates are computed on a taxable equivalent basis.
INTEREST DATA
<TABLE>
(Dollar Amounts in Thousands - Interest Amounts and Interest Rates on a Fully Tax-Equivalent Basis)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Taxable loans (net of unearned
income) $ 79,063 $ 7,732 9.78% $44,742 $4,782 10.69% $31,295 $2,962 9.47%
Tax exempt securities 718 41 5.71% 93 5 5.33% 0 0 0.00%
Taxable investments 34,678 2,089 6.03% 31,778 2,074 6.53% 27,424 1,716 6.26%
Interest bearing deposits 12,907 501 3.88% 12,670 617 4.87% 7,847 166 2.12%
Federal funds sold 9,653 512 5.30% 5,012 292 5.82% 2,191 93 4.26%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 137,019 10,875 7.94% 94,295 7,770 8.24% 68,757 4,937 7.18%
Non-interest earning assets 5,948 3,328 2,415
Allowance for possible
loan losses (750) (447) (349)
- ------------------------------------------------------------------------------------------------------------------------------------
Total average assets $142,217 $97,176 $70,823
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and
Shareholders' Equity
Interest bearing liabilities:
NOW deposits $ 13,664 $ 309 2.26% $10,665 $ 275 2.58% $ 6,288 $ 153 2.43%
Savings deposits 23,401 656 2.80% 20,677 626 3.03% 23,467 647 2.76%
Money market deposits 6,883 211 3.07% 5,277 197 3.74% 3,595 100 2.78%
Time deposits 63,353 3,485 5.50% 38,781 2,113 5.45% 23,555 930 3.95%
Subordinated debt 1,041 94 9.05% 1,378 123 8.94% 0 0 0.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 108,342 4,755 4.39% 76,778 3,334 4.34% 56,905 1,830 3.22%
Non-interest bearing liabilities 928 670 226
Demand deposits 21,797 11,887 7,134
Shareholders' equity 11,150 7,841 6,558
- ------------------------------------------------------------------------------------------------------------------------------------
Total average liabilities $142,217 $97,176 $70,823
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 6,120 $4,436 $3,107
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread 3.55% 3.90% 3.97%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income/margin
on average earning assets 4.47% 4.70% 4.52%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
Unity Bancorp, Inc. and Subsidiary
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The following table presents by category the major factors that contributed to
the changes in net interest income for each of the years ended December 31,
1996, 1995 and 1994, as compared to each respective previous period. Amounts
have been computed on a fully tax-equivalent basis, assuming a Federal income
tax rate of 34%.
VOLUME/RATE ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollar Amounts in Thousands on a Fully Tax-Equivalent Basis)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, Year Ended December 31,
1996 versus 1995 Increase 1995 versus 1994 Increase
(Decrease) Due to Change in: (Decrease) Due to Change in:
- ------------------------------------------------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Interest income:
Taxable loans (net of unearned
income) $3,668 $(406) $(312) $1,273 $382 $164
Tax exempt securities 33 0 2 0 0 5
Taxable investment securities 189 (159) (15) 272 74 12
Interest bearing deposits 12 (125) (2) 102 216 133
Federal funds sold 270 (26) (24) 120 34 44
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income $4,172 $(716) $(351) $1,767 $706 $358
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest expense:
NOW deposits $ 77 $ (34) $(10) $107 $9 $6
Savings deposits 82 (46) (6) (77) 63 (8)
Money market deposits 60 (36) (11) 47 34 16
Time deposits 1,339 21 13 601 353 228
Subordinated debt (30) 2 (0) 0 0 123
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,528 (93) (14) 678 459 365
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $2,644 $(623) $(337) $1,089 $247 $(7)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PROVISION FOR LOAN LOSSES
For the year ended December 31, 1996, the Company's provision for loan losses
was $416 thousand, an increase of $188 thousand, or 82% over the provision for
the comparable period ending December 31, 1995. For the year ended December 31,
1995, the Company's provision for loan losses was $229 thousand, an increase of
$68 thousand over the provision of $161 thousand for the year ended December 31,
1994. The increased provisions reflect the continued growth in the Company's
loan portfolio.
OTHER INCOME
Other income, primarily consisting of gains on sales of loans and service fees
received from deposit accounts, amounted to $2.4 million for the year ended
December 31, 1996, an increase of $1.0 million, or 73.6%, from the comparable
period of 1995. Other income for the year ended December 31, 1995 increased by
$757 thousand, or 120%, to $1.4 million compared to $628 thousand in 1994. These
increases were primarily related to increased gains on sale of loans by the
Company in both the years December 31, 1996 and December 31, 1995, as well as
the Company's increasing level of deposits. The Company is an active participant
in the United States Small Business Administration's ("SBA") guaranteed loan
program and the Company has been designated a "preferred lender" for the States
of New Jersey, Delaware, New York and Pennsylvania. Under the SBA program, the
SBA guarantees between 75% and 90% of the principal balance of any approved
loan. After closing a loan, the Company sells the guaranteed portion of the
loan. For the year ended December 31, 1996, the Company recognized $1.5 million
in income from the gain on sale of loans, an increase of $597 thousand, or
68.5%, compared to the year ended December 31, 1995. For the year ended December
31, 1995, the Company recognized income of $871 thousand from the gain on sale
of loans, an increase of $624 thousand over the $247 thousand recognized for the
year ended December 31, 1994. The increases in gain on sale of loans are
attributable to the Company's increasing penetration of the small business loan
market in the Company's trade areas.
Other Expenses
Other expenses for year ended December 31, 1996 amounted to $6.4 million, an
increase of $2.4 million, or 61.0%, from the comparable period of 1995 when
other expenses totaled $4.0 million. For the year ended December 31, 1995, other
expenses increased by $1.4 million, or 53.0%, compared to $2.6 million for the
year ended December 31, 1994. These increases were primarily attributable to
increased salary, occupancy and other operating expenses. The increases in
salary
10
<PAGE>
Unity Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
and occupancy expenses during the years ended December 31, 1995 and
December 31, 1996 reflect the Company's expansion through the establishment of
new branches. Beginning in 1995, the Company opened new branches in Flemington
and Springfield and continued its expansion in 1996 by opening new offices in
Scotch Plains and Union, New Jersey, in addition to relocating its main branch
and corporate headquarters from Annandale to new leased space in Clinton, New
Jersey. Other expenses also increased for the year ended December 31, 1996 due
to the one-time special assessment imposed by the FDIC to recapitalize the
Savings Association Insurance Fund, which insures the Bank's deposits. The one
time assessment resulted in a charge of $370 thousand ($222 thousand after
taxes). The recapitalization has led to reduced insurance premiums for the
Company, as the FDIC has adopted a new premium assessment schedule under which
the highest rated institution will pay only a $2 thousand annual assessment and
other institutions will pay premiums of up to 27 basis points of assessed
deposits.
Income Tax Expense
The income tax provision, which includes both federal and state taxes, for the
year ended December 31, 1996 and for the years ended December 31, 1995 and 1994
was $644 thousand, $609 thousand and $219 thousand, respectively. Increases in
income taxes were primarily attributable to increases in income before taxes in
all periods reported, as well as full utilization of the Company's net operating
loss carryforwards during the year ended December 31, 1994.
Financial Condition
At December 31, 1996, the Company's total assets were $172.7 million, compared
to $121.8 million at December 31, 1995 and $78.6 million at December 31, 1994.
Total loans increased to $97.8 million at December 31, 1996 from $59.1 million
at December 31, 1995 and $36.4 million at December 31, 1994. Total deposits
increased to $153.6 million at December 31, 1996 from $111.0 million at December
31, 1995 and $70.7 million at December 31, 1994.
Loan Portfolio
At December 31, 1996, the Company's total loans were $97.8 million, an increase
of $38.7 million, or 65.7%, over total loans at December 31, 1995. The Company's
loan portfolio at December 31, 1995 totaled $59.1 million, an increase of $22.7
million, or 62.3%, over total loans at December 31, 1994. These increases in the
Company's loan portfolio reflect the Company's expansion through its new
branches as well as its continued penetration of its existing marketplace.
The following table sets forth the classification of the Company's loans by
major category at December 31, 1996 and as of December 31, 1995:
(Dollars in Thousands)
- ----------------------------------------------------------------------------
December 31, 1996 1995
Amount Percent Amount Percent
- ----------------------------------------------------------------------------
Commercial and industrial $17,965 18.4% $ 9,125 15.4%
Real estate
Non-residential properties 41,674 42.6% 23,612 40.0%
Residential properties 23,044 23.6% 16,034 27.1%
Construction 10,223 10.4% 5,705 9.7%
Lease financing 17 0.0% 83 0.1%
Consumer 4,924 5.0% 4,549 7.7%
- ----------------------------------------------------------------------------
Total loans $97,847 100.0% $59,108 100.0%
- ----------------------------------------------------------------------------
The following table sets forth commercial and construction loans as of December
31, 1996 in terms of loan maturities and interest rate sensitivity:
(Dollars in Thousands)
- ----------------------------------------------------------------------------
Within 1 to 5 After
1 Year Years 5 Years Total
- ----------------------------------------------------------------------------
Commercial $ 7,365 $8,909 $1,692 $17,966
Real estate - Construction 6,143 867 3,213 10,223
- ----------------------------------------------------------------------------
Total Loans (a) $13,508 $9,776 $4,905 $28,189
- ----------------------------------------------------------------------------
(a) Loans due after one-year totaling $10,601 have fixed interest rates.
The remaining 28% of such loans or $4,080 have floating or adjustable rates.
The Company's loan portfolio consists of commercial and industrial loans, real
estate loans and consumer loans. Commercial and industrial loans are made for
the purpose of providing working capital, financing the purchase of equipment or
inventory and for other business purposes. Real estate loans consist of loans
secured by commercial or residential property and loans for the construction of
commercial or residential property. Consumer loans are made for the purpose of
financing the purchase of consumer goods, home improvements, and other personal
needs, and are generally secured by the personal property being purchased.
The Company's loans are primarily to businesses and individuals located in the
Company's trade area. The Company has not made loans to borrowers outside of the
United States. Commercial lending activities are focused primarily on lending to
small business borrowers. The Company believes that its strategy of customer
service,
11
<PAGE>
Unity Bancorp, Inc. and Subsidiary
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
competitive rate structures and selective marketing, have enabled the
Company to gain market entry to local loans. Mergers and lending curtailments at
larger banks competing with the Company have also contributed to the Company's
efforts to attract borrowers.
ASSET QUALITY
The Company's principal earning assets are its loans. Inherent in the lending
function is the risk of the borrower's inability to repay the borrower's loan
under its existing terms. Risk elements include non accrual loans, past due and
restructured loans, potential problem loans, loan concentrations and other real
estate.
Non-performing assets include loans that are not accruing interest (non-accruing
loans) as a result of principal or interest being in default for a period of 90
days or more. When a loan is classified as non-accrual, interest accruals
discontinue and all past due interest is reversed and charged against current
income. Until the loan becomes current, any payments received from the borrower
are applied to outstanding principal until such time as management determines
that the financial condition of the borrower and other factors merit recognition
of such payments as interest.
The following table sets forth information concerning the Company's
non-performing assets as of the dates indicated:
(Dollars in Thousands)
- ---------------------------------------------------------
December 31, 1996 1995
- ---------------------------------------------------------
Non-accrual loans $669 $78
Non-accrual loans to total loans 0.68% 0.13%
Non-performing assets to total assets 0.50% 0.30%
Allowance for possible loan losses as a
percentage of non-performing loans 103.02% 165.29%
- ----------------------------------------------------------
The Company attempts to minimize overall credit risk through loan
diversification and its loan approval procedures. The Company's due diligence
begins at the time a borrower and the Company begin to discuss the origination
of a loan. Documentation, including a borrower's credit history, materials
establishing the value and liquidity of potential collateral, the purpose of the
loan, the source and timing of the repayment of the loan, and other factors are
analyzed before a loan is submitted for approval. Loans made are also subject to
periodic review.
The Company's non-accrual loans increased by $591 thousand from year end 1995 to
$669 thousand at December 31, 1996. This increase was primarily attributable to
the addition of nine loans being placed on non-accrual status during the year,
while the Company's one non-accrual loan in 1995 was charged off. At December
31, 1996, $191 thousand in loans were past due greater than 90 days but still
accruing interest.
The interest income that would have been recorded had these loans performed
under the original contract terms was not material for the years ended December
31, 1995 and 1994 and was $61 thousand for the year ended December 31, 1996.
At the dates indicated in the above table, there were no concentration of loans
exceeding 10% of the Company's total loans and the Company had no foreign loans.
Loans not included in past due, nonaccrual or restructured categories, but where
known information about possible credit problems causes management to be
uncertain as to the ability of the borrowers to comply with the present loan
repayment terms over the next six months, totaled $513 thousand at December 31,
1996.
ALLOWANCE FOR LOAN LOSSES
The Company attempts to maintain an allowance for loan losses at a sufficient
level to provide for potential losses in the loan portfolio. Loan losses are
charged directly to the allowance when they occur and any recovery is credited
to the allowance. Risks within the loan portfolio are analyzed on a continuous
basis by the Company's officers, by outside, independent loan review auditors
and by the Company's Audit Committee. A risk system, consisting of multiple
grading categories, is utilized as an analytical tool to assess risk and
appropriate reserves. Along with the risk system, management further evaluates
risk characteristics of the loan portfolio under current and anticipated
economic conditions and considers such factors as the financial condition of the
borrower, past and expected loss experience, and other factors management feels
deserve recognition in establishing an appropriate reserve. These estimates are
reviewed at least quarterly, and, as adjustments become necessary, they are
realized in the periods in which they become known. Additions to the allowance
12
<PAGE>
Unity Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
are made by provisions charged to expense and the allowance is reduced by net
charge-offs (i.e., loans judged to be uncollectible and charged against the
reserve, less any recoveries on such loans). Although management attempts to
maintain the allowance at a level deemed adequate, future additions to the
allowance may be necessary based upon changes in market conditions. In addition,
various regulatory agencies periodically review the Company's allowance for loan
losses. These agencies may require the Company to take additional provisions
based on their judgments about information available to them at the time of
their examination.
The Company's allowance for possible loan losses totaled $886 thousand, $562
thousand and $380 thousand at December 31, 1996, 1995 and 1994, respectively.
The increases in the allowance are due to the continued increase in the
Company's total loan portfolio.
The following is a summary of the reconciliation of the allowance for loan
losses for the years ended years ended December 31, 1996, 1995 and 1994:
Analysis of the Allowance for Loan Losses
(Dollars in Thousands)
- ----------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- ----------------------------------------------------------
Balance at Beginning of Year $562 $380 $302
Charge-offs
Real estate 0 49 45
Installment 6 1 10
Commercial 44 0 28
Lease financing 42 0 0
- ----------------------------------------------------------
Total charge offs 92 50 83
- ----------------------------------------------------------
Recoveries
Real estate 0 3 0
- ----------------------------------------------------------
Total recoveries 0 3 0
- ----------------------------------------------------------
Total net charge offs 92 47 83
- ----------------------------------------------------------
Provision charged to expense 416 229 161
- ----------------------------------------------------------
Balance of allowance at end of year $886 $562 $380
- ----------------------------------------------------------
Ratio of net charge-offs to average
loans outstanding 0.12% 0.11% 0.26%
- ----------------------------------------------------------
Ratio of allowance to loans
outstanding 0.91% 0.95% 1.04%
- ----------------------------------------------------------
The following table sets forth, for each of the Company's major lending areas,
the amount and percentage of the Company's allowance for loan losses
attributable to such category, and the percentage of total loans represented by
such category, as of the periods indicated:
Allocation of the Allowance for Loan Losses
(Dollars in Thousands)
<TABLE>
- --------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
% of % of % of
(Dollars in Thousands) Amount All loans Amount All loans Amount All loans
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance Applicable to:
Commercial and industrial $152 18.4% $ 96 15.4% $ 62 19.1%
Real Estate:
Nonresidential properties 336 42.6% 187 39.9% 166 41.2%
Residential properties 247 23.5% 92 27.2% 123 26.2%
Construction 82 10.5% 121 9.7% 11 3.5%
Lease financing 4 0.0% 1 0.1% 3 0.9%
Consumer 65 5.0% 65 7.7% 15 9.1%
- --------------------------------------------------------------------------------
Total $886 100.0% $562 100.0% $380 100.0%
- --------------------------------------------------------------------------------
</TABLE>
INVESTMENT SECURITIES
The Company maintains an investment portfolio to fund increased loans or
decreased deposits and other liquidity needs and to provide an additional source
of interest income. The portfolio is composed of U.S. Treasury securities,
obligations of U.S. Government and government sponsored agencies, selected
municipal and state obligations, collateralized mortgage obligations and
corporate fixed income securities.
13
<PAGE>
Unity Bancorp, Inc. and Subsidiary
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Management determines classification of securities at the time of purchase.
Securities classified as available for sale may be sold as part of the overall
asset/liability management process and are stated at fair market value with
unrealized gains and losses reported as a separate component to shareholders'
equity, net of taxes. Securities held to maturity are based on management's
intent and the Company's ability to hold them to maturity. Securities held to
maturity are stated at cost, adjusted for unamortized purchase premiums and
discounts.
At December 31, 1996 $26.0 million of the Company's investment securities were
classified as held to maturity and $11.2 million were classified as available
for sale compared to $19.9 and $16.3 a year ago.
At December 31, 1996, total investment securities were $37.1 million, an
increase from total investment securities of $36.2 million at December 31, 1995,
which was an increase from total securities of $30.5 million at December 31,
1994. The increases in the Company's investment securities for the year ended
December 31, 1996 is a result of the Company's deposit inflow exceeding funding
necessary for new loan originations.
In connection with implementing new accounting guidance issued in November 1995,
the Company reassessed the classification of its investment securities. During
December 1995, the Company transferred securities held to maturity with a
carrying value of $15.9 million and an unrealized gain of $146 thousand to
available for sale and transferred $6.9 million with an unrealized loss of $89
thousand from available for sale to held to maturity. The unrealized loss is
amortized on a security by security basis.
A comparative summary of securities available for sale and held to maturity at
December 31, 1996 and 1995 is as follows:
SECURITIES
(Dollars in Thousands)
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale
US Treasury $ 351 $ 352 $ 1,964 $ 1,977
US government agencies 7,460 7,433 7,504 7,564
US government sponsored agencies and corporations 0 0 706 720
State and municipal 874 874 1,360 1,365
Other 2,489 2,494 4,624 4,678
- -----------------------------------------------------------------------------------------------------------------------------------
Total $11,174 $11,153 $16,158 $16,304
- -----------------------------------------------------------------------------------------------------------------------------------
Held to maturity
US government agencies $ 7,208 $ 7,190 $ 6,773 $ 6,765
US government sponsored agencies and corporations 10,011 9,461 3,988 3,500
Other 8,781 8,596 9,096 8,999
- -----------------------------------------------------------------------------------------------------------------------------------
Total $26,000 $25,247 $19,857 $19,264
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Unity Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
CONTRACTUAL MATURITY DISTRIBUTION OF SECURITIES
(Dollars in Thousands)
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Amortized Market Average Amortized Market Average
Cost Value Rate Cost Value Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Available for Sale
US Treasury
Under 1 year $ 351 $ 352 5.93% $ 1,611 $ 1,621 5.93%
1-5 years 0 0 0.00% 352 356 5.93%
US government agencies
1-5 years 0 0 0.00% 706 720 6.80%
US government sponsored agencies
Under 1 year 2,501 2,505 6.29% 7,712 7,772 6.70%
1-5 years 4,959 4,928 5.71% 499 511 7.90%
State and municipal
Under 1 year 874 874 3.92% 1,360 1,365 7.21%
Other
Under 1 year 2,024 2,029 5.92% 1,000 1,000 5.74%
1-5 years 0 0 0.00% 2,547 2,588 6.38%
Over 10 years 465 465 6.69% 371 371 6.92%
- -----------------------------------------------------------------------------------------------------------------------------------
Total $11,174 $11,153 5.78% $16,158 $16,304 6.61%
- -----------------------------------------------------------------------------------------------------------------------------------
Held to maturity
US government agencies
Over 10 years $ 7,207 $ 7,190 6.17% $ 6,773 $ 6,764 6.70%
US government sponsored agencies
1-5 years 5,242 5,241 6.02% 1,239 1,216 5.05%
5-10 years 3,520 3,361 6.03% 1,500 1,382 4.43%
Over 10 years 1,250 859 3.57% 1,250 903 2.74%
Other
1-5 years 670 670 6.20% 667 667 5.86%
Over 10 years 8,111 7,926 6.11% 8,428 8,332 6.17%
- -----------------------------------------------------------------------------------------------------------------------------------
Total $26,000 $25,247 5.98% $19,857 $19,264 5.93%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
DEPOSITS
Deposits are the Company's primary source of funds. The Company experienced a
growth in deposit balances of $42.6 million, or 38.3%, to $153.6 million at
December 31, 1996, from $111.0 million at December 31, 1995. Deposits increased
by $40.3 million, or 57.0%, to $111.0 million at December 31, 1995 from $70.7
million at December 31, 1994. This growth was accomplished through the Company's
expansion through its new branches, its emphasis on customer service,
competitive rate structures and selective marketing. The Company attempts to
establish a comprehensive relationship with its business borrowers, seeking
deposits as well as lending relationships. This approach has helped the Company
increase its non-interest bearing deposits. From December 31, 1994 to December
31, 1996, the Company's non-interest bearing demand deposits increased from $9.2
million, or 12.9% of total deposits to $31.4 million, or 20.4%, of total
deposits, an increase of $22.2 million, or 242%. In addition, the Company's time
deposits increased from $28.1 million at December 31, 1994, to $75.9 million at
December 31, 1996, an increase of $47.8 million, or 170%. The Company has no
foreign deposits, nor are there any material concentrations of deposits.
15
<PAGE>
Unity Bancorp, Inc. and Subsidiary
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The following table sets forth the average amounts of various types of deposits
for each of the periods indicated:
(Dollars in Thousands)
- -------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Amount % Amount % Amount %
- -------------------------------------------------------------------------------
Average Balance Deposits:
NOW deposits $ 13,664 10.6% $10,665 12.2% $ 6,288 9.8%
Savings deposits 23,401 18.1% 20,677 3.7% 23,467 36.6%
Money market deposits 6,883 5.3% 5,277 6.0% 3,595 5.6%
Time deposits 63,353 49.1% 38,781 4.5% 23,555 36.9%
Demand deposits 21,797 16.9% 11,887 3.6% 7,134 11.1%
- -------------------------------------------------------------------------------
Total $129,098 100.0% $87,287 100.0% $64,039 100.0%
- -------------------------------------------------------------------------------
The Company does not actively solicit short-term deposits of $100,000 or more
because of the liquidity risks posed by such deposits. The following table
summarizes the maturity distribution of certificates of deposits of
denominations of $100,000 or more as of December 31, 1996.
(Dollars in Thousands)
- ---------------------------------------------
Time Deposits ($100,000 and over)
Three months or less $6,930
Over three months through six months 3,650
Over six months through twelve months 3,021
Over twelve months 200
- ---------------------------------------------
Total $13,801
- ---------------------------------------------
INTEREST RATE SENSITIVITY ANALYSIS
The principal objective of the Company's asset and liability management function
is to (i) evaluate the interest-rate risk included in certain balance sheet
accounts; (ii) determine the level of risk appropriate given the Company's
business focus, operating environment, capital, and liquidity requirements;
(iii) establish prudent asset concentration guidelines; and (iv) manage the risk
consistent with Board approved guidelines. The Company seeks to reduce the
vulnerability of its operations to changes in interest rates and to manage the
ratio of interest-rate sensitive assets to interest-rate sensitive liabilities
within specified maturities or repricing dates. The Company's actions in this
regard are taken under the guidance of the Asset/Liability Committee (ALCO) of
the Board of Directors. The ALCO generally reviews the Company's liquidity, cash
flow needs, maturities of investments, deposits and borrowings and current
market conditions and interest rates.
One of the monitoring tools used by the ALCO is an analysis of the extent to
which assets and liabilities are interest rate sensitive and measures the
Company's interest rate sensitivity "gap". An asset or liability is said to be
interest rate sensitive within a specific time period if it will mature or
reprice within that time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds interest rate sensitive assets. Accordingly,
during a period of rising rates, a negative gap may result in the yield on the
institution's assets increasing at a slower rate than the increase in the cost
of interest-bearing liabilities. Conversely, during a period of falling interest
rates, an institution with a negative gap would experience a repricing of its
assets at a slower rate than its interest-bearing liabilities which,
consequently, may result in its net interest income growing.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at the periods indicated which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods presented. Except as noted, the amount of
assets and liabilities which reprice or mature during a particular period were
determined in accordance with the earlier of the term to repricing or the
contractual terms of the asset or liability. The Company's loan prepayment
assumptions are based upon actual historic prepayment rates.
16
<PAGE>
Unity Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
(Dollars in Thousands)
- ------------------------------------------------------------------------------
December 31, 1996
0-3 Mo 3-12 Mo 1-5 Yrs 5+Yrs
- -------------------------------------------------------------------------------
Assets
Securities $ 16,461 $ 23,188 $ 36,811 $ 37,174
Fed Funds\Cash Investments 20,673 22,944 23,521 23,521
Commercial Loans (Fixed) 940 5,022 26,249 26,413
Commercial Loans (Variable) 40,198 40,198 40,198 40,198
Home Equity Loans (Fixed) 6 24 64 2,363
Home Equity Loans (Variable) 6,193 6,193 6,193 6,193
Consumer Loans 116 417 852 967
SBA Loans (Variable) 12,947 12,947 12,947 12,947
Purchased Mortgages 0 4,536 4,536 4,536
Deposit Loans 3,829 4,060 4,279 4,295
- -------------------------------------------------------------------------------
Total Interest Bearing Assets 101,363 119,529 155,650 158,607
- -------------------------------------------------------------------------------
Liabilities
Certificates Of Deposit 18,549 68,056 73,115 76,579
Money Market Deposit Accounts 8,637 8,637 8,637 8,637
Savings Accounts 10,146 10,146 10,146 10,146
Now Accounts 12,677 12,677 12,677 12,677
Money Market Savings Accounts 14,830 14,830 14,830 14,830
- -------------------------------------------------------------------------------
Total Interest Bearing Liabilities 64,839 114,346 119,405 122,869
- -------------------------------------------------------------------------------
Cumulative Sensitivity Gap $ 36,524 $ 5,183 $ 36,245 $ 35,738
- -------------------------------------------------------------------------------
OPERATING, INVESTING AND FINANCING CASH FLOWS
As of December 31, 1996, cash and cash equivalents increased $8.8 million to
$33.4 million, compared with an increase of $14.6 million during the prior year.
Net cash used in operating activities decreased $355.7 thousand primarily due to
an increase in gain on loans sold associated with the Company's Small Business
Administration loan sales. Cash used in investing activities increased to $40.5
million compared with $27.5 million used in 1995, reflecting the Company's
increase in loans. Net cash provided by financing activities totaled $49.6
million as of December 31, 1996 compared to $41.6 million provided a year
earlier, primarily attributed to the issuance of common stock totaling $5.4
million.
For the year ended December 31, 1995, cash and cash equivalents increased $14.6
million to $24.7 million, compared with a decrease of $5 million during the
prior year. Net cash provided by operating activities decreased $433 thousand
primarily due to an increase in gain on sale of loans. Cash used in investing
activities increased to $27.5 million compared with $18.3 million used in 1994,
reflecting the Company's increase in the loan and securities portfolio. Net cash
provided in financing activities totaled $41.6 million in 1995 compared with
$12.1 million provided a year earlier as the Company increased deposits through
the addition of two branches.
LIQUIDITY
The Company's liquidity is a measure of its ability to fund loans, withdrawals
or maturities of deposits and other cash outflows in a cost-effective manner.
The Company's principal sources of funds are deposits, scheduled amortization
and prepayments of loan principal, sales and maturities of investment securities
and funds provided by operations. While scheduled loan payments and maturing
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The Company's total deposits equaled $153.6 million, $111.0 million and $70.7
million as of December 31, 1996, 1995 and 1994, respectively. The increase in
funds provided by deposit inflows during these years has been more than
sufficient to provide for the Company's lending demand.
Through the Company's investment portfolio the Company has generally sought to
obtain a safe yet slightly higher yield than would have been available to the
Company as a net seller of overnight Federal Funds while still maintaining
liquidity. Through its investment portfolio, the Company also attempts to manage
its maturity gap by seeking maturities of investments which coincide as closely
as possible with maturities of deposits. The Company's investment portfolio also
includes securities available for sale to provide liquidity for anticipated loan
demand and other liquidity needs.
17
<PAGE>
Unity Bancorp, Inc. and Subsidiary
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Although the Company has traditionally been a net "seller" of Federal Funds (or
overnight loans to large banks), the Company does maintain lines of credit with
the Federal Home Loan Bank of New York, Summit Bank and PNC Bank for "purchase"
of Federal Funds in the event that temporary liquidity needs arise.
Management believes that the Company's current sources of funds provide adequate
liquidity for the current cash flow needs of the Company.
CAPITAL
A significant measure of the strength of a financial institution is its capital
base. The Company's federal regulators have classified and defined capital into
the following components: (1) Tier I capital, which includes tangible
shareholders' equity for common stock and qualifying preferred stock, and (2)
Tier II capital, which includes a portion of the allowance for possible loan
losses, certain qualifying long-term debt and preferred stock which does not
qualify for Tier I capital. Minimum capital levels are regulated by risk-based
capital adequacy guidelines which require an institution to maintain certain
capital as a percent of assets and certain off-balance sheet items adjusted for
pre defined credit risk factors (risk-adjusted assets.) An institution is
required to maintain, at a minimum, Tier I capital as a percentage of
risk-adjusted assets of 4.0% and combined Tier I and Tier II capital as a
percentage of risk-adjusted assets of 8.0%.
In addition to the risk-based guidelines, the Company's regulators require that
a bank which meets the regulator's highest performance and operation standards
maintain a minimum leverage ratio (Tier I capital as a percentage of tangible
assets) of 3%. For those institutions with higher levels of risk or that are
experiencing or anticipating significant growth, the minimum leverage ratio will
be proportionately increased. Minimum leverage ratios for each institution are
evaluated through the ongoing regulatory examination process.
The following table summarizes the risk-based and leverage capital ratios for
the Company at December 31, 1996, as well as the required minimum regulatory
capital ratios:
- -------------------------------------------------------------------------------
Minimum Regulatory
December 31, 1996 Requirements
- -------------------------------------------------------------------------------
Risk-based Capital:
Tier I capital ratio 16.43% 4.00%
Total capital ratio 17.24% 8.00%
Leverage ratio 11.09% 3.00-5.00%
- -------------------------------------------------------------------------------
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements of the Company and notes thereto, presented elsewhere
herein, have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Company
are monetary. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company prospectively adopted Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114) effective
January 1, 1995. As defined in SFAS 114, a loan is impaired when based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. SFAS 114 requires that the impairment of a loan be based on the
loan's effective interest rate. Impairment can also be measured based on a
loan's observable market price or the fair value of the collateral, if the loan
is collateral dependent. If the measure of the impaired loan is less than the
recorded investment in the loan, the Company establishes a valuation allowance,
or adjusts existing valuation allowances, with a corresponding charge or credit
to the provision for possible loan losses. The effect of adopting this new
accounting standard was not material.
In November 1995, the Financial Accounting Standards Board issued a special
report "A Guide to Implementation of Statement No. 115 on Accounting for Certain
Investments in Debt and Equity Securities." This special report allowed a
company to make a one-time reclassification of securities within investment
categories without tainting the classification of other securities remaining
within the categories. During December 1995, the Company transferred securities
held to maturity with a carrying value of approximately $15,920,000 and an
unrealized gain of approximately $145,800 to
18
<PAGE>
Unity Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
available for sale. The company also transferred securities available for
sale of approximately $6,913,000 and an unrealized loss of $89,000 to held to
maturity. The unrealized loss is being amortized on a security by security
basis.
The Company adopted Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" effective in 1995. The
statement requires that the Company disclose estimated fair values for its
financial instruments. The fair value estimates are made at a discrete point in
time based upon relevant market information and information about the financial
instruments.
In October 1995 the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 123. "Accounting for Stock-Based
Compensation" (SFAS 123). This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. SFAS 123
encourages all entities to adopt the "fair value based method" of accounting for
employee stock compensation plans. However, SFAS 123 also allows an entity to
continue to measure compensation cost under such plans using the "intrinsic
value based method." The accounting requirements of this statement are effective
for transactions entered into in fiscal years that begin after December 15,
1995. The Company does not intend to apply the fair value based method, but the
Company's financial statements in 1996 and thereafter will include the
disclosure required by SFAS 123. Such disclosures include net income and
earnings per share as if the fair value based method had been applied.
On June 28, 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings.
Under the financial-components approach, after a transfer of financial assets,
an entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished. The financial-components
approach focuses on the assets and liabilities that exist after the transfer.
Many of these assets and liabilities are components of financial assets that
existed prior to the transfer. If a transfer does not meet the criteria for a
sale, the transfer is accounted for as a secured borrowing with pledge of
collateral.
It is important to note that this Statement extends the "available-for-sale" or
"trading" approach in SFAS 115, Accounting for Certain Investments in Debt and
Equity Securities, to non-security financial assets that can contractually be
prepaid or otherwise settled in such a way that the holder of the asset would
not recover substantially all of its recorded investment. Thus, non-security
financial assets (no matter how acquired) such as loans, other receivables,
interest-only strips or residual interests in securitization trusts (for
example, tranches subordinate to other tranches, cash reserve accounts or rights
to future interest from serviced assets that exceed contractually specified
servicing fees) that are subject to prepayment risk that could prevent recovery
of substantially all of the recorded amount are to be reported at fair value
with the change in fair value accounted for depending on the asset's
classification as "available-for-sale" or "trading." The Statement also amends
SFAS 115 to prevent a security from being classified as held-to-maturity if the
security can be prepaid or otherwise settled in such a way that the holder of
the security would not recover substantially all of its recorded investment.
This Statement requires that a liability be derecognized if and only if either
(a) the debtor pays the creditor and is relieved of its obligation for the
liability or (b) the debtor is legally released from being the primary obligor
under the liability either judicially or by the creditor. Therefore, a liability
is not considered extinguished by an in-substance defeasance.
This Statement provides implementation guidance for accounting for (1)
securitizations, (2) transfers of partial interests, (3) servicing of financial
assets, (4) securities lending transactions, (5) repurchase agreements, (6) loan
syndications and participations, (7) risk participations in banker's
acceptances, (8) factoring arrangements, (9) transfers of receivables with
recourse, (10) transfers of sales-type and direct financing lease receivables,
and (11) extinguishments of liabilities.
A number of existing FASB Statements are superseded or amended by SFAS 125. SFAS
125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Also, the extension of the SFAS 115 approach to certain non-security financial
assets and the amendment to SFAS 115 is effective for financial assets held on
or acquired after January 1, 1997. Reclassifications that are necessary because
of the amendment do not call into question an entity's intent to hold other debt
securities to maturity in the future. The Company, at this time, does not
believe that SFAS 125 will have a significant impact on the consolidated
financial position or results of operations in 1997.
19
<PAGE>
Unity Bancorp, Inc. and Subsidiary
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Unity Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Unity Bancorp,
Inc. (a New Jersey corporation) and subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Unity Bancorp, Inc. and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
/S/ Arthur Andersen LLP
Roseland, New Jersey
January 22, 1997
20
<PAGE>
Unity Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996 1995
- ----------------------------------------------------------------------------
Assets
Cash and due from banks $15,848,021 $17,064,858
Federal funds sold 17,600,000 7,625,000
- ----------------------------------------------------------------------------
Total cash and cash equivalents (Note 2 and 12) 33,448,021 24,689,858
Securities (Notes 2, 3 and 12)
Available for sale (at market value) 11,152,967 16,304,282
Held to maturity (aggregate market value
of $25,246,902 and $19,264,315
in 1996 and 1995, respectively) 25,999,907 19,856,743
- ----------------------------------------------------------------------------
Total securities 37,152,874 36,161,025
Loans (including loans held for sale of
$2,041,650 and $3,515,561
in 1996 and 1995, respectively)
(Notes 2, 4, 5 and 12) 97,847,453 59,108,042
Less: Unearned income 19,544 49,278
Less: Allowance for possible loan losses 886,465 561,931
- ----------------------------------------------------------------------------
Net loans 96,941,444 58,496,833
Premises and equipment, net (Notes 2 and 6) 3,103,931 1,094,043
Accrued interest receivable 1,052,809 858,060
Other assets (Note 8) 988,597 504,221
- ----------------------------------------------------------------------------
Total Assets $172,687,676 $121,804,040
============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (Note 12)
Demand
Noninterest bearing $ 31,385,323 $118,662,191
Interest bearing 21,282,010 19,345,467
Savings 24,976,839 22,202,038
Time (includes deposits $100,000 and over
of $13,801,000 and $6,706,000
in 1996 and 1995, respectively) 75,910,888 50,787,928
- ----------------------------------------------------------------------------
TOTAL DEPOSITS 153,555,060 110,997,624
Subordinated debt (Notes 7) - 1,510,000
Obligation under capital lease (Note 9) 380,275 -
Accrued interest payable 533,695 391,525
Accrued expenses and other liabilities 228,645 428,482
- ----------------------------------------------------------------------------
TOTAL LIABILITIES 154,697,675 113,327,631
- ----------------------------------------------------------------------------
Commitments and contingencies (Note 9)
Shareholders' equity (Notes 1, 7 and 10)
Common stock, no par value, 2,500,000 shares
authorized; 1,964,113 and 1,204,560 shares
issued and outstanding
in 1996 and 1995, respectively 16,867,120 7,371,889
Retained earnings 1,183,357 1,070,573
Unrealized holding (loss) gain on securities
available for sale, net of tax benefit (60,476) 33,947
- ----------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 17,990,001 8,476,409
- ----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $172,687,676 $121,804,040
============================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-21-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest on loans (Note 2) $ 7,731,561 $ 4,781,664 $ 2,962,336
Interest on securities 2,616,179 2,696,182 1,881,830
Interest on Federal funds sold 511,894 291,638 93,402
- -------------------------------------------------------------------------------------------------------
Total interest income 10,859,634 7,769,484 4,937,568
INTEREST EXPENSE 4,755,958 3,333,866 1,829,989
- -------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 6,103,676 4,435,618 3,107,579
Provision for possible loan losses (Note 2) 416,456 228,560 160,563
- -------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 5,687,220 4,207,058 2,947,016
- -------------------------------------------------------------------------------------------------------
OTHER INCOME
Service charges on deposits 521,597 294,899 240,329
Net gain (loss) on sale of securities (Note 3) 31,851 (18,999) --
Gain on sale of loans (Note 2) 1,467,664 871,185 247,236
Other income 383,267 238,093 140,851
- -------------------------------------------------------------------------------------------------------
Total other income 2,404,379 1,385,178 628,416
- -------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 2,832,500 1,974,038 1,193,369
Occupancy expense 786,733 237,502 141,995
Special SAIF assessment 370,141 -- --
Other operating expenses (Note 13) 2,413,714 1,766,730 1,265,111
- -------------------------------------------------------------------------------------------------------
Total other expenses 6,403,088 3,978,270 2,600,475
- -------------------------------------------------------------------------------------------------------
Income before provision for income taxes 1,688,511 1,613,966 974,957
Provision for income taxes (Notes 2 and 8) 644,078 609,031 219,007
- -------------------------------------------------------------------------------------------------------
NET INCOME $ 1,044,433 $ 1,004,935 $ 755,950
- -------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE (Note 2) $ .74 $ .83 $ .67
- -------------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding (Note 2) 1,419,855 1,203,774 1,126,193
- -------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-22-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Holding
Gain (Loss)
Retained on Securities Total
Common Earnings Available Shareholders'
Stock (Deficit) for Sale Equity
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $ 5,493,784 $ (461,118) $ - $ 5,032,666
Issuance of common stock,
net of offering expenses 1,858,105 - - 1,858,105
Net income - 1994 - 755,950 - 755,950
Unrealized loss on securities
available for sale, net of taxes - - (286,529) (286,529)
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 7,351,889 294,832 (286,529) 7,360,192
Cash dividend - $.19 per share - (229,194) - (229,194)
Issuance of common stock 20,000 - - 20,000
Net income - 1995 - 1,004,935 - 1,004,935
Unrealized gain on securities available
for sale, net of taxes - - 320,476 320,476
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 7,371,889 1,070,573 33,947 8,476,409
Cash dividend - $.18 per share - (359,011) - (359,011)
Stock dividend - 5% 569,922 (572,638) (2,716)
Issuance of common stock, net of
offering expenses (Note 7) 5,405,309 - - 5,405,309
Subordinated debt conversion (Note 7) 3,520,000 - - 3,520,000
Net income - 1996 - 1,044,433 - 1,044,433
Unrealized loss on securities available
for sale, net of taxes - - (94,423) (94,423)
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 16,867,120 $1,183,357 $ (60,476) $ 17,990,001
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
-23-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 1,044,433 $ 1,004,935 $ 755,950
Adjustments to reconcile net income to net
cash provided by operating activities -
Provision for possible loan losses 416,456 228,560 160,563
Depreciation and amortization 318,447 209,278 155,504
(Gain) loss on sale of premises and equipment -- (1,033) 4,027
Net (gain) loss on sale of securities (31,851) 18,999 --
Gain on sale of loans (1,467,664) (871,185) (247,236)
Amortization of securities premiums, net 52,062 47,919 29,649
Deferred tax benefit (78,398) (69,493) (68,229)
Increase in accrued interest receivable (194,749) (205,396) (241,016)
Increase in other assets (356,830) (89,775) (54,912)
Increase in accrued interest payable 142,170 257,906 58,374
(Decrease) increase in accrued expenses and other liabilities (199,836) (30,804) 380,439
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (355,760) 499,911 933,113
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 1,234,435 501,779 --
Purchases of securities held to maturity (8,029,867) (14,081,604) (10,057,477)
Purchases of securities available for sale (8,448,191) (237,700) (2,490,000)
Maturities and principal payments on securities held to maturity 1,883,254 8,333,727 5,047,612
Maturities and principal payments on securities available for sale 12,190,938 266,097 312,999
Proceeds from sale of loans 14,906,898 10,853,327 3,222,107
Net increase in loans (52,300,301) (32,693,256) (14,276,824)
Capital expenditures (1,934,261) (449,995) (66,066)
Proceeds from sale of premises and equipment -- 9,500 20,000
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (40,497,095) (27,498,125) (18,287,649)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase in deposits 42,557,436 40,302,577 11,107,920
Decrease in other borrowed funds -- -- (905,036)
Proceeds from issuance of subordinated debt 2,010,000 1,510,000 --
Proceeds from issuance of common stock, net 5,405,309 20,000 1,858,105
Cash dividends and fractional shares paid (361,727) (229,194) --
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 49,611,018 41,603,383 12,060,989
- --------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 8,758,163 14,605,169 (5,293,547)
Cash and cash equivalents at beginning of year 24,689,858 10,084,689 15,378,236
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 33,448,021 $ 24,689,858 $ 10,084,689
====================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 4,613,788 $ 3,075,960 $ 1,771,615
Income taxes paid 1,152,300 574,511 --
====================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-24-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Unity Bancorp, Inc. (the "Parent Company") and its wholly-owned subsidiary,
First Community Bank (the Bank, or when consolidated with the Parent Company,
the "Company"). All significant intercompany balances and transactions have
been eliminated in consolidation.
Effective December 1, 1994, each certificate representing common shares of
the Bank was exchanged for an equal number of common shares of the Parent
Company and the Parent Company acquired all of the outstanding common shares of
the Bank. This exchange of shares has been accounted for as a reorganization of
entities under common control resulting in no changes to the underlying carrying
amount of assets and liabilities. All prior period amounts have been restated to
give effect for this reorganization.
The Bank was incorporated in the State of New Jersey on July 27, 1990. The
Bank was subsequently granted a charter by the New Jersey Department of Banking
and commenced operations on September 13, 1991 after purchasing the deposits of
two existing branches of another financial institution through the Resolution
Trust Corporation. The Bank currently operates six branches in Hunterdon,
Somerset and Union counties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparations 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
The Company classifies its securities into three categories: (1) held to
maturity, (2) available for sale and (3) trading. Securities which the Company
has the ability and intent to hold until maturity are classified as held to
maturity. These securities are carried at cost adjusted for amortization of
premiums and accretion of discounts.
Securities which are held for an indefinite period 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 and are carried at market value. Differences between a security's amortized
cost and market value is charged/credited directly to shareholders' equity, net
of income tax effect. The cost of securities sold is determined on a specific
identification basis. Gains and losses on sales of securities are recognized in
the statements of income on the date of sale.
The Company has not classified any of its securities as trading.
LOANS
Interest is credited to operations primarily based upon the principal amount
outstanding. When management believes there is sufficient doubt as to the
ultimate collectibility of interest on any loan, the accrual of applicable
interest is discontinued.
Loan origination fees, net of direct loan origination costs, are deferred
and are recognized over the estimated life of the related loans as an adjustment
of the loan yield.
The Company prospectively adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS
114) effective January 1, 1995. As defined in SFAS 114, a loan is impaired when,
based on current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. SFAS 114 requires that the impairment of a loan be based on the
present value of expected future cash flows, net of estimated costs to sell,
discounted at the loans effective interest rate.
-25-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Impairment can also be measured based on a loan's observable market price or
the fair value of collateral, if the loan is collateral dependent. If the
measure of the impaired loan is less than the recorded investment in the loan,
the Company establishes a valuation allowance, or adjusts existing valuation
allowances, with a corresponding charge or credit to the provision for possible
loan losses. The effect of adopting this new accounting standard was not
material.
Loans held for sale are reflected at the lower of aggregate cost or market
value.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained at a level management
considers adequate to provide for potential loan losses. The allowance is
increased by provisions charged to expense and reduced by net charge-offs. The
level of the allowance is based on management's evaluation of potential losses
in the loan portfolio, after consideration of prevailing economic conditions in
the Company's market area. Credit reviews of the loan portfolio, designed to
identify potential charges to the allowance, are made during the year by
management and a loan review consultant.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated useful
lives of the assets.
SALE AND SERVICING SBA LOANS
The Company originates loans to customers under an SBA program that
generally provides for SBA guarantees of 70% to 90% of each loan. The Company
generally sells the guaranteed portion of each loan to a third party and retains
the unguaranteed portion in its own portfolio. A gain is recognized on these
loans through collection on sale of a premium over the adjusted carrying value,
through retention of an ongoing rate differential less a normal service fee
(excess servicing fees) between the rate paid by the borrower to the Company and
the rate paid by the Company to the purchaser, or both.
To calculate the gain (loss) on sale, the Company's investment in an SBA
loan is allocated among the retained portion of the loan, excess servicing
retained and the sold portion of the loan, based on the relative fair market
value of each portion. The gain on the sold portion of the loan is recognized.
The carrying value of the retained portion of the loan is reduced, which
increases the future yield. The excess servicing fees are reflected as an asset
and are classified in loans for financial reporting purposes. The asset is
amortized over an estimated life using a method approximating the effective
interest method; in the event future prepayments are significant and future
expected cash flows are inadequate to cover the unamortized excess servicing
asset, additional amortization would be recognized.
Serviced loans sold to other financial institutions are not included in the
accompanying consolidated balance sheets. The total amount of such loans
serviced, but owned by outside investors, amounted to approximately $26,877,000
and $9,982,000 at December 31, 1996 and 1995, respectively.
INCOME TAXES
Deferred income taxes are recognized for tax consequences of "temporary
differences" by applying enacted statutory tax rates, applicable to future
years, to differences between the financial reporting and the tax basis of
existing assets and liabilities.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks
(including certificates of deposit) and Federal funds sold. Generally, Federal
funds are sold for a one-day period. At December 31, 1996 and 1995 certain
certificates of deposit with maturities in excess of 90 days, amounting to
approximately $5,327,000 and $3,357,000, respectively, were included in cash and
due from banks.
-26-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of
common shares and common share equivalents outstanding during each year adjusted
for the effect of stock options and warrants, if dilutive and material. The
weighted average shares have been adjusted retroactively for the effect of stock
splits and stock dividends.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to conform
with the current year presentation.
3. SECURITIES
Information with regard to the Company's securities portfolio
at December 31, 1996 and 1995 is as follows-
<TABLE>
<CAPTION>
1996 Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
Obligations of U.S. Government agencies $17,219,279 $ 33,162 $(601,566) $16,650,875
Corporate debt securities 495,211 3,529 -- 498,740
Mortgage-backed securities 8,285,417 58,491 (246,621) 8,097,287
- ------------------------------------------------------------------------------------------------------------
Total Held to Maturity $25,999,907 $ 95,182 $(848,187) $25,246,902
- ------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Treasury securities $ 350,593 $ 1,157 $ -- $ 351,750
Obligations of U.S. Government agencies 7,460,618 15,949 (43,418) 7,433,149
Obligations of states & political subdivisions 873,750 630 (325) 874,055
Mortgage-backed securities 101,896 82 -- 101,978
Corporate debt securities 2,024,231 4,804 -- 2,029,035
Federal Home Loan Bank stock 363,000 -- -- 363,000
- ------------------------------------------------------------------------------------------------------------
Total Available for Sale $11,174,088 $ 22,622 $ (43,743) $11,152,967
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1995 Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
Obligations of U.S. Government agencies $10,760,758 $ 8,457 $(504,387) $10,264,828
Mortgage backed securities 9,095,985 1,005 (97,503) 8,999,487
- ------------------------------------------------------------------------------------------------------------
Total Held to Maturity $19,856,743 $ 9,462 $(601,890) $19,264,315
- ------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Treasury securities $ 1,963,616 $ 13,478 $ -- $ 1,977,094
Obligations of U.S. Government agencies 8,210,971 72,757 -- 8,283,728
Obligations of states and political subdivisions 1,360,000 6,147 (810) 1,365,337
Mortgage-backed securities 838,976 13,607 -- 852,583
Corporate debt securities 3,547,211 40,629 -- 3,587,840
Federal Home Loan Bank stock 237,700 -- -- 237,700
- ------------------------------------------------------------------------------------------------------------
Total Available for Sale $16,158,474 $ 146,618 $ (810) $16,304,282
- ------------------------------------------------------------------------------------------------------------
</TABLE>
-27-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The amortized cost and estimated market value of securities at December 31,
1996, by contractual maturity, are shown below.
Estimated
Amortized Market
Cost Value
- ---------------------------------------------------------------------
Held to Maturity
Due after one year through five years $ 6,736,826 $ 6,741,245
Due after five years through ten years 2,519,754 2,359,380
Due after ten years 8,457,910 8,048,990
Mortgage-backed securities 8,285,417 8,097,287
- ---------------------------------------------------------------------
$25,999,907 $25,246,902
- ---------------------------------------------------------------------
Available for Sale
Due in one year or less $ 5,750,010 $ 5,759,685
Due after one year through five years 4,959,182 4,928,304
Federal Home Loan Bank stock 363,000 363,000
Mortgage-backed securities 101,896 101,978
- ---------------------------------------------------------------------
$11,174,088 $11,152,967
- ---------------------------------------------------------------------
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations without call or prepayment
penalties.
In accordance with a special statement issued by the Financial Accounting
Standards Board, the Company transferred securities held to maturity with a
carrying value of approximately $15,920,000 and an unrealized gain of
approximately $145,800 to available for sale in December 1995. The Company also
transferred securities classified as available for sale with an amortized cost
basis of approximately $6,913,000 and an unrealized loss of $89,000 to held to
maturity. The unrealized loss at the date of transfer is being amortized into
interest income over the remaining lives of the securities.
Proceeds from sales of securities were $1,234,435 in 1996 and $501,779 in
1995. Gross gains (losses) on sales of securities were $31,851 and ($18,999) in
1996 and 1995, respectively.
Securities with carrying values aggregating $350,000 were pledged to secure
public deposits at December 31, 1996.
4. LOANS
Loans outstanding by classification as of December 31, 1996 and
1995, are as follows-
1996 1995
---------------------------------------------------------------------
Loans secured by real estate-
Residential properties $23,043,636 $16,033,700
Nonresidential properties 41,673,772 23,612,087
Construction loans 10,222,711 5,705,208
Commercial and industrial loans 17,966,352 9,125,192
Lease financing receivables 17,000 83,193
Loans to individuals 4,923,982 4,548,662
- ---------------------------------------------------------------------
$97,847,453 $59,108,042
- ---------------------------------------------------------------------
As of December 31, 1996 and 1995, the Bank's recorded investment in impaired
loans, defined as nonaccrual loans, was $669,000 and $78,000, respectively, and
the related valuation allowance was $76,000 and $16,000, respectively. This
valuation allowance is included in the allowance for possible loan losses in the
accompanying balance sheet.
-28-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Interest income that would have been recorded during 1996 had these loans
performed under the original contract terms was $61,400. At December 31, 1996,
$191,000 in loans were passed due greater than 90 days but still accruing
interest.
As of December 31, 1996, approximately 77% of the Company's loans were
secured by real estate. As such, a substantial portion of the Company's
borrowers' ability to repay their loans is dependent on the economic environment
of the real estate industry in the Company's market area.
In the ordinary course of business, the Company may extend credit to
officers, directors or their associates. These loans are subject to the
Company's normal lending policy. An analysis of such loans, all of which are
current as to principal and interest payments, is as follows-
Balance at December 31, 1995 $3,953,574
New Loans 5,288,282
Repayment (3,335,736)
- -------------------------------------------------
Balance at December 31, 1996 $5,906,120
- -------------------------------------------------
5. ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is based on estimates. Ultimate
losses may vary from current estimates. These estimates are reviewed
periodically and, as adjustments become known, they are reflected in operations
in the periods in which they become known.
An analysis of the change in the allowance for possible loan losses during
1996, 1995 and 1994 is as follows-
1996 1995 1994
- -------------------------------------------------------------------------------
Balance at beginning of year $ 561,931 $ 380,191 $ 301,673
Provision charged to expense 416,456 228,560 160,563
Loans charged-off (91,922) (50,257) (82,045)
Recoveries on loans previously charged-off -- 3,437 --
- -------------------------------------------------------------------------------
Balance at end of year $ 886,465 $ 561,931 $ 380,191
- -------------------------------------------------------------------------------
6. PREMISES AND EQUIPMENT
The detail of premises and equipment as of December 31, 1996 and 1995 is
as follows-
1996 1995
- ---------------------------------------------------------------------------
Land and buildings $ 1,044,241 $ 631,966
Furniture, fixtures and equipment 1,463,784 732,498
Leasehold Improvements 1,274,621 116,332
- ---------------------------------------------------------------------------
3,782,646 1,480,796
Less Accumulated depreciation and amortization (678,715) (386,753)
- ---------------------------------------------------------------------------
$ 3,103,931 $ 1,094,043
- ---------------------------------------------------------------------------
In 1996, the Company entered into a lease for a new branch facility which
meets the requirements of capital lease accounting. The net present value of the
future minimum lease payments of approximately $380,000 is included in land and
buildings.
7. SHAREHOLDERS' EQUITY
In December 1996, the Company completed a stock offering resulting in the
issuance of 401,500 shares of common stock and, attached to each share, a
nontransferable warrant to purchase one share of common stock at an exercise
price of $15.75 at any time within two years after the offering.
On January 15, 1996, the Company declared a 5% stock dividend and on
September 26, 1996, the Company declared a 5 for 4 stock split effective October
28, 1996. All share and per share information for all periods presented in these
financial statements has been adjusted to give effect for the stock dividend and
the stock split.
-29-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1995, the Company had $1,510,000 in subordinated notes
outstanding. In March 1996, the Company issued an additional $2,010,000 of
subordinated debt. During the course of the year, the Company extended offerings
to redeem all subordinated notes outstanding in exchange for shares of the
Company's common stock at contracted exchange rates of $12.00, $12.50 and $13.50
per share. The aggregate effect of retiring this debt was an increase to capital
of $3,520,000.
On April 29, 1994, the Company's shareholders approved the 1994 Employee
Nonqualified Stock Option Plan (the Employee Plan) and the 1994 Nonemployee
Director Stock Option Plan (the Director Plan). Under the Plans, the Board of
Directors may grant options to officers or nonemployee directors to purchase the
Company's stock. Option prices of the Plans are determined by the Board,
provided however, that the option price of shares may not be less than 85% of
the fair market value of shares at the date of grant. The period during which an
option under either Plan may be exercised varies, but no option may be exercised
after 10 years from the date of grant. As of December 31, 1996, 125,000 shares
are reserved for issuance under the Plans.
Transactions under the plan are summarized as follows-
Number Exercise Price
of Shares Per Share
- ------------------------------------------------------------
Outstanding, December 31, 1995 -- $ -
Options granted 50,199 9.72 - $10.80
Options exercised -- --
Options expired (200) 9.72
- ------------------------------------------------------------
Outstanding, December 31, 1996 49,999 $9.72 - $10.80
- ------------------------------------------------------------
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its Option Plans and accordingly, recorded
compensation expense totaling $12,800 in 1996 for those options that had an
exercise price which was less than the fair market value of the Company's stock
on the grant date. Had compensation costs for the Company's stock option plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with the method of SFAS No. 123, the Company's net income
and income per share would have been reduced to the pro forma amounts indicated
below-
1996
- ------------------------------------
Net income-
As reported $1,044,433
Pro forma 913,747
Income per share
As reported $.74
Pro forma $.64
- -----------------------------------
The fair value of each option grant under both Plans is estimated as of the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1996; dividend yield of 0%,
expected volatility of 47.06%: a risk-free interest rate of 5.21% and an
expected life of 2.6 years.
The following table summarizes information about stock options outstanding
at December 31, 1996-
Number Number
Outstanding at Remaining Exercisable at
Exercise Price December 31, 1996 Contractual Life December 31, 1996
- --------------------------------------------------------------------------------
$10.80 38,125 4 years 38,125
9.72 11,874 4 years 11,874
- --------------------------------------------------------------------------------
$10.54 49,999 49,999
- --------------------------------------------------------------------------------
-30-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
In addition, select key employees and board members are eligible to
participate in the Company's Stock Award Plan. Under the Plan, the Company may
award stock grants to those employees and Board members at its discretion. The
Company will record an expense equal to the sum of (i) the number of shares
granted and (ii) the fair market value of the stock at the date of grant. The
Company granted 3,071 shares to its employees in 1995, resulting in a charge to
operations of approximately $20,000. No shares were granted during 1996. As of
December 31, 1996, the Company has 21,929 shares reserved for issuance under the
Stock Award Plan.
8. INCOME TAXES
The components of the provision for income taxes are as follows-
1996 1995 1994
- ------------------------------------------------------------------------
Federal
Current $ 622,391 $ 596,270 $233,386
Deferred benefit (78,398) (69,493) (68,229)
- ------------------------------------------------------------------------
Total Federal 543,993 526,777 165,157
- ------------------------------------------------------------------------
State 100,085 82,254 53,850
- ------------------------------------------------------------------------
Total provision for income taxes $ 644,078 $ 609,031 $219,007
- ------------------------------------------------------------------------
A reconciliation between the reported income taxes and the amount computed
by multiplying income before taxes by the statutory Federal income tax rate is
as follows-
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
- --------------------------------------------------------------------------------------
Federal income taxes at statutory rate $574,093 $548,748 $ 331,485
State income taxes, net of Federal income tax effect 66,056 54,288 35,541
Utilization of net operating loss carryforwards -- -- (145,299)
Other 3,929 5,995 (2,720)
- ---------------------------------------------------------------------------------------
Provision for income taxes $644,078 $609,031 $ 219,007
- ---------------------------------------------------------------------------------------
</TABLE>
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. The components of the net deferred tax asset at December 31, 1996
and 1995 are as follows-
1996 1995
- -------------------------------------------------------------------------------
Provision for possible loan losses $ 298,274 $ 172,902
Unrealized loss (gain) on securities available for sale 40,317 (22,400)
Other, net (31,577) (2,754)
- --------------------------------------------------------------------------------
$ 307,014 $ 147,748
- --------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
Lease Obligations
The Company leases its headquarters and three of its branch facilities under
operating leases. Future minimum rental payments under these leases, excluding
renewal options, are as follows-
1997 $443,000
1998 428,000
1999 398,000
2000 373,000
2001 373,000
Thereafter 1,440,888
- -------------------------
-31-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company entered into a lease for its Scotch Plains facility which meets
the requirements of capital lease accounting (see Note 6). Future gross lease
obligations total approximately $600,000 and will be paid in monthly
installments through April, 2006.
LITIGATION
The Company may, in the ordinary course of business, become a party to
litigation involving collection matters, contract claims and other legal
proceedings relating to the conduct of its business. In managements judgment,
the consolidated financial position or results of operations of the Company will
not be affected materially by the final outcome of any present legal
proceedings.
COMMITMENTS TO BORROWERS
Commitments to extend credit are legally binding loan commitments with set
expiration dates. They are intended to be disbursed, subject to certain
conditions, upon request of the borrower. The Company was committed to advance
approximately $18,596,000 to its borrowers as of December 31, 1996, which
commitments generally expire within one year.
Standby letters of credit are provided to customers to guarantee their
performance, generally in the production of goods and services or under
contractual commitments in the financial markets. The Company has entered into
standby letters of credit contracts with its customers totaling approximately
$949,000 as of December 31, 1996, which generally expire within one year.
10. REGULATORY CAPITAL
The Parent Company and the 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 Parent Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Parent Company's and the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications 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 Parent Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 1996, that
the Parent Company and the Bank meet all capital adequacy requirements to which
they are subject.
As of December 31, 1996, the most recent notification from the Federal
Reserve Bank categorized the Parent Company as well capitalized and the most
recent notification from the Federal Deposit Insurance Corporation categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Parent Company and
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.
-32-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
- -------------------------------------------------------------------------------
The Parent Company's actual capital amounts and ratios are presented in the
following table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ----------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996-
Total capital
(to Risk Weighted Assets) $18,841,669 17.24% >$8,734,729 >8.00% >$10,929,661 >10.00%
Tier I Capital
(to Risk Weighted Assets) 17,955,204 16.43% >4,371,865 >4.00% >6,557,797 >6.00%
Tier I Capital
(to Average Assets) 17,955,204 11.09% >6,477,699 >4.00% >8,097,123 >5.00%
As of December 31, 1995-
Total capital
(to Risk Weighted Assets) 8,910,486 11.48% >6,210,977 >8.00% >7,763,721 >10.00%
Tier I Capital
(to Risk Weighted Assets) 8,363,171 10.77% >3,105,488 >4.00% >4,658,232 >6.00%
Tier I Capital
(to Average Assets) 8,363,171 7.34% >4,558,615 >4.00% >5,698,268 >5.00%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The Banks actual capital amounts and ratios are presented in the following
table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ----------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996-
Total capital
(to Risk Weighted Assets) $12,355,737 11.32% >$8,733,623 >8.00% >$10,917,028 >10.00%
Tier I Capital
(to Risk Weighted Assets) 11,469,272 10.51% >4,366,811 >4.00% >6,500,217 >6.00%
Tier I Capital
(to Average Assets) 11,469,272 7.09% >6,474,880 >4.00% >8,093,600 >5.00%
As of December 31, 1995-
Total capital
(to Risk Weighted Assets) 8,910,486 11.48% >6,210,977 >8.00% >7,763,721 >10.00%
Tier I Capital
(to Risk Weighted Assets) 8,363,171 10.77% >3,105,488 >4.00% >4,658,232 >6.00%
Tier I Capital
(to Average Assets) 8,363,171 7.34% >4,558,615 >4.00% >5,698,268 >5.00%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
11. EMPLOYEE BENEFIT PLANS
The Bank has a 401(k) savings plan covering substantially all employees.
Under the Plan, an employee can contribute up to 15% of their salary on a tax
deferred basis. The Bank may also make discretionary contributions to the Plan.
The Bank contributed approximately $35,230 and $7,120 to the Plan in 1996 and
1995, respectively.
The Bank does not currently provide any post retirement or post employment
benefits to its employees other than the 401(k) plan.
-33-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" effective in 1995. The
statement requires that the Company disclose estimated fair values for its
financial instruments. The fair value estimates are made at a discrete point in
time based upon relevant market information and information about the financial
instruments.
Because no market exists for a portion of the Company's financial
instruments, fair value estimates are based on judgment regarding a number of
factors. These estimates are subjective in nature and involve some
uncertainties. Changes in assumptions and methodologies may have a material
effect on these estimated fair values. In addition, reasonable comparability
between financial institutions may not be likely due to a wide range of
permitted valuation techniques and numerous estimates which must be made. This
lack of uniform valuation methodologies also introduces a greater degree of
subjectivity to these estimated fair values.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
CASH AND FEDERAL FUNDS SOLD
For those short-term instruments, the carrying value is a reasonable
estimate of fair value.
SECURITIES
For the held to maturity and available for sale portfolios, fair values are
based on quoted market prices or dealer quotes. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
LOANS
The fair value of loans is estimated by discounting the future cash flows
using current market rates.
DEPOSIT LIABILITIES
The fair value of demand deposits and savings accounts is the amount payable
on demand at the reporting date. The fair value of fixed-maturity certificates
of deposit is estimated by discounting the future cash flows using current
market rates.
UNRECOGNIZED FINANCIAL INSTRUMENTS
At December 31, 1996, the Bank had standby letters of credit outstanding of
$949,000. The fair value of these commitments is nominal.
At December 31, 1996, the bank had commitments to extend credit totaling
$18,596,000. The Bank does not charge a fee on these loan commitments and,
consequently, there is no basis to calculate a fair value.
At December 31, 1996, the Bank services loans owned by outside investors in
the amount of $26,877,000 at various service fee rates. The fair value
approximates the present value of service fees charged to the investors, net of
costs to service the loans, under the loan servicing arrangements.
-34-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
The estimated fair value of the Company's financial instruments as of
December 31, 1996 and 1995 is as follows-
<TABLE>
<CAPTION>
1996 1996 1995 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets-
Cash and Federal funds sold $ 33,448,021 $ 33,448,021 $ 24,689,858 $ 24,689,858
Securities held to maturity 25,999,907 25,246,902 19,856,743 19,264,315
Securities available for sale 11,152,967 11,152,967 16,304,282 16,304,282
Loans, net of allowance for possible loan losses 96,941,444 96,670,513 58,496,833 58,428,286
Financial liabilities-
Deposits-
Demand 52,667,333 52,667,333 38,007,658 38,007,658
Savings 24,976,839 24,976,839 22,202,038 22,202,038
Time 75,910,888 75,892,237 50,787,928 50,472,202
- ---------------------------------------------------------------------------------------------------------------
Total deposits $153,555,060 $153,536,409 $110,997,624 $110,681,898
- ---------------------------------------------------------------------------------------------------------------
Subordinated debt -- -- $ 1,510,000 $ 1,510,000
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
13. OTHER OPERATING EXPENSES
The components of other operating expenses for the year ended December 31,
1996, 1995 and 1994 are as follows
1996 1995 1994
- ------------------------------------------------------------------
Professional and other fees $ 315,000 $ 237,000 $ 121,000
Office expenses 615, 000 416,000 267,000
Advertising expense 251,000 141,000 226,000
Communication expense 152,000 130,000 82,000
Bank services 333,000 200,000 148,000
FDIC insurance assessment 182,000 167,000 135,000
Directors fees 276,000 187,000 98,000
Other expenses 289,000 288,000 188,000
- ------------------------------------------------------------------
$2,413,000 $1,766,000 $1,265,000
- ------------------------------------------------------------------
14. CONDENSED FINANCIAL STATEMENTS OF UNITY BANCORP, INC. (PARENT COMPANY ONLY)
Balance Sheets
December 31 1996 1995
- -----------------------------------------------------------------------------
Assets
Cash and due from Banks $ 6,420,351 $ 32,370
Net loans -- 1,412,184
Investment in Bank subsidiary 11,465,350 8,472,069
Other assets 126,329 91,505
- ----------------------------------------------------------------------------
Total assets $18,012,030 $10,008,128
- ----------------------------------------------------------------------------
Liabilities and Shareholders' Equity-
Other liabilities $ 22,029 $ 21,719
Subordinated debt -- 1,510,000
Shareholders' equity 17,990,001 8,476,409
- ----------------------------------------------------------------------------
Total liabilities and shareholders' equity $18,012,030 $10,008,128
- ----------------------------------------------------------------------------
-35-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income Statements
- --------------------------------------------------------------------------------------------------------------
December 31 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income $ 11,125 $ 111,368
Dividends from Bank subsidiary 359,011 292,990
Other income 14,616 --
- --------------------------------------------------------------------------------------------------------------
Total income 384,752 404,358
Interest expense 93,934 123,243
Other expenses 60,195 78,762
- --------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in undistributed income of subsidiary 230,623 202,353
Benefit for income taxes (a) (51,355) (36,255)
- --------------------------------------------------------------------------------------------------------------
Income before equity in
undistributed income of subsidiary 281,978 238,608
Equity in Undistributed Income of Subsidiary 762,455 766,327
- --------------------------------------------------------------------------------------------------------------
Net income $ 1,044,433 $ 1,004,935
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) No Federal income tax is applicable to the dividends and other income
received from the Bank since the Parent Company and the Bank file a consolidated
income tax return.
<TABLE>
<CAPTION>
<S> <C> <C>
Statements of Cash Flows
- --------------------------------------------------------------------------------------------------------------
December 31 1996 1995
- --------------------------------------------------------------------------------------------------------------
Operating activities -
Net income $ 1,044,433 $ 1,004,935
Adjustments to reconcile net income to net cash provided by operating
activities Equity in undistributed income of subsidiary (762,455) (766,327)
Depreciation and amortization 12,759 --
Increase in other assets (47,583) (21,735)
Increase in other liabilities 310 21,719
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 247,464 238,592
- --------------------------------------------------------------------------------------------------------------
Investing activities --
Net decrease (increase) in loans outstanding 1,412,184 (1,412,184)
Additional equity investment in bank subsidiary (2,325,249) --
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (913,065) (1,412,184)
- --------------------------------------------------------------------------------------------------------------
Financing activities -
Net decrease in borrowed funds -- (74,844)
Proceeds from issuance of common stock 5,405,309 --
Proceeds from issuance for subordinated debt 2,010,000 1,510,000
Cash dividends and fractional shares paid (361,727) (229,194)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,053,582 1,205,962
- --------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 6,387,981 32,370
Cash and cash equivalents, beginning of year 32,370 --
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 6,420,351 $ 32,370
- --------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Interest paid $ 108,516 $ 98,822
- --------------------------------------------------------------------------------------------------------------
</TABLE>
-36-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following quarterly financial information for the years ended December
31, 1996, and 1995 are unaudited. However, in the opinion of management, all
adjustments, which include normal recurring adjustments necessary to present
fairly the results of operations for the periods, are reflected. Results of
operations for the periods are not necessarily indicative of the results of the
entire year or any other interim period.
1996 March June September December
31 30 30 31
- --------------------------------------------------------------------------------
Total interest income $2,315,547 $2,633,852 $2,826,894 $3,083,341
Total interest expense 1,050,360 1,085,780 1,268,956 1,350,862
- --------------------------------------------------------------------------------
Net interest income 1,265,187 1,548,072 1,557,938 1,732,479
Provision for possible loan losses 139,483 117,805 107,790 51,378
- --------------------------------------------------------------------------------
Net interest income after
provision for possible loan
losses 1,125,704 1,430,267 1,450,148 1,681,101
Total other income 528,589 521,615 683,411 670,764
Total other expenses 1,440,621 1,662,936 2,006,792 1,936,817
- --------------------------------------------------------------------------------
Net income $ 213,672 $ 288,946 $ 126,767 $ 415,048
- --------------------------------------------------------------------------------
Net income per common share $.15 $.20 $.09 $.29
- --------------------------------------------------------------------------------
1995 March June September December
31 30 30 31
- --------------------------------------------------------------------------------
Total interest income $1,624,421 $1,836,217 $2,075,723 $2,233,123
Total interest expense 611,430 738,629 945,283 1,038,524
- --------------------------------------------------------------------------------
Net interest income 1,012,991 1,097,588 1,130,440 1,194,599
Provision for possible loan losses 65,003 80,502 44,376 38,679
- --------------------------------------------------------------------------------
Net interest income after
provision for possible loan
losses 947,988 1,017,086 1,086,064 1,155,920
Total other income 217,317 407,424 407,890 352,547
Total other expenses 958,527 1,130,460 1,194,614 1,303,700
- --------------------------------------------------------------------------------
Net income $206,778 $294,050 $299,340 $204,767
- --------------------------------------------------------------------------------
Net income per common share $.17 $.24 $.25 $.17
- --------------------------------------------------------------------------------
(a) Includes a special one time SAIF assessment of $370,141.
-37-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
FIRST COMMUNITY BANK BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
First Community Bank Board of Directors
[ A PHOTOGRAPH ]
Robert Van Volkenburgh *
Chairman of the Board
Chief Executive Officer
Total Packaging Corp. &
Best Packaging & Design Corp.
[ A PHOTOGRAPH ]
David Dallas *
Vice Chairman
Chief Executive Officer
Dallas Group of America
[ A PHOTOGRAPH ]
James Hyman *
President/CEO
First Community Bank
[ A PHOTOGRAPH ]
John Fallone
President
The Fallone Organization
[ A PHOTOGRAPH ]
Walter M. Hazard *
President
Atrion Corporation
[ A PHOTOGRAPH ]
Charles S. Loring
Owner
Charles S. Loring, CPA
[ A PHOTOGRAPH ]
Allen Tucker
President
Tucker Enterprises
* Member of Unity Bancorp, Inc. Board of Directors
-38-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
[ A PHOTOGRAPH ]
Robert H. Dallas
President
Dallas Group of America
[ A PHOTOGRAPH ]
Peter P. DeTommaso *
President
Home Owners Heaven, Inc.
[ A PHOTOGRAPH ]
Jeffrey E. Devers
President
The Palladin Group
[ A PHOTOGRAPH ]
John R. O'Brien
Owner
O'Brien Funeral Home
[ A PHOTOGRAPH ]
Peter G. Schoberl
Executive Vice President
First Community Bank
[ A PHOTOGRAPH ]
Samuel Stothoff
President
Samuel Stothoff Company
[ A PHOTOGRAPH ]
Robert J.
van Volkenburgh, Jr., M.D.
Chief Executive Officer
RJV Capital Management, LLC
Chief Financial Officer
Total Packaging Corp.,
Best Packaging & Design Corp. and
J.E. Rhoads & Sons
* Member of Unity Bancorp, Inc. Board of Directors
-39-
<PAGE>
Unity Bancorp, Inc. and Subsidiary
PRODUCTS AND SERVICES
- --------------------------------------------------------------------------------
CHECKING
NJCC Account
Regular Checking
NOW Account
Money Market Checking
Business Checking
Prosperity Checking
SAVINGS
Regular Savings
Money Market Savings
Money Market Deposit
Money Market IRA
Holiday Club Accounts
CERTIFICATES OF DEPOSIT
Regular
Retirement
CONSUMER LOANS
Home Equity Loans
Auto Loans
Personal Loans
Mortgage Loans
BUSINESS LOANS
SBA Loans*
Commercial Loans
Construction Loans
Lines of Credit
Cash Flow Manager
OTHER SERVICES
Safe Deposit Boxes
Certified Checks
Direct Deposit
U.S. Savings Bonds
Traveler's Cheques
Money Orders
Wire Transfers
Night Depository
Notary Public
Public Funds Depository+
Realtor Escrow
Tenant Security
INVESTMENT ALTERNATIVES
Fixed & Variable Rate Tax Deferred Annuities
Mutual Funds
Stocks & Bonds
(offered through FCB Service Co., Inc., a New Jersey State
licensed insurance agency and a wholly owned subsidiary of
First Community Bank, MDS Bankmark and MDS Securities)
* Preferred Lender in New Jersey, Pennsylvania,
New York and Delaware
+ Eligibility Certified under the Governmental Unit Deposit
Protection Act (GUDPA)
FULL SERVICE OFFICES
- --------------------------------------------------------------------------------
Clinton
64 Old Highway 22 o 908 730-7300
Flemington
110 Main Street o 908 782-2000
Linden
628 North Wood Avenue o 908 925-8353
North Plainfield
450 Somerset Street o 908 769-0303
Scotch Plains
2222 South Avenue o 908 233-8009
Springfield
733 Mountain Avenue o 201 258-0111
Union
952 Stuyvesant Avenue o 908 851-9700
24-Hour MAC ATMs available at all offices
<PAGE>
Unity Bancorp, Inc. and Subsidiary
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
FIRST COMMUNITY BANK
MANAGEMENT
James Hyman
President
Chief Executive Officer
Peter G. Schoberl
Executive Vice President
Senior Loan Officer
Michael T. Bono
Senior Vice President
Business Development Officer
Peter Carone
Senior Vice President
Manager, Mortgage Group
Edward Cichone
Senior Vice President
Commercial Loan Officer
Vito A. de'Marsi
Senior Vice President
Commercial Loan Officer
Robert Kesnowski
Senior Vice President
Senior SBA Development Officer
Thomas Maresca
Senior Vice President
Operations Officer
Julie Y. Carlson
Vice President
Treasurer
Walter J. DeMoss
Vice President
Construction Loan Officer
Michael F. Downes
Vice President
Manager, SBA Group
Ruth Green
Vice President
Manager, Flemington
John M. Krivacs
Vice President
Business Development Officer
William H. Metz
Vice President
Manager, Linden
John Nalesnik
Vice President
Manager, Loan Administration
Edward Dalton
Assistant Vice President
SBA Loan Specialist
Maria Garciano
Assistant Vice President
Manager, Springfield
John J. Kauchak
Assistant Vice President
Manager, Deposit Services
Rose M. Phelan
Assistant Vice President
Manager, Scotch Plains
Michael Riccio
Assistant Vice President
Manager, Clinton
James Tumolo
Assistant Vice President
Manager, North Plainfield
Linda B. McDermott
Corporate Secretary
Executive Assistant
Carole Marshall
Assistant Treasurer
Deposit Specialist
Kenneth Selmer
Assistant Treasurer
Credit Analyst
Aleta M. Fusco
Assistant Secretary
Assistant Manager, North Plainfield
Nancy Rathbun
Assistant Secretary
Manager, Loan Services
Leslie Scheiderman
Assistant Secretary
Manager, Loan Compliance
UNITY BANCORP, INC.
Unity Bancorp, Inc. and Subsidiary
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
Administrative Offices
Unity Bancorp, Inc.
64 Old Highway 22
Clinton, New Jersey 08809
Counsel
McCarter & English
Newark, New Jersey
Auditors
Arthur Andersen LLP
Roseland, New Jersey
Stockholder Services
Stockholder address changes or
inquiries regarding stockholder
accounts and stock transfers should
be directed to:
First City Transfer Company
111 Wood Avenue South
Suite 206
Iselin, New Jersey 08830
(908) 205-4517
Investor and Media Inquiries
Copies of the corporation's annual
report on Form 10-K filed with the
Securities and Exchange
Commission are available to each
stockholder free of charge upon
written request. Investor and media inquiries
should be directed to:
James Hyman
Corporate Relations
Unity Bancorp, Inc.
64 Old Highway 22
Clinton, New Jersey 08809
(908) 730-7630
or
L. G. Zangani, Inc.
Financial Public Relations
Penn Plaza
62 Pennsylvania Avenue
Flemington, NJ 08822
(908) 788-9660
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
The Registrant has one subsidiary, First Community Bank.
First Community Bank has a single subsidiary, FCB Investment Company.
EXHIBIT 23
----------
CONSENT OF ARTHUR ANDERSEN LLP
To Unity Bancorp Inc.:
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated January 22, 1997 and to all references to our Firm
into this Form 10-KSB and into Unity Bancorp Inc.'s previously filed
Registration Statement No. 333-20687 on Form S-8. It should be noted that we
have not audited any financial statements of Unity Bancorp Inc. subsequent to
December 31, 1996 or performed any audit procedures subsequent to the date of
our report.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,158,782
<INT-BEARING-DEPOSITS> 13,689,239
<FED-FUNDS-SOLD> 17,600,000
<TRADING-ASSETS> 11,152,967
<INVESTMENTS-HELD-FOR-SALE> 25,999,907
<INVESTMENTS-CARRYING> 25,246,902
<INVESTMENTS-MARKET> 0
<LOANS> 97,847,453
<ALLOWANCE> 886,465
<TOTAL-ASSETS> 172,687,676
<DEPOSITS> 153,555,060
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,142,616
<LONG-TERM> 0
0
0
<COMMON> 16,867,120
<OTHER-SE> 1,122,881
<TOTAL-LIABILITIES-AND-EQUITY> 172,687,676
<INTEREST-LOAN> 7,731,561
<INTEREST-INVEST> 2,616,179
<INTEREST-OTHER> 511,894
<INTEREST-TOTAL> 10,859,634
<INTEREST-DEPOSIT> 4,682,024
<INTEREST-EXPENSE> 4,775,958
<INTEREST-INCOME-NET> 6,103,676
<LOAN-LOSSES> 416,546
<SECURITIES-GAINS> 31,851
<EXPENSE-OTHER> 6,403,088
<INCOME-PRETAX> 1,688,510
<INCOME-PRE-EXTRAORDINARY> 1,688,510
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,419,855
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.74
<YIELD-ACTUAL> 4.47
<LOANS-NON> 669,000
<LOANS-PAST> 191,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 561,931
<CHARGE-OFFS> 91,922
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 886,465
<ALLOWANCE-DOMESTIC> 886,465
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
