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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3282551
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification)
64 OLD HIGHWAY 22, CLINTON, NEW JERSEY 08809
- - ---------------------------------------- ----------
(Address of principal executive offices) (zip code)
(908) 730-7630
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
The number of shares outstanding of each of the registrant's classes of common
equity stock, as of November 15, 1998: Common Stock, No Par Value: 3,136,482
shares outstanding.
Transitional Small Business Disclosure Format (check one):
YES NO X
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<PAGE>
<TABLE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks ........................................................ $ 14,089,358 $ 19,567,200
Federal funds sold ............................................................. 10,600,000 13,050,000
------------ ------------
Total cash and cash equivalents ........................................ 24,689,358 32,617,200
------------ ------------
Securities
Available for sale, at fair value ........................................... 44,577,857 17,409,103
Held to maturity, at amortized cost
(aggregate fair value of $6,256,688 and $23,499,307) ................... 6,529,255 23,899,060
------------ ------------
51,107,112 41,308,163
------------ ------------
Loans (including loans held for sale of $2,140,535 and $2,786,480) ............. 157,025,694 134,196,719
Less: Unearned income ...................................................... 28,551 20,734
Allowance for loan losses ........................................ 1,604,400 1,321,735
------------ ------------
Net loans ........................................................ 155,392,743 132,854,250
------------ ------------
Premises and equipment, net .................................................... 4,524,170 4,268,906
Accrued interest receivable .................................................... 1,457,815 1,347,860
Other assets ................................................................... 1,323,505 1,385,587
------------ ------------
Total assets ........................................................... $238,494,703 $213,781,966
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand
Noninterest Bearing .................................................... $ 45,105,483 $ 41,093,550
Interest bearing ....................................................... 35,263,673 29,897,843
Savings ..................................................................... 34,971,561 31,199,141
Time (includes deposits $100,000 and over of $26,666,773 and $20,297,000) ... 99,865,835 90,223,951
------------ ------------
Total deposits ......................................................... 215,206,552 192,414,485
------------ ------------
Obligation under capital lease ................................................. 311,840 334,634
Accrued interest payable ....................................................... 483,506 492,627
Accrued expenses and other liabilities ......................................... 824,638 549,979
------------ ------------
Total liabilities ...................................................... 216,826,536 193,791,725
------------ ------------
Commitments and contingencies Shareholders' Equity
Common stock, no par value, 7,500,000 shares authorized;
3,097,332 and 2,978,228 issued and outstanding ......................... 18,320,931 17,127,308
Treasury Stock, at cost; 57,595 shares in 1998 .............................. (890,615) 0
Retained earnings ........................................................... 4,173,542 2,901,175
Accumulated other comprehensive income / (loss) ............................. 64,309 (38,242)
------------ ------------
Total Shareholders' Equity ............................................. 21,668,167 19,990,241
------------ ------------
Total liabilities and Shareholders' Equity ............................. $238,494,703 $213,781,966
============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
2
<PAGE>
<TABLE>
UNITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Income
Interest on loans .............................................. $ 3,429,663 $ 3,028,535 $ 9,672,217 $ 8,081,495
Interest on Securities ......................................... 960,526 826,385 2,768,413 2,330,796
Interest on Federal Funds Sold ................................. 143,013 121,775 482,894 530,068
----------- ----------- ----------- -----------
Total interest income .......................................... 4,533,202 3,976,695 12,923,524 10,942,359
----------- ----------- ----------- -----------
Interest expense .................................................. 1,863,348 1,654,987 5,399,170 4,623,217
----------- ----------- ----------- -----------
Net interest income ............................................... 2,669,854 2,321,708 7,524,354 6,319,142
----------- ----------- ----------- -----------
Provision for loan losses ......................................... 197,000 160,400 473,944 395,587
----------- ----------- ----------- -----------
Net interest income after provision for possible loan losses ...... 2,472,854 2,161,308 7,050,410 5,923,555
----------- ----------- ----------- -----------
Other income
Service charges on deposits .................................... 234,983 197,904 667,106 532,913
Gain on sale of loans .......................................... 594,102 304,831 1,659,542 1,081,310
Gain on sale of securities ..................................... 91,088 0 233,483 0
Other income ................................................... 233,048 158,828 620,071 423,639
----------- ----------- ----------- -----------
Total other income ............................................. 1,153,221 661,563 3,180,202 2,037,862
----------- ----------- ----------- -----------
Other expenses
Salaries and employee benefits ................................. 1,304,799 874,590 3,738,354 2,898,892
Occupancy expense .............................................. 227,818 254,602 764,688 780,541
Other operating expenses ....................................... 1,041,642 752,472 3,101,802 2,261,611
----------- ----------- ----------- -----------
Total other expenses ........................................... 2,574,259 1,881,664 7,604,844 5,941,044
----------- ----------- ----------- -----------
Income before taxes ............................................... 1,051,816 941,207 2,625,768 2,020,373
Provision for income taxes ........................................ 388,041 365,373 1,003,246 785,858
----------- ----------- ----------- -----------
Net income ........................................................ $ 663,775 $ 575,834 $ 1,622,522 $ 1,234,515
=========== =========== =========== ===========
Basic earnings per share .......................................... 0.22 0.29 0.54 0.42
Diluted earnings per share ........................................ 0.21 0.28 0.50 0.41
Weighted average shares outstanding ............................... 3,058,941 2,966,414 3,016,593 2,962,338
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
3
<PAGE>
<TABLE>
UNITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net income .................................................... $663,775 $575,834 $1,622,522 $1,234,515
======== ======== ========== ==========
Other comprehensive income
Unrealized gain / (loss) on securities ..................... 126,557 28,898 51,140 (56,674)
Tax Benefit / (Provision) .................................. (46,634) (11,270) (19,433) 22,103
-------- -------- ---------- ----------
Net unrealized gains / (losses) on securities, net of
reclassification adjustment (see disclosure) ............ 79,923 17,628 31,707 (34,571)
-------- -------- ---------- ----------
Cumulative effect of change in accounting principle,
net of tax (see disclosure) ................................ 70,844 70,844
-------- -------- ---------- ----------
Other comprehensive income / (loss), net of tax ............... 150,767 17,628 102,551 (34,571)
-------- -------- ---------- ----------
Comprehensive income .......................................... $814,542 $593,462 $1,725,073 $1,199,944
======== ======== ========== ==========
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Disclosure:
reclassification amount, net of tax
Unrealized holding gains/ (losses)
arising during the period .................................. $136,398 $ 17,628 $ 176,467 $ (34,571)
less: reclassification adjustment for gains
in net income ........................................... 56,475 -- 144,760 --
-------- -------- ---------- ----------
$ 79,923 $ 17,628 $ 31,707 $ (34,571)
======== ======== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
4
<PAGE>
<TABLE>
UNITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (Unaudited)
<CAPTION>
For the period ended
September 30,
------------------------------
1998 1997
------------ --------------
<S> <C> <C>
Operating activities:
Net income ............................................................... $ 1,622,523 $ 1,234,515
Adjustments to reconcile net income to net cash provided by (used in)
(used in) operating activities
Provision for possible loan losses ................................. 473,944 395,587
Depreciation and amortization ...................................... 401,289 392,885
Net gain on sale of securities ..................................... (233,483) 0
Gain on sale of loans .............................................. (1,659,542) (1,081,310)
Amortization of securities premiums, net ........................... 6,693 (6,687)
Decrease (increase) in accrued interest receivable ................. (109,955) (308,384)
Increase in other assets ........................................... 62,082 (94,857)
Increase in accrued interest payable ............................... (9,121) 79,565
Increase in accrued expenses and other liabilities ................. 251,865 206,925
------------ -------------
Net cash provided by (used in) operating activities ........... 806,295 818,239
------------ -------------
Investing activities:
Proceeds from sale of securities ......................................... 10,505,388 0
Net increase in securities ............................................... (19,974,996) (5,039,930)
Proceeds from sale of loans .............................................. 13,466,780 10,702,919
Net increase in loans .................................................... (34,819,675) (39,372,446)
Capital expenditures ..................................................... (666,553) (918,926)
Proceeds from sale of assets ............................................. 10,000 0
------------ -------------
Net cash used in investing activities .............................. (31,479,056) (34,628,383)
------------ -------------
Financing activities:
Increase in deposits ..................................................... 22,792,067 30,325,296
Proceeds from issuance of common stock, net .............................. 1,492,801 256,881
Treasury stock purchases ................................................. (1,189,544) 0
Cash Dividends ........................................................... (350,405) (296,812)
------------ -------------
Net cash provided by financing activities .......................... 22,744,919 30,285,365
------------ -------------
(Decrease) Increase in cash and cash equivalents .............................. (7,927,842) (3,524,779)
Cash and cash equivalents at beginning of year ................................ 32,617,200 33,448,021
------------ -------------
Cash and cash equivalents at end of period .................................... $ 24,689,358 $ 29,923,242
------------ -------------
Supplemental disclosures:
Interest paid ............................................................ $ 5,408,291 $ 4,611,631
Income taxes paid ........................................................ 1,003,028 647,750
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
5
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
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"), and reflect all adjustments and disclosures which
are, in the opinion of management, necessary for a fair presentation of
interim results. All significant intercompany balances and transactions
have been eliminated in consolidation. The financial information has been
prepared in accordance with the Company's customary accounting practices
and has not been audited.
Certain information and footnote disclosures required under generally
accepted accounting principles have been condensed or omitted pursuant to
the SEC rules and regulations. These interim financial statements should be
read in conjunction with the Company's consolidated financial statements
and notes thereto for the year ended December 31, 1997.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the year.
1. Shareholders' Equity:
The Board of Directors on April 24, 1998 approved a three for two stock
split payable June 1, 1998 to shareholders of record as of May 15, 1998.
All share and per share information for all periods presented in these
financial statements has been adjusted to give effect for the stock split.
The Board of Directors declared cash dividends on January 6, 1998, April
15, 1998, July 15, 1998 and October 13, 1998. Shareholders of record on
January 19, 1998, April 30, 1998, July 31, 1998 and October 30, 1998
received a $.03 per share cash dividend paid on February 9, 1998, May 15,
1998, and $.05per share dividend paid on August 14, 1998 and November 13,
1998.
The Company initiated a dividend reinvestment program pursuant to which
shareholders of the Company will be permitted to purchase additional shares
of the Company's common stock with their quarterly dividends and additional
cash contributions up to $2,500. The dividend reinvestment program became
effective on May 15, 1998 and pursuant to the Plan, the Company has issued
235,369 shares.
On January 6, 1998, the Board of Directors approved a stock repurchase
program pursuant to which the Company may repurchase from time to time up
to 150,000 shares of its outstanding stock. Shares purchased by the Company
through the repurchase program will be used to fund the dividend
reinvestment program, the Company's stock option plans and for other
corporate purposes. As of September 30, 1998, the Company has repurchased
76,691 shares under the Plan and has subsequently re-issued 19,096 shares,
for an ending balance of 57,595 shares.
2. Disclosure of accumulated other comprehensive income balances:
Unrealized Unrealized
Gain / (Loss) Gain / (Loss)
on Securities on Securities
Nine months ended September 30, 1998 1997
---------------------------------------------------------------------------
Accumulated other comprehensive
balances, Jan 1 $ (38,242) $ (60,476)
Current-period change 102,551 25,905
===========================================================================
Accumulated other comprehensive
balances $ 64,309 $ (34,571)
===========================================================================
6
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
3. Recently issued accounting pronouncements:
The Company Adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("Statement 130") effective January 1,
1998. Statement 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Under Statement 130, comprehensive income is divided
into net income and other comprehensive income. Other comprehensive income
includes items previously recorded directly in equity, such as unrealized
gains or losses on securities available-for-sale. Comparative financial
statements provided for earlier periods are reclassified to reflect
application of the provisions of the statement.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("Statement 131") was
issued September, 1997. Statement 131 establishes standards for the way
public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected financial information about operating segments in interim
financial reports to shareholders. Statement 131 is effective for financial
statements for periods beginning after December 15, 1997. The Company has
determined that it has no separate reportable segments.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Post retirement Benefits" ("Statement
132") was issued February, 1998. Statement 132 revises employers'
disclosures about pension and other post retirement benefit plans. The
Statement becomes effective for fiscal years beginning after December 15,
1997. Earlier application is permitted. The Company has not determined the
effect, if any, on its current disclosures.
Statement of Financial Accounting Standards No. 133 " Accounting for
Derivative Instruments and Hedging Activities" was issued June 1998. The
statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at it's fair value. The Statement requires the
changes in the derivative's faire value be recognized currently in earnings
unless specific hedge accounting criteria is met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999,.
A company may also implement the Statements as of the beginning of any
fiscal quarter after issuance (that is , fiscal quarters beginning June 16,
1998 and thereafter). Statement 133 cannot be applied retroactively.
Statement 133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 3, 1997 (and, at the
company's election, before January 1, 1998).
The transition provisions of Statement 133 provide that at the date of
initial application, a bank holding company may transfer any debt security
categorized as held-to-maturity into the available-for-sale category or the
trading category without calling into question the intent to hold other
debt securities to maturity in the future. The transition provisions
further require that the unrealized gain (losses) on a transferred
held-to-maturity debt security be reported as part of the
cumulative-effect-type adjustment of net income if transferred to the
trading category or as part of the adjustment to the change in net
unrealized holding gains (losses) on available for sale securities if
transferred to the available-for-sale category. The adoption of this new
standard did not have a material impact on the Company's financial
condition or results of operations. In accordance with the new standard,
the Company re-classified approximately $10.9 million of securities
classified as Held-to-Maturity to Available-for-Sale on July 1, 1998. As of
that date, the unrealized gain on these securities of $114,264 was recorded
as a cumulative effect of change in accounting principle, net of related
income tax provision of $43,420 and was included in the statement of
comprehensive income for the three and nine months ended September 30,
1998.
7
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis
UNITY BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
This financial review presents management's discussion and analysis of the
Company's financial condition and results of operations. It should be read in
conjunction with the consolidated condensed financial statements and the
accompanying notes.
FINANCIAL CONDITION
The Company's total assets increased to $238.5 million at September 30, 1998,
$24.7 million, or 11.6%, above year end 1997 total assets of $213.8. Net loans
totaled $155.4, a $22.5 million increase, or 17.0%, compared to $132.9 at
December 31, 1997. The Company's securities portfolio, including securities held
to maturity and available for sale, grew to $51.1 million, a 23.7% increase at
September 30, 1998, compared to $41.3 million at December 31, 1997. As of
September 30, 1998 Shareholders' Equity totaled $21.7 million compared to $20.0
million at December 31, 1997. The growth in the Company's total assets,
securities and deposits was a result of the Company's branch expansion,
continued penetration of its existing markets, emphasis on customer service,
competitive rate structures, selective marketing and growing product line. The
Company's Shareholders' Equity increases were attributable to retention of
earnings, issuance of stock grants and exercised of stock options and warrants,
but was subsequently offset by treasury stock purchases, net of re-issuance
totaling $.9 million as of September 30, 1998.
These increases in total assets were funded by increases in the Company's total
deposits which increased to $215.2 million at September 30, 1998, an increase of
$22.8 million, or 11.9%, over total deposits of $192.4 million at December 31,
1997. Time deposits increased by $9.6 million, or 10.7%, savings deposits
increased by $3.7 million or 12.1%, interest bearing demand deposits increased
by $5.3 million, or 18.0%, and noninterest bearing demand increased by 4.0
million, or 9.8%. Promotional activities contributed to the increase in time
deposits as well as the Company's continued penetration of existing markets.
Deposits are obtained primarily from the market areas which the Company serves.
As of September 30, 1998 the Company did not have any brokered deposits and
neither solicited nor offered premiums for such deposits.
The Company's nonaccrual loans increased by $1.4 million from year end 1997 to
$2.3 million at September 30, 1998. The increase in nonaccrual loans is
substantially the result of Management's decision to place two real estate
secured loans on nonaccrual status due to delinquent payments. At September 30,
1998, $2.5 million in loans were contractually past due greater than 90 days but
still accruing interest, compared to $552 thousand for the year ending December
31, 1997. In Management's best judgment all non performing assets are either
fully collateralized or reserved based on circumstances known at this time.
The Company achieved a 9.17% Tier I Leverage Ratio at September 30, 1998
compared to the federally-mandated minimum Tier I Capital Ratio of 4.0%. The
Tier 1 Capital ratio was 12.32% and the Risk Based Capital ratio was 13.23%.
8
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations - Continued
RESULTS OF OPERATIONS
Net Income
For the nine months ended September 30, 1998, the Company earned net income of
$1.622 million, or $.54 basic earnings per share, compared to net income of
$1,234 thousand, or $.42 basic earnings per share, earned for the comparable
period of 1997. Basic earnings per share were calculated on 3,016,593 weighted
average shares outstanding at September 30, 1998 compared to 2,962,338 weighted
average shares outstanding a year earlier, adjusted for the 3 for 2 stock split
declared April 24, 1998. The changes in the components of net income included a
$1.1 million, or 19.0%, increase in net interest income after provision for loan
losses, and a $1.1 million, or 56.1% increase in noninterest income. These items
were partially offset by an increase in noninterest expenses of $1.7 million, or
28.0%, as the Company continued its branch expansion and increased staff
required to support and deliver its new products introduced in 1997 and 1998.
For the three months ended September 30, 1998, net income grew 15.3%, totaling
$664 thousand, or $.22 per share, compared to $576 thousand, or $.29 per share
for the same period in 1997. Earnings per share were calculated on 3,058.941
weighted average shares outstanding for the quarter ended September 30, 1998,
compared to 2,966,414 shares outstanding a year earlier, a 3.1% increase
totaling 92,527 shares.
Net Interest Income
The Company's interest income increased by $1.981 thousand, or 18.1%, to $12.9
million for the nine months ended September 30, 1998 from $10.9 million for the
comparable period of 1997. The increase was attributed to an additional $44.9
million in average earning assets, a 34% increase over prior year, totalling
224.6 million. Interest expense increased by $776 thousand, or 16.8%, to $5.4
million for the nine months ended September 30, 1998 from $4.6 million for the
comparable period of 1997.
This increase in interest expense was primarily attributable to the $18.8
million, or 12.4%, increase in the Company's interest bearing deposits from
$151.3 million as of September 30, 1997 to $170.1 million as of September 30,
1998. The net interest margin remained relatively unchanged at 4.00% for the
nine months ended September 30, 1998 compared to 4.70% for the same period ended
September 30, 1997.
Provision for Loan Losses
The Company's provision for loan losses totaled $474 thousand for the nine
months ended September 30, 1998, compared to $396 thousand for the same period
ended 1997. The increase in the provision is primarily the result of the
Company's maintanance of it loan loss reserve as a percent of total loans less
loans held for sale. As of September 30, 1998 the reserve increased to 1.03%
compared to .96% as of September 30, 1997. The allowance is a result of
Management's analysis of the estimated inherent losses in the Bank's loan
portfolio. Management determines provisions as necessary to maintain the
allowance for loan losses at targeted levels as measured against total loans
and/or past due accounts and Management's analysis of current economic
conditions.
For the third quarter of 1998, the provision for loan losses increased by $37
thousand, or 22.8%, over the comparable period of 1997. Management determines
provisions as necessary to maintain the allowance for loan losses at targeted
levels as measured against total loans and/or past due accounts.
At September 30, 1998, the reserve was 68% of non-accrual loans; the prior
year's reserve was 171% of non-accrual loans. The change was substantially due
to the result of management's decision to place two real estate-secured loans on
non-accrual status due to delinquent payments in the first quarter of 1998. In
management's best judgement all non-performing assets are either fully
collateralized or reserved based on circumstances known at this time.
9
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations - Continued
Noninterest Income
Service charges on deposits increased $134 thousand to $667 thousand for the
nine months ended September 30, 1998, a 25.2% increase over $533 thousand
reported September 30, 1997. The majority of the increase is due to the growth
in the demand accounts which includes higher volumes of transactions processed,
improvement in return check fee collection ratios, repricing transaction fees in
March 1998 and additional fee income generated by ATM services charges.
The Company's gain on sale of loans increased by $578 thousand (53.5%) to $1,660
thousand for the nine months ended September 30, 1998 from $1,081 thousand for
the comparable period of 1997. This increase in the gain on sale of loans
reflects the Company's increased participation in the Small Business
Administration's ("SBA") guaranteed loan program as 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 up to 90% of the
principal of a qualifying loan. The Company then sells the guaranteed portion of
the loan into the secondary market. The Company sold $13.5 million in SBA loans
as of September 30, 1998 compared to $10.7 million sold in the same period in
1997.
Proceeds from sales of securities amounted to $10.5 million at September 30,
1998. Net gains on sales of securities were $233 thousand for the nine months
ended September 30, 1998. There were no sales in 1997.
Other income which primarily consists of SBA servicing fee income, increased
$196 thousand (46.4%), to $620 thousand for the nine month period ended
September 30, 1998 due to a larger portfolio of loans serviced.
For the quarter ended September 30, 1998 service charges on deposits increased
$37 thousand to $235 thousand, a 18.7% increase over $198 thousand reported
September 30, 1997. As stated above, growth in demand accounts and repricing
transactions fees contributed to the increase in charges.
Gain on sale of loans increased 94.9% or $289 thousand from $305 thousand in
1997 to $594 thousand for the three month period ended September 30, 1998. The
increase was attributable to the same factors as discussed in the nine month
comparisons.
Proceeds from sales of securities amounted to $5.7 million at September 30,
1998. Net gains on sales of securities amounted to $91 thousand for the three
month period ended September 30, 1998. There were no sales in 1997.
Other income increased $74 thousand, or 46.7, for the three month period ending
September 30, 1998 as compared to September 30, 1997 due to a larger portfolio
of loan serviced.
Noninterest Expense
The Company's total other expenses increased by $1.664 thousand, or 28.0%, to
$7.6 million for the nine month period ended September 30, 1998 from $5.9
million for the comparable period of 1997. Salaries and employee benefits
increased $839 thousand due to additional staffing required to support the
increased level of activity on new products developed in 1997, staffing required
for the opening of the Linden branch in April 1997, along with increases in
commissions paid associated with the increased volume in loan sales. Other
operating expenses which includes items such as deposits and loan expenses,
advertising, professional services, office expenses and other miscellaneous
expenses increased $840 thousand, largely due to the increasing customer base,
branch expansion, product development and marketing.
For the third quarter of 1998 total other expenses increased by $693 thousand,
or 36.8%, to $2.6 million for the three month period ended September 30, 1998
from $1.8 million for the comparable period of 1997. Increases are comprised of
$430 thousand in salaries and employee benefits, $(27) thousand in occupancy
expenses and $289 thousand in other operating expenses. The increases were
primarily attributable to expansion as discussed previously. The decrease in
occupancy expense of $27 thousand was primarily due to the prior year direct
expense of leasehold improvements.
10
<PAGE>
PART II - OTHER INFORMATION
UNITY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
Item 1. Legal Proceedings
There are various claims and lawsuits in which the Company is periodically
involved incidental to the Bank's business. In the opinion of management, no
material loss is expected from any such pending claims or lawsuits.
Item 2. Change in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On or about March 30, 1998, the Registrant mailed to its shareholders a proxy
statement ("Proxy Statement") for the purpose of soliciting proxies for use at
its Annual Meeting of Shareholders. The proxies were solicited pursuant to
regulation 14A under the Securities Exchange Act of 1934 and there were no
solicitations in opposition thereto.
At the close of business on March 16, 1998, the record date for the
determination of stockholders entitled to vote at the meeting, there were
outstanding 2,011,853 shares of common stock, constituting all of the
outstanding voting securities of UBI, and each such share was entitled to one
vote at such meeting.
At such meeting 1,502,404 shares were represented either in person by ballot or
by proxy, constituting a quorum for the conduct of business.
At the Annual Meeting, held on April 24, 1998, the shareholders approved the
following proposals set forth in the Proxy statement by the votes indicated:
1. The election of the nominees named in the Proxy Statement to serve as
directors of the Company for the terms of office specified and until their
successors are duly elected and qualified. The following tabulation with
respect to each nominee for director is as follows:
Term of Affirmative Withheld
Director Expiration Votes Votes
-------- ---------- ----------- --------
John Tremblay 2,001 1,490,555 11,849
The following directors terms of
office continued after the
meeting:
Robert J. Van Volkenburgh 2,000
David D. Dallas 1,999
Peter P. DeTommaso 1,999
Charles S. Loring 2,000
2. Approval of the Unity Bancorp, Inc. 1n Plan. For - 1,035,539; Against -
132,929; Withheld Authority - 10,779.
Note: All shares outstanding, represented and votes cast were prior to the
Company's 3 for 2 Stock split declared on April 24, 1998.
11
<PAGE>
Item 5. Other Information
Year 2000
Overview
The Company continues its commitment to be Y2K compliant. Currently, the Company
remains on schedule with its Year 2000 testing, in accordance to the FFIEC
schedule. We have completed testing with our main data servicer and item
processor with success. We have assessed our risks on our lending portfolio and
continue to perform due diligence to ensure all new and existing borrowers meet
the appropriate guidelines, as necessary, as put forth by the regulators. Many
conversions to Year 2000 compliant equipment and softwares have been completed,
and we continue our commitment to the Year 2000 project remains in an active
status to ensure each and everyone of our systems and equipment operates
appropriately in the Year 2000.
Summary
The Company utilizes software and related technologies throughout its business
that will be affected by the century date change in the year 2000 ("Y2K").
During 1997, a committee comprised of the entire senior management team and
other key associates was formed to determine the full scope and related costs of
this problem to ensure that the Company's systems continue to meet its internal
needs and those of its customers.
The first phase of this project, the assessment phase, has been completed. The
Y2K committee has identified all hardware, software, systems and processes that
might be affected by the century date change. It has evaluated the criticality
of all systems. A plan of action for all items was developed which includes
tests and alternatives. Possible worst case scenarios were discussed to help
determine the criticality of an item. For example, if the Company's primary
accounting software does not read the century date change correctly, it is
possible that borrowers and depositor accounts will have miscalculations and
balance errors. The entire internal bookkeeping process could be affected to the
point were the Company would halt operations until a remedy was put in place.
Thus the Company's primary accounting system is considered to be a mission
critical item and was assigned as mission critical. On the positive side, the
accounting system's vendor has represented to the Company that its software is
Y2K compliant. The vendor has obtained Y2K compliance certification from an
independent testing organization and the software has also been reviewed by an
appropriate party. In addition, a lending subcommittee was formed to evaluate
the risk that the Y2K problem might have on all of the Company's borrowers who
have indebtedness in excess of $250,000. This evaluation, now substantially
complete, was undertaken to assess borrowers' ability to repay loans in the year
2000 and beyond. Overall, the Company believes hat the Y2K issue poses a low
risk to a large majority of its borrowers.
The project is currently in its last testing stage. Written testing plans have
been prepared for all items assigned as mission critical verses not mission
critical. Testing has been completed on most all of these applications. Testing
of the Company's most critical application, its data processing system, has been
completed. The vendor has provided the Company with a copy of its internal test
of the system for Y2K compatibility. To date the Company has advanced the
system's operating date to January 3, 2000 and has reviewed the resultings. In
addition, the results of the many internal tests provided by the vendor are
being reviewed for their adequacy. The Company expects to have tests of all
items completed by December 31, 1998.
The final phase of this project is to administer the contingency plans where
testing has uncovered weaknesses. This phase has already begun in certain areas.
For instance, many old personal computers (PC's ) and their software have been
replaced with Y2K compliant PC's and software. The Company's primary processor,
NCR, certified that they are compliant. The system date of the upgraded software
has been successfully advanced in the year 2000, although further testing still
remains.
The Company believes it has committed sufficient resources to this project to
ensure its success. Costs incurred to date have not been material. The Company
has no programmers on staff and is reliant on the vendors of purchased software
to upgrade their products to be Y2K compliant, if necessary. To date, the Y2K
project is on schedule and future costs are not expected to be material.
12
<PAGE>
Item 5. Other Information - Continued
Unauthorized Overdraft
Subsequent to the close of the third quarter, the Bank discovered that it has
been the victim of an unauthorized overdraft to a single customer. Although the
Bank is still investigating this occurrence, it appears that the total amount of
the overdraft may range from $680,000 to $1,400,000. The Bank is pursuing all
legal actions available to recover this overdraft, and it appears that assets
may be available to satisfy the Bank's claims, at least in part. At this time,
the Bank has established a $300,000 reserve in November in connection with this
situation. Management will continue to investigate this matter, and take all
steps possible to safeguard the Bank's interests.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
Number (27) - Financial Data Schedule
(b) Reports on Form 8-K
April 16, 1998 - Announcing First Quarter 1998 Results
July 13, 1998 - Announcing Second Quarter 1998 Results and declaration of
cash dividend (dated July 15, 1998).
SIGNATURES
Pursuant to the requirements 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.
Date: November 15, 1998 By: /s/ JOHN F. TREMBLAY
-----------------------------
John F. Tremblay, President
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
registrants Unaudited September 30, 1998 interim financial statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
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