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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
----------------------------
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.
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(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Delaware 22-3282551
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
64 Old Highway 22, Clinton, NJ 08809
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(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
Common Stock Purchase Warrants 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 |X| No | |
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|
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<PAGE>
The aggregate market value of the voting stock held by non-affiliates of
the Issuer as of February 28, 1998, was $22,446,200.
The number of shares of the Issuer's Common Stock, no par value,
outstanding as of February 28, 1998, was 2,011,853.
For the fiscal year ended December 31, 1997, the Issuer had total revenues
of $18,068,519.
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<TABLE>
<CAPTION>
DOCUMENTS INCORPORATED BY REFERENCE
10-KSB ITEM DOCUMENT INCORPORATED
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<S> <C> <C>
Item 6. Management's Discussion and Registrant's Annual Report to Shareholders under
Analysis or Plan of Operation the caption "Management's Discussion and Analysis"
Item 7. Financial Statements Registrant's Annual Report to Shareholders under
the caption "Consolidated Financial Statements"
Item 9. Directors and Executive Officers of Proxy Statement for 1998 Annual Meeting of
the Company; Compliance with Shareholders to be filed no later than April 29, 1998
Section 16(a) of the Exchange Act
Item 10. Executive Compensation Proxy Statement for 1998 Annual Meeting of
Shareholders to be filed no later than April 29, 1998
Item 11. Security Ownership of Certain Proxy Statement for 1998 Annual Meeting of
Beneficial Owners and Management Shareholders to be filed no later than April 29, 1998
Item 12. Certain Relationships and Related Proxy Statement for 1998 Annual Meeting of
Transactions Shareholders to be filed no later than April 29, 1998
</TABLE>
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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 six branches located in Clinton,
North Plainfield, Flemington, Springfield, Scotch Plains, Linden 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 Linden, New
Jersey branch. This service area includes communities in Essex, Hunterdon,
Middlesex, Morris, Somerset, Union and Warren Counties, New Jersey. The Bank has
applied to the New Jersey Department of Banking and Insurance and the Federal
Deposit Insurance Corporation to establish a new branch in Whitehouse, New
Jersey. Assuming receipt of regulatory approvals, this branch may be opened by
the third quarter of 1998.
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
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specific services and charges in a manner designed to attract the business of
the small and medium sized 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, serves 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, Linden 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 87 full-time and 9 part-time employees. None of the
Company's employees are represented by any collective bargaining units. The
Company believes that its relations with its employees are good.
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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 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.
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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. The minimum ratio of
total capital to 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 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.
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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.
Insurance of Deposits. The Bank's deposits are insured up to a maximum of
$100,000 per depositor under the SAIF of the FDIC. Pursuant to the Federal
Deposit Insurance Corporation Improvements Act of 1991 ("FDICIA") the FDIC has
established a risk-based assessment system. Premium assessments under this
system are 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. To effectuate this system, the
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 was 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. As a result of the
recapitalization of the SAIF, FDIC premium assessments to SAIF members, both in
the
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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 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. 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.
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 six branch offices. The following table
sets forth certain information regarding the Company's properties as of December
31, 1997.
Leased
Location or Owned Date of Lease Expiration
- -------- ------- ------------------------
64 Old Highway 22 Leased 7/3/04
Clinton, NJ
450 Somerset Street Owned N/A
North Plainfield, NJ
110 Main Street Leased 3/31/03
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
628 North Wood Avenue Owned N/A
Linden, NJ
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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 1997.
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 was listed for trading on the
NASDAQ Bulletin Board. As of December 31, 1997, there were 724 stockholders of
record of the Common Stock.
Commencing on June 16, 1997, the Company's Common Stock Purchase Warrants
also began trading on the American Stock Exchange under the symbol "UBI.WS".
The following table sets forth the high and low bid prices of the Common
Stock, as reported on the NASDAQ Bulletin Board during 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. For 1997, the
table sets forth the high and low sales prices for the Common Stock on the
American Stock Exchange. 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.
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Bid
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Cash
High Low Dividend
- --------------------------------------------------------------------------------
1997:
4th Quarter .................. 19.38 16.00 .05
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3rd Quarter .................. 16.50 13.38 .05
- --------------------------------------------------------------------------------
2nd Quarter .................. 14.50 13.75 .05
- --------------------------------------------------------------------------------
1st Quarter .................. 17.75 14.00 .05
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1996:
4th Quarter ................. 13.50 12.75 .10
- --------------------------------------------------------------------------------
3rd Quarter ................. 14.00 13.00 .05
- --------------------------------------------------------------------------------
2nd Quarter ................. 14.20 12.00 .05
- --------------------------------------------------------------------------------
1st Quarter ................. 13.00 11.20 .05
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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 $.05 per share. Additionally, the Company issued 10% stock dividends during
1992 and 1993 and a 5% stock dividend in 1996. The Company also declared five
for four stock split 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 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
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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, 1997, the Bank had $6,095,817
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.
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 1998 Annual Shareholders Meeting
under the caption "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, 1998.
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The following table sets forth certain information about each executive
officer of the Company who is not also a director.
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Name, Age and Position Officer Since (1) Principal Occupation During
Past Five Years
- ---------------------- ----------------- ---------------------------
- --------------------------------------------------------------------------------
Thomas B. Maresca, 40, 1991 Senior Vice President of the
Senior Vice President Bank since 1994; employed by
of the Bank the Bank since its inception.
- --------------------------------------------------------------------------------
Joseph M. Reardon, 45, 1998 Chief Financial Officer of the
Chief Financial Officer Company and Senior Vice President
of the Company and of the Bank; previously Chief
Senior Vice President Financial Officer of B.M.J.
of the Bank Financial Corp.
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- -----------
(1) Includes prior service as an officer of the Bank.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is included in the definitive
Proxy Statement for the Company's 1998 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, 1998.
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 1998
Annual Shareholders 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, 1998.
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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 1998 Annual
Shareholders 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, 1998.
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)
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 (1)
10(vi) 1994 Stock Option Plan for Non-Employee Directors (1)
10(vii) Change in Control Agreement (2)
10(viii) Stock Bonus Plan (2)
10(ix) 1997 Stock Option Plan (3)
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10(x) 1997 Stock Bonus Plan (3)
10(xi) Employment Agreement, dated November 14, 1997 by and
among John F. Tremblay, Unity Bancorp, Inc.
and First Community Bank.
13 Annual Report to Shareholders for the year ended
December 31, 1997
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.
(3) Incorporated by reference from Exhibits B and C from the Company's
Definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
(b) Reports on Form 8-K
DATE ITEM REPORTED
---- -------------
October 16, 1997 Item 5-- Reporting the Registrant's Third
Quarter 1997 Earnings.
October 28, 1997 Item 5-- Reporting the Appointment of
John Tremblay as President.
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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, hereunto duly authorized.
UNITY BANCORP, INC.
Dated: March 30, 1998 By: /s/ JOHN F. TREMBLAY
---------------------------
JOHN F. TREMBLAY, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
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NAME TITLE DATE
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ ROBERT J. VAN VOLKENBURGH Chairman of the Board and Chief March 30, 1998
- ----------------------------- Executive Officer
Robert J. Van Volkenburgh
- -------------------------------------------------------------------------------------------------
/s/ JOHN F. TREMBLAY President and Director March 30, 1998
- -----------------------------
John F. Tremblay
- -------------------------------------------------------------------------------------------------
/s/ JOSEPH M. REARDON Chief Financial Officer (Principal March 30, 1998
- ----------------------------- Financial and Accounting Officer)
Joseph M. Reardon
- -------------------------------------------------------------------------------------------------
/s/ DAVID D. DALLAS Vice Chairman and Corporate March 30, 1998
- ----------------------------- Secretary
David D. Dallas
- -------------------------------------------------------------------------------------------------
/s/ CHARLES S. LORING Director March 30, 1998
- -----------------------------
Charles S. Loring
- -------------------------------------------------------------------------------------------------
/s/ PETER P. DETOMMASO Director March 30, 1998
- -----------------------------
Peter P. DeTommaso
=================================================================================================
</TABLE>
16
EXHIBIT 10(XI)
EMPLOYMENT AGREEMENT
This AGREEMENT made as of this 14th day of November 1997 by and between
UNITY BANCORP, INC., a Delaware corporation having its principal place of
business at 64 Old Highway 22, Clinton, New Jersey 08809 ("UBI"), FIRST
COMMUNITY BANK, a New Jersey state bank with its principal place of business
located at 64 Old Highway 22, Clinton, New Jersey 08809 ("FCB") (UBI and FCB
jointly referred to herein as the "Employer"), and JOHN F. TREMBLAY, an
individual residing at 5 Dorchester Court, Jackson, New Jersey 08527 (the
"Executive").
W I T N E S S E T H:
WHEREAS, Employer deems it to be in its best interests to secure and retain
the services of the Executive and the Executive desires to work for Employer
upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises and undertakings
herein contained, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. Employment and Term.
(a) Employer hereby employs the Executive as President of UBI and FCB
(collectively, the "Position") and the Executive agrees to serve in the employ
of UBI and FCB in the Position, for a term of one year (the "Initial Term"),
which shall commence on the date hereof (the "Effective Date"), and which,
subject to paragraphs 1(b) and (c) hereof, shall terminate on the first
anniversary of the Effective Date; provided, however, that no less than 45 days
prior to the first anniversary of the Effective Date, Employer shall provide
Executive with written notice of its intention to negotiate a renewal of this
Agreement or allow the Agreement to terminate; further provided, however, that
the foregoing provision shall not in any way be interpreted as granting
Executive a right to have this Agreement extended or renewed and further
provided that Employers' failure to provide such notice shall not affect the
termination of this Agreement upon its first anniversary date.
(b) Employer shall have the right to terminate the Executive's employment
hereunder prior to the first anniversary of the Effective Date, but if such
termination is not for "cause", Executive shall be entitled to receive the
compensation and benefits provided for under Section 3(d) hereof. If such
termination is for "cause" as defined below, Executive shall not be entitled to
receive any compensation from and after the date of such termination. For
purposes of this Agreement, "cause" means (i) the Executive's willful and
continued failure substantially to perform the duties of the Position, (ii)
fraud, misappropriation or other intentional material damage to the property or
business of Employer, (iii) the Executive's admission or conviction of,
<PAGE>
or plea of nolo contendere to, any felony that, in the judgment of the Board of
Directors of Employer (the "Board"), adversely affects Employer's reputation or
the Executive's ability to perform his duties hereunder; or (iv) Executive's
willful violation of any law, rule or regulation (other than traffic violations
or similar offenses) or final cease-and-desist order issued by or regulatory
consent agreement with any banking regulatory agency having jurisdiction over
UBI, FCB or their subsidiaries.
(c) This Agreement shall terminate upon Executives' death or his
disability, as defined herein. Upon Executives' death or his disability, the
obligation of Employer hereunder to pay Executive the compensation called for
under Section 3 hereof shall terminate, and Employer's only obligation shall be
to pay Executive any and all benefits to which Executive was entitled at the
time of such death or disability under any benefits plans of Employer then in
place. For purposes of this provision, the term "disability" shall mean
permanent and total disability, physical or mental, which, in the reasonable
estimation of the Board of Directors, prohibits Executive from performing the
duties and services required by the Position.
2. Duties.
(a) Subject to the ultimate control and discretion of the Board, the
Executive shall serve in the Position and perform all duties and services of an
Executive nature commensurate to the Position which the Board may from time to
time reasonably assign to the Executive.
(b) The Executive shall devote all of the Executive's time and attention
during regular business hours to the performance of the Executive's duties
hereunder and, during the term of the Executive's employment hereunder, shall
not engage in any other business enterprise which requires more than five hours
per week of the Executive's personal time or attention, unless granted the prior
permission of the Board. The foregoing shall not prevent the Executive's
purchase, ownership or sale of investment securities or of any interest in, any
business which competes with the business of Employer, provided that such
ownership or investment constitutes not more than five percent of the
outstanding shares of a corporation whose stock is listed on a National
Securities Exchange or on the National Association of Securities Dealers
Automated Quotation System, or the Executive's involvement in charitable or
community activities, provided that the time and attention which the Executive
devotes to such activities does not materially interfere with the performance of
the Executive's duties hereunder.
3. Compensation.
(a) For all services to be rendered by the Executive under this Agreement,
Employer agrees to pay the Executive a salary of not less than $135,000 per
annum during the term of this Agreement ("Base Compensation"), payable in
accordance with Employer's normal payroll practices as in effect from time to
time. In addition, to the extent the Board deems it appropriate, Executive shall
be entitled to receive an annual bonus as determined by the Board.
<PAGE>
(b) The Executive, in his capacity as a Director of Employer, shall receive
all usual and customary per meeting Board fees, in accordance with the Board's
policies in effect from time to time. Executive shall not be entitled to receive
any committee fees, although Executive may be required to serve on one or more
committees of the Board.
(c) In addition to the compensation provided for under subparagraph (a)
hereof, Executive shall be entitled to receive the use, at the Employer's
expense, of an automobile of a type and size commensurate with Executive's
status as president of the Employer; provided, however, that under no
circumstances shall the purchase price for such vehicle, regardless of whether
the vehicle is actually purchased by the Employer, leased or otherwise acquired,
exceed $35,000. Executive shall also be entitled to receive life insurance with
a death benefit equal to at least one times Executive's annual Base
Compensation. Finally, Executive shall be entitled to participate in the
Employer's existing stock option plan for officers and employees. Pursuant to
the Plan, Executive will receive options to purchase 2,500 shares of UBI Common
Stock at an exercise price of 85% of the fair market valued of the stock on the
date of grant. Such options shall have a term of five years, and be exercisable
at any time during their term.
(d) If Employer terminates the Executive's employment hereunder, other than
in accordance with paragraphs 1(b) for "cause" or (c) hereof, prior to the
expiration of the Initial Term, or if Executive voluntarily resigns his
employment hereunder prior to the expiration of the Initial Term, Employer shall
continue to pay the Executive the Base Compensation provided in paragraph 3(a)
hereof, in accordance with Employer's normal payroll practices in effect from
time to time, for a period of three (3) months after such termination, and
maintain in effect or pay the equivalent value of the medical and other
insurance benefits, if any, provided Executive hereunder for a period of
eighteen (18) months after such termination. Although Executive shall have no
duty to mitigate any damages incurred in connection with his termination by
Employer other than in accordance with paragraphs 1(b) or (c) hereunder, in the
event Executive obtains new employment and such new employment provides for
hospital, health, medical and life insurance, and other benefits in a manner
substantially similar to the benefits payable by Employer to Executive hereunder
upon the date of his termination, Employer may permanently terminate any
duplicative benefit it is otherwise obligated to provide. The foregoing
provision entitling Executive to voluntarily terminate his employment hereunder
and receive the benefits provided for under this Section 3(d) shall not be
effective during the final ninety (90) days of the Initial Term and any
subsequent term of this Agreement if the Initial Term is extended or a new term
is agreed to.
4. Vacations. The Executive shall be entitled each year to four weeks of
vacation time during which vacation the Executive shall continue to receive the
compensation provided in paragraph 3 hereof. Each vacation shall be taken by the
Executive at such time or times as the Executive reasonably determines, taking
into account Executive's duties as set forth in Section 2 hereof and Employer's
business needs at any particular time.
<PAGE>
5. Expenses. Employer shall promptly reimburse the Executive for all
reasonable expenses paid or incurred by the Executive in connection with his
employment hereunder upon presentation of expense vouchers or appropriate
documentation therefor reasonably requested by Employer.
6. Change in Control.
(a) Upon the occurrence of a Change in Control (as herein defined) followed
at any time during the term of this Agreement by termination of the Executive's
employment, either voluntarily by Executive within six months of such Change in
Control in the event he has experienced any demotion, loss of title, office or
significant authority, reduction in annual compensation or benefits, or
relocation of his principal place of employment by more than 30 miles from its
location immediately prior to the Change in Control, or involuntarily by
Employer or its successor during the term of this Agreement, other than an
involuntary termination of Executive's employment for "cause" as defined in
paragraph 1(b) hereof, the Executive shall be entitled to the benefits provided
under paragraph (c).
(b) A "Change in Control" shall mean:
(i) a reorganization, merger, consolidation or sale of all or
substantially all of the assets of UBI, or a similar transaction in which
UBI is not the resulting entity;
(ii) individuals who constitute the Incumbent Board (as herein
defined) of UBI cease for any reason to constitute a majority thereof;
(iii) an event of a nature that would be required to be reported in
response to Item I of the current report on Form 8-K, as in effect on the
date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act");
(iv) Without limitation, a change in control shall be deemed to have
occurred at such time as any "person" (as the term is used in Section 13(d)
and 14(d) of the Exchange Act), excluding the trustee of any employee
benefit plans or any employee benefit plans established by UBI or FCB from
time to time, becomes after the date hereof a "beneficial owner" (as
defined in Rule 139(d) under the Exchange Act) directly or indirectly, of
securities of UBI representing 25 percent or more of UBI's outstanding
securities ordinarily having the right to vote at the election of
directors;
<PAGE>
(v) A tender offer is made for 25 percent or more of the voting
securities of UBI and the shareholders owning beneficially or of record 25
percent or more of the outstanding securities of UBI have tendered or
offered to sell their shares pursuant to such tender offer and such
tendered shares have been accepted by the tender offeror.
For these purposes, "Incumbent Board" means the Board of Directors on the
Effective Date, provided that any person becoming a director subsequent to the
Effective Date whose election was approved by a vote of at least three-quarters
of the directors comprising the Incumbent Board, or whose nomination for
election by members or stockholders was approved by the same nominating
committee serving under an Incumbent Board, shall be considered as though he
were a member of the Incumbent Board.
(c) In the event the conditions of paragraph (a) above are met, Executive
shall be entitled to receive the Base Compensation which would otherwise have
been payable to Executive through the end of the six (6) month period after such
termination. Such payments will be made in accordance with Employer's normal
payroll practices in effect at the time of Executive's termination. In addition,
Employer shall continue to provide Executive with hospital, health, medical and
life insurance, and any other benefits in effect at the time of such termination
through the end of such period. Executive shall have no duty to mitigate damages
in connection with his termination by Employer or its successor hereunder
without cause. However, in the event Executive obtains new employment and such
new employment provides for hospital, health, medical and life insurance, and
other benefits, in a manner substantially similar to the benefits payable by
Employer to Executive upon the date of such termination, Employer may
permanently terminate the duplicative benefits it is obligated to provide
hereunder.
7. Additional Covenants.
(a) Confidential Information. Except as required in the performance of his
duties hereunder, the Executive shall not use or disclose any Confidential
Information (as hereinafter defined) or any know-how or experience related
thereto without the express prior written authorization of Employer. Upon
termination of his employment, the Executive shall leave with Employer all
documents and other items in his possession which contain Confidential
Information. For purposes of this paragraph 7(a), the term "Confidential
Information" shall mean all information about Employer or relating to any of its
services or any phase of its operations not generally known to any of its
competitors with which the Executive becomes acquainted during the term of his
employment.
(b) Specific Performance. Employer and the Executive agree that irreparable
damage would occur in the event that the provisions of paragraph 9(a) hereof
were not performed in accordance with their specific terms or were otherwise
breached. Employer and the Executive accordingly agree that Employer shall be
entitled to an injunction or
<PAGE>
injunctions to prevent a breach of paragraph 7(a) hereof and to enforce
specifically the terms and provisions of paragraph 7(a) hereof in addition to
any other remedy to which Employer is entitled at law or in equity.
8. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient, if in writing and if sent by registered or
certified mail to either party hereto at their respective addresses set forth
above. All notices shall be deemed given when mailed.
9. Assignability. The services of the Executive hereunder are personal in
nature, and neither this Agreement nor the rights or obligations of Executive
hereunder may be assigned , whether by operation of law or otherwise. This
Agreement shall be binding upon, and inure to the benefit of, Employer and its
successors and assigns. This Agreement shall inure to the benefit of the
Executive's heirs, executors, administrators and other legal representatives.
10. Waiver. The waiver by Employer or the Executive of a breach of any
provision of this Agreement by the other shall not operate or be construed as a
waiver of any subsequent or other breach hereof.
11. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey without giving effect to
principles of conflict of laws.
<PAGE>
12. Entire Agreement. This Agreement contains the entire agreement of the
parties hereto with respect to the subject matter hereof and may not be amended,
waived, changed, modified or discharged, except by an agreement in writing
signed by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
their respective hands and seals as of the day and year first above written.
ATTEST: UNITY BANCORP, INC.
By: /s/ ROBERT J. VAN VOLKENBURGH
- -------------------------- -------------------------------
ROBERT J. VAN VOLKENBURGH
Chairman of the Board
FIRST COMMUNITY BANK
By: /s/ WALTER HAZARD
-----------------------------
WALTER HAZARD
WITNESS: EXECUTIVE:
/s/ JOHN F. TREMBLAY
- -------------------------- --------------------------------
JOHN F. TREMBLAY
Mission
Statement
The Cover
The cover illustrates the Company's entrance onto the American Stock Exchange.
The common stock trades under the symbol of "UBI" and warrants under "UBI.WS"
Our mission is to fulfill the needs of our shareholders, customers and employees
by being a profitable, sound, and responsive community bank.
We commit to:
o Provide quality products and services;
o Be creative and responsive to our customers;
o Select, train and maintain a professional team and provide an environment
where they feel motivated to achieve outstanding performance and in which
they can obtain a sense of personal worth, growth, achievement and
recognition;
o Strongly support the continued growth and development of our community.
The foundation of our business practice includes:
o Confidentiality and professionalism
o Honesty and integrity
o Safety and soundness
o Accuracy and dependability
<PAGE>
Financial
Highlights
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------------
FINANCIAL PERFORMANCE
Net interest income $8,713 $6,104
Provision for loan losses 497 416
Noninterest income 3,043 2,404
Operating expenses 7,986 6,033
Special SAIF Assessment -- 370
Provision for income taxes 1,259 644
- --------------------------------------------------------------------------------
Net income $2,015 $1,044
================================================================================
PER SHARE DATA
Basic earnings per share $ 1.02 $0.74
Cash dividends $ 0.20 $0.18
Book value $10.07 $9.16
Weighted average shares 1,977,604 1,419,855
FINANCIAL RATIOS
Return on assets 1.05% 0.73%
Return on equity 10.78% 9.37%
Net interest margin 4.72% 4.47%
Dividend payout ratio 14.73% 34.37%
Tier 1 leverage ratio 9.51% 11.09%
FINANCIAL POSITION
Assets $213,782 $172,688
Net loans 132,854 96,941
Investment securities 41,308 37,153
Deposits 192,414 153,555
Shareholders' equity 19,990 17,990
================================================================================
Table of Contents
UBI Board of Directors 2
Chairman's Message 3
Group Profiles 7
Financial Review 9
FCB Board of Directors 41
Products & Services 42
Management 44
Corporate Information 45
<PAGE>
UBI
Directors
[PHOTO]
seated: Robert Van Volkenburgh, Chairman & CEO.
standing left to right: John F. Tremblay, President,
David Dallas, Vice Chairman & Secretary, and Charles Loring, Director.
not pictured: Peter P. DeTommaso, Director.
Corporate Profile - Unity Bancorp, Inc. is a bank holding company incorporated
in Delaware under the Bank Holding Company Act of 1956, as amended. Its wholly-
owned subsidiary, First Community Bank was granted a charter by the New Jersey
Department of Banking and commenced operations on September 13, 1991. The Bank
provides a full range of commercial and retail banking services through seven
branch offices located in Hunterdon, Somerset and Union counties in New Jersey.
These services include the acceptance of demand, savings and time deposits;
extension of consumer, real estate, Small Business Administration and other
commercial credits as well as personal investment advisory services through the
Bank's wholly-owned subsidiary, FCB Service Co., Inc.
2
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Chairman's
Message
================================================================================
[PHOTO]
Robert Van Volkenburgh
Chairman of the Board &
Chief Executive Officer
Unity Bancorp, Inc.
It is with great pleasure that I report on fiscal year 1997, the most profitable
year in the history of Unity Bancorp, Inc. The period began with market
recognition of the Company's past performance as evidenced by its listing on the
American Stock Exchange, and was solidified by accomplishments that translated
into record earnings and increased shareholder value.
The Corporation nearly doubled its earnings with a 93% increase in net income to
$2.01 million for the year ended December 31, 1997, compared to $1.04 million
for the year ended December 31, 1996. This record earnings performance resulted
in basic earnings per share of $1.02 for the year, a 38% increase over the $.74
basic earnings per share reported for the prior year.
Assets continued our strong historical growth trend reaching $214 million at
December 31, 1997, an increase of 24% over the 1996 total of $173 million. Net
loans increased 37% to $133 million in 1997, compared to $97 million for the
prior year. This solid asset growth was funded by the strong demand for
commercial loans throughout the market place and the maturity of the branch
offices opened in 1996 and 1997.
We are pleased by the continued growth of the Corporation's deposit base as
First Community Bank's seven full service branches successfully addressed the
financial needs of our communities throughout the vibrant markets of Hunterdon,
Somerset and Union counties.
At year-end 1997, deposits grew 25% to $192 million from $154 million in 1996.
Noninterest bearing demand deposits rose 32% to $41 million in 1997 from $31
million in 1996. This deposit growth is a direct result of the growth in our
three new full service branches opened in Union County, in 1996 and 1997, in
addition to the strong sales efforts in all branches.
The Corporation's listing on the American Stock Exchange under the symbol "UBI"
on January 13, 1997 marked a significant event in our history. The listing of
Unity Bancorp Inc. on the AMEX offers ongoing opportunities to create liquidity
in our common stock. At December 31, 1997 the common stock was trading at
$19.125, an increase of 32% over the January 13, 1997 price of $14.50.
3
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Chairman's
Message
================================================================================
Net Income
(in thousands)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
1994 $ 756
1995 $1,005
1996 $1,044
1997 $2,015
As part of Unity Bancorp's December 1996 offering, common stock purchase
warrants were issued and may be exercised prior to December 15, 1998. The
warrants are also listed on the AMEX and are traded under the symbol "UBI.WS".
At year-end 1997, the warrants were trading at $4.25, an increase of 325% over
the initial trading price of $1.00 as of January 13, 1997. These warrants will
provide additional capital to fund the Corporation's future growth.
In recognition of earnings performance and the Company's strong capital
position, Unity Bancorp paid cash dividends totaling $.20 in 1997, marking 13
consecutive quarterly cash dividends. Total equity at year end 1997 grew to $20
million from the $18 million reported December 31, 1996, an 11% increase.
Presently, market capitalization is in excess of $40 million, a $10 million or
33% increase over the $30 million reported year end 1996.
We take this opportunity to recognize the combined efforts of Peter Schoberl,
Executive Vice President/Senior Loan Officer; Thomas Maresca, Senior Vice
President/Senior Operations Officer and Julie Carlson, Vice President/
Treasurer. As a committee, these individuals managed the Bank during a period of
transition in our organization following the resignation of James Hyman on
August 31, 1997. Jim had served as Bank President/CEO and President/COO of Unity
Bancorp.
On October 23, 1997, the Board of Directors welcomed John F. Tremblay as
President of First Community Bank and President of Unity Bancorp, Inc. Mr.
Tremblay has 28 years of experience in New Jersey banking, most recently as
President of a $650 million, 24 branch community bank in Central Jersey. Under
his leadership, the Bank will continue to enhance and expand upon its reputation
as one of the state's premier community banking institutions.
First Community Bank's Linden branch moved out of its temporary quarters in
December 1997, into its newly renovated home on North Wood Avenue. Like the
other communities the Bank has chosen in expanding its market presence, Linden
and the surrounding communities have responded enthusiastically to our unique
brand of community banking.
On December 25, 1997, First Community Bank proudly launched its first cable
television advertising campaign, featuring the slogan, "If we were you, we'd
bank with us!" The slogan is illustrated with a variety of comic animals
depicting the unfriendly customer service one might receive at a competitor
bank. The animals presently include a frustrated
Total Assets
(in thousands)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
1994 $ 78,648
1995 $121,804
1996 $172,688
1997 $213,782
4
<PAGE>
Unity Bancorp, Inc. and Subsidiary
================================================================================
Basic Earnings
Per Share
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
1994 $0.62
1995 $0.83
1996 $0.74
1997 $1.02
orangutan, a prayerful raccoon and a snarling dog. The ads are designed to
enhance First Community Bank's identity as the community bank of choice across
Hunterdon, Somerset and Union counties. Branch promotions reinforcing the animal
advertising theme are in production for the coming year.
At year-end we accepted the resignations of Walter M. Hazard, from the Unity
Bancorp and First Community Bank Boards and John R. O'Brien from the Bank Board
of Directors. Effective February 1998, John Fallone also resigned as Director of
First Community Bank. We thank these gentlemen for their valued service to the
organization. Mr. Charles S. Loring has been appointed to the Unity Bancorp,
Inc. Board of Directors. Mr. Loring has been a Director of First Community Bank
and will now bring his professional experience to the corporate board.
The year 1998 will be one of continued expansion of shareholder and customer
services, technology and our branch network.
On January 15, 1998, Unity Bancorp initiated a Dividend Reinvestment Plan
("DRIP") whereby shareholders will be permitted to purchase additional common
stock with their quarterly dividends or by cash contributions. Purchases under
this plan are made without the expense of broker commissions and provide
quarterly statements of transaction activity. Concurrently, the Company approved
a stock repurchase program whereby the Company may periodically repurchase up to
100,000 shares of its outstanding common stock. This action enables the Company
to fund the DRIP, its stock option plan, and other corporate needs.
First Community Bank is filing an application for its eighth full service branch
in Whitehouse, Hunterdon County, which we expect to open in the third quarter.
We continue to search for additional opportunities to expand our branch network
through acquisitions available as a result of industry consolidation.
The coming year will see First Community Bank further its goals to aggressively
improve the delivery of quality products and customer service. We have expanded
both our consumer lending and residential mortgage lending groups. John Podskoc,
Senior Vice President for Retail Banking, recently joined the Bank and will
focus on expanding our consumer lending function. In January 1998, we began
offering
Shareholders' Equity
(in thousands)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
1994 $ 7,360
1995 $ 8,476
1996 $17,990
1997 $19,990
5
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Chairman's
Message
================================================================================
Total Loans
(in thousands)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
1994 $ 36,421
1995 $ 58,497
1996 $ 96,941
1997 $132,854
overdraft protection in the form of a Personal Access Line (PAL). Later in the
first quarter, First Community Bank will offer credit cards. We anticipate
significant growth of our retail portfolio through an aggressive marketing
program and responsiveness to our customers` needs. First Community Bank will
profit from the strength of the economy by satisfying the market's growing
appetite for consumer loans.
First Community Bank will continue to be a leader in providing for the financial
needs of small businesses in our communities by providing responsive personal
service to those businesses who are often ignored by large banks engaged in the
consolidation process. As a Preferred SBA lender, our market is expanded
throughout the states of New Jersey, Pennsylvania, New York and Delaware.
Our efforts to provide high quality customer service will continue in 1998 with
plans to upgrade our branch information systems to "Autobank," which will
provide platform automation and improve operating efficiencies. Plans will be
developed to provide personal computer banking and a "customer call" center. We
believe we can provide the highest quality customer service and products through
the use of technology while maintaining the personal attention our customers
deserve, but do not receive from the large out-of-area banks that focus on size
alone.
We are proud of what Unity Bancorp and First Community Bank achieved during the
past year and look forward to even better performances in 1998. Our ability to
compete successfully with banks large and small has been proven time and again
since we opened for business in 1991. The company's commitment to personalized
service is recognized and respected by customers and competitors alike. As a
result, Unity Bancorp shareholders have seen their investment grow at an annual
rate of return of 35% over the past six years, and we expect that rate of growth
to continue.
Unity Bancorp is well positioned to achieve its mission of fulfilling the needs
of shareholders, customers and employees by being a profitable, sound and
responsive community bank. On behalf of the Boards of Directors of both Unity
Bancorp, Inc. and First Community Bank, and our Management and Staff, we thank
you for your confidence and look forward to your continued support in the year
ahead.
/s / Robert Van Volkenburgh
Robert Van Volkenburgh
Chairman of the Board
Chief Executive Officer
Total Deposits
(in thousands)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
1994 $ 70,695
1995 $110,998
1996 $153,555
1997 $192,414
6
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Group
Profiles
================================================================================
Small Business Capital
[PHOTO]
standing left to right: Michael S. Chernoff, Nannette A. Derillo, Sanjay Patel.
seated: Walter Gorczyca, Michael Downes.
The Small Business Lending Group earned the Bronze Small Business Administration
Award for the second consecutive year in recognition of First Community's
outstanding achievement in generating SBA loans in New Jersey and Eastern
Pennsylvania.
Additions to our professional staff have greatly enhanced First Community's
ability to effectively sell and service loans that assist small business
customers in successfully growing their companies. Small business loans rose 39%
from $13.8 million in 1996 to $19.2 million in 1997.
First Community Bank's legal lending limit now exceeds $2 million based on the
strength of the Bank's capital. Greater lending capabilities position our
organization at a new level in business development opportunities and augment
our lenders' efforts to market First Community's financial services to larger
companies.
In keeping with our philosophy of encouraging borrowers to maintain deposit
accounts with the Bank, lenders capitalized on First Community's expanding
presence in Union County by further penetrating that commercial market for loan
and deposit business in 1997.
In their first year of operation, the Residential Mortgage Group closed over 100
loans financing more than $20 million in home purchases and provided additional
revenues to the Bank.
Lending
[PHOTO]
standing left to right: Peter Carone, Walter DeMoss, Ruth Green,
Edward Cichone, William Metz.
seated: Peter Schoberl,
Vito A. de'Marsi, Michael Bono.
7
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Group
Profiles
================================================================================
Operations
[PHOTO]
standing left to right:
John Nalesnik, Julie Y. Carlson,
John Kauchak, John Podskoc.
seated: Joseph M. Reardon, Thomas Maresca.
Finance - The January 13, 1997 listing of Unity Bancorp's common stock on the
American Stock Exchange initiated a new era in investor interest in the
corporation by enhancing market recognition and broadening investors'
opportunities to purchase Unity stock.
Site Management - The April 1997 opening of the Bank's Linden office proceeded
smoothly from its months of operation in temporary quarters through the December
1997 move into its newly-renovated headquarters on North Wood Avenue. The Bank's
seventh full service office includes safe deposit boxes, a night depository, and
a 24 HR drive-up ATM.
Human Resources - The introduction of Community Notes, a quarterly newsletter
was designed to facilitate communications among employees by reporting corporate
financial news, product and service information, branch, departmental and
individual achievements; and community support activities.
Information Systems - Installation of a LAN (Local Access Network) in the
Clinton headquarters building marked the first step in a major upgrade to the
Bank's computer system. Linking branch and back office operations, the LAN
allows staff members to communicate electronically and retrieve customer account
information faster than ever before. It will be expanded to the entire branch
system during the coming year.
Product Development - New products such as the Escrow Accounting ServicE, which
combines escrow account funds into a single master account and the overdraft
protection afforded by the Bank's new Personal Access Line, are excellent
examples of First Community's ongoing commitment to expand its product offerings
to meet the diverse and ever changing needs of our business and personal banking
customers.
By paying an additional 1% in interest, the new Holiday Bonus Club enticed
customers to have weekly payments transferred automatically from their First
Community Bank checking account into a Holiday Club account.
Subscription to ACH origination services enables First Community to better serve
customer's funds transfer requirements by electronically processing payroll,
EFTS payments, and other invoices.
8
<PAGE>
[PHOTO]
Financial Review
Management Discussion and Analysis 10
Consolidated Balance Sheet 22
Consolidated Statements of Income 23
Consolidated Statements of Changes in Shareholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 26
Report of Independent Accountants 40
9
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Management Discussion and Analysis
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Unity Bancorp, Inc's.
consolidated 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 1997 data.
Overview and Strategy
Unity Bancorp, Inc. (the "Parent Company") is a bank holding company
incorporated in Delaware under the Bank Holding Company Act of 1956, as amended.
Its wholly-owned subsidiary, First Community Bank (the "Bank" or, when
consolidated with the Parent Company, the "Company") was granted a charter by
the New Jersey Department of Banking and commenced operations on September 13,
1991. The Bank provides a full range of commercial and retail banking services
through seven branch offices located in Hunterdon, Somerset and Union counties
in New Jersey. These services include the acceptance of demand, savings and time
deposits; extension of consumer, real estate, Small Business Administration and
other commercial credits as well as personal investment advisory services
through the Bank's wholly-owned subsidiary, FCB Service Co., Inc.
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 amounts of noninterest income,
which includes gains on sales of loans, including loans originated under the
Small Business Administration's Guaranteed Loan Program, and operating expenses.
Net Income
The Company increased net income for the year 1997 to a record $2.0 million, or
$1.02 basic earnings per share. These results compare to earnings totaling $1.0
million, or $.74 per share for the year 1996. Net income improved by $970
thousand, or 93%, primarily as a result of a $2.5 million increase in net
interest income reduced by an increase of $1.6 million in total other expenses.
The 43% increase in the Company's net interest income resulted from a $4.2
million, or 38%, increase in total interest income partially offset by a $1.6
million, or 33%, increase in total interest expense. The increase in total
interest income was primarily attributable to a $35.9 million, or 37%, increase
in the Company's loan portfolio, the Company's highest yielding earning asset.
As a result, the average yield on the Company's interest-earning assets
increased to 8.13% for the year ended December 31, 1997 from 7.94% for the
comparable period of 1996, despite a decrease on the average yield on the
Company's loan portfolio.
For the year ended December 31, 1996, net income totaled $1.0 million,
remaining relatively unchanged from the $1.0 million earned in the comparable
period of 1995. Although the Company's net interest income increased by $1.7
million, or 38%, over the comparable period of 1995, the increase was offset by
an increase of $2.4 million, or 61%, in total other expenses. The increase in
net interest income resulted from an increase of $3.1 million, or 40%, 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 66%, increase in the Company's loan portfolio. Despite the increase
in the loan portfolio, the average yield on interest-earning assets declined to
7.94% for the year ended December 31, 1996 from 8.24% for the comparable period
of 1995. The decline in the 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 during 1996 were at lower rates of interest
than those loans originated during 1995, reflecting reduced market rates.
Interest expense rose $1.6 million, or 33%, to $6.3 million for the year
ended December 31, 1997 compared to $4.8 million for the year ended December 31,
1996, and $1.4 million, or 43%, to $3.3 million for the year ended December 31,
1995. The increases in interest expense over all periods is primarily
attributable to a 64% increase in the Company's interest-bearing deposits from
December 31, 1995 to December 31, 1997.
On a per share basis, basic earnings were $1.02 for the year ended December
31, 1997, $.74 for the year ended December 31, 1996, and $.83 for the year ended
December 31, 1995.
10
<PAGE>
Unity Bancorp, Inc. and Subsidiary [GRAPHIC]
================================================================================
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 shareholders' 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-earnings assets less the average
rate on interest-bearing liabilities) and (5) the Company's net on average
earning assets. Rates/Yields are computed on a fully tax-equivalent basis,
assuming a federal income tax rate of 34%.
Interest Data
(Dollar Amounts in Thousands - Interest Amounts and Interest Rates/Yields on a
Fully Tax-Equivalent Basis)
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended December 31, 1997 1996 1995
====================================================================================================================================
Average Rate/ Average Rate/ Average Rate/
Balance Interest Yield Balance Interest Yield Balance Interest Yield
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Taxable loans
(net of unearned income) $115,558 $11,227 9.72% $ 79,063 $ 7,732 9.78% $44,742 $4,782 10.69%
Tax-exempt securities 998 58 5.81% 718 41 5.71% 93 5 5.38%
Taxable investment securities 40,021 2,460 6.15% 34,678 2,089 6.02% 31,778 2,074 6.53%
Interest-bearing deposits 16,418 636 3.87% 12,907 501 3.88% 12,670 617 4.87%
Federal funds sold 12,101 661 5.46% 9,653 512 5.30% 5,012 292 5.83%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 185,096 15,042 8.13% 137,019 10,875 7.94% 94,295 7,770 8.24%
Noninterest-earning assets 8,153 5,948 3,328
Allowance for loan losses (1,065) (750) (447)
- ----------------------------------------------------------------------------------------------------------------------------------
Total average assets $192,184 $142,217 $97,176
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities and
Shareholders' Equity
Interest-bearing liabilities:
NOW deposits $ 15,945 $ 351 2.20% $ 13,664 $ 309 2.26% $10,665 $ 275 2.58%
Savings deposits 28,534 892 3.13% 23,401 656 2.80% 20,677 626 3.03%
Money market deposits 9,163 293 3.20% 6,883 211 3.07% 5,277 197 3.73%
Time deposits 85,128 4,732 5.56% 63,353 3,485 5.50% 38,781 2,113 5.45%
Other debt 568 44 7.75% 1,041 94 9.03% 1,378 123 8.93%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 139,338 6,312 4.53% 108,342 4,755 4.39% 76,778 3,334 4.34%
Noninterest-bearing liabilities 822 928 670
Demand deposits 33,330 21,797 11,887
Shareholders' equity 18,694 11,150 7,841
- ----------------------------------------------------------------------------------------------------------------------------------
Total average liabilities
and shareholders' equity $192,184 $142,217 $97,176
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 8,730 $ 6,120 $ 4,436
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread 3.60% 3.55% 3.90%
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income/margin
on average earning assets 4.72% 4.47% 4.70%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Management Discussion and Analysis
================================================================================
Volume/ Rate Analysis of Changes in Net Interest Income
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,
1997, 1996 and 1995, 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%.
<TABLE>
<CAPTION>
(Dollar Amounts in Thousands on a Fully Tax-Equivalent Basis)
====================================================================================================================================
Year Ended December 31 Year Ended December 31,
1997 versus 1996 Increase 1996 versus 1995 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) $ 3,569 $ (51) $ (23) $ 3,668 $ (406) $ (312)
Tax-exempt securities 16 1 -- 34 -- 2
Taxable investment securities 322 43 7 189 (160) (15)
Interest bearing deposits 136 (1) -- 12 (125) (2)
Federal funds sold 130 15 4 270 (26) (24)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income $ 4,173 $ 7 $ (13) $ 4,173 $ (717) $ (351)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities
Interest expense:
NOW deposits $ 52 $ (8) $ (1) $ 77 $ (34) $ (10)
Savings deposits 144 76 17 82 (46) (6)
Money market deposits 70 9 3 60 (35) (11)
Time deposits 1,198 37 13 1,339 20 13
Other debt (43) (13) 6 (30) 1 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,420 100 37 1,528 (94) (14)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 2,753 $ (93) $ (50) $ 2,645 $ (624) $ (337)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Provision for Loan Losses
For the year ended December 31, 1997, the Company's provision for loan losses
was $497 thousand, an increase of $81 thousand, or 19%, over the provision for
the year ending December 31, 1996. For the year ended December 31, 1996, the
Company's provision for loan losses was $416 thousand, an increase of $188
thousand over the provision of $229 thousand for the year ended December 31,
1995. The increased provisions is the result of loan growth of $36.3 million for
1997 and $38.7 million for 1996 combined with the aging of the Company's loan
portfolio. Future provisions for loan losses will be based upon management's
assessment of the loan portfolio and its underlying collateral, trends in non
performing loans, the current economic conditions and other factors which
warrant recognition in order to maintain the allowance at levels sufficient to
provide for estimated losses.
Other Income
Other income, primarily consisting of gains on sales of loans and service fees
received from deposit accounts, amounted to $3.0 million for the year ended
December 31, 1997, an increase of $639 thousand, or 27%, from the comparable
period of 1996. Other income for the year ended December 31, 1996 increased by
$1.0 million, or 74%, to $2.4 million compared to $1.4 million in 1995. These
increases were primarily attributable to increased gains on sales of loans in
both the years ended December 31, 1997 and December 31, 1996, as well as the
Company's increasing level of deposit accounts subject to service fees. The
Company is an active participant in the United States Small Business
Administration's guaranteed loan program. Pursuant to this program, the United
States Small Business Administration guarantees between 75% and 90% of the
principal balance of any approved loan. After closing such a loan, the Company
sells the guaranteed portion of the loan to investors in the secondary market.
For the year ended December 31, 1997, the Company recognized gains of $1.7
million from the sale of loans, an increase of $227 thousand, or 15%, compared
to the year ended December 31, 1996.
For the year ended December 31, 1996, the Company recognized gains of $1.5
million from the sale of loans, an increase of $597 thousand over the $871
thousand recognized for the year ended December 31, 1995. 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.
12
<PAGE>
Unity Bancorp, Inc. and Subsidiary [GRAPHIC]
================================================================================
Other Expenses
Other expenses for the year ended December 31, 1997 amounted to $8.0 million, an
increase of $1.6 million, or 25%, from the comparable period of 1996 when other
expenses totaled $6.4 million. For the year ended December 31, 1996, other
expenses increased by $2.4 million, or 61%, compared to $4.0 million for the
year ended December 31, 1995. These increases were primarily attributable to
increased salary, occupancy and other operating expenses. The increases in
salary and occupancy expenses during the years ended December 31, 1997, 1996 and
1995 reflect the Company's expansion through the establishment of new branches.
Since the beginning of 1995, the Company has opened new branches in Flemington,
Springfield, Scotch Plains, Union and Linden, New Jersey and has relocated its
main branch and corporate headquarters from Annandale to a leased facility in
Clinton, New Jersey. Increases in other operating expenses reflect increased
item processing and servicing charges related to the expanding deposit base,
combined with office expenses due to new locations and additional expenses
associated with AMEX membership.
Income Tax Expense
The income tax provisions, which includes both federal and state taxes, for the
years ended December 31, 1997, 1996 and 1995 were $1.3 million, $644 thousand
and $609 thousand, respectively, representing a 38.5%, 38.1% and 37.7% effective
tax rate in each year, respectively. Increases in the provision for income taxes
were attributable to increases in income before taxes for all periods reported.
Financial Condition
At December 31, 1997, the Company's total assets were $213.8 million, compared
to $172.7 million at December 31, 1996 and $121.8 million at December 31, 1995.
Net loans increased to $132.9 million at December 31, 1997 from $96.9 million at
December 31, 1996 and $68.5 million at December 31, 1995. Total deposits
increased to $192.4 million at December 31, 1997 from $153.6 million at December
31, 1996 and $111.0 million at December 31, 1995.
Loan Portfolio
At December 31, 1997, the Company's net loans were $132.9 million, an increase
of $35.9 million, or 37%, over total loans at December 31, 1996. The loan
portfolio at December 31, 1996 totaled $96.9 million, an increase of $38.4
million, or 66%, over total loans at December 31, 1995. These increases in the
loan portfolio reflect the Company's expansion into new lending markets through
its new branches as well as its continued penetration of its existing
marketplace.
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, competitive rate structures and selective marketing have
enabled the Company to gain entry to the market for local loans. Mergers and
lending curtailments at larger banks competing with the Company have also
contributed to the Company's successful efforts to attract borrowers.
The following table sets forth the classification of the Company's loans by
major category as of December 31, 1997, 1996, 1995, 1994 and 1993 respectively:
<TABLE>
<CAPTION>
(Dollars in Thousands)
====================================================================================================================================
December 31, 1997 1996 1995 1994 1993
Amount % Amount % Amount % Amount % Amount %
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial & industrial $ 20,348 15.2% $17,965 18.4% $ 9,125 15.4% $ 6,952 19.1% $ 4,600 18.2%
Real estate:
Non-residential
properties 66,526 49.6% 41,674 42.6% 23,612 40.0% 15,018 41.2% 10,217 40.5%
Residential properties 28,891 21.5% 23,044 23.6% 16,034 27.1% 9,514 26.1% 7,041 27.9%
Construction 13,014 9.7% 10,223 10.4% 5,705 9.7% 1,293 3.6% 490 1.9%
Lease financing -- 0.0% 17 0.0% 83 0.1% 335 .9% 648 2.6%
Consumer 5,419 4.0% 4,924 5.0% 4,549 7.7% 3,309 9.1% 2,216 8.8%
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans $134,197 100.0% $97,847 100.0% $59,108 100.0% $36,421 100.0% $25,212 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Management Discussion and Analysis
================================================================================
The following table sets forth commercial & industrial and real
estate-construction loans as of December 31, 1997 in terms of loan maturities
and interest rate sensitivity:
(Dollars in Thousands)
=========================================================================
Within 1 to 5 After
1 Year Years 5 Years Total
=========================================================================
Commercial & industrial $11,192 $ 7,938 $1,218 $20,348
Real estate-construction 9,376 3,638 -- 13,014
- -------------------------------------------------------------------------
Total loans (a) $20,658 $11,576 $1,218 $33,362
- -------------------------------------------------------------------------
(a) Loans due after one year totaling $5,134 have fixed interest rates. The
remaining 60% of such loans or $7,660 have floating or adjustable rates.
Asset Quality
The Company's principal earning assets are its loans. Inherent in the lending
function is the possibility a customer may not perform in accordance with the
contractual terms of the loan. A borrowers' inability to repay the loan can
create the risk of nonaccrual loans, past due loans, restructured loans and
potential problem loans.
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 and loans past due 90 days or greater. When a loan is
classified as nonaccrual, interest accruals discontinue and all past due
interest previously recognized as income is reversed and charged against current
period income. Until the loan becomes current, any payments received from the
borrower are applied totally to outstanding principal until such time as
management determines that the financial condition of the borrower and other
factors merit recognition of a portion of such payments as interest income.
The Company attempts to minimize credit risk by ensuring loan
diversification and adhering to the Company's credit administration policies and
procedures. Due diligence on loans under consideration 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
of funds for repayment of the loan, and other factors are analyzed before a loan
is submitted for approval. The Company's loan portfolio is also subject to
periodic internal review for credit quality.
The following table sets forth information concerning the Company's
non-performing assets as of the dates indicated:
<TABLE>
<CAPTION>
(Dollars in Thousands)
========================================================================================================
December 31, 1997 1996 1995 1994 1993
========================================================================================================
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $943 $669 $78 $48 $66
Nonaccrual loans to total loans 0.70% 0.68% 0.13% 0.13% 0.26%
Non-performing assets to total assets 0.70% 0.50% 0.30% 0.51% 0.10%
Allowance for loan losses as a
percentage of non-performing loans (a) 88.38% 103.02% 165.29% 93.87% 457.08%
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes loans greater than 90 days past due that are still accruing
interest.
The Company's nonaccrual loans increased by $275 thousand from year end
1996 to $943 thousand at December 31, 1997. This net increase was attributable
to the addition of $589 thousand in loans being placed on nonaccrual status
partially offset by payments received of $246 thousand and charge-offs of $68
thousand for 1996 nonaccrual loans. At December 31, 1997, $552 thousand in loans
were past due greater than 90 days but still accruing interest compared to $191
thousand for the year ending December 31,1996.
The interest income that would have been recorded had these loans performed
under the original contract terms was not material for the year ended December
31, 1995, $61 thousand for the year ended December 31, 1996 and $92 thousand as
of December 31, 1997.
At the dates indicated in the above table, there were no concentration of
loans exceeding 10% of the total loan portfolio 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 $1.1 million at December 31,
1997.
14
<PAGE>
Unity Bancorp, Inc. and Subsidiary [GRAPHIC]
================================================================================
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 subsequent recovery is
credited to the allowance. Risks within the loan portfolio are analyzed on a
continuous basis by the Company's management, by 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 the appropriate level of loss 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 borrowers, past and expected loan loss experience,
and other factors management feels deserve recognition in establishing an
adequate reserve. This risk assessment process is performed at least quarterly,
and, as adjustments become necessary, they are realized in the periods in which
they become known. Additions to the allowance are made by provisions charged to
expense whereas the allowance is reduced by net charge-offs (i.e., loans judged
to be uncollectible are charged against the reserve, less any recoveries on such
loans). Although management attempts to maintain the allowance at a level deemed
adequate to provide for potential losses, future additions to the allowance may
be necessary based upon certain factors including changes in market conditions.
In addition, various regulatory agencies periodically review the adequacy of the
Company's allowance for loan losses. These agencies may require the Company to
make additional provisions based on their judgments about information available
to them at the time of their examination.
The Company's allowance for loan losses totaled $1.3 million, $886 thousand
and $562 thousand at December 31, 1997, 1996 and 1995, 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 December 31, 1997, 1996, 1995, 1994 and 1993:
Analysis of the Allowance for Loan Losses
<TABLE>
<CAPTION>
(Dollars in Thousands)
=========================================================================================================
Year Ended December 31, 1997 1996 1995 1994 1993
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $ 886 $562 $380 $302 $134
Charge-offs
Real estate 55 -- 49 45 --
Consumer 3 6 1 10 15
Commercial and industrial 10 44 -- 28 --
Lease financing -- 43 -- -- --
- ---------------------------------------------------------------------------------------------------------
Total charge-offs 68 92 50 83 15
- ---------------------------------------------------------------------------------------------------------
Recoveries
Real estate 6 -- 3 -- --
- ---------------------------------------------------------------------------------------------------------
Total recoveries 6 -- 3 -- --
- ---------------------------------------------------------------------------------------------------------
Total net charge offs 62 92 47 83 15
- ---------------------------------------------------------------------------------------------------------
Provision charged to expense 498 416 229 161 183
- ---------------------------------------------------------------------------------------------------------
Balance of allowance at end of year $1,322 $886 $562 $380 $302
- ---------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans outstanding 0.05% 0.12% 0.11% 0.26% 0.08%
- ---------------------------------------------------------------------------------------------------------
Ratio of allowance to total loans,
net of loans held for sale 1.01% 0.93% 1.01% 1.07% 1.22%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Allocation of the Allowance for Loan Losses
The following table sets forth for each of the Company's major lending
areas, the amount and percentage of the allowance for loan losses attributable
to such category and the percentage of total loans represented by such category,
as of the periods indicated:
15
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Management Discussion and Analysis
================================================================================
<TABLE>
<CAPTION>
(Dollars in Thousands)
====================================================================================================================================
Year Ended December 31, 1997 1996 1995 1994 1993
====================================================================================================================================
% of % of % of % of % of
Amount All loans Amount All loans Amount All loans Amount All loans Amount All loans
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Applicable to:
Commercial & industrial $ 267 15.2% $152 18.4% $ 96 15.4% $ 62 19.1% $ 50 16.6%
Real estate:
Non-residential
properties 555 49.6% 336 42.6% 187 39.9% 166 41.2% 125 41.4%
Residential properties 340 21.5% 247 23.5% 92 27.2% 123 26.2% 91 30.1%
Construction 107 9.7% 82 10.5% 121 9.7% 11 3.5% 5 1.7%
Lease financing 0 0.0% 4 0.0% 1 0.1% 3 0.9% 7 2.3%
Consumer 53 4.0% 65 5.0% 65 7.7% 15 9.1% 24 7.9%
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,322 100.0% $886 100.0% $562 100.0% $380 100.0% $302 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment Securities
The Company maintains an investment securities portfolio to fund increased loan
demand, temporary deposit outflows, and other liquidity needs that may arise 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 state and municipal obligations, corporate fixed
income securities and equity securities.
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," (SFAS 115),
effective January 1, 1994. Under SFAS 115, securities are classified as
securities held to maturity based on management's intent and ability to hold
them to maturity. Such securities are stated at cost, adjusted for unamortized
purchase premiums and discounts. Securities that are bought and held principally
for the purpose of resale in the near term are classified as trading securities,
which are carried at market value. Realized gains and losses from trading
activity and gains and losses from marking the portfolio to market value are
included in trading revenue. Securities not classified as securities held to
maturity or trading securities are classified as securities available for sale
and are stated at fair value. Unrealized gains and losses on securities
available for sale are excluded from results of operations and are reported as a
separate component of shareholders' equity, net of taxes. Securities classified
as available for sale include securities that may be sold in response to changes
in interest rates, changes in prepayment risks, the need to increase regulatory
capital or other similar requirement.
Management determines the appropriate classification of securities at the
time of purchase. At December 31, 1997, $23.9 million of investment securities
were classified as held to maturity and $17.4 million were classified as
available for sale. At December 31, 1997, no investment securities were
classified as trading securities.
At December 31, 1997, total investment securities were $41.3 million, an
increase from total investment securities of $37.1 million at December 31, 1996,
which was an increase from total investment securities of $36.2 million at
December 31, 1995. The $4.2 million increase in the Company's investment
securities for the year ended December 31, 1997 is primarily attributable to the
increase in total deposits.
A comparative summary of securities available for sale and held to maturity
at December 31, 1997, 1996 and 1995 is follows:
Securities
<TABLE>
<CAPTION>
(Dollars in Thousands)
=========================================================================================================================
December 31, 1997 1996 1995
=========================================================================================================================
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Available for sale
U.S. Treasury $ 1,995 $ 2,008 $ 351 $ 352 $ 1,964 $ 1,977
U.S. Government agencies -- -- -- -- 706 720
U.S. Government sponsored agencies and corporations 12,988 12,969 7,460 7,433 7,504 7,564
State and municipal 1,064 1,072 874 874 1,360 1,365
Other 1,355 1,360 2,489 2,494 4,624 4,678
- -------------------------------------------------------------------------------------------------------------------------
Total $17,402 $17,409 $11,174 $11,153 $16,158 $16,304
- -------------------------------------------------------------------------------------------------------------------------
Held to maturity
U.S. Government agencies $ 6,452 $ 6,418 $ 7,208 $ 7,190 $ 6,773 $ 6,765
U.S. Government sponsored agencies and corporations 9,014 8,563 10,011 9,461 3,988 3,500
Other 8,433 8,518 8,781 8,596 9,096 8,099
- -------------------------------------------------------------------------------------------------------------------------
Total $23,899 $23,499 $26,000 $25,247 $19,857 $19,264
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
Unity Bancorp, Inc. and Subsidiary [GRAPHIC]
================================================================================
Contractual Maturity Distribution of Securities
<TABLE>
<CAPTION>
(Dollars in Thousands)
==========================================================================================================
December 31, 1997 1996
==========================================================================================================
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Available for sale
U.S. Treasury
Under 1 year $ 997 $ 999 6.24% $ 351 $ 352 5.93%
1-5 years 998 1,009 6.51% -- -- --
U.S. Government sponsored agencies
and corporations
Under 1 year 2,997 2,998 6.20% 2,501 2,505 6.29%
1-5 years 6,991 6,971 5.84% 4,959 4,928 5.71%
5-10 years 3,000 3,000 6.82% -- -- --
State and municipal
Under 1 year 201 201 3.70% 874 874 3.92%
1-5 years 863 871 4.25% -- -- --
Other
Under 1 year -- -- 0.00% 2,024 2,029 5.92%
Over 10 years 1,355 1,360 0.00% 465 465 6.69%
- ----------------------------------------------------------------------------------------------------------
Total $17,402 $17,409 6.04% $11,174 $11,153 5.78%
- ----------------------------------------------------------------------------------------------------------
Held to maturity
U.S. Government agencies
Over 10 years $ 6,452 $ 6,418 6.42% $ 7,207 $ 7,190 6.17%
U.S. Government sponsored agencies
and corporations
Under 1 year 1,247 1,247 4.66% -- -- --
1-5 years 3,501 3,500 6.32% 5,242 5,241 6.02%
5-10 years 3,017 2,896 5.37% 3,520 3,361 6.03%
Over 10 years 1,249 920 2.83% 1,250 859 3.57%
Other
1-5 years 672 674 6.00% 670 670 6.20%
Over 10 years 7,761 7,844 6.20% 8,111 7,926 6.11%
- ----------------------------------------------------------------------------------------------------------
Total $23,899 $23,499 5.91% $26,000 $25,247 5.98%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Deposits
Deposits are the Company's primary source of funds. The Company experienced
growth in deposit balances of $38.9 million, or 25%, to $192.4 million at
December 31, 1997, compared to year end 1996. Deposits increased by $42.6
million, or 38%, to $153.6 million at December 31, 1996 from $111.0 million at
December 31, 1995. This growth was achieved through the combination of the
Company's expansion of its branch network, 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 noninterest-bearing deposits. From December 31, 1995 to December
31, 1997, the Company's level of noninterest-bearing demand deposits increased
from $18.7 million, or 17% of total deposits to $41.1 million, or 21% of total
deposits, an increase of $22.4 million, or 120%. In addition, the Company's time
deposits increased from $50.8 million at December 31, 1995 to $90.2 million at
December 31, 1997, an increase of $39.4 million, or 78%. The Company has no
foreign deposits, nor are there any material concentrations of deposits.
17
<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:
<TABLE>
<CAPTION>
(Dollars in Thousands)
=========================================================================================================
Year Ended December 31, 1997 1996 1995
=========================================================================================================
Amount % Amount % Amount %
=========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Average Balance:
NOW deposits $ 15,945 9.3% $ 13,664 10.6% $10,665 12.2%
Savings deposits 28,534 16.6% 23,401 18.1% 20,677 23.7%
Money market deposits 9,163 5.3% 6,883 5.3% 5,277 6.0%
Time deposits 85,128 49.5% 63,353 49.1% 38,781 44.5%
Demand deposits 33,330 19.4% 21,797 16.9% 11,887 13.6%
- ---------------------------------------------------------------------------------------------------------
Total $172,100 100.0% $129,098 100.0% $87,287 100.0%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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, 1997.
(Dollars in Thousands)
- ----------------------------------------------------------
Time Deposits ($100,000 and over)
Three months or less $11,234
Over three months through six months 3,826
Over six months through twelve months 3,986
Over twelve months 1,881
- ----------------------------------------------------------
Total $20,927
- ----------------------------------------------------------
Interest Rate Sensitivity Analysis
The principal objectives of the Company's asset and liability management
function are to evaluate the interest rate risk included in certain balance
sheet accounts; determine the level of risk appropriate given the Company's
business focus, operating environment, capital, and liquidity requirements;
establish prudent asset concentration guidelines, and 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, current market conditions,
and interest rate levels.
One of the monitoring tools used by the ALCO is an analysis of the extent
to which the Company's assets and liabilities are interest rate sensitive which
determines 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 interest bearing 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 interest earning 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 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.
18
<PAGE>
Unity Bancorp, Inc. and Subsidiary [GRAPHIC]
================================================================================
<TABLE>
<CAPTION>
(Dollars in Thousands)
==============================================================================================
December 31, 1997 0-3 Mos 3-12 Mos 1-5 years 5+ years
==============================================================================================
<S> <C> <C> <C> <C>
Interest-earning assets
Loans $ 70,565 $ 90,684 $101,443 $133,254
Investment securities 15,855 20,984 32,781 41,308
Federal Funds sold 13,050 13,050 13,050 13,050
Interest-bearing deposits 12,796 15,569 15,569 15,569
- ----------------------------------------------------------------------------------------------
Total $112,266 $140,287 $162,843 $203,181
- ----------------------------------------------------------------------------------------------
Interest-bearing liabilities
NOW deposits $ 20,565 $ 20,565 $ 20,565 $ 20,565
Savings deposits 31,199 31,199 31,199 31,199
Money Market deposits 9,789 9,789 9,789 9,789
Time deposits 25,034 70,286 89,053 90,224
Other debt -- -- -- 335
- ----------------------------------------------------------------------------------------------
Total $ 86,587 $131,839 $150,606 $152,112
- ----------------------------------------------------------------------------------------------
Cumulative Sensitivity Gap $ 25,679 $ 8,448 $ 12,237 $ 51,069
- ----------------------------------------------------------------------------------------------
</TABLE>
Operating, Investing and Financing Cash
As of December 31, 1997, cash and cash equivalents decreased $830.8 thousand to
$32.6 million. Net cash provided by operating activities totaled $873.6
thousand, compared to $355.8 thousand used in 1996. Net cash used in investing
activities remained relatively unchanged from $40.4 million in 1997, compared to
$40.5 million during the prior year. Net cash provided by financing activities
totaled $38.8 million, compared to $49.6 million provided a year earlier,
reflecting the Company's deposit growth.
For the year ended December 31, 1996, cash and cash equivalents increased
$8.8 million to $33.4 million, compared with an increase of $14.6 million during
1995. Net cash provided by 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 the loan and securities portfolio. Net cash provided
in financing activities totaled $49.6 million in 1996 compared with $41.6
million provided a year earlier, primarily attributed to the issuance of common
stock and subordinated debt totaling $6.4 million.
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 amounted to $192.4 million, $153.6 million and
$111.0 million as of December 31, 1997, 1996, and 1995, respectively. The
increase in funds provided by deposit inflows during these years has been more
than adequate to provide for the Company's lending demand.
Through the Company's investment securities portfolio, the Company has
generally sought to obtain safe yet slightly higher yields than would have been
available to the Company as a net seller of overnight Federal Funds while still
maintaining adequate liquidity. The Company also manages its maturity gap by
seeking maturities of investment securities which coincide as closely as
possible with maturities of deposits. The Company's securities available for
sale portfolio is also available as a resource to provide additional liquidity
for anticipated loan demand and other liquidity needs.
19
<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
through 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 bank 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 loan losses,
certain qualifying long-term debt and preferred stock which does not qualify for
Tier I capital. Minimum capital levels for banks are regulated by risk-based
capital adequacy guidelines which require a bank to maintain certain capital as
a percent of the bank's assets and certain off-balance sheet items adjusted for
predefined credit risk factors (risk-adjusted assets). A bank 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 4%. For those banks 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 bank 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, 1997, as well as the required minimum regulatory
capital ratios:
<TABLE>
<CAPTION>
==================================================================================================
Minimum
Regulatory Well Capitalized
December 31, 1997 Requirements Provisions
==================================================================================================
<S> <C> <C> <C>
Risk-based Capital:
Tier I capital ratio 13.39% 4.00% 6.00%
Total capital ratio 14.28% 8.00% 10.00%
Leverage ratio 9.51% 4.00% 5.00%
- --------------------------------------------------------------------------------------------------
</TABLE>
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.
20
<PAGE>
Unity Bancorp, Inc. and Subsidiary [GRAPHIC]
================================================================================
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". SFAS 128 supersedes Accounting Principles Board Opinion No. 15,
"Earnings Per Share", and specifies the computation, presentation, and
disclosure requirements for earnings per share ("EPS") for entities with
publicly held common stock or potential common stock. SFAS 128 replaces Primary
EPS and Fully Diluted EPS with Basic EPS and Diluted EPS, respectively. SFAS 128
also requires dual presentation of Basic EPS on the face of the income statement
for entities with complex capital structures and a reconciliation of the
information utilized to calculate Basic EPS to that used to calculate Diluted
EPS.
SFAS 128 is effective for financial statement periods ending after December
15, 1997. Earlier application is not permitted. After adoption, all prior period
EPS is required to be restated to conform with SFAS 128. The Company expects
that the adoption of SFAS 128 will result in Basic EPS being the same as EPS
currently reported and Diluted EPS will be lower than currently reported EPS.
SFAS No. 129 "Disclosure of Information about Capital Structure", was
issued in February 1997. SFAS 129 is effective for periods ending after December
15, 1997. SFAS 129 lists required disclosures about capital structure that had
been included in a number of separate statements and opinions of authoritative
accounting literature. As such, the adoption of SFAS 129 is not expected to have
a significant impact on the disclosures in financial statements of the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS 130 established standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Under SFAS 130, comprehensive income is separated 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. SFAS 130 is effective for interim and annual
periods beginning after December 15, 1997. Comparative financial statements
provided for earlier periods are required to be reclassified to reflect
application of the provisions of the statement.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS 131 establishes reporting standards
for operating segments in annual financial statements and requires those
enterprises to report selected financial information about operating segments in
interim financial reports to shareholders. SFAS131 is effective for financial
statements for periods beginning after December 15, 1997.
Readiness for Year 2000
The Company has taken actions to understand the nature and extent of the work
required to make its systems, products, and infrastructure Year 2000 compliant.
Failure to adequately address any Year 2000 deficiencies in the Company's
operations could have a material adverse effect on the Company's results of
operations in future periods. However, Management believes that it is taking all
necessary steps to ensure that all systems and vendors utilized become Year 2000
compliant prior to year end 1998. This will allow sufficient time for testing,
review, and replacement of systems or servicing agents that cannot meet this
goal. These efforts should involve minimal costs, and the Company believes,
based on available information, that it will be able to manage its total Year
2000 transition without any material effect on its operation, products or
services. Management also believes the Company is in compliance with all bank
regulatory requirements regarding Year 2000. The Company and the Bank are
subject to regulatory examination regarding Year 2000 compliance.
21
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Consolidated
Balance Sheets
================================================================================
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 19,567,200 $ 15,848,021
Federal funds sold 13,050,000 17,600,000
- ------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents (Notes 2 and 14) 32,617,200 33,448,021
Securities (Notes 2, 3 and 14)
Available for sale, at fair value 17,409,103 11,152,967
Held to maturity, at amortized cost (aggregate fair value of $23,499,307
and $25,246,902 in 1997 and 1996, respectively) 23,899,060 25,999,907
- ------------------------------------------------------------------------------------------------------------
Total securities 41,308,163 37,152,874
Loans (including loans held for sale of $2,786,480 and $2,041,650
in 1997 and 1996, respectively) (Notes 2, 4, 5 and 14) 134,196,719 97,847,453
Less: Unearned income 20,734 19,544
Less: Allowance for loan losses 1,321,735 886,465
- ------------------------------------------------------------------------------------------------------------
Net loans 132,854,250 96,941,444
Premises and equipment, net (Notes 2 and 6) 4,268,906 3,103,931
Accrued interest receivable 1,347,860 1,052,809
Other assets (Note 10) 1,385,587 988,597
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 213,781,966 $ 172,687,676
============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (Notes 7 and 14)
Demand
Noninterest-bearing $ 41,093,550 $ 31,385,323
Interest-bearing 29,897,843 21,282,010
Savings 31,199,141 24,976,839
Time (includes deposits $100,000 and over of $20,927,000 and $13,801,000
in 1997 and 1996, respectively) 90,223,951 75,910,888
- ------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 192,414,485 153,555,060
Obligation under capital lease (Note 11) 334,634 380,275
Accrued interest payable 492,627 533,695
Accrued expenses and other liabilities 549,979 228,645
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 193,791,725 154,697,675
- ------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 11)
Shareholders' equity (Notes 2, 8 and 12)
Common stock, no par value, 7,500,000 shares authorized; 1,985,485 and
1,964,113 shares issued and outstanding in 1997 and 1996, respectively 17,127,308 16,867,120
Retained earnings 2,901,175 1,183,357
Unrealized holding loss on securities available for sale,
net of tax benefit (38,242) (60,476)
- ------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 19,990,241 17,990,001
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 213,781,966 $ 172,687,676
============================================================================================================
</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
Income
================================================================================
<TABLE>
<CAPTION>
For the years ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest on loans (Note 2) $11,226,595 $ 7,731,561 $ 4,781,664
Interest on securities 3,137,565 2,616,179 2,696,182
Interest on Federal funds sold 661,294 511,894 291,638
- ----------------------------------------------------------------------------------------------
Total interest income 15,025,454 10,859,634 7,769,484
INTEREST EXPENSE 6,312,366 4,755,958 3,333,866
- ----------------------------------------------------------------------------------------------
NET INTEREST INCOME 8,713,088 6,103,676 4,435,618
Provision for loan losses (Note 2) 497,355 416,456 228,560
- ----------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,215,733 5,687,220 4,207,058
- ----------------------------------------------------------------------------------------------
OTHER INCOME
Service charges on deposits 757,053 521,597 294,899
Net gain (loss) on sale of securities (Note 3) -- 31,851 (18,999)
Gain on sale of loans (Note 2) 1,694,795 1,467,664 871,185
Other income 591,217 383,267 238,093
- ----------------------------------------------------------------------------------------------
Total other income 3,043,065 2,404,379 1,385,178
- ----------------------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 3,927,754 2,832,500 1,974,038
Occupancy expense 1,008,902 786,733 237,502
Special SAIF assessment -- 370,141 --
Other operating expenses (Note 15) 3,048,902 2,413,714 1,766,730
- ----------------------------------------------------------------------------------------------
Total other expenses 7,985,558 6,403,088 3,978,270
- ----------------------------------------------------------------------------------------------
Income before provision for income taxes 3,273,240 1,688,511 1,613,966
Provision for income taxes (Notes 2 and 10) 1,258,611 644,078 609,031
- ----------------------------------------------------------------------------------------------
NET INCOME $ 2,014,629 $ 1,044,433 $ 1,004,935
==============================================================================================
BASIC EARNINGS PER SHARE (NOTES 2 AND 9) $1.02 $.74 $.83
DILUTED EARNINGS PER SHARE (NOTES 2 AND 9) $1.01 $.73 $.83
==============================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING (NOTES 2 AND 9) 1,977,604 1,419,855 1,203,774
==============================================================================================
</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 Changes in
Shareholders' Equity
================================================================================
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Holding
Gain (Loss)
On Securities Total
Common Retained Available Shareholders'
Stock Earnings For Sale Equity
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 8) 5,405,309 -- -- 5,405,309
Subordinated debt conversion (Note 8) 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
Cash dividend - $.15 per share -- (296,811) -- (296,811)
Issuance of common stock, net 260,188 -- -- 260,188
Net income - 1997 -- 2,014,629 -- 2,014,629
Unrealized gain on securities
available for sale, net of taxes -- -- 22,234 22,234
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 17,127,308 $ 2,901,175 $ (38,242) $ 19,990,241
=========================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
24
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Consolidated Statements of
Cash Flows
================================================================================
<TABLE>
<CAPTION>
For the years ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 2,014,629 $ 1,044,433 $ 1,004,935
Adjustments to reconcile net income to net
cash provided by operating activities -
Provision for loan losses 497,355 416,456 228,560
Depreciation and amortization 446,014 318,447 209,278
Gain on sale of premises and equipment -- -- (1,033)
Net (gain) loss on sale of securities -- (31,851) 18,999
Gain on sale of loans (1,694,795) (1,467,664) (871,185)
Amortization of securities premiums, net (12,693) 52,062 47,919
Deferred tax benefit (202,542) (78,398) (69,493)
Increase in accrued interest receivable (295,051) (194,749) (205,396)
Increase in other assets (210,023) (356,830) (89,775)
(Decrease) increase in accrued interest payable (41,068) 142,170 257,906
Increase (decrease) in accrued expenses and other liabilities 373,900 (199,836) (30,804)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 873,726 (355,760) 499,911
- --------------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of securities available for sale -- 1,234,435 501,779
Purchases of securities held to maturity (10,019,531) (8,029,867) (14,081,604)
Purchases of securities available for sale (17,000,390) (8,448,191) (237,700)
Maturities and principal payments on securities held to maturity 12,101,389 1,883,254 8,333,727
Maturities and principal payments on securities available for sale 10,813,746 12,190,938 266,097
Proceeds from sale of loans 13,682,371 14,906,898 10,853,327
Net increase in loans (48,397,737) (52,300,301) (32,693,256)
Capital expenditures (1,610,990) (1,934,261) (449,995)
Proceeds from sale of premises and equipment -- -- 9,500
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (40,431,142) (40,497,095) (27,498,125)
- --------------------------------------------------------------------------------------------------------------------
Financing Activities:
Increase in deposits 38,859,425 42,557,436 40,302,577
Proceeds from issuance of subordinated debt -- 2,010,000 1,510,000
Proceeds from issuance of common stock, net 260,188 5,405,309 20,000
Cash dividends and fractional shares paid (395,017) (361,727) (229,194)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 38,724,596 49,611,018 41,603,383
- --------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (830,821) 8,758,163 14,605,169
Cash and cash equivalents at beginning of year 33,448,021 24,689,858 10,084,689
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 32,617,200 $ 33,448,021 $ 24,689,858
====================================================================================================================
Supplemental Disclosures:
Interest paid $ 6,311,489 $ 4,613,788 $ 3,075,960
Income taxes paid 1,282,750 1,152,300 574,511
====================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
25
<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.
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 seven
branches in Hunterdon, Somerset and Union counties.
2. Summary of significant accounting policies
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Amounts requiring the use of significant
estimates include the allowance for loan losses and the fair value
disclosures of financial instruments. 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 fair value. Differences between a
security's amortized cost and fair 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 evaluates its loans for impairment. A loan is considered
impaired when, based on current information and events, it is probable that
the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impairment of a loan is measured
based on the present value of expected future cash flows, net of estimated
costs to sell, discounted at the loans effective interest rate. 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 loan
losses.
Loans held for sale are reflected at the lower of aggregate cost or market
value.
Allowance for Loan Losses
The allowance for 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
26
<PAGE>
Unity Bancorp, Inc. and Subsidiary
================================================================================
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.
To calculate the gain (loss) on sale, the Company's investment in an SBA
loan is allocated among the retained portion of the loan, the value of loan
servicing 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 allocated fair value for loan servicing is reflected as an
asset and is classified in loans for financial reporting purposes. As of
December 31, 1997 and 1996, the amount of this asset was approximately
$1,069,000 and $803,000, respectively. 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
$35,738,000 and $26,877,000 at December 31, 1997 and 1996, 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, 1997 and 1996
certain certificates of deposit with maturities in excess of 90 days,
amounting to approximately $2,773,000 and $5,327,000, respectively, were
included in cash and due from banks.
Loans Held for Sale
Loans held for sale are carried at the lower of aggregate cost or fair
market value.
Net Income Per Share
The Bank adopted SFAS No. 128, "Earnings per Share" effective December 15,
1997. In accordance with this new accounting standard, basic earnings per
share is computed based on the weighted average number of shares
outstanding for the periods presented. Diluted earnings per share is
computed based on the weighted average number of shares outstanding for the
period presented adjusted for the effect of the stock options and warrants
outstanding, if dilutive. The Bank restated previously reporting earnings
per share for 1996 and 1995 as required by this new accounting standard.
New Financial Accounting Standards
The Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income," in June 1997. This statement is effective
for years beginning after December 15, 1997. Statement No. 130 requires
entities that present a complete set of financial statements to include the
components of comprehensive income. Comprehensive income consists of net
income or loss for the current period and revenues, expenses, gains, and
losses that have been previously excluded from the income statement and
were only reported as a component of equity. The effect of adopting
Statement No. 130 is not expected to be material to the Company's results
of operations or financial position.
27
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial
Statements
================================================================================
Also in June 1997 the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which is effective for all periods beginning after December
15, 1997. Statement No. 131 requires that a company report certain
information about operating segments in complete set of financial
statements of the enterprise and in condensed financial statements of
interim periods issued to shareholders. It also requires that a company
report certain information about their products and services, the
geographic areas in which they operate, and their major customers.
Management is currently evaluating the disclosures impact of Statement No.
131 on its financial statements and has not determined if it has any
reportable segments.
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, 1997 and 1996 is as follows-
<TABLE>
<CAPTION>
1997 Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held To Maturity
Obligations of U.S. Government agencies $15,466,484 $ 16,429 $(501,913) $14,981,000
Corporate debt securities 497,402 4,448 -- 501,850
Mortgage-backed securities 7,935,174 154,161 (72,878) 8,016,457
------------------------------------------------------------------------------------------------------
Total Held To Maturity $23,899,060 $175,038 $(574,791) $23,499,307
======================================================================================================
Available For Sale
U.S. Treasury securities $ 1,994,894 $ 12,859 $ -- $ 2,007,753
Obligations of U.S. Government agencies 12,988,282 3,754 (22,755) 12,969,281
Obligations of states & political subdivisions 1,064,363 7,042 -- 1,071,405
Mortgage-backed securities 81,900 -- (414) 81,486
Federal Home Loan Bank stock 517,700 -- -- 517,700
Other corporate stocks 754,923 28,183 (21,628) 761,478
------------------------------------------------------------------------------------------------------
Total Available For Sale $17,402,062 $ 51,838 $ (44,797) $17,409,103
======================================================================================================
1996 Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------------------------------------------------
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>
28
<PAGE>
Unity Bancorp, Inc. and Subsidiary [GRAPHIC]
================================================================================
The amortized cost and estimated fair value of securities at December 31,
1997, by contractual maturity, are shown below.
Estimated
Amortized Fair
Cost Value
---------------------------------------------------------------------
Held To Maturity
Due in one year or less $ 1,247,221 $ 1,247,159
Due after one years through five years 3,998,310 4,001,995
Due after five years through ten years 3,016,647 2,895,850
Due after ten years 7,701,708 7,337,846
Mortgage-backed securities 7,935,174 8,016,457
---------------------------------------------------------------------
$23,899,060 $23,499,307
=====================================================================
Available For Sale
Due in one year or less $ 4,194,792 $ 4,198,410
Due after one year through five years 8,852,747 8,849,489
Due after five years through ten years 3,000,000 3,000,540
Mortgage-backed securities 81,900 81,486
Corporate stocks 1,272,623 1,279,178
---------------------------------------------------------------------
$17,402,062 $17,409,103
=====================================================================
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.
For the year 1997, there were no sales of 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 in 1996 and ($18,999) in 1995.
Securities with carrying values aggregating $750,000 were pledged to secure
public deposits at December 31, 1997.
4. Loans
Loans outstanding by classification as of December 31, 1997 and 1996, are
as follows-
1997 1996
--------------------------------------------------------------
Loans secured by real estate-
Residential properties $ 28,891,480 $23,043,636
Nonresidential properties 66,526,225 41,673,772
Construction loans 13,013,662 10,222,711
Commercial and industrial loans 20,348,133 17,966,352
Lease financing receivables -- 17,000
Loans to individuals 5,417,219 4,923,982
--------------------------------------------------------------
$134,196,719 $97,847,453
==============================================================
As of December 31, 1997 and 1996, the Bank's recorded investment in
impaired loans, defined as nonaccrual loans, was $943,000 and $669,000,
respectively, and the related valuation allowance was $204,000 and $76,000,
respectively. This valuation allowance is included in the allowance for
loan losses in the accompanying balance
29
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial
Statements
================================================================================
sheet. Interest income that would have been recorded during 1997 had these
loans performed under the original contract terms was $92,000. At December
31, 1997, $552,000 in loans were past due greater than 90 days but still
accruing interest.
As of December 31, 1997, approximately 81% 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, 1996 $5,906,120
New Loans 9,221,337
Repayments (5,459,497)
------------------------------------------------
Balance at December 31, 1997 $9,667,960
================================================
5. Allowance for loan losses
The allowance for 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 loan losses during 1997,
1996 and 1995 is as follows-
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 886,465 $ 561,931 $380,191
Provision charged to expense 497,355 416,456 228,560
Loans charged-off (68,023) (91,922) (50,257)
Recoveries on loans previously charged-off 5,938 -- 3,437
----------------------------------------------------------------------------------
Balance at end of year $1,321,735 $886,465 $561,931
==================================================================================
</TABLE>
6. Premises and equipment
The detail of premises and equipment as of December 31, 1997 and 1996 is as
follows-
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C>
Land and buildings $1,746,103 $1,044,241
Furniture, fixtures and equipment 2,181,883 1,463,784
Leasehold improvements 1,465,649 1,274,621
----------------------------------------------------------------------------------
5,393,635 3,782,646
----------------------------------------------------------------------------------
Less: Accumulated depreciation and amortization (1,124,729) (678,715)
----------------------------------------------------------------------------------
$4,268,906 $3,103,931
==================================================================================
</TABLE>
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.
30
<PAGE>
Unity Bancorp, Inc. and Subsidiary [GRAPHIC]
================================================================================
7. Deposits
Time deposits in denominations of $100,000 or more totaled $20,927,193 and
$13,801,346 at December 31, 1997 and 1996, respectfully.
Schedule maturities of certificates of deposit are as follows -
<TABLE>
<CAPTION>
Year Ended December 31, 1997 Over 3 mos Over 1 year
3 mos through through Over
or less 1 year 3 years 3 years Total
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$100,000 or more $11,234,124 $ 7,811,673 $ 1,881,396 -- $20,927,193
Less than $100,000 $13,799,948 $37,440,039 $16,886,154 $1,170,617 $69,296,758
===========================================================================================================
<CAPTION>
Year Ended December 31, 1996 Over 3 mos Over 1 year
3 mos through through Over
or less 1 year 3 years 3 years Total
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$100,000 or more $ 6,929,704 $ 6,671,642 $ 200,000 -- $13,801,346
Less than $100,000 $11,819,587 $42,852,175 $4,859,733 $2,578,047 $62,109,542
===========================================================================================================
</TABLE>
8. 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.
During the course of the year, 2,060 warrants were exercised and at
December 31, 1997, 399,440 warrants remain outstanding with an expiration
date of December 15, 1998.
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.
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 $9.60,
$10.00 and $10.80 per share, adjusted for subsequent stock split. 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, 1997, 125,000 shares are reserved for issuance under the
Plans.
On April 25, 1997, the Company's shareholders approved the 1997 Stock
Option Plan. Under the Plan, the Board of Directors may grant incentive
stock options ("ISOs") and non-statutory options. Officers, employees and
members of the Board of Directors of the Corporation are eligible to
participate in the Plan. Options intended to qualify as Incentive Stock
Options will be granted only to persons who are eligible to receive such
options. The exercise price for options granted under the 1997 Option Plan
will be determined by the Board of Directors at the time of grant, but may
not be less than 85% of the fair market value of the Common Stock on the
date of grant or 100% for any ISO. The term during which each option may be
exercised shall be determined by the Board of Directors, but in no event
shall an option be exercisable in whole or in part more than ten years from
the date of grant. As of December 31, 1997, 50,000 shares are reserved for
issuance under the Plan.
31
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial
Statements
================================================================================
Transactions under the plans are summarized as follows-
<TABLE>
<CAPTION>
Number Exercise Price Weighted Average
of Shares Per Share Exercise Price
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, December 31, 1995 -- -- --
Options granted 50,199 $9.72-$10.80 $10.54
Options exercised -- -- --
Options expired (200) 9.72 9.72
----------------------------------------------------------------------------------------
Outstanding, December 31, 1996 49,999 9.72-10.80 10.54
Options granted 40,200 11.47-13.92 12.80
Options exercised (10,312) 9.72-11.47 10.57
Options expired -- -- --
----------------------------------------------------------------------------------------
Outstanding, December 31, 1997 79,887 $9.72-$13.92 $11.68
========================================================================================
</TABLE>
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its Option Plans and accordingly,
recorded compensation expense totaling $16,600 in 1997 and $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-
1997 1996
---------------------------------------------
Net income-
As reported $2,014,629 $1,044,433
Pro forma 1,901,955 913,747
Earnings per share-
Basic as reported $1.02 $.74
Pro forma $.96 $.64
Diluted as reported $1.01 $.73
Pro forma $.95 $.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 1997 and 1996;
dividend yields of 1.5% and 0%, expected volatilities of 47.06% and 47.06%,
risk-free interest rates of 6.08% and 5.21%, and expected lives of 2.6
years and 2.6 years, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1997-
<TABLE>
<CAPTION>
Number Number
Outstanding at Remaining Exercisable at
Exercise Price December 31, 1997 Contractual Life December 31, 1997
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$13.92 2,500 4.8 years 2,500
13.81 700 4.9 years 700
13.38 24,000 4.0 years 24,000
11.47 8,000 4.0 years 8,000
10.80 38,125 3.0 years 38,125
9.72 6,562 3.0 years 6,562
------------------------------------------------------------------------------------------
$11.68 79,887 79,887
===========================================================================================
</TABLE>
Select key employees and Board members are eligible to participate in the
Company's two Stock Bonus Plans. Under the Plans, 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,
32
<PAGE>
Unity Bancorp, Inc. and Subsidiary [GRAPHIC]
================================================================================
resulting in a charge to operations of approximately $20,000. No shares
were granted during 1996 and 9,000 shares were granted to employees and
Board members in 1997, amounting to approximately $120,000 in expense. On
April 25, 1997, the Company's shareholders approved 50,000 additional
shares to be reserved for Stock Bonuses. As of December 31, 1997, the
Company has 62,929 shares reserved for issuance under the Stock Bonus
Plans.
9. Earnings Per Share
The following is a reconciliation of the calculation of basic and dilutive
earnings per share-
<TABLE>
<CAPTION>
Net Weighted Earnings
For the Year Ended December 31, 1997- Income Average Shares Per Share
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share -
Income available to common shareholders $2,014,629 1,977,604 $1.02
========
Effect of Dilutive Securities -
Stock Options and Warrants 21,576
-------------------------------------------------------------------------------------------------------
Diluted earnings per share - Income available to
common shareholders plus assumed conversions $2,014,629 1,999,180 $1.01
=======================================================================================================
For the Year Ended December 31, 1996-
Basic earnings per share -
Income available to common shareholders $1,044,433 1,419,855 $ .74
========
Effect of Dilutive Securities -
Stock Options and Warrants 9,407
-------------------------------------------------------------------------------------------------------
Diluted earnings per share - Income available to
common shareholders plus assumed conversions $1,044,433 1,429,262 $ .73
=======================================================================================================
For the Year Ended December 31, 1995-
-------------------------------------------------------------------------------------------------------
Basic earnings per share -
Income available to common shareholders $1,004,935 1,203,774 $ .83
========
Effect of Dilutive Securities -
None
-------------------------------------------------------------------------------------------------------
Diluted earnings per share - Income available to
common shareholders plus assumed conversions $1,004,935 1,203,774 $ .83
=======================================================================================================
</TABLE>
10. Income taxes
The components of the provision for income taxes are as follows-
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal
Current $1,220,818 $622,391 $596,270
Deferred benefit (202,542) (78,398) (69,493)
----------------------------------------------------------------------------------------
Total Federal 1,018,276 543,993 526,777
----------------------------------------------------------------------------------------
State 240,335 100,085 82,254
----------------------------------------------------------------------------------------
Total provision for income taxes $1,258,611 $644,078 $609,031
=======================================================================================
</TABLE>
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>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at statutory rate $1,112,902 $574,093 $548,748
State income taxes, net of Federal income tax effect 158,621 66,056 54,288
Other (12,912) 3,929 5,995
---------------------------------------------------------------------------------------------
Provision for income taxes $1,258,611 $644,078 $609,031
=============================================================================================
</TABLE>
33
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial
Statements
================================================================================
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,
1997 and 1996 are as follows-
1997 1996
---------------------------------------------------------------------------
Provision for loan losses $465,544 $298,274
Unrealized loss on securities available for sale 23,913 40,317
Other, net (3,288) (31,577)
---------------------------------------------------------------------------
Net deferred tax asset $486,219 $307,014
===========================================================================
11. Commitments and contingencies
Lease Obligations
1998 $ 518,000
1999 500,000
2000 470,000
2001 470,000
2002 470,000
Thereafter 1,441,000
==========================
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 listed-
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 $18,367,000 to its borrowers as of December 31, 1997,
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 $712,000 as of December 31, 1997, which generally expire
within one year.
12. 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, 1997, that the Parent Company and the Bank meet all capital
adequacy requirements to which they are subject.
34
<PAGE>
Unity Bancorp, Inc. and Subsidiary [GRAPHIC]
================================================================================
As of December 31, 1997, 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 either institution's category.
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, 1997-
Total Capital
(to Risk Weighted Assets) $21,280,204 14.28% >/=$11,894,078 >/=8.00% >/=$14,867,597 >/=10.00%
Tier I Capital
(to Risk Weighted Assets) 19,958,469 13.29% >/=$ 5,947,039 >/=4.00% >/=$ 8,920,558 >/=16.00%
Tier I Capital
(to Average Assets) 19,958,469 9.51% >/=$ 8,391,353 >/=4.00% >/=$10,489,192 >/=15.00%
As of December 31, 1996-
Total Capital
(to Risk Weighted Assets) 18,841,669 17.24% >/=$ 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 >/=16.00%
Tier I Capital
(to Average Assets) 17,955,204 11.09% >/=$ 6,477,699 >/=4.00% >/=$ 8,097,123 >/=15.00%
==================================================================================================================
</TABLE>
The Bank'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, 1997-
Total Capital
(to Risk Weighted Assets) $16,318,241 11.03% >/=$11,840,752 >/=8.00% >/=$14,800,940 >/=10.00%
Tier I Capital
(to Risk Weighted Assets) 14,996,506 10.13% >/=$15,920,376 >/=4.00% >/=$18,880,564 >/=16.00%
Tier I Capital
(to Average Assets) 14,996,506 7.35% >/=$18,162,141 >/=4.00% >/=$10,202,676 >/=15.00%
As of December 31, 1996-
Total Capital
(to Risk Weighted Assets) 12,355,737 11.32% >/=$18,733,623 >/=8.00% >/=$10,917,028 >/=10.00%
Tier I Capital
(to Risk Weighted Assets) 11,469,272 10.51% >/=$14,366,811 >/=4.00% >/=$16,500,217 >/=16.00%
Tier I Capital
(to Average Assets) 11,469,272 7.09% >/=$16,474,880 >/=4.00% >/=$18,093,600 >/=15.00%
==================================================================================================================
</TABLE>
35
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial
Statements
================================================================================
13. Employee benefit plans
The Bank has a 401(k) savings plan covering substantially all employees.
Under the terms of the Plan, an employee can contribute up to 15% of their
salary on a tax deferred basis. The Bank will match 50% of an employee's
contribution, up to 6% of the employee's salary. Employees become fully
vested in the Bank's contribution after six years of service. The Bank
contributed $30,620, $32,483 and $7,120 to the Plan in 1997, 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.
14. Fair value of financial instruments
The fair value estimates for financial instruments are made at a discrete
point in time based upon relevant market information and information about
the underlying 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 that which similar loans with similar maturities
would be made to borrowers with similar credit ratings.
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, 1997, the Bank had standby letters of credit outstanding of
$712,000. The fair value of these commitments is nominal.
At December 31, 1997, the bank had commitments to extend credit totaling
$18,367,000. 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, 1997, the Bank services loans owned by outside investors in
the amount of $35,738,000 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.
36
<PAGE>
Unity Bancorp, Inc. and Subsidiary [GRAPHIC]
================================================================================
The estimated fair value of the Company's financial instruments as of
December 31, 1997 and 1996 is as follows-
<TABLE>
<CAPTION>
1997 1997 1996 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets-
Cash and Federal funds sold $ 32,617,200 $ 32,617,200 $ 33,448,021 $ 33,448,021
Securities held to maturity 23,899,060 23,499,307 25,999,907 25,246,902
Securities available for sale 17,409,103 17,409,103 11,152,967 11,152,967
Loans, net of allowance for loan losses 132,854,250 133,953,064 96,941,444 96,670,513
------------------------------------------------------------------------------------------------------------
Financial liabilities-
Total deposits $192,414,485 $192,117,265 $153,555,060 $153,536,409
============================================================================================================
</TABLE>
15. Other operating expenses
The components of other operating expenses for the year ended December 31,
1997, 1996 and 1995 are as follows
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Professional and other fees $ 514,000 $ 315,000 $ 237,000
Office expenses 809,000 615,000 416,000
Advertising expense 272,000 251,000 141,000
Communication expense 212,000 152,000 130,000
Bank services 427,000 333,000 200,000
FDIC insurance assessment 100,000 182,000 167,000
Directors fees 271,000 276,000 187,000
Other expenses 444,000 290,000 288,000
--------------------------------------------------------------------------------------------
$3,049,000 $2,414,000 $1,766,000
============================================================================================
</TABLE>
16. Condensed financial statements of Unity Bancorp, Inc. (Parent Company only)
<TABLE>
<CAPTION>
Balance Sheets
------------------------------------------------------------------------------------------------------------
December 31, 1997 1996
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from Banks $ 2,096,817 $ 6,420,351
Securities available for sale, at fair value 2,769,231 --
Investment in Bank subsidiary 14,989,474 11,465,350
Other assets 145,156 126,329
------------------------------------------------------------------------------------------------------------
Total assets $20,000,678 $18,012,030
============================================================================================================
Liabilities and Shareholders' Equity-
Other liabilities $ 10,437 $ 22,029
Shareholders' equity 19,990,241 17,990,001
------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $20,000,678 $18,012,030
============================================================================================================
</TABLE>
37
<PAGE>
Unity Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial
Statements
================================================================================
<TABLE>
<CAPTION>
Income Statements
------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 290,129 $ 11,125 $ 111,368
Dividends from Bank subsidiary (a) 296,811 359,011 292,990
Other income -- 14,616 --
------------------------------------------------------------------------------------------------------------
Total income 586,940 384,752 404,358
Interest expense -- 93,934 123,243
Other expenses 361,214 60,195 78,762
------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in undistributed
income of subsidiary 225,726 230,623 202,353
Income tax benefit (a) (24,169) (51,355) (36,255)
------------------------------------------------------------------------------------------------------------
Income before equity in undistributed income of subsidiary 249,895 281,978 238,608
Equity in undistributed income of subsidiary 1,764,734 762,455 766,327
------------------------------------------------------------------------------------------------------------
Net income $2,014,629 $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>
Statements Of Cash Flows
------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities -
Net income $2,014,629 $1,044,433 $1,004,935
Adjustments to reconcile net income to net cash
provided by operating activities -
Equity in undistributed income of subsidiary (1,764,734) (762,455) (766,327)
Amortization of securities premiums, net (38,509) -- --
Depreciation and amortization 12,759 12,759 --
Increase in other assets (38,203) (47,583) (21,735)
(Decrease) increase in other liabilities (11,592) 310 21,719
------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 174,350 247,464 238,592
------------------------------------------------------------------------------------------------------------
Investing activities -
Maturities on securities available for sale 1,000,000 -- --
Purchases of securities available for sale (3,711,261) -- --
Net decrease (increase) in loans outstanding -- 1,412,184 (1,412,184)
Additional equity investment in Bank subsidiary (1,750,000) (2,325,249) --
------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,461,261) (913,065) (1,412,184)
------------------------------------------------------------------------------------------------------------
Financing activities -
Net decrease in borrowed funds -- -- (74,844)
Proceeds from issuance of common stock, net 260,188 5,405,309 --
Proceeds from issuance for subordinated debt -- 2,010,000 1,510,000
Cash dividends and fractional shares paid (296,811) (361,727) (229,194)
Net cash (used in) provided by financing activities (36,623) 7,053,582 1,205,962
Net change in cash and cash equivalents (4,323,534) 6,387,981 32,370
Cash and cash equivalents, beginning of year 6,420,351 32,370 --
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $2,096,817 $6,420,351 $ 32,370
============================================================================================================
Supplemental disclosures:
Interest paid -- $108,516 $98,822
============================================================================================================
</TABLE>
38
<PAGE>
Unity Bancorp, Inc. and Subsidiary [GRAPHIC]
================================================================================
17. Quarterly financial information (unaudited)
The following quarterly financial information for the years ended December
31, 1997, and 1996 is 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.
<TABLE>
<CAPTION>
1997 March June September December
31 30 30 31
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $3,272,497 $3,693,166 $3,976,696 $4,083,095
Total interest expense 1,426,458 1,541,771 1,654,987 1,689,150
-------------------------------------------------------------------------------------------------------------
Net interest income 1,846,039 2,151,395 2,321,709 2,393,945
Provision for loan losses 58,316 176,871 160,400 101,767
-------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 1,787,723 1,974,524 2,161,309 2,292,177
Total other income 564,428 811,871 661,562 1,005,204
Total other expenses 2,155,699 2,324,167 2,247,037 2,517,266
-------------------------------------------------------------------------------------------------------------
Net income $ 196,452 $ 462,228 $ 575,834 $ 780,115
-------------------------------------------------------------------------------------------------------------
Basic earnings per common share $.10 $.23 $.29 $.39
-------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $.10 $.23 $.29 $.38
============================================================================================================
<CAPTION>
1996 March June September December
31 30 30 31
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $2,406,624 $2,542,775 $2,826,894 $3,083,341
Total interest expense 1,050,359 1,085,780 1,268,956 1,350,862
-------------------------------------------------------------------------------------------------------------
Net interest income 1,356,265 1,456,995 1,557,938 1,732,479
Provision for loan losses 139,483 117,805 107,790 51,378
-------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 1,216,782 1,339,190 1,450,148 1,681,101
Total other income 437,512 612,692 682,411 670,793
Total other expenses 1,440,621 1,662,936 2,006,792(a) 1,936,817
-------------------------------------------------------------------------------------------------------------
Net income $ 213,672 $ 288,946 $ 126,738 $ 415,077
-------------------------------------------------------------------------------------------------------------
Basic earnings per common share $.17 $.21 $.09 $.25
============================================================================================================
Diluted earnings per common share $.17 $.21 $.09 $.25
============================================================================================================
</TABLE>
(a) Includes a special one time SAIF assessment of $370,141.
39
<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 Delaware corporation) and subsidiary as of December 31, 1997 and 1996,
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, 1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 28, 1998
40
<PAGE>
Unity Bancorp, Inc. and Subsidiary
First Community Bank
Directors
================================================================================
[PHOTO] [PHOTO]
Robert David
Van Volkenburgh Dallas
[PHOTO] [PHOTO]
Peter P. Robert H.
DeTommaso Dallas
[PHOTO] [PHOTO]
Charles S. Peter G.
Loring Schoberl
[PHOTO] [PHOTO]
Allen Samuel
Tucker Stothoff
[PHOTO] [PHOTO]
John F. Robert J.
Tremblay van Volkenburgh, Jr., M.D.
41
<PAGE>
Products & Services
MEDIA ADVERTISING
[GRAPHIC]
[GRAPHIC]
CHECKING
NJCC Account
Regular Checking
If We Were You NOW Account
We'd Bank With Us! Money Market Checking
Business Checking
As seen on local cable stations Prosperity Checking
throughout Hunterdon,
Somerset and Union Counties.
CERTIFICATES OF DEPOSIT
Regular
Retirement [GRAPHIC]
SAVINGS
Regular Savings
Money Market Savings
Money Market Deposit
Money Market IRA
Holiday Club Accounts
[GRAPHIC]
[GRAPHIC]
CONSUMER LOANS
Home Equity Loans BUSINESS LOANS
Auto Loans SBA Loans*
Personal Loans Commercial Loans
Mortgage Loans Construction Loans
Personal Access Line Lines of Credit
Cash Flow Manager
42
<PAGE>
Products & Services
[GRAPHIC]
OTHER SERVICES ===================================
Safe Deposit Boxes
Certified Checks Full Service Offices
Direct Deposit
U.S. Savings Bonds Clinton
Traveler's Cheques 64 Old Highway 22
Money Orders 908 730-7300
Wire Transfers
Night Depository Flemington
Notary Public 110 Main Street
Public Funds Depository+ 908 782-2000
Escrow Account ServicE
Tenant Security Linden
628 North Wood Avenue
908 925-8353
North Plainfield
450 Somerset Street
908 769-0303
Scotch Plains
2222 South Avenue
908 233-8009
Springfield
733 Mountain Avenue
973 258-0111
Union
952 Stuyvesant Avenue
908 851-9700
24-Hour MAC ATMs
available at
all offices
===================================
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)
43
<PAGE>
<TABLE>
<S> <C> <C>
Board of Directors First Community Bank Management
Robert Van Volkenburgh * John F. Tremblay John Nalesnik
Chairman of the Board President Vice President
Chief Executive Officer Credit Administrator
Total Packaging Corp. & Peter G. Schoberl
Best Packaging & Design Corp. Executive Vice President Edward Dalton
Senior Loan Officer Assistant Vice President
David Dallas * SBA Loan Specialist
Vice Chairman Michael T. Bono
Chief Executive Officer Senior Vice President Maria Garciano
Dallas Group of America Sr. Business Development Ofc. Assistant Vice President
Manager, Springfield
Robert H. Dallas Peter Carone
President Senior Vice President John J. Kauchak
Dallas Group of America Manager, Mortgage Group Assistant Vice President
Manager, Information Systems
Peter P. DeTommaso * Edward Cichone
Retired President Senior Vice President Rose M. Phelan
Home Owners Heaven, Inc. Commercial Loan Officer Assistant Vice President
Manager, Scotch Plains
Charles S. Loring * Vito A. de'Marsi
Owner Senior Vice President Michael Riccio
Charles S. Loring, CPA Commercial Loan Officer Assistant Vice President
Manager, Clinton
Peter G. Schoberl Michael F. Downes
Executive Vice President Senior Vice President James Tumolo
First Community Bank Manager, SBA Group Assistant Vice President
Manager, North Plainfield
Samuel Stothoff Thomas Maresca
President Senior Vice President Linda B. McDermott
Samuel Stothoff Company Senior Operations Officer Corporate Secretary
Executive Assistant
John F. Tremblay * John Podskoc
President Senior Vice President Bruce Jala
First Community Bank Retail Banking Assistant Treasurer
Business Development Officer
Allen Tucker Joseph M. Reardon
President Senior Vice President Carole Marshall
Tucker Enterprises Director of Finance Assistant Treasurer
Compliance Specialist
Robert J. Julie Y. Carlson
van Volkenburgh, Jr., M.D. Vice President Aleta M. Fusco
Physician Treasurer Assistant Secretary
Investment Counselor
Walter J. DeMoss
Vice President Leslie Scheiderman
Construction Loan Officer Assistant Secretary
Manager, Compliance
Ruth Green
Vice President
Business Manager, Flemington
William H. Metz
Vice President
Business Manager, Linden
</TABLE>
* Member of Unity Bancorp, Inc. Board of Directors
44
<PAGE>
Unity Bancorp, Inc.
Corporate
Information
<TABLE>
<S> <C>
Administrative Offices Stock Listing
Unity Bancorp, Inc. Unity Bancorp, Inc. common stock is traded on
64 Old Highway 22 the American Stock Exchange ("AMEX") under the
Clinton, New Jersey 08809 symbol "UBI" and warrants under "UBI.WS".
Counsel Common Stock Prices/Dividend Paid
Jamieson Moore Peskin & Spicer The table below sets forth by quarter the range of
Morristown, New Jersey high, low and quarter-end closing sale prices for Unity Bancorp,
Inc. common stock and the cash dividends paid per common share.
Auditors
Arthur Andersen LLP =====================================================
Roseland, New Jersey Cash
1997 Dividend
Registrar & Transfer Agent Quarter High Low Close Paid
Shareholder address changes or inquiries =====================================================
regarding shareholder accounts and stock First $17.750 $14.000 $15.500 $0.05
transfers should be directed to: Second $14.500 $13.750 $13.750 $0.05
First City Transfer Company Third $16.500 $13.375 $16.500 $0.05
P.O. Box 170 Fourth $19.375 $16.000 $19.125 $0.05
Iselin, New Jersey 08837-0170 =====================================================
(732) 906-9227 Total $0.20
Financial Information Warrant Purchase Stock Prices
Copies of the corporation's annual report on
Form 10-K filed with the Securities and The table below sets forth by quarter the range of
Exchange Commission may be high, low and quarter-end closing sale prices for
obtained: Unity Bancorp, Inc. warrant purchase stock.
o by writing to Julie Y. Carlson, VP/Treasurer
at corporate headquarters =========================================
o electronically at the SEC's home page at 1997
www.sec.gov Quarter High Low Close
=========================================
Investor and Media Inquiries Third $3.000 $1.000 $3.000
Analysts, institutional investors, individual Fourth $5.000 $3.000 $4.500
shareholders and media representatives
should contact:
John F. Tremblay [GRAPHIC]
Shareholder Relations
Unity Bancorp, Inc.
64 Old Highway 22 Dividend Reinvestment
Clinton, New Jersey 08809 and Stock Purchase Plan
(908) 730-7630
or The Unity Bancorp, Inc. dividend
L. G. Zangani, Inc. reinvestment and stock purchase plan
Financial Public Relations enables holders of common stock to
9 Main Street purchase additional shares of common
Flemington, NJ 08822 stock conveniently and without paying
(908) 788-9660 brokerage commissions or service
charges. A prospectus and enrollment
Web Info card may be obtained by writing to
Information on UBI & FCB financial results, Shareholders Relations at corporate
products and services, and branch locations headquarters.
is available on the internet at:
www.firstcommunitybankNJ.com
</TABLE>
Annual Meeting of Shareholders
Shareholders are cordially invited to the Annual Meeting of Shareholders. The
Meeting will convene at 3:30 pm, Friday, April 24, 1998, in Unity Bancorp's
Corporate Headquarters located at 64 Old Highway 22, Clinton, NJ.
45
<PAGE>
[GRAPHIC]
[LOGO] UNITY Bancorp, Inc.
64 Old Highway 22
Clinton, New Jersey 08809
800 618-BANK
The Registrant has one subsidiary, First Community Bank.
First Community Bank has a two subsidiaries, FCB Investment Company, and
FCB Service Co.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Unity Bancorp, Inc.:
As independent public accountants , we hereby consent to the incorporation by
reference of our report dated January 28, 1998 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, Registration Statement No.
333-12565 on Form SB-2, as amended by Post-Effective Amendment No. 1 on Form
S-3, and Registration Statement No. 333-46509 on Form S-3.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
registrants audited December 31, 1997 financial statements and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,399,641
<INT-BEARING-DEPOSITS> 16,167,559
<FED-FUNDS-SOLD> 13,050,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,409,103
<INVESTMENTS-CARRYING> 23,899,060
<INVESTMENTS-MARKET> 23,499,307
<LOANS> 134,175,985
<ALLOWANCE> 1,321,735
<TOTAL-ASSETS> 213,781,966
<DEPOSITS> 192,414,485
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,042,606
<LONG-TERM> 334,634
0
0
<COMMON> 17,127,308
<OTHER-SE> 2,862,933
<TOTAL-LIABILITIES-AND-EQUITY> 213,781,966
<INTEREST-LOAN> 11,226,595
<INTEREST-INVEST> 3,137,565
<INTEREST-OTHER> 661,294
<INTEREST-TOTAL> 15,025,454
<INTEREST-DEPOSIT> 6,268,591
<INTEREST-EXPENSE> 6,312,366
<INTEREST-INCOME-NET> 8,713,088
<LOAN-LOSSES> 497,355
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,985,558
<INCOME-PRETAX> 3,273,240
<INCOME-PRE-EXTRAORDINARY> 3,273,240
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,014,629
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 4.71
<LOANS-NON> 943,235
<LOANS-PAST> 552,218
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,078,398
<ALLOWANCE-OPEN> 886,465
<CHARGE-OFFS> 68,023
<RECOVERIES> 5,938
<ALLOWANCE-CLOSE> 1,321,735
<ALLOWANCE-DOMESTIC> 1,321,735
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
